Cost Containment and the Patient
Protection and Affordable Care Act
Innovation, Business & Law Colloquium:
Health Care Reform Act
David Orentlicher, MD, JD
Visiting Professor of Law
University of Iowa College of Law
September 23, 2010
On one hand
The legislation “puts into place
virtually every cost-control reform
proposed by physicians, economists,
and health policy experts.”
Orszag & Emanuel (2010)
On the other hand
"The job of figuring how to cover
uninsured people used up all the
political oxygen that was available.
They didn't have the energy for costs."
Alan Sager, quoted by McClatchy-Tribune News
Service, April 1, 2010
Cost containment
Outline of today’s class
The cost problem
Is PPACA the solution?
If not, how else might we contain
costs?
What constraints does the law place on
cost containment strategies?
Cost containment
Outline of today’s class
The cost problem
Is PPACA the solution?
If not, how else might we contain
costs?
What constraints does the law place
on cost containment strategies?
The highest spending country
Health care spending in economically-
advanced democracies
US $7,290/capita 16% of GDP
Switzerland 61% of US 67% of US
Canada 53% of US 63% of US
Germany 49% of US 65% of US
Japan 35% of US 51% of US
New Zealand 34% of US 57% of US
OECD Health Data 2009 (2007 data except 2006
for Japan)
Total expenditure on health per
capita (US$ PPP)
OECD, 2006
Total expenditure as % GDP
OECD, 2006
The cost problem
What do we get for our money?
Inadequate return on our health care $
US health system is less efficient than systems in:
Spain, France, Germany, Austria, Italy
UK, Denmark, Norway
Japan, China, Australia
Canada, Mexico, Colombia, Venezuela
Evans, et al. 2001
US patients treated in higher-cost communities
have similar outcomes to US patients in lower-
cost communities
Gawande 2009
Infant mortality per 1,000 births
OECD, 2006
Total preventable years of life lost
per 100,000 pop.
OECD, 2006
Quality of care
Breast cancer, 5-year survival rate
US-90.5%, Canada-87.1%, Japan-86.1%, France-82.8%,
UK -77.9%
Colon cancer, 5-year survival rate
Japan-67.3%, US-65.5%, Canada-60.7%, France-57.1%,
UK-50.7%
Asthma hospitalization rate (per 100,000 pop.)
US-120, UK-75, Japan-58, France-43, Canada-18
Diabetes hospitalization rate (per 100,000 pop.)
US-57, UK-32, Canada-23, Germany-14, Italy-11
Inadequate return on our health care $
Not because we’re less healthy
% of pop. daily tobacco smokers
OECD, 2006
Alcohol consumption (liters per capita)
OECD, 2006
% of pop. 65 years or older
OECD, 2006
% of pop. 19 years or younger
OECD, 2006
Obesity rates
Overall effect of health status
Americans overall are less healthy, but this is
only a small part of our higher health care costs
McKinsey & Company study found that “disease
burden” adds $25 billion in health care costs for
treatment of disease (out of $2.5 trillion in health
care spending)
Why are costs higher in the US?
Higher prices in US
Costs are higher in US in large part because prices
for health care services are higher
Single-payer systems can bargain more effectively with
doctors, hospitals and pharmaceutical companies
Can also have enforceable spending targets via “all-payer
regulation” (Oberlander and White 2009)
Higher ratio of specialists to primary care physicians in
US
Probably reflects high ratio of specialist pay to primary care
pay (Vladeck 2010)
High costs of medical education also may be important
(Peterson and Burton 2007)
Greater use of surgical procedures and
expensive diagnostic tests
More procedures to treat blocked coronary arteries
(twice OECD avg.), more knee replacements (50%
above OCED avg.), and more cesarean sections
(25% above OECD avg.)
Increase in outpatient surgery centers very important
More MRI exams (more than twice OECD avg.) and
more CT exams (more than twice OECD avg.)
OECD Health Data 2009 and Peterson and Burton 2007
Structural contributors to high costs
Insurance => Price-insensitive consumers
If treatment costs $100 and yields a “value” of $75, it
shouldn’t be provided—but if the patient only pays $25
and receives the $75 value, it will be worth it to the
patient
Americans pay more total dollars out of pocket, but we
generally pay a smaller percentage of our health care
costs out of pocket (i.e., through deductibles and co-
payments) (premium payments are not included)
France-8%, US-13%, Germany-13%, Canada-15%, Japan-
17%, Switzerland-32% (Peterson and Burton 2007)
Structural contributors to high costs
Fee-for-service reimbursement => Quality-
insensitive physicians and hospitals
When physicians and hospitals are paid more to do
more, regardless of outcome, they’ll do more
Especially when they lose money on higher quality care (Urbina
2006)
Example of clinic that switched from salary to
commission on fees generated and doctors scheduled
more appointments and ordered more blood tests and x-
rays (Hemenway 1990)
Cost containment
Outline of today’s class
The cost problem
Is PPACA the solution?
