Evolution of Consumer Driven Health Plans Blog Series: Part 2

January 20, 2016

Evolution of Consumer Driven Health Plans Blog Series: Part 2


Part 2: Drivers of Healthcare Spending Increases

This is the second installment in our five-part series, “The Evolution of Consumer Driven Health Plans: From Cost Shifting to True Healthcare Consumerism.” The goal of the series is to help employers and plan managers assess both the positive and negative consequences of CDHPs, and to recommend steps they can take to better equip employees to be informed healthcare consumers.

In the previous article we shared the hard facts on the 167 percent rise in U.S. healthcare spending since 2002.  Now we will analyze the drivers of that increase in detail to shed light on what is required to shift to a culture of healthcare consumerism. 

There are many factors that have led to the spending increase.  Some of the top drivers include:

Fee-For-Service Reimbursement Model

Many of these cost drivers are unique to the U.S. healthcare system and are a function of economics and not of actual health impact. Most notably, our fee-for-service (FFS) reimbursement model drives volume-based incentives, resulting in providers delivering more tests and treatment without linking payment to the quality of the outcomes. In 2008, 78 percent of employer sponsored health plans were based on the FFS model.  Because the majority of costs in the FFS model are covered by third party insurance providers, consumers have had limited understanding of the economic impact of their healthcare decisions and little incentive to question the advice they receive from providers.

Fragmentation of Care Delivery

Similarly, because doctors are paid based on volume, there has been little incentive historically to coordinate care delivery across providers to increase efficiency. High panel sizes and lack of time with patients has created the dynamic of primary care physicians (PCPs) becoming a place to get your referral, not a place to get your care. Patients are increasingly sent to specialists for treatments that primary care physicians have the ability to perform, but don’t have the incentive structure in place to do so. The rate of specialist referrals has increased by 94 percent over approximately the past 10 years. Physicians currently delegate nearly 40 percent of primary care services to higher-cost specialists. With large patient panels and a high volume of referrals, care coordination becomes increasingly difficult or impossible. This lack of care coordination often leads to overtreatment, costing the United States between $158 and $226 billion annually.

Industry Consolidation

The rapid consolidation of the healthcare industry has also contributed to rising costs and the care coordination problem. The healthcare industry is undergoing major transformations including large-scale mergers and acquisitions, joint ventures, and collaborations both horizontally and vertically. The number of hospital acquisitions has been steadily rising since 2005 from an average of 50 per year to over 100. Despite some positive movement among consolidated groups away from the FFS model, the primary stated rationale for consolidation has been to increase economies of scale. Unfortunately, there is no indication that these savings are being passed to the consumer. This consolidation has created large, multi-discipline medical groups and hospital affiliations that exert significant market power and network dominance in many areas of the country.  A summary of research on the impact of consolidation performed by the Robert Wood Johnson Foundation revealed that hospital mergers in concentrated markets generally lead to price increases between 20 and 40 percent. 

Administrative Burden

The complexity of our multi-payer reimbursement system in the U.S. has been another factor driving the disproportionate increases in healthcare administrative costs. The average physician spends 16.6 percent of the work week on administrative tasks and 81 percent believe that percentage is growing. This administrative burden impacts healthcare costs, physician satisfaction and even the overall patient experience as many patients complain that their providers spend more time focusing on their systems than their patients.

Rising Drug Costs

Drug costs are another key difference between the U.S. and the rest of the developed world. Pharmaceuticals represent 16 percent of the healthcare pie, and U.S. drug spending is up 13.6 percent in 2015 – over twice the increase in overall healthcare costs. U.S. drug prices are significantly higher than the rest of the world. A recent Reuters study looked at prices for the top 20 medications worldwide and found that U.S. prices were three times higher than U.K. prices, six times higher than in Brazil and 16 times higher than in India. The same study found that U.S. prices for top brand-name drugs had jumped 127 percent between 2008 and 2014, while austerity measures in Europe had actually resulted in price declines over the same period.

Healthcare Access

Lack of convenient and timely access to medical services for many Americans has driven up healthcare spending due to a systematic overuse of high cost emergency rooms. Estimated annual waste from unneeded ER visits is $38B according to a New England Health Institute study. While much of the focus of this problem has been on the uninsured, studies show that ER overuse is on the rise across all patient populations, irrespective of age, ethnicity or insurance coverage. Lack of timely access to primary care services, convenient after-hours and weekend care, and immediate reassurance about a medical condition are the main drivers of ER overuse.

Aggressive Healthcare Marketing

In addition to the lack of access, the rise in healthcare services marketing has created a false demand for services that may not be supported clinically, and confusion about the appropriate place to receive care. As a result, consumers are inundated with advertisements not only for medications they may not need, but for medical devices, joint replacements, attractive medical facilities, and even Freestanding Emergency Centers (FECs) that patients often confuse with Urgent Care clinics but cost significantly more.

High Rates of Chronic Disease

Many nations across the globe are dealing with increasing healthcare costs due to an aging population. In the U.S., poor diet, a heavy consumption of processed foods, inactivity and smoking have also led to an increase in the percentage of the population suffering from one or more chronic diseases. Between 1995 and 2015 the number of Americans diagnosed with a chronic disease jumped from 118M to 149M or nearly half the population. People with chronic conditions like heart disease, cancer, diabetes, and asthma consume a disproportionate percentage of overall healthcare services, including 81 percent of all prescription drug spending and 76 percent of all physician visits.

Many of these cost drivers are unique to the U.S. healthcare system and require fundamental changes in our delivery model.  Next in our series on the “Evolution of Consumer Driven Health Plans” we will outline how these rising costs have caused many employers to encourage participation in CDHPs. To learn more, download the full white paper.

Did you miss Part 1 in this series? Read it here.

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