Bending the Cost CurveBending the Cost Curve

Michael Chernew

May 20, 2010

DisclosuresDisclosures

PharmaPharma PurchasersPurchasers Other Other industryindustry

GovernmentGovernment

ConsultingConsulting PfizerPfizer AHIPAHIP AvalereAvalere MedPACMedPAC

GenentechGenentech BCBSABCBSA AltarumAltarum CBO Panel of CBO Panel of Health AdvisorsHealth Advisors

AbbotAbbot Anthem BCBS Anthem BCBS (Maine)(Maine)

HRETHRET CMS Office of CMS Office of the Actuarythe Actuary

LillyLilly HewittHewitt Mass Medical Mass Medical SocietySociety

GrantsGrants PfizerPfizer

Astra Astra ZenecaZeneca

PhRMAPhRMA

Continued spending growth should scare you

Definitional issues matterDefinitional issues matter

Do we mean: Do we mean: – Cost per service [i.e. Price]?Cost per service [i.e. Price]?– Spending per disease?Spending per disease?

Spending at the population (national) level?Spending at the population (national) level?

Spending growth vs. levelSpending growth vs. level

Time

SpendingSpending High spending, rapid growth

Low spending, rapid growth

Low spending, slow growth

0102030405060708090

100

Our debt is unsustainableOur debt is unsustainable

Source: President’s Budget: http://www.cbo.gov/ftpdocs/112xx/doc11231/03-05-apb.pdf

Debt / GDP (%)

Health care is a major driver of debt Health care is a major driver of debt

% G

DP

Source: Congressional Budget Office. The Long-Term Outlook for Health Care Spending. http://www.cbo.gov/ftpdocs/87xx/doc8758/MainText.3.1.shtml

Tax rate implicationsTax rate implications

SCENARIOSSCENARIOS

PROJECTIONS FOR 2050PROJECTIONS FOR 2050

Effect on Effect on EconomyEconomy

Effect on TaxesEffect on Taxes

Tax code is Tax code is indexed for indexed for inflation and inflation and growth in real growth in real income. income.

1% Gap1% GapReal GDP Real GDP reduced by reduced by 3% to 16%.3% to 16%.

Highest Bracket Highest Bracket (35 (35 60%) 60%)

2.5% Gap2.5% GapSubstantial Substantial reductions in reductions in real GDP. real GDP.

Highest Bracket Highest Bracket (35 (35 92%) 92%)

Source: CBO. Financing Projected Spending in the Long-Run. July 2007.

Message 1:Message 1:

Health care spending GROWTH Health care spending GROWTH willwill slow slow

SlowSlow is not the same as is not the same as FallFall– Age adjusted, per beneficiary spending will still Age adjusted, per beneficiary spending will still

riserise

At the system level, the challenge is not At the system level, the challenge is not how to do more with less money, but how how to do more with less money, but how to do more with ‘Less More’ moneyto do more with ‘Less More’ money

Controlling SpendingControlling Spending

Spending AccountingSpending Accounting

Spending = PRICE x QUANTITYSpending = PRICE x QUANTITY

Spending growth will not slow unless Spending growth will not slow unless PRICE and/or QUANTITY growth slowsPRICE and/or QUANTITY growth slows

Defining ValueDefining 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 Saving Cost Effective Not Cost Effective

Message 2:

Who Will Slow SpendingWho Will Slow Spending

What will slow spending growthWhat will slow spending growth

Payment Payment – Affects price, maybe quantityAffects price, maybe quantity

Benefit designBenefit design– Affects quantity, maybe priceAffects quantity, maybe price

Organization of medical practiceOrganization of medical practice– Affects quantityAffects quantity

Message 3:Message 3:

Physicians, collectively, must shape the Physicians, collectively, must shape the future future – Develop care strategiesDevelop care strategies– Design (or collaborate to design) incentive Design (or collaborate to design) incentive

systems or they will be imposed upon yousystems or they will be imposed upon you

(said as if physicians do not have enough to do)(said as if physicians do not have enough to do)

Why PhysiciansWhy Physicians

They think clinicallyThey think clinically

They control care decisionsThey control care decisions

They care about the patientsThey care about the patients

ENDEND