No Longer Trying to Have it Both Ways: Measuring Total Health Care Costs

Apr 15, 2015 | Christopher F. Koller, President

Welcome to health care’s economic wonderland:

“Health care costs are killing employers and the government budget.”

“Health care jobs are the key to our economic recovery.”

“We want to lure more high-paying biotech jobs into our community.”

These contradictory statements often peacefully coexist in the magical reality of this wonderland. When I was health insurance commissioner in Rhode Island, the same leaders who urged me to deny rate increases to insurers also championed any growth in health care jobs and vied to attend the next ribbon-cutting ceremony for a hospital expansion.

A few states, though, are trying to create a new reality, changing the way health care is provided and paid for. The strategies these states are employing differ in some fundamental ways, but implicit in each one is that health care is an economic activity to be measured. Reform efforts need to be assessed, and the value of health care spending evaluated, understood, and improved.

The Milbank Memorial Fund studied the total cost of care measurement activities in four states—Maryland, Massachusetts, Oregon, and Vermont. Their methods are summarized in a new report, “State Models for Health Care Cost Measurement: A Policy and Operational Framework.” The report brings a few lessons to mind:

Strategy Matters

Total cost of care measurement is part of a comprehensive and distinct health policy strategy in each state. Oregon’s focus is on Coordinated Care Organizations; Vermont has been implementing its Blueprint for Health. Maryland has revamped its all payer hospital rate-setting strategy, and Massachusetts is targeting the rate of cost growth as part of its Chapter 224 reforms. In each case, the cost measurement efforts studied here serve and reinforce systematic strategies.

It Is Hard

Attempting to measure one-fifth of one’s economy may be criticized as overly technocratic, but never as unambitious. The report identifies some daunting questions to be answered. With consumers, employers, and state and federal governments all paying for care, where does data come from? What is being counted and how? Who is being measured: the state as a whole? Different types of payers (Medicare, Medicaid, and commercial insurers)? Newly accountable providers? What about the increasing portion of costs borne by consumers, directly and in benefit cost-sharing?

Once those questions are answered, what exactly is reported out to whom, in ways that promote understanding? Reports with dollar signs denote some people’s revenues and other’s expenses. They are subject to various interpretations—not all of them accurate and some selectively so.

It Is Important

In spite of the recent slowdown in health care cost growth in the United States, as described by Gail Wilensky in a recent Milbank Quarterly op-ed, it remains a vital policy issue. We pay more for our health care than any other country. Health care continues to chew up government budgets, and much of our slowdown has been accomplished by shifting costs to patients, as Drew Altman pointed out in a recent Wall Street Journal Think Tank column.

A total cost of care approach is also consistent with an ethic of justice—of equal treatment regardless of a population’s ability to pay. It permits providers and policymakers alike to see the health care system as a whole, creates social solidarity, and reduces fragmented payer-specific views that often encourage price discrimination—when prices vary for the same service based on the market power of the provider or the payer.

Most importantly, local government and private sector stakeholders in these four states have decided they can’t have it both ways; that the marginal dollar for health care may be better spent elsewhere—in factors that determine health, in other services, or in savings for taxpayers and purchasers. A yardstick that measures total expenses on health care and rate of growth helps create this conversation.

The Fund commissioned this report for three reasons:

  • We were asked to do so by these states. They wanted to learn from one another and share their lessons within their home states. The Fund finds this sort of peer-to-peer learning to be particularly effective.
  • We agree with these states: dollars spent on health care are dollars not available for other uses, including those that improve the social determinants of health. Understanding the rate at which costs are growing—and the growth rate the economy can bear—is important for the financial health of any state.
  • We think other states can benefit from these lessons. The Fund is committed to compiling the best evidence and experience to help leaders and decision makers improve the health of populations. Given that State Innovation Model funds are available, payment reform experiments are abounding, provider consolidation is rising, Medicaid is gobbling up state budgets, and more high cost drugs are in the pipeline, the importance of measuring and controlling costs will not go away. Other states can consider and learn from the information compiled.

This report documents how each state’s yardstick is different in important ways—reflecting the distinct social values, political cultures, and health care system characteristics in the state, and the exploratory nature of this work. Time and evidence will determine the efficacy of the states’ strategies and their measurement efforts. Other states will use total cost of care yardsticks in new and different ways.

But regardless of their applications, yardsticks are not magical. They have one reality. Only after assessing something’s cost can you compare its value to other uses. All four of these state “policy pioneers” are showing us how to do that. We need to take note of their work and learn from it.