By Jeff Goldsmith

A recent spate of commentaries on the continuing health spending moderation raise an important policy question:  If the cost curve is well and truly bent, why are we investing so much of our policy energy on bending it further, when the more pressing problem is the declining percentage of Americans that can afford our health system’s astronomical costs?

Health spending the past two reported years (2009 and 2010) have grown in the high 3 percent range, the lowest growth rates since Dwight Eisenhower’s last year in office (1960), five years before Medicare. Medicare’s actuaries have pointed to the recession as a root cause.  Yet even Medicare spending growth has subsided to about 5 percent in 2010, a development hard to attribute to recession since so few Medicare patients have first-dollar cost exposure. This analyst’s extensive industry contacts suggest no spending rebound in 2011 and 2012, despite an aging population and fee-for-service’s pernicious volume-increasing incentives in full force.

Pharmaceutical spending. The two most explosive cost problems of the 1980’s and 1990’s, pharmaceutical spending and imaging — which together now represent about 20 percent of total health spending — are now seeing low single digit growth, and seem likely to remain quiescent.  In the pharma case, the main contributor is the ruinous outflow of branded drugs from patent protection, and the failure to replace them with new protected drugs.  This outflow continues unabated until 2018.  Branded drug prescriptions are shrinking by 5 percent per year, and the only things preventing pharmaceutical sales from actually declining are brand price increases and growth in generics, which now represent almost 80 percent of prescriptions, according to IMS Health.  While specialty drugs (biologicals) remain a concern, those too begin losing patent protection in earnest in the next few years.

Imaging. After, seemingly, decades of double digit growth, high technology imaging volumes also have subsided into the low single digits. The Deficit Reduction Act cuts in imaging technical payments sharply cut imaging payments to freestanding imaging providers and physician offices.  A further downward revision of imaging technical fees in 2010 continued the pressure.  These reductions have triggered a spasmodic collapse of private practice cardiology and a thunderous rush of cardiologists into hospital employment.  Waves of cuts in Medicare technical payments appear to have popped a high tech imaging bubble.

Though the recession and activism by pharmaceutical and radiology benefits management industries have undoubtedly slowed pharma and imaging spending, a dearth of new, must-have technologies may be the root cause.  The newest game changing imaging modality, PET scanning, was introduced into mainstream clinical practice in the 1990’s. Sixty-four slice CT was introduced almost eight years ago.  Biologics aside, the last major game changing pharmaceutical product, statin drugs, were introduced in the late 1980’s.

There hasn’t been a major breakthrough in interventional cardiology since stenting, or in implantables since the cardioverter (defibrillator) — both introduced in the late 1980’s.  This lengthy dearth of game changing technologies is actually not good news for patients, but it has produced an unforeseen dividend of cost moderation.

Hospital spending. Of course, hospital spending has been a durable cost driver since the late 1960’s. Here too, there has been gradual but insistent moderation, though hospital spending continued growing at close to 5 percent a year as of 2010. Though widely reported reductions in elective surgery may be traced to the recession, hospital admissions began decelerating four years before the recession, and actually declined beginning in late 2009, after the recession had “ended”.  As Ken Kaufman recently showed here, the declines have crossed age categories.

Payer policy has made a major contribution to declining admissions, as both private health plans and Medicare contractors have increasingly challenged the medical necessity of emergency admissions, stacking up of patients in observation units.  Hospital costs could reaccelerate as baby boomers begin falling apart in earnest.  Eternal vigilance is required here.  But structural changes in physician communities might also retard hospital admissions going forward.

Shifting physician priorities. The last few years have seen the beginning of the retirement of the baby boom physician cohort, the most entrepreneurial generation of physicians in the nation’s history. Baby boom docs fueled the freestanding imaging and surgical center boom, as well as supercharging the physician office with high octane testing capacity.

These entrepreneurial boomer physicians are being replaced by a frightened, risk averse, debt-burdened cadre of Gen Y physicians seeking 35 hour work weeks, rather than seven figure incomes and the rigors of  private practice.  Hospital employment of physicians has consequently surged in the last eight years.

