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American Academy of Actuaries Summer Summit July 16, 2012 Health Care Costs: Background Information

Section A Health Spending Growth and Cost Drivers: Selected Reports……………………………………2 Section B Health Spending Growth and Cost Drivers: Related Academy Materials…………………….…..7 Section C ACA Provisions Designed to Reduce Health Spending and Improve Quality………………......10

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Section A Health Spending Growth and Cost Drivers Selected Reports 1. National Health Expenditure Projections: Modest Annual Growth Until Coverage Expands and Economic Growth Accelerates. Sean Keehan, et al. Health Affairs July 2012. http://content.healthaffairs.org/content/31/7/1600.abstract?etoc

Summary For 2011–13, US health spending is projected to grow at 4.0 percent, on average—slightly above the historically low growth rate of 3.8 percent in 2009. Preliminary data suggest that growth in consumers’ use of health services remained slow in 2011, and this pattern is expected to continue this year and next. In 2014, health spending growth is expected to accelerate to 7.4 percent as the major coverage expansions from the Affordable Care Act begin. For 2011 through 2021, national health spending is projected to grow at an average rate of 5.7 percent annually, which would be 0.9 percentage point faster than the expected annual increase in the gross domestic product during this period. By 2021, federal, state, and local government health care spending is projected to be nearly 50 percent of national health expenditures, up from 46 percent in 2011, with federal spending accounting for about two-thirds of the total government share. Rising government spending on health care is expected to be driven by faster growth in Medicare enrollment, expanded Medicaid coverage, and the introduction of premium and cost-sharing subsidies for health insurance exchange plans. 2. Cost Drivers in Health Care. Alliance For Health Reform Issue Brief. April 2012. http://www.allhealth.org/publications/Cost_of_health_care/Cost_Drivers_in_Health_Care_109.pdf

Summary This Issue Brief catalogues factors that are cited as cost drivers in health care, without making any assessment of the relative merits of the factors. It presents the factors within three broad categories, recognizing that it is the interactions that are critical, and that any categorization is dependent on judgments about placement. --Aggregate national demographic and economic factors-Per capita income; age; disease prevalence. --Determinants of health of individuals and societies-Individual characteristics (genetics) and personal behaviors; the physical environment in which individuals live and work; the social and economic environment in the community. --Health system factors-Demand-side issues: the prevalence of insurance coverage; insurance coverage shortfalls; and the information gaps in health care. Supply-side issues: overall supply and mix of services; the development, diffusion and pricing of new technology. Systemic, crosscutting issues: marketplace structures; payment incentives (driving volume, especially of higher cost services); fragmented delivery and financing systems; insufficient

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evidence-base on multiple aspects of care and costs; regulatory issues; quality and safety; malpractice litigation risks 3. Health Care Cost and Utilization Report: 2010. Health Care Cost Institute. May 2012. http://www.healthcostinstitute.org/files/HCCI_HCCUR2010.pdf

Summary We find continued growth in per capita and estimated aggregate health care spending in this population, although that growth is less than 4 percent. This is consistent with the Centers for Medicare & Medicaid Services’ findings regarding national health expenditures. Patients’ out-ofpocket share of prices paid went up, although the cost-sharing rate on a per capita basis (including beneficiaries who did not use services) did not change much. Prices increased across all categories of service, with outpatient services experiencing the fastest growth. Unlike other recent reports on health care spending, we find that the increased spending is mostly due to unit price increases rather than changes in the quantity or intensity of services. 4. Higher Fees Paid To US Physicians Drive Higher Spending For Physician Services Compared To Other Countries. Miram J. Laugesen and Sherry A. Glied. Health Affairs, September 2011. Summary Higher health care prices in the United States are a key reason that the nation’s health spending is so much higher than that of other countries. Our study compared physicians’ fees paid by public and private payers for primary care office visits and hip replacements in Australia, Canada, France, Germany, the United Kingdom, and the United States. We also compared physicians’ incomes net of practice expenses, differences in financing the cost of medical education, and the relative contribution of payments per physician and of physician supply in the countries’ national spending on physician services. Public and private payers paid somewhat higher fees to US primary care physicians for office visits (27 percent more for public, 70 percent more for private) and much higher fees to orthopedic physicians for hip replacements (70 percent more for public, 120 percent more for private) than public and private payers paid these physicians’ counterparts in other countries. US primary care and orthopedic physicians also earned higher incomes ($186,582 and $442,450, respectively) than their foreign counterparts. We conclude that the higher fees, rather than factors such as higher practice costs, volume of services, or tuition expenses, were the main drivers of higher US spending, particularly in orthopedics. 5. High and Rising Health Costs: Demystifying U.S. Health Care Spending. The Synthesis Project Policy Brief No 16, Robert Wood Johnson Foundation. October 2008. http://www.rwjf.org/files/research/35368.highrisingcosts.brief.pdf

