Minnesota Health Care Market Trends and Strategies for Cost Containment Health Care Transformation Task Force July 30, 2007 Julie Sonier Director, Health Economics Program Minnesota Department of Health

Overview of Presentation Background Recent trends in health insurance coverage in Minnesota –Factors contributing to the decline in employer coverage Cost trends: private markets and public programs Drivers of health care cost increases Cost containment strategies to date: –Private market –State government

Background - Health care cost growth is not a new problem - Most health care spending is incurred for a small share of the population - Minnesota health care spending

Historical Perspective: Health Care Spending Growth is Not a New Problem Source: Centers for Medicare and Medicaid Services

From: The Sad History of Health Care Cost Containment as Told in One Chart, Drew Altman and Larry Levitt, Health Affairs, Web Exclusive, January 23, 2002

Health Care Spending as a Share of Gross Domestic Product *Projected. Source: Centers for Medicare and Medicaid Services. Spending estimates as of January 2007; projections as of February 2007.

Health Spending is Highly Concentrated Among Relatively Few People Source: Berk and Monheit, The Concentration of Health Care Expenditures, Revisited, Health Affairs, March/April Expenditure estimates for civilian non- institutionalized population.

Health Care Spending Trends: Minnnesota and U.S Total Health Care Spending Minnesota U.S. $19.3 billion $1,264.4 billion $29.4 billion $1,860.9 billion Health Care Spending Growth, 2000 to 2005 (avg. annual): Minnesota U.S. 8.8% 8.0% Per Capita Health Care Spending: Minnesota U.S. $3,917 $4,476 $5,742 $6,276 Health Care Spending as a Share of the Economy: Minnesota U.S. 10.5% 12.8% 12.7% 15.0% Sources: MDH Health Economics Program, Centers for Medicare and Medicaid Services (spending for health services and supplies, a subset of total national health spending)

Minnesota Health Care Spending by Source of Funds, 2005 Source: MDH Health Economics Program Total Spending $29.4 Billion

Minnesota Health Care Spending by Type of Service, 2005 Source: MDH Health Economics Program Total Spending $29.4 Billion

What Savings Are Needed to Achieve 20% Reduction in Health Care Spending by 2011? 2005 Minnesota Health Care Spending$29.4 billion Projected growth rate of national spending, 2005 to % total growth 6.9% avg annual growth 2010 Minnesota spending (assuming national projected growth rate) $41.1 billion 20% savings$8.2 billion

Recent Trends in Health Insurance Coverage

Uninsurance Rate Trends in Minnesota *Indicates statistically significant difference (95% level) from prior survey year. Source: 1995, 1999, 2001, 2004 Minnesota Health Access Surveys

Sources of Insurance in Minnesota, 2001 and 2004 Source: 2001 and 2004 Minnesota Health Access Surveys * Indicates a statistically significant difference from 2001.

Factors Contributing to a Decline in Employer Coverage Lower share of population employed in 2004 vs 2001 (72.3% vs 75.0%) Changes in job characteristics. For example: –Increase in temporary/seasonal jobs –Smaller share of population working for very large employers, where employer-based coverage is more likely Decline in employer coverage was largely the result of declining access, not take-up

Access to Employer Coverage: Offer, Eligibility, and Take-up Rates, 2001 and 2004 *Indicates a statistically significant difference from Source: 2001 and 2004 Minnesota Health Access Surveys

Private and Public Cost Pressures

Private Health Insurance Premium and Spending Trends, 1995 to 2005 Source: MDH Health Economics Program. Fully-insured market only.

Key Minnesota Health Care Cost and Economic Indicators, 1995 to 2005 Notes: health care cost is MN privately insured spending on health care services per person, and does not include enrollee out of pocket spending for deductibles, copayments/coinsurance, and services not covered by insurance.. Sources: Health care cost data from Minnesota Department of Health, Health Economics Program; per capita personal income from U.S. Department of Commerce, Bureau of Economic Analysis; inflation data from U.S. Bureau of Labor Statistics (consumer price index); workers wages from MN Department of Employment and Economic Development

Total Cost Per Person and Health Plan/Enrollee Shares, 1997 to 2005 Source: MDH Health Economics Program.

