NCSL Podcasts

Understanding the Drivers of Health Care Costs | OAS Episode 197

Episode Summary

Steep increases in health care costs in the commercial health market—the portion of the market not including Medicare and Medicaid—are the focus of this episode. Analyst Alyssa Vangeli explains what's driving the increases, where the greatest increases are occurring and what federal and state governments are doing to address the issue.

Episode Notes

Health care costs in the U.S. over the last 20 years have grown faster than the cost of other goods and services. Commercial health care costs, which include about half the health care market, have grown faster than Medicaid and Medicare spending.


Our guest on this episode is Alyssa Vangeli, a senior consultant with Bailit Health, a consulting firm in Massachusetts where she works with states to provide health policy analysis and consulting around the commercial health market. Vangeli explained what's driving the increase in costs, which segments of the health care economy are seeing the greatest cost increases, and the efforts by the federal and state governments to better understand the cost drivers and try to contain them. She also offered examples of what different states are doing and the success of those efforts.


Episode Transcription

Ed:      Hello and welcome to “Our American States,” a podcast from the National Conference of State Legislatures. I’m your host, Ed Smith. 


AV:      Commercial market health care spending has increased significantly over the past 20 plus years so we are seeing total spending per person increasing almost 130% between 2001 and 2020.


Ed:      That was Alyssa Vangeli, a senior consultant with Bailit Health, a consulting firm in Massachusetts where she works with states to provide health policy analysis and consulting around the commercial health market.


Health care costs over the last 20 years have grown faster than the cost of other goods and services. In commercial health costs which cover about half the health care market, they are growing faster than Medicaid and Medicare spending. I sat down with Alyssa to discuss what is driving the increase in costs, which segments of the health care economy are growing fastest and the efforts by the federal and state governments to better understand the cost drivers and try to contain them. 


            She also offered examples of what different states are doing and the success of those efforts. Here is our discussion. Alyssa, welcome to the podcast. 


AV:      Thanks so much. So happy to be here.


Ed:      So, why don’t you start by just telling the listeners a little bit about your background and the work that you do at Bailit Health. 


AV:      Sure. Bailit Health is a consulting firm. We are dedicated to ensuring insure and provider performance accountability on behalf on public agencies and employer purchasers. In my role, I support states with health policy analysis and research, strategic development implementation, program design and multi stakeholder process management and I currently manage a multistate commercial market affordability technical assistance program as well as provide support to states in developing strategies to pursue cost growth medication.


Ed:      I think that makes you just the right person for us to talk to about the cost of health care. Everyone knows that health care is expensive whether it is through their insurance or paying out of pocket for something, but most people don’t know much about it. I mean most people obviously know the price of a gallon of gas more than the price of a hip replacement. So, I wonder if you could first just kind of breakdown the different areas of health care coverage that people have and the sector of health care that we are talking about today. 


AV:      Sure. So, as you noted, there are different ways that people can obtain health care coverage. In the U.S., it is primarily through Medicare which is the federal health insurance program specifically for people ages 65 and older. Medicaid which is the joint federal and state program that provides coverage for some people with limited income and resources. And then the third is commercial or private health insurance coverage, which will be the topic of what we are discussing today. 


            Commercial insurance includes insurance that is provided through an employer which is the primary way that individuals and families obtain private insurance. And commercial insurance can also be purchased through a state or federal health exchange. And I want to note that for the purposes of talking about health care costs today, the focus is going to be on medical care; not dental or vision care as though services are typically covered through separate types of insurance. 


Ed:      Yeah. Great point. Talking about that segment of the market, commercial health costs, what kinds of trends do you see coming down the road the next five years, the next decade?


AV:      Sure. So, I will say on a national level, commercial market health care spending has increased significantly over the past 20 plus years so we are seeing total spending per person increasing almost 130% between 2001 and 2020 according to data from the Center of Medicaid and Medicare Services. It is important to note that health care costs have also risen much faster than the cost of other goods and services. It’s worth noting that commercial insurance spending per person has typically grown much faster than Medicare and Medicaid spending, which is largely because prices paid by private insurance are higher and rise more quickly than prices paid by public payors. These trends are expected to continue. So, while health care spending slows substantially in 2020 to 21due to the lower utilization with the COVID-19 pandemic, spending is expected to rebound in the coming years based on both increased use and prices. 