Summary  Health insurance is becoming increasingly difficult for workers—and their employers—to afford. Premiums increased 114 percent between 1999 and 2007, while workers’ earnings increased only 27 percent.  U.S. spending on health care—as a percentage of GDP—is more than six percentage points higher than the average for other developed countries. 3


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Technology—not demographics or medical malpractice—is the key driver of health spending, accounting for an estimated half to two-thirds of spending growth. Other important drivers of health care spending include health status (particularly obesity) and low productivity gains in the health care sector.

6. Examination of Health Care Cost Trends and Cost Drivers. Massachusetts Office of the Attorney General. June 22, 2011. http://www.mass.gov/ago/docs/healthcare/2011-hcctd-full.pdf

Summary Our examination identified several factors that we believe should be considered when analyzing cost containment strategies. We found: 1. There is wide variation in the payments made by health insurers to providers that is not adequately explained by differences in quality of care. 2. Globally paid providers do not have consistently lower total medical expenses. 3. Total medical spending is on average higher for the care of health plan members with higher incomes. 4. Tiered and limited network products have increased consumer engagement in value-based purchasing decisions. 5. Preferred Provider Organization (PPO) health plans, unlike Health Maintenance Organization (HMO) health plans, create significant impediments for providers to coordinate patient care because PPO plans are not designed around primary care providers who have the information and authority necessary to coordinate the provision of health care effectively. 6. Health care provider organizations designed around primary care can coordinate care effectively (1) through a variety of organizational models, (2) provided they have appropriate data and resources, and (3) while global payments may encourage care coordination, they pose significant challenges.

7. Bending the Curve Through Health Reform Implementation. Several authors including John Bertko and Mark McClellan. The Brookings Institution. October 2010. http://www.brookings.edu/~/media/research/files/reports/2010/10/btc%20ii/final%20bending%20the%20curve%201 02010.pdf

Summary Reducing health care spending growth remains an urgent and unresolved issue, especially as the ACA expands insurance coverage to 32 million more Americans. While more should be done legislatively, the current reform legislation includes important opportunities that will require decisive steps in regulation and execution to fulfill their potential for curbing spending growth. Executing these steps will not be automatic or easy. Yet doing so can achieve a health care system based on evidence, meaningful choice, balance between regulation and market forces, and collaboration that will benefit patients and the economy. We focus on three concrete objectives to be reached within the next five years to achieve savings while improving quality across the health system:

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1. Speed payment reforms away from traditional volume-based payment systems so that most health payments in this country align better with quality and efficiency. 2. Implement health insurance exchanges and other insurance reforms in ways that assure most Americans are rewarded with substantial savings when they choose plans that offer higher quality care at lower premiums. 3. Reform coverage so that most Americans can save money and obtain other meaningful benefits when they make decisions that improve their health and reduce costs. 8. Lessons from Medicare's Demonstration Projects on Disease Management and Care Coordination. Lyle Nelson, Congressional Budget Office Working Paper 2012-01. January 18, 2012. http://cbo.gov/sites/default/files/cbofiles/attachments/WP2012-01_Nelson_Medicare_DMCC_Demonstrations.pdf

Summary This paper summarizes the results of Medicare demonstrations of disease management and care coordination programs. Such programs seek to improve the health care of people who have chronic conditions or whose health care is expected to be particularly costly, and they seek to reduce the costs of providing health care to those people. In six major demonstrations over the past decade, Medicare’s administrators have paid 34 programs to provide disease management or care coordination services to beneficiaries in Medicare’s fee-for-service sector. All of the programs in those demonstrations sought to reduce hospital admissions by maintaining or improving beneficiaries’ health, and that reduction was a key mechanism through which they expected to reduce Medicare expenditures. On average, the 34 programs had no effect on hospital admissions or regular Medicare expenditures (that is, expenditures before accounting for the programs’ fees). There was considerable variation in the estimated effects among programs, however. Programs in which care managers had substantial direct interaction with physicians and significant in-person interaction with patients were more likely to reduce hospital admissions than programs without those features. After accounting for the fees that Medicare paid to the programs, however, Medicare spending was either unchanged or increased in nearly all of the programs. 9. Care Coordination in Fee-For-Service Medicare, in Report to the Congress: Medicare and the Health Care Delivery System. Medicare Payment Advisory Commission (MedPAC). June 2012. http://medpac.gov/chapters/Jun12_Ch02.pdf

