Cost of Care

What Is Driving Total Cost of Care?

April 25, 2018 3:18 pm

This is a preview of research that will be released at HFMA’s Annual Conference on June 24.

Providing stronger incentives for adoption of value-based payment models and encouraging competition among well-integrated delivery systems are two strategies that hold significant promise for reducing the nation’s total cost of care.

A recent study of healthcare markets across the United States conducted by HFMA, Leavitt Partners, and McManis Consulting, with the support of the Commonwealth Fund, looked at quantitative and qualitative analyses of factors that may be influencing total cost of care in the nation’s healthcare markets. Here, we present some key findings.

Sidebar: About the Study of Factors Influence the Total Cost of Health Care

The Impact of Population-Based VBP Models

A quantitative analysis of possible correlations between population-based value-based payment (VBP) models and total cost of care found no statistically significant correlation during the period analyzed. A higher level of VBP model penetration also had no statistically significant impact on quality outcomes.

The qualitative analysis yielded several explanations for this lack of correlation, including the following.

The period studied was too early for effects on total cost of care to be realized. Participation in programs such as the Medicare Shared Savings Program (MSSP) was just beginning during the period analyzed. Reports of outcomes under the MSSP indicate that success in achieving shared savings often requires several years of participation in the program.

Few VBP models offer significant incentives to manage total costs of care. VBP contracts for most provider organizations had upside risk only; both health plans and provider organizations felt it was important to take an incremental approach to risk. The result, however, is that financial incentives are not yet in place for broad-scale changes to care delivery.

Incentives have not yet been aligned from the system level to the clinician level. Across most provider organizations interviewed for the study, clinician compensation remains heavily reliant on productivity-based compensation. Within some physician practices, especially those focused on primary care, there was a sense that change was closer at hand. Compensation metrics tied to quality, access, and patient panel size were being introduced.

Infrastructure costs can delay positive realization of a return on investment. For organizations participating in VBP models, the infrastructure costs for patient population analytics and care management can be significant and are likely to offset any savings realized during early years in the models.

Given these considerations, the efficacy of population-based VBP models in containing growth in total cost of care has not yet been established. Financial incentives will have to strengthen considerably before the impact of these models can be proven.

The Impact of Factors Related to Market Structure

The quantitative analysis identified 23 factors that had a statistically significant impact on variations in baseline total cost of care across markets, the prevalence of chronic diseases being the most significant of these factors. Combined, the factors predicted 82 percent of the variation in baseline costs (see the exhibit below).

These factors proved much less successful, however, in predicting variations in growth in total cost of care. Combined, they predicted just 27 percent of variation in growth. The significance of factors also shifted, with physical environment factors (such as average daily temperatures) predicting more of the variation in cost growth than prevalence of chronic diseases (see the exhibit below).

The quantitative analysis also indicated that, although health plan and hospital concentration had a statistically significant impact on predicting baseline total cost of care and growth in costs, the impact was relatively marginal compared with other factors and could have both positive negative and positive impacts on cost.

Findings from the qualitative analysis of nine markets also suggested that competition alone is not the answer. The question of “what type” of competition may be more important than “how much,” as indicated by the following two key findings.

Costs were lower in markets with well-organized provider networks. Sufficient consolidation had occurred in these markets to leave between two and four health systems with good geographic coverage competing within the market. Physicians in these markets tended to be either employed by the health systems or in close alignment with a system. Notably, competitors in lower-cost markets in the study typically included at least one integrated delivery system with a health plan, a hospital, and clinician capabilities.

Markets that were less consolidated, or less aligned vertically, tended to have higher costs. Independent specialty physician groups often competed directly with health systems in these markets, as did specialty surgical facilities or hospitals. Patient care also tended to be more vertically segmented in higher-cost markets, with higher, middle, and lower income groups receiving care from different provider networks.

The qualitative analysis also found that lower-cost markets had good mechanisms for sharing information among care purchasers. Organized employer coalitions or state reporting agencies dedicated to the exchange or public reporting of information on healthcare quality and costs were present in many of the lower-cost markets.

Other Findings

The qualitative analysis also produced other notable findings.

Employers are reluctant to adopt models that might limit employees’ choice of providers. As unemployment rates fall in most markets, employers are concerned about changing benefit designs that they see as important tools for the recruitment and retention of employees.

Payment pressures and pressures on physician practices continue to grow. Government programs are paying for a steadily increasing percentage of patients. For physician practices, particularly small, independent practices, factors such as the costs of electronic health records and other technologies, increasing administrative burdens, and pressures on payment rates are posing challenges.

The outlook for the Affordable Care Act is tenuous. Several of the markets visited were not in Medicaid expansion states. The state exchanges in many of the markets were troubled, with high year-over-year premium increases and declining enrollments that affected risk pools for health plans on the exchanges.

Recommendations and Action Steps

Based on our findings, we recommend several key areas of focus moving forward that we believe could moderate growth in total cost of care.

Continue movement toward models that increase financial incentives to manage total cost of care. Given our finding that even though VBP models may have penetrated broadly in some markets, but not deeply in most, we recommend that both government and commercial payers continue to experiment with models that increase incentives to make changes to care delivery models that could increase both the quality and cost-effectiveness of care. Experiments should continue with population-based VBP models but should not be confined exclusively to these models. It will be imperative to document the success or failure of VBP models in managing total cost of care to demonstrate the value of adopting these models more broadly.

Balance the benefits of competition with the benefits of integration. While there is little doubt that competition matters, the answer to the question of how much competition is necessary may be less than assumed. Our qualitative research found that lower-cost markets had competition among a few health systems that were highly aligned with physician groups. We also found that lower-cost markets had some degree of competition among health plans and that these markets had more innovation with payment and care delivery models.

Support more transparent sharing of information on healthcare cost and quality. Lower-cost markets had organized mechanisms for the sharing of information on healthcare cost and quality. Effective consumer transparency has been a challenge, but there was widespread consensus that with the right tools and incentives, it could have a significant impact.

The study recommends specific action steps for policy makers, health plans, clinicians, health systems and hospitals, employers, and other community leaders, which are described in the full report. It is clear, however, that effective change within markets will require a coalescing of stakeholder interests that defines the best path forward. The path forward will likely be different for different markets. But it is also clear that stakeholders in every market think they can do better.


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