The Challenge of Controlling Healthcare Costs

Healthcare in the United States encompasses a broad spectrum of patient and provider outcomes. While systemic issues prevent every person from receiving adequate coverage, many people get top-notch care. That may, in part, explain a paradox of public opinion: according to Gallup, “Americans’ views of their own healthcare coverage are quite positive, and much higher than the ratings they give healthcare coverage in the country more generally.”

Those contradictory sentiments are reconcilable in light of the various interests at play in the American healthcare industry. Each of the actors involved in providing care to people have unique goals which do not always completely overlap – particularly considering the inherently zero-sum nature of financial payments.

The actors in the healthcare industry

Patients: Look to reduce costs as much as possible while still receiving the best possible care.
Insurers: Aim to maximize the amount of enrollments they can get while still remaining financially viable.
Providers: Seek to improve patient outcomes while ensuring financial solvency.
Government: Tasked with creating legislation that both reflects public opinion and maximizes positive outcomes.

Cost-control in the healthcare industry

Many of the costs related to providing healthcare are fixed. Physician salaries, instruments, and drugs all require expenditures on the part of the hospital, and for the hospital to remain solvent, those expenses must be recouped. The question, then, becomes who is responsible for that funding?

Polling suggests that people are widely in favor of expanding access to medical services. Rising costs are cited as one of the major hurdles to more universal care, which has led both providers and legislators to investigate the areas in which costs can be controlled.

Physicians, understandably, are hesitant to adopt cost-control measures that require cutting staff or reducing access to life-saving medicine. The challenge for this group is to reduce the overall amount of money it takes to treat a particular patient without reducing the quality of care each person receives. Cost-control strategies are divided into two classes:

    • Those that affect the financing side, namely how much individuals pay for coverage.
    • Those that affect the reimbursement side, i.e., how much insurers pay out to providers.

Tactics that attempt to control financing side costs are generally structured around limiting the amount of money individuals pay for insurance plans. The logic is that insurers will have to adjust their reimbursement patterns, creating an equilibrium that reduces the overall amount a patient has to pay for care. This can be achieved via regulation, whereby the government intervenes to limit the amount individuals pay for coverage, or via competition, where market forces naturally drive down costs as companies attempt to gain the most customers.

However, both regulatory and competitive attempts to reduce financing side costs require insurers to have some measure of control over their reimbursements. If the amount that insurance companies are paying hospitals and providers remains static – or increases – the reductions in price will be untenable and eventually force consumers to pay more in taxes or premiums.In a competitive system, health care providers are encouraged to compete on price, with the expectation that offering the cheapest plans will yield the most customers. In order to lower their prices, these companies will be incentivized to reduce waste and provide services as efficiently as possible.

Managing reimbursement financing necessitates controlling the cost of providing particular treatments. There are several methods for doing so:

    • Cost sharing: With cost-sharing, patients pay out of pocket for some part of their health care. This must be negotiated when they buy their coverage, and so is an example of both financing and reimbursement working in tandem. The goal is to reduce demand for medical services and ensure that they are only used when necessary.
    • Utilization management: With this method, hospital administrators audit the time and resources spent on particular procedures in hopes of cutting down on redundancies and increasing efficiency.
    • Supply Limits: Supply limits apply both to the number of physicians capable of performing a particular service and to the materials that make the service possible. When capping the number of people who can receive care, the goal is to reduce demand to only the most important cases.

There is also an increased emphasis placed on patient satisfaction. This aim is in many ways orthogonal to the goal of reducing costs, which has left many in the industry feeling the pinch. Despite this, in September of 2015, Standard and Poor’s revised its outlook for the healthcare industry from negative to stable, suggesting that hospitals may be coming to a better understanding of these new challenges.

Future challenges for physicians

While each of these strategies offers some promise, there is no fail-safe way to reduce overall costs without compromising the quality of care provided. For example, the introduction of EHRs provides hospitalists with more information, but the process of taking that data and using it to enact meaningful change is still in its relative infancy. In addition, the storage of these records opens hospitals up as targets of cybercrime, which means that administrators need to be constantly mindful of these new risks.

For more information about implementing value-based healthcare initiatives, please download part one of our free white paper, Understanding Value-Based Healthcare.

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