Findings from recent Medicare demonstrations on care coordination and disease management models have not shown systematic improvements in beneficiary outcomes or reductions in Medicare spending. Despite those findings, many health care providers and researchers still see significant potential for care coordination programs to improve care. The most successful model in the Medicare demonstrations emphasized restructuring systems to support a care coordination intervention. This finding supports the conclusion that successful care coordination cannot be a “plug-in module” but must be an integral part of the system providing the care. The approaches most likely to achieve significant improvement in care coordination are those that: fundamentally change the FFS incentives to provide more, rather than better, care; give organizations the flexibility to use the best tools for their population; and support, facilitate, and 5


permit innovation that will improve care for beneficiaries. While broad payment reform (such as the shared savings payment approach for ACOs and bundled payments) holds promise for improving care coordination, these changes will take time to develop. In the interim, it may be necessary to take intermediate steps to improve care coordination and provide explicit payments for the related activities that primary care clinicians do but that are not currently paid for under the FFS system. Policy options for care coordination could include adding codes or modifying existing codes in the fee schedule that allow practitioners to bill for care coordination activities, creating a per beneficiary payment for care coordination, or using payment policy to reward or penalize outcomes resulting from coordinated or fragmented care.

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Section B Health Spending Growth and Cost Drivers Related Academy Materials 1. Taking Control: An Actuarial Perspective on Health Spending Growth. Issue brief, September 2008. Issue brief: http://www.actuary.org/files/spending_ib_08.4.pdf/spending_ib_08.4.pdf Related slides from Academy hill briefing: http://www.actuary.org/files/publications/slides%20from%20health%20spending%20briefing%20sept08.pdf

This issue brief reviews some of the major causes of health spending growth. It focuses on drivers of health spending growth that are actuarial in nature and examines various options that have been proposed to address them. In general, the drivers of health spending growth that are discussed in this issue brief can be thought of in terms of those that contribute to increases in the price paid for health care services, and those that contribute to higher levels of health care utilization. Health care service prices increase for reasons such as:  Broader provider networks limiting the ability of health care purchasers to negotiate discounts;  The shortage of primary care physicians resulting in greater use of specialist care at higher service fees; and  Provider consolidation increasing size and leverage, potentially reducing price competition. Health care utilization increases for reasons such as:  New medical technology that can be more expensive than the technology that it replaces;  Predominant provider reimbursement structures that reward health care providers for providing more services;  Comprehensive benefit packages that lower the out-of-pocket costs that consumers face at the point of service; and  Less healthy lifestyle choices that increase the need for medical services to treat and manage chronic diseases. In addition, the brief discusses two factors that don’t affect health spending overall, but do affect health insurance premiums—adverse selection and cost shifting. 2. An Actuarial Perspective on Proposals to Improve Medicare’s Financial Condition. Issue brief, May 2011 http://www.actuary.org/files/Medicare_Financial_IB_Final_051211.8.pdf/Medicare_Financial_IB_Final_051211.8. pdf related 2012 campaign voter guide: http://www.actuary.org/files/publications/Campaign%202012%20Medicare%20FINAL%20042312.pdf

This paper outlines many of the Medicare-related provisions in the various debt and deficit reduction proposals. For each proposal, a summary of the key cost, access, and quality issues from an actuarial perspective is provided. Options explored include, among others: setting 7


spending targets, moving to a premium support approach, expanding the authority of the Independent Payment Advisory Board (IPAB), revising the FFS plan design, and raising the Medicare eligibility age. 3. An Actuarial Perspective on Accountable Care Organizations. Issue brief, June 2011. http://www.actuary.org/files/publications/ACO_issue_brief.pdf

An ACO is a group of health care providers, such as physicians and hospitals, that work together to manage and coordinate care for a group of patients—across the entire spectrum of care for those patients—and accept responsibility for the quality and cost of that care. The ACO structure is intended to encourage more integrated care for patients, resulting in quality improvements and reduced costs. This issue brief discusses various issues that stakeholders should evaluate as ACOs are implemented. 4. Value-Based Insurance Design. Issue brief, June 2009. http://www.actuary.org/files/publications/value_based_insurance_design_june2009.pdf

