Published 8/1/2012
Allie Obremskey; Vasanth Sathiyakumar, BA; Jordan Apfeld, BA; Alex A. Jahangir, MD; Manish K. Sethi, MD

Whose Responsibility Is It to Reduce Healthcare Spending?

Does it fall to the federal government, the state, or the private sector?

Although the rising costs of health care have been a central issue of political debate, no major changes in reducing healthcare expenditures have been made. Unless efforts to reduce healthcare expenditures are enacted, recent national and state-level efforts to increase the scope of medical insurance coverage to the nearly 50 million uninsured Americans will magnify the problem. Already, Medicare’s Hospital Insurance Trust Fund is projected to run out by 2024, Medicaid is limiting benefits to recipients due to a lack of finances, and cuts of up to 10 percent are planned for hospitals and physicians.

Several unnecessary cost drivers contribute to rising healthcare spending, including defensive practices, overtreatment, unnecessary imaging, failures in care coordination, and pricing failures. A recent national survey sponsored by the American Association of Orthopaedic Surgeons (AAOS) estimated that orthopaedists spend nearly $2 billion annually on defensive practices. Other cost drivers include increases in medical technology and services, rising administrative costs, and increasing costs for prescription drugs.

Reducing the cost of national healthcare spending will require a coordinated effort for reform among federal, state, and private sector agents. Although no sweeping reforms have increased the quality and access of health care while reducing costs yet, a number of examples already exist at the federal, state, and private sector levels that have reduced expenses in key healthcare sectors. These reforms have implications for practicing orthopaedic surgeons. In the struggle to “economize” American health care, it is important to reflect upon where this responsibility falls: with the federal government, the state, or the private sector.

Cost cutting on the federal level
The Patient Protection and Affordable Care Act (PPACA) pioneered by the Obama administration in spring 2010 is the largest attempt at healthcare reform in recent decades and places the federal government in a central cost-cutting role.

PPACA specifically allocates money to comparative effectiveness research, such as trials to determine whether generic versions of certain drugs are comparable in effectiveness to their brand-name counterparts or whether new, more expensive treatments are more effective than current treatments.

An outgrowth of comparative effectiveness research will likely be a restructuring of Medicare payment plans that would cover proven treatment methods in full, but make patients who opt for more expensive treatments responsible for the difference in cost.

The implementation of health insurance exchanges is estimated to reduce healthcare expenses by lowering premiums through competition, transparency, accessibility, and governmental oversight. The Congressional Budget Office believes $27 billion in administrative costs can be saved through these exchanges.

PPACA also rewards hospitals for cost-reducing modernization such as the following:

  • implementing electronic medical records (EMRs) to reduce administrative costs
  • increasing primary, at-home, and preventive care services to reduce the onset of complex diseases and resultant costly treatments
  • incorporating bundled payment systems for hospital and clinical services, as well as pay-for-performance incentives for physicians that may reduce healthcare expenditures by 1.5 percent each year
  • achieving low readmission rates through evidence-based protocols that would reduce excessive testing and unnecessary imaging.

Other reforms that attempt to reduce costs under PPACA include the formation of an Independent Payment Advisory Board that has the authority to reduce costs in certain Medicare programs and the creation of an Innovation Center to test new programs through Medicare.

Although the controversy over the Obama plan continues, one thing is for sure: the federal government will take the lead in attempting to control rising healthcare costs.

State-level reforms
Many states across the nation have also demonstrated effective approaches to reducing healthcare costs. In 2003, Texas passed the Medical Malpractice and Tort Reform Act, which has brought the average number of malpractice suits filed to below the national average (209 per 10 million residents in Texas compared to the national average of 326 per 10 million residents) and lowered the average payment per malpractice suit ($170,632 in Texas versus $336,437 nationally).

According to a recent national survey, nearly three-quarters of U.S. orthopaedists support some sort of tort reform. If implemented on a national basis, tort reform may help reduce the practice of defensive medicine.

Massachusetts is attempting to address rising health-related expenses through the Health Care Quality Improvement and Cost Reduction Act of 2012. If enacted, the law would encourage a more judicious use of tests and treatments by implementing a global payment system. The act would encourage the creation and increase the prominence of Accountable Care Organizations (ACOs), networks of hospitals and physicians that care for patients as teams. Each ACO will receive annual fees for treatment and care with bonus incentives for providing high-quality services. Fees would be adjusted for high-risk patients. Blue Cross Blue Shield of Massachusetts has been experimenting with this type of payment system since 2009.

The act would also reduce administrative costs by mandating the implementation of EMRs by 2017 while limiting the growth of healthcare spending to half a point less than the growth of the annual gross state product. Hospitals will be penalized with luxury taxes if they charge more than 20 percent above the state median for a particular service unless the hospital can document that the service in question has limited statewide availability and is delivered with increased quality.