            And we also know that the high rates of inflation that we are seeing now are expected to further increase health care costs moving forward. That’s because general an inflation ripples into health care costs typically about two years after inflation spikes because providers are seeking price increases to help them cover increases in labor and other input costs. And so, as providers are renewing their multiyear contracts, we expect to see especially large rate increases now and in the coming years. But it is important to remember that assuming that inflation continues to moderate, that impact will be temporary. 


Ed:      Now there is a lot of research about what drives health care costs. I also know there are different service areas in health care and I think maybe it would be helpful to kind of explain how those different categories are and what the research that you’ve seen and the experts that you’ve talked to think accounts for these increases in these different areas. 


            (TM):  05:17


AV:      Sure. And I want to start with a reminder that I will be focused on drivers of commercial health care costs in particular. So, at a high level, research shows that commercial market spending growth is largely driven by increasing prices rather than utilization meaning how much health care is being used. One data that we look to for this information is from the Health Care Cost Institute, which analyses health care spending for people with employer-sponsored insurance. The most recent report looks at spending trends between 2017 and 2021 and they found that commercial market spending per person increased 21% overall during that time period. With prices increasing an average of 14% compared to only a 7% increase in utilization. The analysis then goes deeper to break out these trends by categories of health care services including inpatient hospital spending, outpatient hospital spending, professional services, which include physician services provided in offices as well as in facilities, and spending on prescription drugs. And while all of these services contributed to spending growth, some played a more significant role than others. Overall, the largest growth was in prescription drug spending followed by inpatient and then outpatient services with professional services experiencing the smallest increase.


            And importantly, when in each category of services, spending increases were largely driven by rising prices rather than increases of utilization with inpatient hospital prices and prescription drug prices increasing the most. So, with prices playing such a large role, this may lead one to wonder what exactly is driving price growth. First, I want to touch again on the role of inflation. Increases in general inflation have an upward impact in health care spending as inflationary costs pressures mean higher costs for things like labor and medical supplies. While the impact is somewhat lagged because price growth in the general economy doesn’t impact health care prices right away, we can expect inflation to result in even steeper price growth over the next few years. And independent of inflation, we can also point to a wide body of research showing that increasing market consolidation leads to higher health care in prices. By market consolidation, I’m referring to hospitals and health systems merging or physician practices being acquired or bought up by hospitals and health systems. And the reason that market consolidation leads to higher prices for commercial insurance is because consolidated providers have more market leverage to negotiate higher rates and raise prices with insurers while having less competition from other providers. 


            While factors such as the quality of services and lower prices paid by public programs are sometimes identified as reasons for higher commercial prices, the literature shows that those factors have substantially less impact on prices. 


Ed:      These costs have a ripple effect as I understand it on both employees and employers, and I wonder if you could talk a little bit about what some of those are.


AV:      Absolutely. High health care expenses translate into both higher premiums which is the amount that employers and employees pay on a monthly basis for health insurance and higher out of pocket costs such as copays, coinsurance and deductibles those are usually paid at the point of accessing care. High health care costs impact both employers and employees and as premiums have increased year over year, we’ve seen trends of employers shifting more of the premium contributions onto their employees or switching to health plans offering the higher cost sharing in order to offset steep premium increases. 


            Some recent national surveys of small businesses have found that a majority of small business owners cite health care costs is their most significant business challenge with nearly half of small businesses increasing the price of their goods or services to offset health care costs, 40% reporting delaying growth opportunities and almost 30% citing that they have held up on hiring new employees due to concerns around growing health care costs. 


            The national data also shows that over time, growth and premiums and deductibles has greatly outpaced both wage growth and inflation. And so, as no surprise, this means that individuals and families are feeling the burden of high and rising health care costs. A national poll of U.S. adult residents conducted just earlier this year confirmed what we know from countless other national and state level surveys and individual stories which is that health care cost barriers result in delayed, rationed or foregone care. For residents that have commercial health insurance, almost 1-in-5 adults reporting skipping or delaying a doctor’s visit in the past year because of the cost of care. 


            When faced with cost barriers, another all too common reality is that people can be forced into medical debt and face difficult tradeoffs such as cutting spending on food, clothing and other basics.


            (TM):  10:05


Ed:      Thanks Alyssa. We will be back with the rest of our conversation after this short break.


            I’m back with Alyssa Vangeli discussing commercial health costs. There have been a lot of efforts at the state and federal level to increase price transparency in health care. We’ve done podcasts on some of those efforts particularly in the area of pharmaceuticals. Are these efforts helpful in achieving cost containment?