Medical Assistance Enrollment and Spending Growth Source: Minnesota Department of Human Services.

MinnesotaCare Enrollment and Spending Growth Source: Minnesota Department of Human Services.

GAMC Enrollment and Spending Growth Source: Minnesota Department of Human Services.

Summary: Private and Public Cost Pressures Erosion in private insurance coverage is likely linked to rising costs Public programs face dual sources of cost pressure: –Rising enrollment –Rising cost per person Despite recent slower cost growth, current trends not sustainable in the long run –Cost of private insurance still growing much faster than incomes, inflation

Drivers of Health Care Cost Growth

Drivers of Health Care Spending: Many Levels of Analysis $ Spent on Health Care Who pays (employers, consumers, govt, etc.)? What services are purchased (hospital, drugs, etc.)? What causes changes in spending for a particular category of service? Price Quantity Change in mix of services provided Factors affecting price: -Market structure -Labor costs & other inputs -Technology -Economy/general inflation -Other factors Factors affecting quantity/type of services: -Prevalence of disease -Demographics -Lifestyle/behavior -Genetics -Environment -Technology -Consumer and provider incentives - Other factors

Health Care Cost Drivers: Spending Growth and Shares of Total Growth by Service, 2003 to 2005 Note: growth rates calculated as annual growth per enrollee over the 2-year period. Other medical includes skilled nursing facilities, home health care, emergency services, services of health professionals other than physicians and dentists, durable medical goods, and chemical dependency/mental health. Source: MDH Health Economics Program. Growth RateShare of Spending Growth

How Is Minnesotas Age Distribution Changing? Sources: U.S. Census Bureau and Minnesota State Demographic Center

Projected Minnesota Population Growth, by Age Group Source: Minnesota State Demographic Center

Variation in Health Care Spending by Age Source: Agency for HeatlhCare Research and Quality, Medical Expenditure Panel Survey, data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions.

Obesity Trends* Among U.S. Adults BRFSS, 1990 No Data <10% 10%–14% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1991 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1992 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1993 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1993 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1994 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1994 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1995 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1996 No Data <10% 10%–14% 15%–19% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1997 No Data <10% 10%–14% 15%–19% 20 (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1998 No Data <10% 10%–14% 15%–19% 20 (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 1999 No Data <10% 10%–14% 15%–19% 20 (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 2000 No Data <10% 10%–14% 15%–19% 20 (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Obesity Trends* Among U.S. Adults BRFSS, 2001 No Data <10% 10%–14% 15%–19% 20%–24% 25% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

No Data <10% 10%–14% 15%–19% 20%–24% 25% (*BMI 30, or ~ 30 lbs overweight for 5 4 person) Obesity Trends* Among U.S. Adults BRFSS, 2002

Obesity Trends* Among U.S. Adults BRFSS, 2003 (*BMI 30, or ~ 30 lbs overweight for 5 4 person) No Data <10% 10%–14% 15%–19% 20%–24% 25%

Obesity Trends* Among U.S. Adults BRFSS, 2004 No Data <10% 10%–14% 15%–19% 20%–24% 25% (*BMI 30, or ~ 30 lbs overweight for 5 4 person)

Impact of Rising Obesity on Health Care Costs (National study) Increasing prevalence –Between 1987 and 2001, obesity prevalence increased 10.3 percentage points, while normal weight prevalence declined 13 percentage points Widening gap between health care spending for obese vs normal weight population –Difference grew from 15% to 37% 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.