Initiatives like value-based insurance design (VBID) are being discussed to address the disconnect between health care spending and health care outcomes. The goal of optimizing patient health through more effective utilization of health care services can be advanced by implementing VBID. Through the structuring of plan design incentives, VBID can be used to lower the financial barriers to high-value treatments (i.e., those with evidence of clinical benefit). The principle underlying VBID rests on the premise that quality health care can be achieved in a cost-effective manner by encouraging the use of high-value services and discouraging the use of low-value services. Restructuring health insurance plans to provide more incentives for patients to receive better quality and more effective care can help refocus the health care system on value rather than volume, especially if the provider payment system is restructured accordingly, as well. This issue brief defines value-based insurance design, provides an overview its prevalence, examines the barriers to implementation, and review policy considerations related to VBID adoption and implementation. 5. Emerging Data on Consumer-Driven Health Plans, Monograph, May 2009. http://www.actuary.org/files/publications/cdhp_may09.pdf

Consumer-driven health (CDH) products have been marketed in various forms since the early 2000s. While emerging data is not entirely conclusive, general directional conclusions can be drawn from the studies published to date. This monograph summarizes the results of some of those studies, focusing on the ones that are based on historical claims data, that use credible methodologies, and that provide reasonably detailed and relevant results. 6. Health Insurance Coverage and Reimbursement Decisions: Implications for Increased Comparative Effectiveness Research, Issue brief, September 2008. http://www.actuary.org/files/comparative.4.pdf/comparative.4.pdf

Comparative effectiveness research is being pursued as a way to better assess the value of health care treatment options. Proponents believe that this research can help identify the best courses of treatment and lead to more standardized practices, thus increasing the quality and value of health

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care while reducing the wide variation in practice patterns. To provide insights into the potential implications of more formal comparative effectiveness research, it is important to better understand how advances in health technology and treatment protocols are incorporated into the healthcare system. This issue brief discusses current assessments of health care quality; the process for incorporating new treatment protocols and technologies into health insurance coverage; and the policy implications of comparative effectiveness research. 7. Medicare’s Financial Condition: Beyond Actuarial Balance, Issue brief, May 2012. http://www.actuary.org/files/Medicare%20Trustees%20IB%20FINAL%20052112.pdf related 2012 campaign voter guide: http://www.actuary.org/files/publications/Campaign%202012%20Medicare%20FINAL%20042312.pdf

Each year, the Academy publishes an issue brief to comment on the release of the annual Medicare trustees’ report. The issue brief highlights the financial challenges facing the Medicare program and urges action to restore the program’s long-term solvency and sustainability. 8. Calls to address health care spending growth Numerous Academy public statements, including letters to congressional leadership, testimony submitted to congressional hearings, and a 2008 election guide backgrounder highlight the importance of addressing health spending growth. As an example, here is an excerpt from a letter to President Obama and other participants at a bipartisan meeting on health reform in February 2010: For long-term sustainability, health spending growth must be reduced. According to the most recent CMS estimates, annual spending growth is projected to average 6.1 percent over the next decade, or 1.7 percentage points higher than the growth in the economy. As a result, health spending will increase from 17.3 percent of GDP in 2009 to 19.3 percent in 2019. Reining in health spending is key to a sustainable health system that is affordable to individuals, employers, and the government. Decision makers need to find ways to control spending, and provisions to control health care spending should be a cornerstone of any health reform efforts. These should include not only one-time improvements that will lower spending in the short-term, but also provisions that will permanently lower spending growth. Health reform efforts provide an important imperative to begin shifting the health care payment and delivery systems to focus on cost-effective and high quality care, which can potentially reduce long-term spending growth. Policymakers need to ensure that promising approaches and successful demonstration projects are adopted on a broad scale in a timely manner.

