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Yes, health care costs are high, but the reasons may not be so obvious

Health Care Current | February 27, 2018

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

My Take

Yes, health care costs are high, but the reasons may not be so obvious

By Sarah Thomas, Managing Director, Deloitte Center for Health Solutions, Deloitte Services LP

Over the past couple of decades, I have heard (and given) many presentations about health care costs in the US. Health care spending was the focus of a conference1 I attended earlier this month, and as I sat down with my table-mates, I asked “do you think we’ll hear anything new?”

The speakers at this event offered some fresh perspectives on three key points that many of us already know:

  • Consumers care about costs.
  • The US spends more on health than other countries.
  • Value-based care (and other payment strategies) have moved the needle, but not much.

Let’s take a closer look at each of these three topics:

1. Consumers are concerned about their own spending, not system-wide spending: While over-use is often seen as a reason for high health care spending in the US, consumers tend to see under-treatment as more of a problem. MollyAnn Brodie shared years of consumer data from the Kaiser Family Foundation.2 There is no question that consumers care about health costs: Their 2017 poll found that:

  • Among adults with health insurance, 43 percent say they have difficulty affording their deductible, and about one-third of consumers have problems paying premiums and other cost-sharing expenses.
  • Three in ten (29 percent) Americans say they have problems paying medical bills. Among this group, seven in ten (73 percent) say they have had to cut back spending on food, clothing, or basic household items to pay medical bills.
  • Twenty-seven percent of Americans say they have put off or postponed needed health care, 23 percent say they have skipped a recommended medical test or treatment, and 21 percent say they have not filled a prescription for a medicine.

MollyAnn noted, however, that awareness of personal health care costs is different from consumers understanding that there is waste in the overall health care system—due to over treatment or low-value care—or believing that society spends too much on health care. Indeed, Kaiser’s surveys and focus groups suggest that consumers are more worried about under-treatment.

2. Rich countries spend more money on health care: One reason the US spends more on health care than other countries could be related to our large gross domestic product (GDP). Health care spending accounts for about 18 percent of the nation’s GDP. In a 2003 landmark paper, health economist Uwe Reinhardt noted that the US pays far more for health care than other industrialized countries.3 Although overuse and waste in the system are often blamed, the late Princeton professor famously concluded “It’s the prices, stupid.” Other researchers have suggested that greater spending on social programs is associated with lower spending on health care.

But Leslie Greenwald of RTI International offered a different perspective. She described a regression analysis that compared differences in health care spending as a share of GDP among countries that make up the Organization of Economic Cooperation and Development (excluding the US) and then added the US to the mix.

Leslie found that the biggest driver of spending differences—once you include the US—is the size of the GDP. Maybe the wealthier (and older) we get, the more we value health care? She said these findings do not mean there aren’t opportunities to save money and improve value, but such opportunities are likely to be in pockets rather than systematic.

3. Value-based care needs more time to show results: Risk-based payment has led to some savings from the early accountable care organizations (ACOs) and from bundling. The results from other initiatives have been decidedly underwhelming. Ashish Jha of Harvard T.H. Chan School of Public Health provided a fairly comprehensive overview and assessment of some value-based care initiatives (e.g., ACOs, readmission policies, value-based purchasing for hospitals, and bundling). He pointed to two bright spots when it comes to spending:

  • The first batch of ACOs, which reduced spending by a solid 2 percent in their first year, have sustained small, but steady savings in subsequent years.
  • Although some industry observers might disagree, Ashish suggested that savings reported for some of the other value-based care initiatives amounted to coding changes. It stands to reason that it is easier to improve coding practices than it is to make real changes.

Maybe we need to give some of these programs more time, at least until a critical mass of payments are risk-based and truly reward innovation that reduces cost and increases value.

So, what can we do about costs?
I walked away from this conference feeling somewhat unsatisfied with our prescriptions for what to do about high health care costs. Is there anything that consumers, health care providers, health plans, pharmaceutical and medtech manufacturers, employers, or the government can do to address high health care costs? I—along with many others in the audience—agreed that clinicians and providers are in the best position to promote change. (Of course, before that can happen, the incentives in payment systems need to be fixed so that providers have a good reason to push for change. And government needs to help by getting rid of barriers.)