Technology Advances in technology can be reflected in: –Better diagnosis – more cases identified –Better treatment – more cases treatable –Higher (or lower) cost per treated case Most economists agree that advances in technology have accounted for a majority of increases in health care spending over time Recently, we have seen renewed policy concerns about a medical arms race –MDH report to the legislature on medical facilities highlighted distorted signals that current payment systems send to markets

Technology Cutler, Your Money or Your Life: –In general, technological advance has been worth it in terms of benefits that exceed costs –However, there are pervasive problems: Opportunities to prevent the need for high-tech interventions are missed Overuse, misuse, and underuse of care –You get what you pay for: The system we have pays well for intensive interventions and doesnt pay well for care management and prevention David Cutler, Your Money or Your Life, Oxford University Press, 2004

Medical Facilities Investment: Why is this an issue? Competition does not necessarily lead to lower prices: –Consumer price sensitivity is limited because most bills are paid by insurance –Some types of facilities have high fixed costs: building more of them than needed results in each facility spreading these costs over a smaller number of people –Because consumers prefer broad provider networks, health plans often do not have leverage to discourage unnecessary facilities by excluding them from provider networks

Medical Facilities Investment: Why is this an issue? Regions with higher supply of health care resources have higher use of supply-sensitive care and higher costs, but do not have better health outcomes. Physician self-referral may lead to overuse of certain types of services Payment systems distort investment incentives by overpaying for some types of services and underpaying for others Quality of care: health outcomes for some types of services are better at high-volume providers. In these cases, it is preferable to encourage a small number of centers of excellence.

Factors Influencing Medical Facility Investment Technological advance Demographics: population growth, aging, illness burden (e.g., rise in obesity) Renovation/replacement of existing facilities Variation in profitability by type of service –Competition for market share in profitable service lines: cardiac care –Cross subsidies from profitable to unprofitable services –Cost shifting among payers Physician self-referral System efficiency

Major Study Findings Current payment systems send distorted market signals that influence medical facility investments. –Need to adjust payment mechanisms to accurately reflect relative costs of services. Fixing the payment system cannot be separated from larger issues related to cost and quality: –Even with accurate payments, problems associated with paying for volume of procedures will remain –Paying for volume discourages efficiency and does nothing to ensure value and quality of services

Market Responses/Cost Containment Strategies

Market Structure Strategies Pooled purchasing –Reduces overhead and increases bargaining power –However, impact on medical costs is limited –Adverse selection likely to be a problem in voluntary pools Strategies to increase competition among plans Strategies to increase competition among providers –Price/quality transparency initiatives –New forms of health care delivery: retail clinics Strategies to control investment in new facilities

Technology-Related Strategies Prior to widespread use of new technology, more consistent evidence of effectiveness and cost- effectiveness vs. existing treatments –Current national debate on evaluation of cost-effectiveness Proposals to control or limit investment in expensive new facilities In addition to overuse, underuse and misuse of technology are also problems –Incentives for appropriate use

Lifestyle/Behavior Related Strategies Prevention Some employers are encouraging and rewarding healthy lifestyles –Reimbursement for health club membership (if used) –Different premiums for smokers/non- smokers

Consumer/Provider Incentives Insurance benefit design –Structure of deductibles, copays, etc. –Comprehensiveness of benefits E.g., limited benefit products for young adults Tiered networks –Incentives for consumers to use lower- cost, higher-quality providers Price/quality transparency initiatives

Quality/Value Management of chronic disease –Better management of patients with chronic disease (such as diabetes or asthma) may reduce complications and save money –Current payment systems pay well for high-tech interventions, but not necessarily for care management that would prevent the need for intervention Value-based purchasing/pay for performance –Create incentives that rewards high quality, cost-effective care Patient safety

Variation in Use of Care Research studies have shown large regional variation in patterns of care, but more care does not necessarily lead to better outcomes –Example: Medicare enrollees in high-spending regions received 60% more care but did not have better quality or outcomes of care Potential for cost savings by reducing variation in care practices – by one estimate, Medicare savings could be close to 30%* Need for more research/knowledge about effectiveness and outcomes *Geography and the Debate Over Medicare Reform, John E. Wennberg et al., Health Affairs web exclusive, 13 February 2002.

Conclusions Many factors that are driving increased costs are not directly controllable, but opportunities to reduce cost growth do exist Need to focus on activities that contain costs rather than shifting them around (to other services or to other payers) Consumers need to play a role in cost containment, but need more and better information in order to make better decisions All stakeholders (health plans, providers, employers, consumers and government) need to play a role in finding solutions