Massachusetts had already enacted healthcare reform in 2006 with provisions similar to those under PPACA, such as the creation of a health insurance exchange and increased regulation of health insurance plans. A bill currently circulating in the Massachusetts State House would create a state agency whose sole responsibility would be to monitor rising healthcare costs.

Several states have found ways to cut Medicaid spending and invest money in other areas designed to improve healthcare while reducing costs. Oregon, for example, will set up “coordinated care organizations” under the direction of the state government to help customers gain access to healthcare services for a single flat rate. New Jersey and Nevada are restructuring the way health care is provided through Medicaid to reduce costs, while New York and Texas are channeling disabled and elderly patients into more cost-efficient managed care programs.

Other states are reducing Medicaid costs through cuts in reimbursements and coverage, as the following examples show:

  • Florida is reducing payments to managed care companies and capping coverage for emergency department visits and in-hospital days.
  • Maine is reducing payments to hospitals and will not cover elective dental care and optometry programs.
  • Illinois will distribute funding to ensure that only documented state residents are benefitting from Medicaid services.
  • Nebraska will reduce the use of private nurses and initiate increases in copayments and premiums for Medicaid customers to offset rising healthcare costs.

On the technology front, both California and Oregon have expanded or implemented telemedicine strategies that improve delivery and quality of health care while reducing costs. For example, 10 Oregon hospitals now have around-the-clock access to neonatologists, stroke neurologists, and other specialists through audio-video technology; this enables patients to save on medically related transportation costs by remaining in local hospitals instead of traveling to larger hospitals. It also gives local physicians access to consultations with physicians in larger medical centers to help implement preventive strategies that can help delay the progression of diseases. Patients can receive medications faster and have their vital signs constantly monitored, ensuring high-quality treatment at a lower cost by fully utilizing local hospitals.

Private sector reforms
Individual hospitals and private insurance companies have the greatest potential to drive down healthcare expenditures. For example, the Mayo Clinic in Rochester, Minn., computerizes all patient information to decrease the ordering of redundant, unnecessary tests and images by physicians, decrease pharmacy errors, and reduce the number of office visits for patients. It has also implemented evidence-based protocols to avoid unnecessary treatments, procedures, and diagnostic testing. Physicians receive a fixed salary, which helps to reduce expenses by removing the fee-for-service incentive to order more tests and procedures. Finally, the Mayo Clinic focuses on preventive services to avoid acute episodes, which cuts expenses by 10 percent annually.

Insurance companies such as Group Health Cooperative in Seattle, similarly aim to lower costs by focusing on primary-care and preventive services that decrease unnecessary hospital treatments, readmission rates, and days spent in the hospital. Group Health specifically connects hospitals with patients’ primary care physicians for continuity of care and adequate follow-up to prevent the progression of diseases.

Blue Cross Blue Shield of Michigan has partnered with 12 hospitals and orthopaedic surgeons in the state to develop best practices for hip and knee replacements. These could reduce the number of infections and other complications and save the state $232 million.

Medication therapy management programs implemented by Blue Cross and Blue Shield of Minnesota include consultations between patients and pharmacists. By making medication-based medical records accessible to patients and physicians and tracking which medications patients are taking, the program has reduced healthcare costs by 31.5 percent—from $11,965 to $8,197 per enrolled person.

Organizational efforts, such as the American Board of Internal Medicine Foundation’s “Choosing Wisely” campaign, aim to lower costs by educating patients and physicians and encouraging doctor-patient discussions of treatment plans. Physicians from nine specialty organizations have compiled lists of procedures and treatments that should be avoided due to high costs and unsubstantiated benefits to patients. The overall objective of the campaign is to improve patient care and reduce unnecessary testing while increasing transparency from both the patient and the physician sides.

Implication for orthopaedists
Although healthcare reforms may be labeled federal, state, or private sector, a coordinated effort involving all three components should be used to reduce healthcare expenditures. All three levels must be responsible for improving healthcare quality and reducing costs, because reforms enacted at each level target specific, unique challenges. Federal and state governments can regulate insurance companies through exchanges and legislate other cost-reducing measures, but only private sector reforms can truly affect healthcare costs associated with individual, local hospitals.

Allie Obremskey; Vasanth Sathiyakumar, BA; Jordan Apfeld, BA; Alex A. Jahangir, MD; and Manish K. Sethi, MD, are all associated with the Vanderbilt Center for Health Policy.

Did you know…

  • Healthcare expenditures totaled $2.6 billion in 2010 and represented nearly 17.9 percent of the U.S. gross domestic product (GDP).
  • National spending on health care has outpaced the growth of the U.S. economy by 2.5 percent per year since 1970.
  • Expenditures associated with health care are estimated to reach 25 percent of the U.S. GDP by 2025.
  • Surgical subspecialty costs are estimated to reach 7.3 percent of the U.S. GDP by 2025.