Change is hard, especially when the goal is to save money. As we all know, savings in one area is lost income in another. But providers and clinicians understand the problems, and have demonstrated that they can make improvements. It was the clinicians and providers, for example, who figured out where to find the savings in bundles. Moreover, consumers trust their clinicians and providers much more than the other groups in the health care sector.

I would put part of my bet on disruptors to force change and technology to help providers and clinicians. One speaker mentioned a 900-bed hospital that had 1,500 administrative and coding staff. I love the idea that augmented intelligence might one day help hospitals and health plans automate administrative functions to reduce administrative costs, and maybe even help consumers and clinicians avoid unpleasant interactions with the system over claims.

Technology might help with a lot of other pain points, too. In my mind, the key is to reward innovators who develop solutions that not only work, but that also break constraints.

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1 Health Affairs event, “Health Spending: Tackling the Big Issues,” February 1, 2018.
2 https://www.kff.org/health-costs/poll-finding/data-note-americans-challenges-with-health-care-costs/
3 https://www.healthaffairs.org/doi/full/10.1377/hlthaff.22.3.89


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In the news

HHS proposes 9-month extension for short-term health plans

The administration wants to extend the duration of low-cost, short-term health plans from a maximum of three months to a period of less than 12 months. Short-term health plans are intended for temporary coverage and are not required to include the 10 essential health benefits outlined by the Affordable Care Act (ACA). A joint proposal was issued February 20 by the US Departments of Health and Human Services (HHS), Labor, and Treasury that would extend short-term plans by about nine months. The proposal follows the president’s October 2017 Executive Order to make more lower-cost health coverage options available.

In 2016, HHS issued regulations that limited the duration of short-term policies to no more than 90 days, instead of the 12-month term that had been allowed. The idea was to encourage more young and healthy individuals to buy ACA-compliant coverage through the public exchanges. Short-term policies do not have to comply with ACA rules such as medical loss ratios, annual/lifetime coverage limits, or guarantee issue coverage. As a result, they tend to be less expensive than more comprehensive health insurance plans.

Several trade groups contend that these (longer) short-term plans will be cheaper (albeit with less coverage), which will attract healthy individuals from the risk pool. This in turn could cause health plans to increase premiums for their ACA-compliant products. Comments on the proposal are due within 60 days. New requirements would likely go into effect 60 days after publication of a final rule.

GAO finds one-third of Medicaid dollars are spent on demonstrations, but not enough done to evaluate results

While about one-third of federal Medicaid dollars went toward Section 1115 demonstration projects in 2015, project spending and scope varied widely among states, according to a new report from the Government Accountability Office (GAO). And while the federal government spent $109 billion on state demonstrations that year, neither the states nor the Centers for Medicare and Medicaid Services (CMS) appear to know whether the investments have been effective in reducing costs or improving care, according to the report.

Section 1115 of the Social Security Act allows states to test and evaluate new approaches for delivering Medicaid services to beneficiaries. As of November 2016, 37 states were operating at least part of their Medicaid program under section 1115 waivers.

Without detailed evaluation data, payers, policymakers, regulators, and health care stakeholders often don’t know which strategies are worth investing in. Based on its findings, GAO recommends that CMS establish written procedures for requiring final evaluation reports at the end of each demonstration cycle. It also suggests that the agency institute a policy for publicly releasing findings from federal evaluations of demonstrations. HHS concurred with these recommendations, according to GAO.

Related: The Deloitte Center for Health Solutions recently reviewed alternative payment models in Medicaid, many of which were implemented as part of broader Medicaid waivers, and found little publicly available information on the outcomes of these initiatives. The cost and complexity of conducting formal evaluations on these emerging models might be one reason. A few states have been able to document some success with their programs, and much of this evidence is the result of federally funded or mandated reporting requirements.

