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How Should We Structure Healthcare Cost Sharing?

How Should We Structure Healthcare Cost Sharing?

by Joseph P. Newhouse

There is a common perception today that cost sharing for healthcare services—meaning deductibles, coinsurance, and copayments—has increased. According to the Kaiser/HRET surveys, high-deductible insurance has become more prevalent, covering 4% of insured workers in 2006, 19% in 2012, and 20% in 2013. However, the proportion of personal healthcare spending paid for out-of-pocket has barely budged—National Health Accounts data show it only increased from 13% of spending in 2006 to 14% in 2012. (Data for 2013 are not yet available.)

Of course, healthcare spending over this period went up faster than household income. So even a constant percentage paid for out-of-pocket translates into a higher share of household income going to healthcare and more risk placed on the household. Furthermore, the National Health Accounts data do not count the consumer’s share of health insurance premiums as out-of-pocket spending. The perception of an increased burden, therefore, may be fed by the fact that employers are shifting more of the premium cost, especially for family coverage, to employees.

But the amount of cost sharing is not my only concern. The issue of how cost sharing, no matter the level, should be structured is also important. Traditional cost sharing was either a deductible followed by a coinsurance rate or a copayment for each use of services. The deductible and coinsurance did not vary irrespective of which physician a patient saw or what services that physician undertook. Part B of Medicare exemplifies this cost-sharing structure. Cost sharing in private health insurance evolved such that patients paid more to see an out-of-network physician. Until recently, however, networks tended to be broad, so staying in network was not difficult.

One move away from these types of traditional cost sharing is value-based insurance design (VBID), as advocated by Mark Fendrick and Michael Chernew. Their basic idea is to lower copayments for more efficacious services, for example drugs for certain chronic conditions such as diabetes, and raise them for less effective services. Although attractive in theory, VBID so far has had limited impact for several reasons.

First, and perhaps most important, many medical services may have high benefit for one patient and minimal or no benefit for another. In this case, VBID cost sharing for the service must be further classified according to patient characteristics. Frequently, the evidence for such a classification is thin.

Second, the limited evidence to date suggests that lowering cost sharing for efficacious services can improve outcomes, but neither saves nor costs money. Improving outcomes for the same amount of spending is, of course, a good thing, but some of the hopes for VBID were that it would save money or at least reduce the rate of growth in spending. Related to this point, many if not most VBID efforts thus far have lowered cost sharing for medically effective services; far fewer have raised cost sharing for services of doubtful efficacy, which would lower costs. An important exception has been the successful effort to increase the proportion of prescribed drugs that are generic.

My take is that VBID has merit conceptually, but unless more effort is directed at raising cost sharing for services of little benefit, its scope for reducing cost is limited. What is your view on VBID? In my next post on this site, I will take up the merits of another move away from traditional cost sharing, reference pricing.

Improving quality of care in the United States

Improving quality of care in the United States

by Barbara J. McNeil, MD

Improving quality of care in the United States is one of three pressing problems in health care today. Access for all and reductions in the rate of cost growth are the other two. But, as in most areas of health, these challenges are interrelated. Relationships between quality and cost have dominated the research and public literature of late. A brief historical review is instructive as we think through key interventions for the future.

In the mid 1960s, the physician Avedis Donabedian provided a model for evaluating and improving the health care system. The Donabedian Model indicated that the structure of delivery organizations influenced the processes of care employed, and that the processes of care influenced resulting outcomes for patients. Since then, multiple organizations and groups have focused on several areas in a sequential manner. Each of these activities has involved herculean efforts with sometimes modest success and with frequent negative or neutral results. A few comments follow about each method.

Enumerating optimal processes of care - This method can be fairly straightforward on a one-by-one basis, such as using beta blockers or aspirin after a heart attack. What becomes more complicated is the creation of composite measures of quality, and the jury is still out on the best way to achieve this. How should each of the processes be "weighted" in a composite index? The obvious answer is according to their impact on outcomes, but information on the individual effect of several processes on outcomes is hard to come by. Hence, individuals typically combine all the effects. The Centers for Medicare and Medicaid Services (CMS) used such an approach in the Health Quality Demonstration Project (HQI) [1].

