Bending the Cost Curve Michael Chernew May 20, 2010

Disclosures PharmaPurchasers Other industry Government ConsultingPfizerAHIPAvalereMedPAC GenentechBCBSAAltarum CBO Panel of Health Advisors Abbot Anthem BCBS (Maine) HRET CMS Office of the Actuary LillyHewitt Mass Medical Society GrantsPfizer Astra Zeneca PhRMA

Continued spending growth should scare you

Definitional issues matter Do we mean: –Cost per service [i.e. Price]? –Spending per disease?  Spending at the population (national) level?

Spending growth vs. level Time Spending High spending, rapid growth Low spending, rapid growth Low spending, slow growth

Our debt is unsustainable Source: President’s Budget: Debt / GDP (%)

Health care is a major driver of debt % GDP Source: Congressional Budget Office. The Long-Term Outlook for Health Care Spending.

Tax rate implications SCENARIOS PROJECTIONS FOR 2050 Effect on Economy Effect on Taxes Tax code is indexed for inflation and growth in real income. 1% Gap Real GDP reduced by 3% to 16%. Highest Bracket (35  60%) 2.5% Gap Substantial reductions in real GDP. Highest Bracket (35  92%) Source: CBO. Financing Projected Spending in the Long-Run. July 2007.

Message 1: Health care spending GROWTH will slow Slow is not the same as Fall –Age adjusted, per beneficiary spending will still rise At the system level, the challenge is not how to do more with less money, but how to do more with ‘Less More’ money

Controlling Spending

Spending Accounting Spending = PRICE x QUANTITY Spending growth will not slow unless PRICE and/or QUANTITY growth slows

Defining Value As we slow spending we must preserve value Cost effectiveness ratio ($/Quality adjusted life year)  Always relative to next best alternative $0$100,000* * This should be higher ($250,000), but decline as overall spending rises Cost SavingCost EffectiveNot Cost Effective Message 2:

Who Will Slow Spending

What will slow spending growth Payment –Affects price, maybe quantity Benefit design –Affects quantity, maybe price Organization of medical practice –Affects quantity

Message 3: Physicians, collectively, must shape the future –Develop care strategies –Design (or collaborate to design) incentive systems or they will be imposed upon you (said as if physicians do not have enough to do)

Why Physicians They think clinically They control care decisions They care about the patients

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