FDA aims to streamline guidance documents for industry, starting with neurological conditions

The US Food and Drug Administration (FDA) is piloting a strategy to develop clearer, more practical guidance documents in a shorter amount of time. The agency is starting with draft guidance documents for five neurological conditions: Duchenne muscular dystrophy, amyotrophic lateral sclerosis (ALS), Alzheimer’s disease, partial onset seizures, and migraines.

In a press release issued this month, FDA Commissioner Scott Gottlieb said that experts at the Center for Drug Evaluation and Research’s Office of New Drugs is collaborating on the development of concise, up-to-date, science-based guidance for the medical community. Historically, professionals in different disciplines have worked separately within FDA. In recent years, the agency has been focusing on having individuals from different disciplines—from physicians and pharmacologists to statisticians—working together to determine which treatments are most effective and develop the guidance.

Gottlieb described the need to place a greater focus on developing treatments for neurological conditions. Despite the devastating impact these conditions can have, much remains unknown about them, especially compared to better-understood diseases. He said the agency is working to ensure that it receives input from affected patients as well.

Enrollment in HSA-qualified plans appears to have leveled off

After more than a dozen years of steady growth, enrollment in health insurance plans that can be paired with a health savings account (HSA) appears to have leveled off, according to new research from the Employee Benefit Research Institute (EBRI). HSAs became available in 2004 after passage of the Medicare reform law. While enrollment estimates vary widely—from 21.4 million to 33.7 million enrollees and family members—five organizations are finding slower enrollment growth, according to EBRI. Enrollment growth rates, according to EBRI, have fallen from a high of nearly 70 percent a decade ago, to no more than 12 percent in 2017.

Health plans must have an annual deductible of at least $1,350 for individual coverage ($2,700 for family coverage) to be paired with an HSA. Employers and employees can make the payments in to the accounts to cover out-of-pocket health care costs. The Deloitte Center for Heath Solutions recently examined HSAs in the individual market and found that younger employees contribute less to their HSA than older employees, healthier individuals find the accounts more attractive than unhealthy individuals, and that HSAs are favored by high-income households over low-income households.

More than 22 million HSAs had been established by the end of 2017, according to a semi-annual HSA survey conducted by Devenir Group, LLC. Those accounts collectively held an estimated $45.2 billion in assets at the end of the year. By the end of January, assets increased to nearly $50 billion, according to the report. The results are based on a survey of the 100 largest HSA administrators.

West Virginia Medicaid to cover treatment for infants born addicted to substances

CMS has approved West Virginia’s request to cover treatment services for babies with neonatal abstinence syndrome (NAS) under Medicaid. West Virginia is the first state in the nation to receive such approval.

NAS occurs when babies are born addicted to drugs—usually opioids, although other substances can be involved—after being exposed in utero. These babies experience withdrawal symptoms after birth. Newborns with NAS need extra care due to their symptoms, which can include tremors, seizures, constant crying, light sensitivity, feeding difficulties, and temperature problems. Some of the services Medicaid will cover include pharmaceutical withdrawal treatment, access to a low-stimulus environment, and a comprehensive assessment.

According to the latest Centers for Disease Control and Prevention data, 33.4 per 1,000 infants born in West Virginia hospitals had NAS in 2013.

In 2012, an infant born at full term without complications had a 2.1-day mean length of stay and $3,500 in charges. An infant with NAS born the same year had a mean hospital stay of 16.9 days and a mean hospital charge of $66,700. Aggregate hospital charges nationally for all infants with NAS in 2012 were estimated to be $1.5 billion; Medicaid programs financed approximately 80 percent of these costs.

White House report urges greater focus on drug costs, unhealthy behaviors

To improve health outcomes in the US, health policy and spending need to focus less on insurance coverage and more on broader issues, including disease-causing behaviors, drug prices, and medical innovation, according to a report released by the White House on February 21. This report is a companion piece to the budget released the previous week (see the February 20, 2018 Health Care Current).

