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What factors will determine the future of the cost trend?

June 11th, 2010

By jeremy.engdahl-johnson

Although some of the reform elements discussed since the launch of the Milliman Medical Index may provide a one-time reduction in the growth of healthcare costs, the primary drivers of historical cost growth as yet remain largely unaddressed by healthcare reform. Those drivers include:

  • Separation of treatment decisions and financial responsibility for those decisions. The majority of treatment decisions are ultimately made by doctors and patients. The majority of the cost of care, however, is borne by the employer. As described in the Milliman Medical Index, out-of-pocket expenses incurred at the point of care only represent about 17% of total healthcare cost for the family of four. This means that the cost vs. benefit decision is not being made by the person who is responsible for most of the cost.
  • Fee-for-service payments to healthcare providers. In most PPO-style employer group health plans, healthcare providers are paid on a fee-for-service basis, meaning that they get paid for each service they provide. This method is fair to providers in that there is a direct link between the work that they do and their compensation. However, it also provides no incentive for providers to deliver care in only the most efficient manner.
  • Defensive medicine. The threat of malpractice lawsuits gives providers a powerful incentive to perform tests or procedures that could be construed as demonstrating diligence in their treatment, but that may not always be medically necessary.
  •  Administrative complexity. Our healthcare system is fraught with administrative requirements, in both delivery and financing. Competitive pressures help minimize those costs, but broader industry efforts may be needed to induce universal implementation of electronic health records (EHR) or other technological efficiencies that will produce major cost reductions. Introduction of the healthcare exchanges may accelerate implementation of some such administrative efficiencies.

The healthcare reform package is a huge step towards universal coverage of all Americans. However, its effect on large employer group health insurance costs may be modest—unless reform can somehow bring about changes to the underlying cost of care.

Cost, Reform

  1. WBH
    June 13th, 2010 at 07:08 | #1

    http://www.nytimes.com/2010/06/03/business/03dartmouth.html?src=busln

    Here is an interesting article that raises doubts about the cost reduction assumptions made in passing health care. No doubt we can do better than we are doing now, but we may have implemented another government program doomed to masive cost overruns followed by financial failure.

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