The Conversation: Cut Health Costs? Here's A Prescription

There is widespread agreement that if federal health care reform passes, making it work will depend in great part on getting a handle on spiraling medical costs that already consume nearly one of every five dollars spent in the United States.

California's experiences and innovations provide "proof of concept" that properly implemented health reform can control costs, while improving the quality of medical care. This is particularly true in developing integrated systems for delivering health care, using health information technology wisely to reduce administrative inefficiencies and addressing environmental factors that lead to poor health outcomes.

The idea of our state as a model of anything other than civic dysfunction may sound strange. But medical costs have grown slower in California than in any other state, according to the Kaiser Family Foundation. Despite this fact, California families still struggle with rising premiums and out-of-pocket costs. According to the New America Foundation, premiums in California have grown seven times faster than median household income. Even being the very best, it turns out, is not nearly good enough.

Bringing down costs will not be easy. Covering all those who lack health insurance will be more expensive, not less, at first. Many of the ideas on which people can agree -- such as using electronic records and focusing on prevention -- will not bring down costs by themselves. And while medical malpractice reforms should certainly be part of any health care reform package, they will not single-handedly solve the cost problem.

The debate about what combination of strategies will achieve the goals of reform will persist. But what we know will not work to contain costs is relying exclusively on either a "public option," as many Democrats suggest, or on the purchase of insurance across state lines, as many Republicans propose. Whether or not reform passes, we will continue to have a hybrid system in the United States. Most health care will still be purchased through the private market, and there will still be large public programs.

We too often fight over the single right answer to a policy question when the correct response is "all of the above." We are going to have to use both the power of markets and the leverage of public programs if we are going to get a handle on spiraling costs. California's experience along with innovations that often rely on collaboration across stakeholders, and between government and private businesses, can guide us as we look ahead to the implementation of federal reform.

Reduce wasteful spending

The U.S. health care system is chock full of opportunities to reduce costs and improve patient care. A report issued last week by Thomson Reuters estimates that more than one-third of what we spend on health care does not actually make patients healthier. This adds up to as much as $850 billion in health care spending that does not improve health in any demonstrable way.

This may seem like a bombshell to those who do not follow health policy closely. But the truth is it simply confirms what researchers at McKinsey Global Institute, Dartmouth University and the Institute of Medicine have been saying for years. Upon further reflection, almost everyone who has interacted with some part of the medical system can think of sources of inefficiency: filling out the same medical history form dozens of times, undergoing the same test twice because results were lost, or being prescribed a drug or procedure with unnoticeable or adverse effects.

Use integrated-care systems

One of the positive aspects of California's medical system is that we have a great deal of experience with integrated systems of delivering medical care. The best known and by far the largest is Kaiser Permanente.

Being a patient of an integrated system is a much different experience than dealing with a number of solo or small-group physician practices. Patients in integrated systems benefit from having their health information stored in a seamless electronic records system and from interfacing with doctors and hospitals that can coordinate care more smoothly across specialties. Not only are health premiums and out-of-pocket costs for enrollees in integrated systems generally lower, levels of satisfaction with care are also equal to or higher than those reported for other systems.

This type of model embodies the characteristics of the "accountable-care organizations," or ACOs, proposed in the House bill unveiled last week and the Senate Finance bill approved in committee in early October. Accountable-care organizations are networks of doctors and hospitals that together would receive a lump-sum payment for coordinating the care of their patients and for taking accountability for both the quality and the value of the care and service delivered.

Since not all medical providers are ready to accept this type of payment, new approaches to care delivery and financing already under way in some states and health systems are also included in legislation. This includes "medical homes" in which practices are paid to guide a patient's care. It also includes "bundled payment" for certain acute episodes of care and chronic conditions.

In this model, providers receive a fee for an entire episode of a patient's care – rather than for individual procedures – and then determine the best use of medical resources to deliver the best care for that patient. The Integrated Healthcare Association is developing a plan for bundled payment for total knee replacement and coronary artery bypass graft in partnership with several Southern California hospitals including Cedars-Sinai Medical Center and health plans including Blue Shield of California.

Administrative burdens must go

There is also a great deal of administrative inefficiency in the health care system. According to a study in the New England Journal of Medicine, almost one-fourth of hospital costs are related to administration and billing, and doctors spend more than eight hours a week on paperwork rather than on patient care. The administrative burden on those who run and participate in public programs is also very high.

To help streamline the process of applying for public programs, the California Healthcare Foundation and the California Endowment partnered with several California counties to develop a new online application tool, "One-E-App."

The investment in the creation of this tool has both reduced administrative overhead and improved the continuity of coverage for children who need public assistance, according to researchers at UCLA. This tool has also been adapted and is now in use in other states, including Indiana and Arizona.

This is just one example of how information technology can – if used wisely – reduce administrative inefficiencies and improve the continuity, and hence quality, of health care coverage. However, simply adding technology to an inefficient and costly medical system will only make the system more complicated and more expensive. Health information technology alone is not enough.

Address social disparities

Real health care reform must address the reasons we fall ill in the first place. In California, there are large disparities in health outcomes among different economic, geographic and cultural communities. The difference in life expectancies of people living in neighborhoods just a few miles apart is striking. The Bay Area Regional Health Inequities Initiative reports that "people who live in West Oakland … can expect to live on average 10 years less than those who live in the Berkeley Hills."

Redressing the "social determinants" of poor health is not only a moral obligation, it is also an economic imperative. The California Center for Public Health Advocacy estimates that a 5 percent reduction in the prevalence of obesity and physical inactivity will save the state nearly $2.4 billion a year. This is because obesity and physical inactivity are associated with the five chronic conditions that account for as much as 75 percent of our health care spending in the United States: diabetes, asthma, depression, congestive heart failure and congestive arterial disease.

The environments in which people live can have a positive impact on their health outcomes even in the face of persistent economic inequality. A local ordinance limits the development of fast food restaurants in south Los Angeles where the prevalence of obesity is higher. And ultimately it is the availability of affordable healthy foods that is the key to lowering rates of obesity. It is 10 times more expensive to get 200 calories from carrots than from donuts.

All components must collaborate

In the end, it will take a broad range of different strategies to control rising health care costs. And the solutions that are developed must be informed by what works in doctors' offices, hospitals and community clinics and for real patients and consumers.

It is for this reason that stakeholders from across the health care spectrum have come together this year to participate in an effort called the "California Task Force on Affordable Care." This series of daylong conversations, convened by the New America Foundation and held at health facilities around the state, will result in the development of a set of proposals to control health care costs based on California's innovative models of delivering high-quality health care and long history of multistakeholder collaboration.

It is possible to dramatically improve the value we get for our medical spending while improving the high quality of care we receive. California's experiences create a road map we can use to successfully implement federal reform and control rising medical costs.