The era of the hospital as the private practitioner’s workshop is ending.  While hospitals staff up their physician coverage (e.g. tripling the number of hospitalists since 2002),  community physicians are withdrawing from hospital practice.  A steadily increasing percentage of surgical practice takes place outside the hospital.  Hospital outpatient surgical volumes are flat.  If policymakers continue to pressure the one remaining source of potential hospital admissions growth, emergency admissions, hospital costs could remain quiescent for the next few years.

The Real Problem: Many Can Not Afford Health Care

Thus, the odds are that the health cost curve remains bent for quite some time. The more pressing policy problem now is that a declining percentage of Americans can afford to use the healthcare system.  Policies such as Accountable Care Organizations, which seek to “bend the cost curve” by replacing fee for service medicine, are misplaced if the real problem is affordability. Even if they perform as policy advocates hope, ACO’s will do nothing meaningful to reduce current excessive costs.

At this writing, 50 million Americans lack health coverage, and may so remain if health reform is derailed by the Supreme Court or the 2012 election.  Perhaps another 35-40 million have coverage but lack the cash to pay the patient’s share of the cost. And 53 million Americans are on Medicaid.   If you add up these three populations,  almost half the country cannot afford to use the health system’s product without massive public subsidy.

According to last year’s Kaiser Family Foundation/HRET survey, 47 percent of those employed throughout the recession avoided seeking needed care.  While some commentators laud the growth in health savings accounts, which the Kaiser/HRET survey says have tripled since 2008, health savings account balances can vanish in a three hour emergency room visit, leaving the patient completely exposed to the next three to five thousand dollars of health costs.

Tremendous within-market cost variations. The most powerful tool available to reduce the absolute cost of health care is exposing patients to the huge variation within markets in the cost of routinely used healthcare services, and rewarding them for making intelligent, cost-conserving choices.   Some salient questions:

• Why should patients or insurers pay $3500 for a hospital MR scan if a radiology benefits management firm can get an MR scan across the street (read by the same radiologist!) for $600?
• Why should patients or their insurers pay $100 thousand for a bypass graft surgery in one hospital when they can get bypass surgery of comparable quality at another hospital in the same community for $50 thousand?
• Would patients travel overseas to receive a joint replacement at a sixth of the cost of that in a US hospital if they received 20 percent of the difference in reduced cost sharing or a cash bonus to their HSA?
• Why should patients or their insurers pay $400 for a non-urgent hospital emergency visit when the same problem can be addressed by a retail clinic or even a walk-in appoint at a local urgent care center for $50?

The challenge for traditional Medicare. For regular Medicare, exposing patients to these cost differentials will be nearly impossible due to the present design of the program, and its administered price model.  The Medicare challenge will be to contain hospital outpatient visit and procedure expense and to bring down episode costs, as well as to simplify reporting requirements and reduce documentation time and expense.

Medicare has already accomplished more than the policy community realizes by rightsizing technical fee payments for outpatient imaging services and pressuring emergency admissions.  This pressure needs to shift to excessive hospital outpatient payments.  Medicare also needs to correct the huge imbalances that exist between technical and professional fees for the same service. Medicare undercompensates physicians for exercising their professional judgment, and overcompensates for the capital and operating expense of complex services, encouraging excessive testing.

Bundling hospital and physician payments for the most costly Medicare services — including preadmission workups, complex clinical intervention, and recovery/rehabilitation — could compel high cost hospitals to reduce episode expense through protocol driven care management.  Attention must be given to assuring that these complex interventions are clinically appropriate.

It would be tragic if the policy community behaved like the senile watchdog that continues barking at the front door, while burglars ransack the back of the house.  Reducing the present astronomical cost of health services is a more difficult, and politically fraught, challenge for policymakers, but one that could be richly rewarded by a grateful, cash-starved public.

Jeff Goldsmith is president of Health Futures Inc. He is also the author of “The Long Baby Boom: An Optimistic Vision for a Graying Generation.” Health Futures specializes in corporate strategic planning and forecasting future health care trends.

This post first appeared at Health Affairs Blog on 5/7/2012.