The health section of the annual Economic Report of the President begins by describing the relationship between unhealthy behavior and poor health. It states that the ACA did little to improve health outcomes and that there is limited evidence that health insurance improves health status.

The report calls for federal agencies to work to address opioid misuse, obesity, and smoking. It outlines some of the health gains that have occurred as a result of tobacco taxes and restrictions that limit where people can smoke. The report outlines some of the steps federal agencies are taking regarding the opioid crisis. These include increasing access to opioid-addiction treatment, researching non-opioid pain management, and halting the import of fentanyl and other synthetic opioids.

While the report strongly encourages medical innovation, it notes that some innovations, such as prescription drugs, aren’t necessarily more effective than existing treatments. The report attributed high drug prices to patent-created monopolies and regulations within Medicare and Medicaid that hinder competition.

The report says that the administration plans to take the following steps to reduce drug prices:

  • Allow state Medicaid programs to create more competitive drug formularies
  • Provide doctors with incentives to prescribe less expensive drugs
  • Allow Medicare Part D plans to negotiate prices
  • Reduce generic drug copays for low-income Medicare beneficiaries
  • Require Medicare Part D plans to share manufacturer discounts at the point of sale
  • Expedite the drug-review process and provide entry into monopolized markets
  • Decrease concentration in the pharmacy benefit manager market

The White House report also discusses the role of the US as the engine of worldwide pharmaceutical innovation and reforms that could address the imbalance of what other countries contribute. Since many foreign governments set lower prices for prescription drugs, the report notes that the US pays significantly more for drugs as a proportion of global sales.

Breaking Boundaries

From virtual clinical trials to virtual reality marketing, pharma strives to innovate

Over the last decade, biopharma companies have introduced breakthrough treatments that have transformed deadly diseases into manageable chronic conditions, and helped improve the quality of patients’ lives. Continuing along this path of innovation, biopharma companies are now working to evolve the traditional high-risk, high-cost research and development model.

Many clinical-trial activities are still using the same processes from two decades ago. Many biopharma leaders are trying to integrate ever-growing amounts of real-world evidence, genomics information, and emerging data sources (such as biosensors) into their processes. Digital technologies have the potential to transform how companies approach clinical development by incorporating valuable insights from multiple data sources. This can radically improve the patient experience, enhance clinical trial productivity, and increase the amount and quality of data collected in trials.

As discussed in Deloitte’s recent paper, Digital R&D: Transforming the future of clinical development, traveling to clinical sites for assessments is a burden for many clinical trial participants. Virtual clinical trials leverage social media, e-consent, telemedicine, apps, and biosensors to simplify recruitment, communicate with patients, and support both passive and active data collection. Longitudinal data is valuable for biopharma companies, and virtual components of a clinical trial can help track participants who move or are not able to return to the study location for follow up.

From clinical development to market access

Developing a drug and bringing it to market might take years and require billions of dollars. Biopharma companies are trying to become more innovative when it comes to marketing their products. One strategy is virtual reality (VR) marketing. VR has been around for years, but it is now being seen as a tool that can be used to help educate consumers about a disease and treatment, and communicate treatment options to physicians.

VR can provide an immersive experience for the user. VR headsets offer 360-degree sights and surround sound; some advanced versions even integrate touch and smells. The technology allows users to take a ride through the body's blood stream, see a drug's mechanism of action, or feel what it's like to live with the symptoms of a disease. Such technology might help a patient understand the long-term effects of a disease.

The goal of VR marketing is to translate the immersion into engagement. Engagement might differ depending on the condition. For example, simulating vision problems could help people understand the effects of certain eye diseases. However, immersion might have less relevance for diseases that don’t directly impact the senses.

Still, biopharma companies seem willing to experiment with VR to promote new products to consumers and health care providers, and to revitalize older brands. Although the return-on-investment at this stage is unclear, some of the biggest companies are investing in VR for marketing. VR could wind up being used more broadly in marketing if it increases prescribing rates or encourages patients to stay on a medication when appropriate. If not, it might be seen as a passing fad.

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