AV:      So, I’ll start by saying that we have lots of experience that shows that price transparency in and of itself doesn’t fuel market competition because consumers don’t tend to shop around for health care services as they may do for other goods and services. But it is effective to use price data to highlight the pricing behavior of entities that are contributing to health care spending growth due to their pricing and then the need for accountability. So, with that said, I will highlight a few different ways that we’ve seen price transparency efforts play out. 


            First is the idea that if health care consumers have information about the costs of visits and procedures in advance, they can make informed decisions about getting care in lower cost settings. And while we certainly want individuals to understand their health care costs, we know that decisions about where to access care are far more complicated and can be based on factors such as referrals, provider location, access to transportation and the urgency of the care needed. So again, pricing information alone won’t necessarily encourage consumers to shop around for less expensive care. 


            We are also seeing some efforts from purchasers and policymakers to use price transparency to understand and in effect call out when prices are excessive when there may be unwarranted price variation for the same services across different hospitals and provider settings and even across different commercial insurers at the same hospital. There are tools such as sage transparency that look at data on hospital finances and how commercial prices compare to what Medicare pays which can help determine whether there is an opportunity for constraining prices through regulatory means or if your payor is negotiating the hospitals for lower prices. 


            And finally, as I touched on before, understanding pricing trends and the role of prices as a contributor to health care spending can help inform the development of targeted cost containment strategies. At the state level, this can entail in-depth claims analysis through an all-payor claims database which can be used to track spending trends and the underlying cost drivers including the role of prices. And if states don’t have such a database, they can use data from their state employee health plans to understand spending and price trends. 


            So yes, price trend transparency efforts are an important part of understanding and addressing health care costs. But these strategies alone won’t make a significant impact on slowing health care cost growth. 


Ed:      Yeah. I had that same discussion about particularly pharmaceuticals and it wasn’t sufficient for just the transparency. We, of course, have an audience of state legislators, legislative staff, other people interested in state policy and I wonder if you could dive into some examples of state policies. In other words, what are states doing around the country and are there things you would particularly point out as interesting to explore.


AV:      Sure, I would be happy to and I will say that states are doing a lot. There is a lot of attention being paid to health care costs and so I’m going to touch on a few strategies, but this is certainly not meant to be an exhaustive list of strategies that states can consider. So, I will talk about cost growth targets first. Healthcare costs growth targets sometimes referred to a benchmark is an annual rate of growth target for health care spending per person for a given state and it is typically pegged to some indicator or forecast that economic growth and consumer well-being. So once a target is established, it is kind of measured performance against that target using claims analysis as I mentioned before. It can hold entities accountable for meeting that health care spending target and then they can implement tailored cost growth mitigation strategies to attain the target. So far, eight states have health care cost growth target programs including Connecticut, Delaware, Massachusetts, New Jersey, Oregon, Rhode Island, Washington and California. 


            Another set of strategies that states are considering are various tools to address provider consolidation. Once strategy is to require closer scrutiny of proposed transactions through advanced notice to the state and a comprehensive review about how the change could impact health care costs, quality and access. Massachusetts, Oregon and California currently have such processes in place and Oregon’s authority extends so far as to allow the state to approve or disapprove a proposed merger, acquisition or other transaction.


            Another strategy to adjust consolidation is making markets more competitive by barring what are called anti-competitive health plan contracting terms. Nevada recently passed a law that bars anti-competitive contracting terms including all or nothing contracting which forces health plans to contract with all providers in a system often at a higher rate instead of allowing contracts with only some providers. The Nevada law also bans contracts for anti-tiering or anti-steering which prohibit insurers from using cost sharing incentives to steer patients to other providers even if they offer better value. And the law prohibits exclusive contracts between insurers and providers. 


            Texas has also passed a law recently prohibiting anti-steering and anti-tiering as well as gag clauses which prevent disclosure of negotiated price or quality information. Another set of strategies that states are pursuing are those to address provider price growth through price growth caps or price caps. Provider growth caps place an upper limit on how much an insured can annually increase the price paid for a service. These caps can apply to overall prices or they can be aimed at specific services or providers where price growth has been especially problematic. Rhode Island and Delaware have implemented hospital price growth caps which limit price increases for both inpatient and outpatient services.


