Health Care Reform Cost Savings

1
Health Care Reform Cost Savings

• Julie Sonier
• Director, Health Economics Program
• Minnesota Department of Health
• SCI Summer Meeting
• July 31, 2008

2
Key Questions

• What are the potential savings associated with
  health care reform?
• Potential is believed to be significant, but is
  difficult to demonstrate
• How can savings be measured?
• How can savings be captured for other uses
  (such as coverage expansion)?

3
Issues in Estimating and Capturing Savings

• Lack of research studies documenting or
  estimating savings
• Many reform ideas have not been tried on a large
  scale
• Some have been tried but are too new to have
  generated much evidence
• No guarantees that potential savings will
  materialize
• Hard to predict interactions in complex system
• Success of many reforms depends on buy-in and
  engagement of a wide range of stakeholders
• Savings are systemwide, and not necessarily
  bookable for state budget purposes
• Savings are more likely to materialize as lower
  rates of spending growth than reductions in the
  level of spending

4
Major Sources of Potential Savings in Minnesotas
2008 Health Reform Law

• Population health improvement
• Overweight/obesity and tobacco use result in
  demonstrably higher health care costs
• Reducing their prevalence should save money
• Payment reform
• Administrative efficiency

5
Impact of Rising Obesity on Health Care
Costs(Ken Thorpe study using national data)

• Increasing prevalence
• Between 1987 and 2001, obesity prevalence
  increased 10.3 percentage points, while normal
  weight prevalence declined 13 percentage points
• Increasing gap between health care spending for
  obese vs normal weight population
• Difference grew from 15 to 37 between 1987 and
  2001
• As a result of both these factors,
  obesity-related health spending accounted for an
  estimated 27 of inflation-adjusted per capita
  health spending increases
• 41 of the rise in heart disease spending
• 38 of the rise in diabetes-related spending

Source Thorpe et al., The Impact of Obesity on
Rising Medical Spending, Health Affairs, October
2004.
6
How Is Payment Reform Expected to Result in
Savings?

• Sources of potential savings
• Consumers will shift to lower-cost providers
• State employee group experience shows that
  consumers are price sensitive
• Increased provider competition on price
• Again, state employee group experience shows that
  providers will lower prices to get into preferred
  tiers
• Provider incentives to re-design delivery of care
  in ways that provide higher quality care at lower
  cost
• Reduce the need for expensive, avoidable
  interventions
• Reduce investment in and use of supply
  sensitive or preference sensitive services

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Other Evidence/Experience Related to Potential
Savings from Payment Reform

• Medicare
• Wide variations in utilization and cost, and no
  association (or a negative association) with
  quality or health outcomes
• Estimated potential savings up to 30 from
  reducing variations in practice patterns
• Minnesota state employee group
• 63 difference between highest-cost and
  lowest-cost provider groups (risk-adjusted)
• Buyers Health Care Action Group
• Care system bidding for total cost of care for
  a patient population in 1990s
• Ultimately, this coalition of large private
  employers (about 200,000 covered lives at its
  peak) lacked the critical mass needed to move the
  market

Wennberg et al., Geography and the Debate Over
Medicare Reform, Health Affairs web exclusive,
February 13, 2002.
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Key Issues for Realizing Savings Through Payment
Reform

• The delivery system will only change if
• Consumers have a reason to consider cost and
  quality in making decisions
• Insurance benefit sets
• Available information on variation in cost and
  quality
• Providers are rewarded for providing care more
  efficiently and avoiding unnecessary services
• Need to pay explicitly for things like care
  coordination, and align financial incentives
• There is a critical mass of health plans,
  purchasers, and consumers committed to changing
  the status quo

9
Administrative Efficiency

• Implementing fully interoperable electronic
  health records estimated at 4.3 potential net
  long-term savings in a report for the State of
  Oregon
• Savings are a result of both reduced medical
  costs (1/3) and increased productivity and lower
  administrative costs (2/3)
• Requires substantial up-front investment
• Administrative transaction simplification
• Estimated 215 million in savings for FY
  2008-2012 by implementing standard electronic
  transactions for
• Eligibility verification
• Health care claims
• Payment and remittance advice

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What Have We Learned in Minnesota?

• There is no magic model with the answers to
  these complex questions
• Its much more an art than a science
• But there are reasonable ways to ballpark
  potential savings
• Take advantage of the information that is out
  there
• Use examples from national research
• Dartmouth Atlas work on variations in cost and
  utilization
• Thorpe work on obesity
• Commonwealth Funds Bending the Curve report
• Use examples and reports from other states

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Measuring and Tracking Savings

• Savings from 2008 health reforms will be tracked,
  in an aggregate way
• Project health care spending in the absence of
  reform, measure actual spending, and define the
  difference as savings
• When 50 million in savings is certified,
  repayment of a loan from the health care access
  fund to the general fund is triggered
• Not the same as savings recapture, since this
  transaction is just a shift of funds within state
  government
• Earlier versions of the health reform bill
  included a savings recapture mechanism based on
  the difference between projected and actual
  spending

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Contact Information
Julie Sonier, Director Health Economics
Program Minnesota Department of Health 651
201-3561 julie.sonier_at_state.mn.us Website
www.health.state.mn.us/healtheconomics