If not, how else might we contain costs?
What constraints does the law place on cost
containment strategies?
PPACA and cost control
Many different provisions designed to contain
costs
Serious question whether they really address the
cost problem—PPACA doesn’t take on the
major drivers of higher costs other than to some
extent through demonstration projects
Permanent reductions in Medicare
reimbursement rates (§ 3401)
Applies to hospitals, nursing homes and other facilities
Every year, payment rates are adjusted to reflect
increases in the operating costs of health care facilities
The increases have been calculated from a “market
basket” of goods and services that the facilities purchase
(with reductions for failure to file quality data and other
“technical” adjustments)
Under PPACA, a productivity adjustment will be
made based on economy-wide productivity gains
(which are greater than in health care)—there also will
be a ten-year further reduction in the update
percentage (0.10 to 0.75 percent per year)
Estimated savings = $196 billion
Permanent reductions in Medicare
reimbursement rates (§ 3401)
Note that PPACA provisions reflect a mix of
policy and politics—see the annual reductions in
update percentages:
2010 0.25% 2015 0.20%
2011 0.25% 2016 0.20%
2012 0.10% 2017 0.75%
2013 0.10% 2018 0.75%
2014 0.30% 2019 0.75%
After 2019, IMAB recommendations due to kick in
Reduction in payment rates for
Medicare Advantage program (§ 3201)
Medicare Advantage is an option for Medicare
recipients to enroll in a private health care plan
rather than choosing traditional, fee-for-service
Medicare (Part C of Medicare)
While the idea was to provide a more-efficient,
lower-cost option, Medicare Advantage plans have
turned out to be more expensive (up to 150% of
traditional Medicare)
The low-hanging fruit of cost savings
Estimated savings = $135 billion
Part B Medicare premium calculation for
high-income recipients (§ 3402)
Part B of Medicare covers physician fees, laboratory
fees and other outpatient services
Most Medicare recipients pay 25 percent of the Part
B premium; currently, higher income recipients pay
between 35 and 80 percent of the Part B premium.
PPACA freezes the income thresholds for higher-
income premiums at 2010 levels for ten years
before resuming annual adjustments for inflation.
Estimated savings = $25 billion
Reduction in disproportionate share
hospital (DSH) payments (§ 3133 )
DSH payments are made to hospitals that treat a
disproportionate share of low-income patients
Originally introduced to compensate hospitals
for higher costs of treating low-income patients;
now justified as a way to maintain access to care
for low-income patients
Estimated savings = $22 billion
Independent Medicare Advisory Board
(IMAB) (§ 3403)
IMAB will develop proposals to keep Medicare
spending within statutory targets, and proposals
will automatically take effect unless Congress
adopts substitute provisions
Proposals may not ration health care, raise costs to
recipients, restrict benefits or modify eligibility criteria
IMAB also will provide Congress with
recommendations for slowing the growth of health
care spending in the private sector.
Estimated savings = $16 billion by 2020, more
substantial after that (assuming it works)
Independent Medicare Advisory Board
(IMAB) (§ 3403)
Concerns about IMAB
Will IMAB focus on short-term fixes rather than long-
term changes that really can “bend the cost curve?”
Will Congress bypass the IMAB process and authorize
increases in funding through independent legislation?
Are the limitations on the kinds of proposals that
IMAB can develop too restrictive?
Will cuts in reimbursement reduce patient access to
physicians?
Patient-Centered Outcomes
Research Institute (§ 6301)
Created to promote comparative-effectiveness
research (CER)
Research that evaluates and compares the patient health
outcomes and benefits of two or more medical
treatments or services
Responsibilities include
Setting priorities for CER and funding CER studies
Analyzing data from CER studies and reporting to the
public on the significance of the study results
Patient-Centered Outcomes
Research Institute (§ 6301)
The Institute may not recommend coverage
changes or other policies based on its analyses, but
Medicare and Medicaid may consider the
Institute’s analyses in determining coverage
policies as long as:
No denial of coverage “solely on the basis of” CER
Coverage decisions do not treat the lives of elderly,
disabled or terminally ill individuals as having lower
value (No death panels!)
Can the CER institute become our NICE?
