U.S. Healthcare Costs: Steps to Reduce Payment Variation and Increase Value

December 10th, 2014 / By Steve Delaronde

In 2003, health policy experts Gerard Anderson and Uwe Reinhardt, along with two Johns Hopkins doctoral candidates, published an article in Health Affairs provocatively titled “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries.” The article reports data from 2000 published by the Organization of Economic Cooperation and Development (OECD) that showed U.S. per capita health spending to be 134 percent higher than the OECD median and 44 percent higher than the country with the next highest per capita expenditure. This occurred despite the fact that most utilization measures in the U.S., such as physician visits per capita and hospital bed days per capita, were below the OECD median.

Not much has changed since then, except that prices keep going up.

  • The U.S. still has the most expensive health care system in the world at $8,915 per person.
  • U.S. healthcare expenses account for 17.2 percent of GDP compared to an OECD median of 9.5 percent, and well above the next most expensive countries, Netherlands (11.8 percent) and France (11.6 percent).
  • Compared to other industrialized countries, the U.S. still pays 2-3 times as much for healthcare services. For example, the International Federation of Health Plans reports the average price of an abdominal CT scan is three times as much in the U.S. as the Netherlands and nine times as much as Canada. The average angioplasty will cost five times as much in the U.S. compared to the Netherlands.

Throughout most of the industrialized world, there is typically a single purchaser of healthcare services which serves as an effective negotiator on behalf of its citizens. Medicare has this advantage in the U.S., but it only represents 16percent of the population, leaving multiple private insurers to fend for themselves.

Cost containment has been widely discussed in the U.S., but there has been little progress. If we are unwilling to reduce prices, there are steps that can be taken that will at least reduce payment variation and increase the value of healthcare.

1. Reduce payment variation within the system. Medicare’s prospective payment system for inpatient hospital stays uses a single Medicare Severity Diagnosis-Related Group (MS-DRG) to classify patients and reimburse hospitals according to a weighting system that ensures patients who are expected to consume more resources have a higher weight than those requiring fewer resources. Because MS-DRGs were designed to serve the Medicare population, 3M developed the 3M All Patient Refined DRG (APR DRG) Classification System which includes four levels of illness severity and mortality risk, and better estimates resource use for non-Medicare. Because of this more versatile and precise classification system, payment variation can be reduced across a wide range of populations. A similar approach can also be used for outpatient services.

2. Offer price transparency and greater value for healthcare services. If price is the denominator in the value equation and quality is the numerator, then as long as the difference in price for a discrete service is related to quality, the value goal is achieved. For example, a surgical procedure such as a hip replacement may justify a higher cost if the average risk of complications is lower, on average, for a particular provider or the average risk-adjusted recovery period is shorter. If quality on this scale can be delivered, then higher prices can be justified. However, there are two challenges related to effectively making value comparisons- the first is price transparency and the second is quality transparency. Both are needed to select a healthcare service based on value.

3. Offer greater value for population health outcomes. A preferred method for achieving value would be to broadly measure a population’s health status using a comprehensive and integrated set of metrics. Health outcomes can often be achieved through population health management techniques, one of which is the identification and reduction of potentially preventable events, which simultaneously improves quality while reducing costs. The more comprehensively quality can be defined and measured, the better the gauge for measuring value. Unfortunately, there is a dearth of well-accepted comprehensive quality measurement tools in healthcare. CMS has collected 190 measures for the Physician Quality Reporting System (PQRS), but the lack of a single well-accepted composite measure among this vast number makes them difficult to use to affect overall health. The Agency for Research and Quality (AHRQ) also produces multiple quality measurement tools, but many of these are limited to patient safety. 3M developed the 3M Value Index Score, which is unique in that it provides one composite score to allow comparisons among primary care providers across a full spectrum of process and outcome measures.

Ultimately, the high price of healthcare is responsible for much of the greater spending that occurs in the U.S. compared to other countries. Reducing the volume of services, particularly the expensive ones, would also have an obvious impact. But in this era of accountable care, a clear and committed focus on the quality component of the value equation is a necessary approach.

Steve Delaronde is director of consulting for populations and payment solutions at 3M Health Information Systems.