Disseminating the use of known processes of care - This has been at the heart of the work of the Institute for Health Improvement (IHI) for decades. IHI differentiates between pure diffusion and active dissemination, which is their ultimate goal. In addition to the need for an improvement "campaign," the IHI emphasizes involvement of top leadership at all institutions, the evaluation of results by qualitative and quantitative approaches, an understanding of the variation in measures across sites and a determination of its causes, and a review of improvement over time.

Improving health care outcomes - While this is clearly the goal of the health care system, quantifying results is easier said than done. On a global level, recent work [2] has indicated that the United States has made great progress in improving health over time. Documenting this fact took years and considerable resources. However, most health care insurers, systems, providers, and patients are interested in more granular information, such as how outcomes for disease x or procedure y differ across delivery sites or providers. The data to obtain accurate measures of these outcomes tend to be insufficient in most situations, with the notable exception of cardiology and cardiac surgery.

Public reporting - Building on the approaches to measuring processes and outcomes of care, public reporting has been used in several states and by several insurers and private groups such as Castlight Health. One common approach to public reporting provides data on outcomes as related to volume, or so-called "volume-outcome" relationships.

Pay for performance - Originally, this was a promising approach to improving patient care. However, its use in the United Kingdom, one of the first implementation sites, proved ineffective when evaluated for its effect on process measures for several chronic conditions [3]. One of the largest U.S. studies on the impact of pay for performance on 30-day mortality after an acute myocardial infarction showed no effect [4].

Bundled or budgeted payments - This method has been introduced as a way of linking cost-conscious behavior with improved outcomes. One recent study reviewed a prototypical example-the impact of the Alternative Quality Contract in Massachusetts on outcomes [5]. It showed a modest effect on underlying growth in medical spending, while slightly improving quality of care for chronic care management, adult preventive care, and some aspects of pediatric care. In one study, a national program, Accountable Care Organizations, was associated with lower spending but not with consistently improved quality [6].

Where do these issues and data lead us? We have a long way to go before fully understanding how to improve quality in its multiple dimensions, while simultaneously restraining cost growth. Learning from multiple disciplines will help us on this journey. At the least, we need to emphasize the second imperative: "Promoting Novel Approaches to Process Improvement." We must understand what process measures to develop and emphasize, and then implement them in innovative ways that ensure quality of care, cost-effectiveness, and accessibility for all.

What process improvements do you think have really moved the needle on costs, quality or access?

1 Centers for Medicare and Medicaid Services. CMS HQI Demonstration Project: Composite Quality Score Methodology Overview. http://www.cms.gov.

2 Members of the U.S. Burden of Disease Collaborators. "The state of U.S. health, 1990-2010: Burden of diseases, injuries, and risk factors." JAMA 310 (2013): 591-608.

3 Campbell, S.M. and Others. "Effects of pay for performance on the quality of primary care in England." N Engl J Med 2009; 261: 368-78.

4 Jha, A.K. and Others. N Engl J Med 344 (2012): 1606-15.

5 Song, Z. and Others. "The 'alternative quality contract' based on a global budget lowered spending and improved quality." Health Aff 31 (2012): 1885-94.

6 McWilliams, J.M. and Others. "Changes in health care spending and quality for Medicare beneficiaries associated with a commercial ACO contract." JAMA 310 (2013): 829-36.

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What is it about healthcare costs?

A key effort of the Forum on Healthcare Innovation is the Survey of Executive Sentiment in Healthcare. When organizing the conference, we realized that we had a unique opportunity to ask senior executives from across all sectors of the healthcare industry about their views on the cost and quality challenges facing the American healthcare system.

We did not ask these executives to report objective data—there are already many well-regarded sources for that information—but rather to provide their thoughts regarding the industry and opportunities to improve value within it. In particular, we asked the executives for their impressions of the current state and future trajectory of both quality and cost—the two underlying components of value in healthcare.

In terms of healthcare quality, respondents were somewhat evenly split. Twenty percent believe that quality in the United States is currently worse than and falling behind that of other industrialized nations, which is only slightly more than the 14% who believe that healthcare quality in the United States is currently better than and pulling ahead of other industrialized nations.