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Section C ACA Provisions Designed to Reduce Health Spending and Improve Quality1 Reduces Medicare provider payments  The annual updates for fee-for-service provider payment rates are being adjusted downward to reflect productivity improvements.  Reduces Medicare hospital payments for excess (preventable) hospital readmissions.  Reduces Medicare payments to certain hospitals for hospital-acquired conditions. Reduces Medicare Advantage plan payments Medicare Advantage payments are being reduced gradually and will be based on FFS costs. Creation of the Independent Payment Advisory Board (IPAB) Beginning in 2014, the board will submit recommendations to make changes to provider payments if Medicare spending exceeds a target per capita growth rate. Unless legislative action overrides the recommendations, they will be implemented automatically. Health care payment and delivery system improvements Pilot programs, demonstration projects, and other reforms will be implemented to increase the focus on delivering high quality and cost-effective care. These include initiatives on bundled payments and accountable-care organizations (ACOs).  Facilitates the creation of ACOs. Allows Medicare providers organized as ACOs to share in the cost savings they achieve for the Medicare program.  Creates the CMS Innovation Center to identify, develop, support, and evaluate innovative models of payment and care service delivery. Payment reform models that improve quality and reduce the rate of cost growth could be expanded throughout the Medicare, Medicaid, and CHIP programs.  Establishes a national Medicare pilot program to develop and evaluate paying a bundled payment for acute and post-acute care services. If the pilot program achieves stated goals of improving or not reducing quality and reducing spending, develop a plan for expanding the pilot program.  Establishes a hospital value-based purchasing program in Medicare to pay hospitals based on performance on quality measures and extend the Medicare physician quality reporting initiative beyond 2010. Develop plans to implement value-based purchasing programs for skilled nursing facilities, home health agencies, and ambulatory surgical centers.  Creates the Independence at Home demonstration program to provide high-need Medicare beneficiaries with primary care services in their home and allow participating teams of health professionals to share in any savings if they reduce preventable hospitalizations, prevent hospital readmissions, improve health outcomes, improve the efficiency of care, reduce the cost of health care services, and achieve patient satisfaction.

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Information reflects the Kaiser Family Foundation’s summary of the ACA, available at: http://www.kff.org/healthreform/upload/8061.pdf

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Increased focus on Medicare-Medicaid dual eligibles Creates a new office within CMS to more effectively integrate Medicare and Medicaid benefits and improve coordination between the federal government and states in order to improve access to and quality of care and services for dual eligibles.  State demonstration projects will evaluate different approaches for coordinating care for dual eligibles. Comparative effectiveness research Establishes the Patient-Centered Outcomes Research Institute (PCORI) to identify research priorities and conduct research that compares the clinical effectiveness of medical treatments. Medical malpractice Awards five-year demonstration grants to states to develop, implement, and evaluate alternatives to current tort litigations. Medicaid  Creates a new Medicaid state plan option to permit Medicaid enrollees with chronic conditions to designate a provider as a health home.  Creates new demonstration projects in Medicaid to pay bundled payments for episodes of care that include hospitalizations; to make global capitated payments to safety net hospital systems; to allow pediatric medical providers organized as ACOs to share in cost-savings; and to provide Medicaid payments to institutions of mental disease for adult enrollees who require stabilization of an emergency condition. Increase access to primary care  Increases Medicaid payments for primary care services provided by primary care doctors to 100% of the Medicare payment rates for 2013 and 2014.  Provides a 10% bonus payment to primary care physicians in Medicare from 2011 through 2015. National quality strategy  Develops a national quality improvement strategy that includes priorities to improve the delivery of health care services, patient health outcomes, and population health. Create processes for the development of quality measures involving input from multiple stakeholders and for selecting quality measures to be used in reporting to and payment under federal health programs.  Establishes the Community-based Collaborative Care Network Program to support consortiums of health care providers to coordinate and integrate health care services, for lowincome uninsured and underinsured populations. Prevention and wellness  Establishes the National Prevention, Health Promotion and Public Health Council to coordinate federal prevention, wellness, and public health activities.  Establishes a grant program to support the delivery of evidence-based and community-based prevention and wellness services aimed at strengthening prevention activities, reducing chronic disease rates and addressing health disparities, especially in rural and frontier areas.

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Eliminates cost-sharing for Medicare covered preventive services that are recommended by the U.S. Preventive Services Task Force. Increases federal Medicaid payments to states that cover preventive services with no cost sharing. Provides incentives to Medicare and Medicaid beneficiaries to complete behavior modification programs. Provides grants for up to five years to small employers that establish wellness programs. Provides technical assistance and other resources to evaluate employer-based wellness programs. Permits employers to offer employees rewards—in the form of premium discounts, waivers of cost-sharing requirements, or benefits that would otherwise not be provided—of up to 30% of the cost of coverage for participating in a wellness program and meeting certain health-related standards.

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HealthCareCosts_Background_2012_0