NICE evaluates the cost-effectiveness of medical
therapies and approves those that are sufficiently
cost-effective for Britain’s National Health Service
Treatments are cost-effective if they provide 1 QALY
for no more than £20,000 (now $31,250)
Sometime, NICE approves treatments up to £30,000
($46,900) per QALY
Rarely, NICE approves treatments beyond £30,000 per
QALY
NICE has approval authority, while the CER
institute can only issue reports
What’s a “good” buy?
“Expensive” more than $100,000/QALY
“Reasonable” $50,000/QALY
(UK upper limit ~ $47,000)
“Very Efficient” less than $25,000/QALY
Most writers use $50-100,000 as upper limit of
good value, but public preferences suggest upper
limit over $200,000.
Hirth RA, et al., Medical Decision Making. 2000;20:332-342
Some sample QALYs (2002 dollars)
Harvard Public Health Review (Fall 2004)
< $0 (If the cost per QALY is less than zero, the intervention actually saves
money)
Flu vaccine for the elderly
Under $10,000
Beta-blocker drugs post-heart attack in high-risk patients
$10,000 to $20,000
Combination antiretroviral therapy for certain patients infected with the AIDS virus
$15,000 to $20,000
Colonoscopy every five to 10 years for women age 50 and up
$20,000 to $50,000
Antihypertensive medications in adults age 35-64 with high blood pressure but no
coronary heart disease
Lung transplant in UK (Anyanwu AC et al. J Thorac Cardiovasc Surg 2002;123:411-420)
$50,000-$100,000
Dialysis for patients with end-stage kidney disease
Antibiotic prophylaxis during dental procedures for persons at moderate to high risk
of bacterial endocarditis ($88,000) (Med Decis Making. 2005;25(3):308-20)
Over $500,000
CT and MRI scans for kids with headache and an intermediate risk of brain tumor
COST/QALY: Selected Medicare services
Condition/Treatment Cost per QALY
Treatment for Erectile Dysfunction $6,400/QALY
*Physician Counseling for Smoking $7,200/QALY
Total Hip Replacement $9,900/QALY
*Outreach for Flu and Pneumonia $13,000/QALY
Treatment of Major Depression $20,000/QALY
Gastric Bypass Surgery $20,000/QALY
Treatment for Osteoporosis $38,000/QALY
*Screening For Colon Cancer $40,000/QALY
Implantable Cardioverter Defibrillator $75,000/QALY
Lung-Volume Reduction Surgery $98,000/QALY
Tight Control of Diabetes $154,000/QALY
*Treating Elevated Cholesterol ( + 1 risk factor) $200,000/QALY
Resuscitation After Cardiac Arrest $270,000/QALY
Left Ventricular Assist Device $900,000/QALY
Cost of treatment for metastatic colon cancer
(Schrag D. NEJM. 2004;351:317-319)
Examining the cost and cost-effectiveness of
adding bevacizumab (Avastin) to chemo in
metastatic colon cancer
Randomized trial compared chemotherapy alone
vs. chemotherapy + bevacizumab
Bevacizumab regimen prolonged median
survival from 15.6 to 20.3 months (p<0.001)
Cost of extra 4.7 months?
$101,500 (assuming $5,000 per month for
bevacizumab)
$259,149 per year of life gained (not quality adjusted)
NICE decided not to recommend for NHS coverage
Examining the cost and cost-effectiveness of
adding bevacizumab (Avastin) to chemo in
advanced non-small cell lung cancer
Randomized trial compared chemotherapy alone
vs. chemotherapy + bevacizumab
Bevacizumab regimen prolonged median survival
from 10.2 to 12.5 months (p=0.007)
Cost of extra 2.3 months?
$66,270-$80,343
$345,762 per year of life gained (assuming $66,270
cost)
Grusenmeyer PA, Gralla RJ. J. Clin. Oncology.
2006;24(18S):6057.
Can the CER institute become our NICE?
Cost-effectiveness decisions are controversial
Prohibited under PPACA from being used as sole basis
for denying coverage in federal programs (§6301)
Oregon Health Care Plan
Ended up with fairly generous “basic” coverage
Mammography screening guidelines in 2009 (even
though cost wasn’t a factor)
US Preventive Services Task Force recommended that
routine screening begin at age 50 instead of age 40
The “tragic choices” problem (Orentlicher 2010)
It’s difficult to make life-and-death decisions openly
PPACA demonstration projects
Bundled payments for hospital care and for the
month following discharge (capitation lite) (§2704
and §3023)
Capitation payments instead of fee-for-service
reimbursement (§2705)
Incentives for doctors and hospitals to form
accountable care organizations (financial rewards
for higher quality and/or lower cost care) (§2706
and §3022)
Will integrated systems exploit market power to
maintain revenues rather than to introduce efficiencies
and reduce costs?