In contrast, when we asked respondents to think about the trajectory of quality and cost control together, we found that while 22% believe that quality is falling behind and healthcare costs are increasing more than general inflation, only 1% believe that quality is pulling ahead and healthcare costs are increasing less than general inflation.

This is quite surprising. Our cost question did not simply ask whether respondents felt healthcare costs would increase in the next five years—few expect healthcare costs to do anything other than increase in the near term. Rather, we asked whether the rate of healthcare cost growth would exceed growth in the cost of other things, such as general inflation.

While our respondents were somewhat evenly divided in their opinions about quality alone, they were significantly more negative when we asked them to consider the potential for controlling cost growth. This leads us to wonder: realizing that current healthcare costs in the United States are high, what has caused so many within the industry to feel that healthcare costs will continue to grow faster than the costs of other goods? What is it about healthcare that makes it predisposed not just to high costs, but also to high cost growth?

Welcome to the Forum on Healthcare Innovation

Welcome to the Forum on Healthcare Innovation. Over the coming months, this blog will provide commentary from Harvard Business School (HBS) and Harvard Medical School (HMS) faculty, as well as other experts, related to issues central to innovation and value improvement in the healthcare industry.

Before we get started, I think it is worth understanding how this blog, website, and overall initiative became a reality. Roughly two years ago, HBS Dean Nitin Nohria and HMS Dean Jeffrey Flier approached a small group of faculty at the two schools with a broad challenge: consider what Harvard University’s business and medical schools might be able to do together to stimulate discussion and research about innovation across all sectors of the healthcare industry. As part of the five-member faculty steering committee, I was filled with a mix of optimism about the possibilities and pessimism about the realities. The faculty of each school already had a great deal of insight to offer about innovation in numerous sectors; surely, combining both faculties would create something even greater than the sum of its parts. Yet, I also knew that coordinating activities across large faculties composed of numerous scholarly agendas could lead to a lack of focus and, ultimately, a loss of impact.

As the deliberations of the faculty steering committee proceeded, however, we realized that the work being conducted at both schools hinged on three common interests: (1) an understanding of the need to improve “value”—the quality of outcomes achieved per dollar spent—across the industry; (2) an appreciation of the need for academic researchers to engage with and learn from senior managers and practitioners; and (3) a realization that any meaningful solution to the challenges facing the healthcare industry would require input from all of its sectors. Having identified this shared set of interests, the faculty steering committee decided to launch the Forum on Healthcare Innovation with a conference, which took place on the HBS campus in November 2012 and brought together roughly 150 senior leaders from across the healthcare industry. In addition, the Forum launched the HBS/HMS Survey of Executive Sentiment in Healthcare, a companion survey sent to all conference invitees.

The recently released report summarizing the conference and survey—5 Imperatives for Addressing Healthcare’s Innovation Challenge—categorizes the findings of both activities in a series of five imperatives for driving value-improving innovation in healthcare. These are:

1 Making value the central objective
  In isolation, efforts to either reduce costs or improve outcomes are insufficient; we need to do both through care coordination and shared information.
2 Promoting novel approaches to process improvement
  Instead of largely focusing on product innovation, we also must create an environment that encourages process improvement and acknowledges that “failure” represents an important component of experimentation and learning.
3 Making consumerism really work
  Today, consumerism remains a strong idea with weak means of execution. We will achieve greater success when providers organize efforts around patient needs and when patients become more active agents in managing their own health.
4 Decentralizing approaches to problem solving
  We should facilitate the movement of care delivery and healthcare innovation from centralized centers of expertise out to the periphery, where more providers, innovators, and patients can engage in collaborative improvement efforts.
5 Integrating new approaches into established organizations
  Our future must build on past successes. Existing healthcare institutions must be reinforced with efforts to integrate new knowledge into established organizations and the communities they serve.

In future posts, we will be digging into specific issues related to each of these five imperatives. For now we ask, “What do you see as the most critical step that the American healthcare industry must take to catalyze value-improving innovation?”

Robert S. Huckman
Albert J. Weatherhead III Professor of Business Administration, Harvard Business School