Summer Journal Club, Week 10: Can we reduce costs through reducing healthcare use?

by Allan Joseph

Welcome to the 10th and final week of Project Millennial’s Summer Journal Club. Previous posts can be found here. This week, we talk about reforms meant to change the amount of care people use.

Last week, we discussed a simple equation to think about healthcare costs:

cost = price x quantity

We focused on the “price” part of that equation last week, and in today’s summer Journal Club finale, we’re going to talk about the quantity side. There’s a lot going on here, so we’ll break it down into a few categories. It’s important to note that most of these have to do changing the demand or supply of medical care itself, not just health insurance. Without further ado:

Changing Provider Incentives

Perhaps the single most surprising thing about the American healthcare system is the way we pay healthcare providers (doctors and hospitals). Instead of being rewarded for keeping patients healthy (the goal of the system, after all), providers are paid on a fee-for-service basis, in which they get paid for every procedure they do, leading to huge incentives for overtreatment, which increases costs. Some time ago in response to this problem, some insurance companies tried “capitated” payments as part of HMOs, in which the company pays a group of doctors a flat fee to provide all necessary care for their patients. Patients were not happy because HMOs tended to have limited doctor networks, and physicians had incentives to provide as little treatment as possible. HMOs are still around, but they’re not the panacea many once thought they were.

Recently, though, there’s been some more action on this front. The Affordable Care Act established Accountable Care Organizations, which Mike has covered extensively here. ACOs are intended to give physicians incentives to provide high-quality, yet affordable care, though it still remains to be seen how effective they’ll be. Other reforms have included a promising experiment in Massachusetts that resembles an ACO, the concept of “bundled payments,” which are a middle ground between fee-for-service and capitated plans. The idea behind bundling payments is that providers should receive a flat payment for treating one episode of an illness, for example, a heart attack, rather than billing individually for each procedure done to treat that condition. Perhaps the most agreed-upon reform is that Medicare is beginning to financially penalize providers whose patients come back due to preventable complications, though there’s quite a bit of controversy over how best to measure that.

Changing Patient Incentives

The very first post of this summer’s Journal Club outlined the reasons people want health insurance, most notably financial stability. However, people act differently when they have insurance — the “dark side” of insurance, known as moral hazard. Basically, when people have insurance, they tend to use more care than they otherwise would — when someone else is paying the bills, it’s easy to over-spend. Of course, that’s partially the point of insurance (without insurance, very few people would be able to afford expensive surgeries), but it can also lead to over-use, in which patients go see the doctor when perhaps they didn’t need to, driving up costs.

Thus, insured patients have an incentive to use more care than they need. How do you fix that? Well, in a general sense, the more patients care about how much they’re paying for care, the more judicious they’ll be — and the way to make them care is to make them pay part of the cost (or so the thinking goes). That’s the idea behind reforms like “consumer-directed health plans,” which include reforms such as “health savings accounts.” These reforms generally involve relying on patients’ judgments as consumers, and the jury’s still out on whether they work. However, given the results of the RAND Health Insurance Experiment and more recent studies, it’s a good guess that such plans reduce costs, but come with a tradeoff of some patients foregoing necessary care. If recent trends are any indication, however, we’ll be learning more soon enough.

Changing How Much Care Is Needed

Perhaps the most straightforward way to deal with the quantity of healthcare provided is to decrease the need for healthcare. As has been a theme throughout the summer (and really, throughout health policy), however, that’s much easier said than done.

The most common proposal for decreasing demand for expensive healthcare is increasing access to preventive care. The idea is that keeping people from getting sick will mean they use less expensive care — for example, if you help a smoker quit smoking, that person will probably not need treatment for lung cancer down the line. There’s just one problem: that doesn’t save money. Why? Healthier people live longer and end up needing other medical care down the line. That’s not to say it’s a bad idea, of course, since such a result would improve quality of life. It just throws some cold water on the plan to reduce costs by increasing preventive care.

There other ways to reduce how much care is needed. Given how much money Medicare spends on the last year of life, perhaps encouraging patients to make their end-of-life wishes clear could save on unwanted care. That’s an incredibly tricky needle to thread, even by health policy standards, as end-of-life issues are really tough to discuss in the political arena (they even birthed the “death panel” meme). Public-health initiatives could reduce the incidence of disease in ways that do end up saving money.

But these solutions, along with all of the ones we’ve discussed today, all have to deal with one nasty fact, best illustrated by this graph from the National Institute for Health Care Management:


The axis labels are somewhat confusing, so let’s run through some of the major findings:

  • The “cheapest” half of the population accounts for only 2.9% of all healthcare spending in the United States.
  • The cheapest 80% of the population accounts for less than 20% of all healthcare spending — that is, the most expensive 20% accounts for 82.2% of healthcare spending.
  • The top 5% of spenders account for half of the healthcare spending.
  • The top 1% of spenders account for 21% of healthcare spending.

This is a nasty problem, and it’s a good question to leave this summer’s journal club with. If you want to reduce healthcare costs, you have to deal with those incredibly expensive patients. We don’t even know a whole lot about those patients (for example, is that expensive 20% the same year to year or does it change), but we know that nibbling around the edges, so to speak, won’t change things. This is perhaps the biggest problem in health policy today, and it doesn’t have any answers — yet.


Allan Joseph is a first year medical student at the Warren Alpert Medical School of Brown University, where he is pursuing an MD/MPP. You can follow him on Twitter @allanmjoseph.

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One thought on “Summer Journal Club, Week 10: Can we reduce costs through reducing healthcare use?

  1. Andrew says:

    What does that graph look like for other advanced industrial countries? They may spend less, but is it still concentrated in the same way?

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