Quality-adjusted payments under PPACA
Incentive payments to hospitals that meet specified
performance standards (§3001)
Adjustments to physician reimbursement based on quality
and cost of care provided (§3001)
Expansion of reports to physicians that indicate how their
use of resources in patient care compares to use by other
physicians (§3003)
Lower payments to hospitals with high numbers of patients
who become sicker because of their hospital care (§3008)
Lower payments to hospitals that have excessive numbers of
patients readmitted to the hospital after discharge (§3025)
Quality-adjusted payments
Pay for performance so far has a mixed track
record
It’s difficult to assess quality of care—did a patient
do well because of or despite the doctor’s
intervention?
Often, process-based measures are used, but those
need continual updating
Impact has been modest to date
Tax on high-cost health plans (§9001)
Starts in 2018
Imposes a 40 percent tax to the extent that the
value of coverage exceeds a threshold amount
The threshold starts at $10,200 for individuals and
$27,500 for families (which is about double the
average cost for health care coverage)
The threshold amount is adjusted upward for
health care cost inflation and higher costs of the
individual’s risk pool
Estimated revenues = $32 billion in 2018 and 2019
Concerns about the “Cadillac” tax
High costs of high-cost health plans may reflect
health status of the workforce and health care costs
of the community rather than the richness of the
benefits
Gabel, et al. 2010
Reducing tax subsidies for health care insurance
may have a regressive effect (i.e., the higher taxes
may represent a higher percentage of income for
lower-income persons)
Himmelstein & Woolhandler 2009; Gabel, et al. 2010
The bottom line under PPACA
Between 2009 and 2019, health care spending is
projected to increase 0.2% as a result of PPACA
But—
Health care coverage is projected to increase by 32.5
million
After the big increase in spending in 2014 for the newly
insured, health care spending is projected to grow by
6.7% rather than 6.8% between 2015 and 2019
Sisko, et al. 2010
Of course, these are projections that may or may not
come to fruition
Cost containment
Outline of today’s class
The cost problem
Is PPACA the solution?
If not, how else might we contain costs?
What constraints does the law place on cost
containment strategies?
Cost containment strategies
If main drivers of high costs are physician
incentives to provide excessive care and patient
incentives to demand excessive care, we should
employ policy changes to remove these incentives
Changes in physician incentives
Salary or capitation for physicians (combined with
quality measures to avoid under-provision of care)—
could increase physician pay and still lower overall costs
Capitation would address problem of too many prescriptions
for expensive drugs—CER institute important here too
Limits on hospital beds, surgical suites, MRI scanners
and other facilities
Financial incentives for patients?
If people are not sufficiently sensitive to costs
because of insurance, should we use health savings
accounts or other mechanisms to give patients
more skin in the game?
Raising out-of-pocket costs reduces patient demand
for care, but
Patients do not always distinguish between necessary
and unnecessary care
Caps on out-of-pocket costs prevent patient sensitivity
to costs of high-cost services (e.g., heart surgery, cancer
chemotherapy)
Buntin et al. 2006
VA Reengineering Strategy
Define and set practice standards that have been
shown to result in better patient outcomes
(including elimination of wasteful hospital and
pharmacy spending)
Monitor performance and measure outcomes
(with both internal and external oversight)
Reward good performance and manage under-
performance
Optimize use of technology (electronic records,
reminders)
Promote patient safety initiatives to reduce
medical error
Cost containment
Outline of today’s class
The cost problem
Is PPACA the solution?
If not, how else might we contain costs?
What constraints does the law place on
cost containment strategies?
Legal constraints on cost
containment strategies
Legal constraints may exist when physicians make
decisions on the basis of costs on a case-by-case
basis (as with the closure of ICU beds in the Singer
study) and take the patient’s poor prognosis into
account—the disparate treatment problem
University Hospital, Glanz, Baby K, and Causey
Legal constraints also may exist when cost
containment policies are adopted that have a
greater effect on persons who are sicker—the
disparate impact problem
Alexander
Protection for the disabled against
discrimination--disparate treatment
In University Hospital , doctors and parents decided
against surgery for a newborn thought to have a
severe and permanent neurologic disability
The US argued that this involved discrimination on the
basis of disability (in violation of §504 of the
Rehabilitation Act)—other children with normal
neurologic development would have received the surgery
But what’s the relevant comparison? You have to treat
similar people similarly, but you don’t have to treat
different people similarly. In other words, was the
withholding of surgery based on relevant or irrelevant
differences between Baby Jane Doe and other infants?