            Price caps on the other hand place a limit on the absolute level of the provider prices and they can be applied in a few different ways. They can be applied broadly across the commercial and shared market overall. They can be applied only for payments for out of network services. They can be limited to a state employee health plan or to only certain services. As a few examples, Montana passed a law in 2016 that limits hospital prices for the state employee health plan. Oregon also passed legislation in 2017 that caps in-network and out of network provider payments for the public employee health plan up to a specified percentage of what Medicare pays with some hospitals exempted. 


            Another strategy is health insurance premium rate review. States are exploring how to leverage the premium rate review process to push down on premiums in state regulated health insurance markets. Well, most states already have processes in place to review and approve proposed rate increases for state regulated health plans, opportunities to strengthen this process can include promoting transparency by producing public facing materials on proposed rate increases and insurer justifications and encouraging the public to way in via testimony and other means if a proposed rate increase is unaffordable. Iowa and Texas have recently passed such laws. And a rate review can also focus on the underlying factors driving health care cost growth such as spending on hospital, physician and pharmaceutical costs. Rhode Island has used regular review as the enforcement mechanism for its provider price growth cap law.


            Another category of cost containment strategies are those focused on value-based payment. Value based payment is a strategy by which health care purchasers and payers use payment to hold providers accountable for the quality and cost of care by rewarding the value of services rather than the volume of services. Value based payment models can potentially slow the rate of health care cost growth by applying a budgeting mechanism to payment and by incentivizing higher value care. Moving toward value-based payment models is most effective when multiple payors including Medicare, Medicaid and commercial plans all align around a common model. 


            (TM):  18:36


Ed:      The question that always follows a discussion of new policies is are they working. So, are states seeing positive outcomes? Is there enough data there for you to be able to make any kind of analysis of that?


AV:      Yes, we are seeing some positive outcomes as a result of these strategies and I’ll highlight a few here. A study of the Rhode Island price growth cap law found a 2.7% decrease in total spending growth from 2010 to 2016 and utilization did not change significantly during this time which suggests that the decrease in spending was primarily driven by lower prices. As another example, in the first two years of Montana State employee health plan price cap initiative, an estimated savings of 47.8 million was generated across inpatient/outpatient services. And an evaluation was recently released on the impact of the Oregon hospital price cap law which found that while there was some ambiguity in the language that delayed initial savings, the initiative is estimated to have saved the state employee plan 107.5 million dollars over the first 27 months of the program. 


            I also want to note that some state strategies are in the early stages of implementation. So, while they are promising, we don’t yet know the full extent of their impact.


Ed:      Well, some of those do sound pretty promising and I wonder what advice you would give to legislators who are maybe thinking about a cost containment strategy for their states?  What kind of homework should they be doing?


AV:      The first and foremost, it is critical to understand the most significant cost drivers in your state to the extent that you have access to this data as this can help inform targeted strategies that have the greatest impact. As we’ve discussed today, the strategies that seem to offer the greatest promise are those that address prices and efforts should focus on the areas of health care spending that data show are high and rising fast.


            Second as we also discussed, there are several strategies the state can pursue to contain health care spending growth and a multi prong approach will likely be necessarily as there is no one magic bullet to address rising health care costs. In addition, this will take significant stakeholder engagement both in terms of working with the impacted entities and engaging of employers and consumers as those who are directly impacted and feeling the burden of high costs. 


            Finally, as we’ve touched on today, multiple states are implementing or considering cost containment strategies so take advantage of the work that has been done today and learn from other states that have been leaders in this area.


Ed:      Well learning from other states is what NCSL is all about so I think that’s a great piece of advice. This is super complicated stuff, Alyssa, and I think I’ve followed most of it so I hope our listeners have as well. Thank you very much and take care.


AV:      Thank you so much.


Ed:      I’ve been talking with Alyssa Vangeli of Bailit Health about the rising cost of commercial health care and government efforts to contain those costs. Thanks for listening. 


            You can check out all the podcasts from the National Conference of State Legislatures by searching for NCSL podcasts wherever you get your podcasts. Tim Storey, NCSL’s CEO hosts “Legislatures:  The Inside Storey” where he focuses on leadership and legislatures. The “Our American States” podcast dives into some of the most challenging public policy issues facing legislators. On “Across the Aisle” host Kelley Griffin tells stories of bipartisanship. Also check out our special series “Building Democracy” on the history of legislatures.