Protection for the disabled against
discrimination--disparate treatment
The University Hospital court rejected the §504
claim on three grounds:
Congress did not intend §504 to apply to medical
treatment decisions (pp.136-137 of HCLE excerpt)
The problem that was being treated was related to
the disabling condition—the disability gave rise to
the need for treatment—thus, the disability was not
an irrelevant factor (pp.135-136 of HCLE excerpt)
The hospital was willing to perform the surgery if the
parents agreed (p.137 of HCLE excerpt)
Protection for the disabled against
discrimination--disparate treatment
Glanz took a different--and more sensible--approach
to the §504 question than did University Hospital.
In Glanz, a doctor refused to perform ear surgery on a
patient because of an HIV infection, which was the
patient’s disabling condition.
According to the doctor, the disability compromised the
patient’s ability to benefit from treatment—the HIV
infection raised the patient’s risk of infection from the
surgery
According to the court, ability to benefit from
treatment was a relevant consideration—leaving the
question open as to how much of a consideration
Protection for the disabled against
discrimination--disparate treatment
Baby K and Causey illustrate concerns that
discriminatory treatment decisions may arise under
the guise of “futility” claims by doctors or hospitals
In a futility case, the doctor or hospital argues that
there is insufficient benefit from treatment for the
patient (medicine has nothing to offer)
But in many cases, the real concern is the costs of
care
Protection for the disabled against
discrimination--disparate treatment
In Baby K, a hospital did not want to ventilate an
anencephalic child (but it was willing to provide
artificial nutrition and hydration to the child)
The court invoked EMTALA which requires stabilizing
treatment in all emergencies
The court observed that the hospital would have
ventilated other children with similar breathing
difficulties
Note the contrast with University Hospital—Baby K’s
breathing difficulties were related to her anencephaly just as
Baby Jane Doe’s need for surgery was related to her disability
Protection for the disabled against
discrimination--disparate treatment
In Causey, a hospital withdrew dialysis and
ventilation from a comatose woman with a 1-5%
chance of regaining consciousness and a life
expectancy of up to two years.
The court rejected the concept of futility on the ground
that it entails non-medical, value judgments
Rather, the court held that doctors can withhold
treatment when it is not part of the medical profession’s
standard of care (p.632 of HCLE excerpt)
Note the contrast with the Baby K court, which rejected a
defense based on the professional standard of care
Protection for the disabled against
discrimination--disparate treatment
Putting all of the cases together, we end up with
a majority of courts deferring to medical
judgment, especially if there is evidence that the
decision is based on the patient’s diminished
ability to benefit from treatment (Glanz)
Also, courts are more deferential when hospitals
implement decisions and are then sued rather than
asking the court to approve the denial of care in
advance
Protection for the disabled against
discrimination--disparate impact
Alexander gave a green light to across-the-board
coverage restrictions that have a disparate impact
on persons with disabilities
In Alexander, Tennessee capped hospitalization for
Medicaid recipients at 14 days per year
Disparate impact because only 7.8% of non-disabled
persons who were hospitalized needed more than 14
days, while 27.4% of disabled persons who were
hospitalized needed more than 14 days
Plaintiffs argued that the disparate impact was
gratuitous—only ten states imposed such limits
Protection for the disabled against
discrimination--disparate impact
The Supreme Court held (in a unanimous decision
authored by Justice Thurgood Marshall) that
§504 protects against some instances of disparate impact
discrimination
Persons with disabilities must be provided “meaningful
access” to the services offered
Tennessee’s durational limit provides meaningful access—
14 days of hospitalization is sufficient for 95% of disabled
recipients of Medicaid
Court greatly concerned with administrative burden and
feasibility of requiring Medicaid to avoid disparate impacts
Protection for the disabled against
discrimination--disparate impact
After Alexander, it’s difficult to imagine successful
challenges to cost containment strategies on the
basis of their disparate impacts
Especially if meaningful access is interpreted with
respect to health care generally rather than the
specific health care service (e.g., cancer chemotherapy
if coverage for a very expensive drug is denied)
Legal constraints on cost containment
The case law indicates that political constraints are
much more important than legal constraints
What is a QALY?
Major
stroke
0 1
Dead Perfect
health
Recurrent Studying for a
stroke law school exam
OECD
Organisation for Economic Co-operation and
Development (www.oecd.org). The 33 member
countries include:
U.S., Canada, Mexico, Chile
Denmark, Norway, Sweden, Finland
U.K., France, Germany, Netherlands, Switzerland
Portugal, Spain, Italy, Greece, Turkey, Israel
Hungary, Czech Republic, Slovak Republic, Slovenia,
Poland
Japan, Korea
Australia, New Zealand