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«CHAPTER 7 Balancing Private and Public Roles in Health Care H ealth care is one of the largest and fastest growing sectors of the U.S. economy, ...»

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CHAPTER 7

Balancing Private and Public Roles in

Health Care

H ealth care is one of the largest and fastest growing sectors of the U.S.

economy, employing millions of individuals in hospitals, physician

offices, home health agencies, long-term care facilities, insurance, and pharmaceutical and medical device companies. Today, Americans are living

longer as a result of public health improvements and advances in medical

treatment. While modern health care provides substantial benefits, there are growing concerns about its rising cost. In 2008, the United States is projected to spend approximately $2.4 trillion, or almost $8,000 per person, on health care, and forecasts indicate that spending will continue to grow at a rate faster than the gross domestic product (GDP). Recognizing that rising costs pose a threat to Americans’ access to health insurance and medical care, the Administration has pursued several initiatives to encourage the efficient provision of health care through private markets and to improve access to affordable health care for individuals in the United States.

This chapter begins with a brief overview of U.S. performance with respect to the population’s health status and spending on health care. This is followed by a discussion of key efforts by the Administration to address issues

of health care quality, cost, and access. The key points of this chapter are:

decades, a trend that is driven by the increased use of high-technology medical procedures, comprehensive health insurance that decreases consumer incentives to shop for cost-effective care, rising rates of chronic disease, and the aging of the population in the United States.

payers, providers, and consumers have more complete information as well as incentives to use medical care that is clinically effective and of high value.

cial protection against uncertain medical costs and by improving access to care. Market-based approaches and innovative benefit designs can enable people to select coverage that best fits their preferences and to more actively participate in their own health care decision making.

health infrastructure, particularly with respect to improving the availability of community-based health care for the underserved, preparing for possible public health crises, supporting health-related research and development, and promoting global health improvement.

The Health of the U.S. Population Health can be defined as a state of complete physical, mental, and social well-being. Individuals who are healthy are more productive and happier.

Genetic factors; the environment; lifestyle behaviors such as smoking, eating healthy foods, and exercise; and medical care consumption are all factors that have been shown to affect an individual’s health.

There are several different ways to measure health outcomes for a population. One consistent and reliable measure is life expectancy, defined as the average number of years of life remaining to a person at a particular age.

Chart 7-1 shows how U.S. life expectancy at birth has changed over the past century. In the early part of the 20th century, life expectancy averaged 51 years until an influenza pandemic in 1918 resulted in a significant drop, to 39 years. Following that crisis, there have been steady increases in life expectancy over time. This positive trend can be explained by several factors, most notably, public health improvements such as cleaner water, improved sanitation, and vaccinations, as well as medical innovation.

A second way to measure population health is by examining disease prevalence. Rising rates of age-adjusted chronic diseases, which are conditions 198 | Economic Report of the President expected to last at least 1 year, are particularly concerning to the medical, public health, and health policy communities. Heart disease and diabetes are two examples of chronic diseases that afflict millions of Americans each year.

Heart disease, which affects 7.3 percent of adults 20 years of age and older, has been the leading cause of death for the past 90 years, as well as a major cause of disability. Diabetes affects 7.8 percent of the population, or roughly

23.6 million children and adults, and has numerous costly complications, including kidney damage, eye problems, nerve damage, foot problems, and depression.

In 2005, approximately 60 percent of people 18 years of age and older in the United States had at least one chronic condition, and older adults were considerably more likely to have multiple chronic conditions (Chart 7-2).

Managing many chronic diseases can be quite costly. More than 50 percent of total medical care expenditures generated by the adult U.S. population (excluding expenditures for dental care and medical equipment and services) is for the treatment of chronic conditions. However, with medical management and lifestyle changes, people can remain productive and lower their risk of disability from these conditions.

Chapter 7 | 199 The good news is that many chronic diseases are preventable. Healthy lifestyle decisions, such as being a nonsmoker, eating nutritious foods, and getting regular physical activity, can significantly lower the likelihood of developing a wide variety of serious medical conditions. In the United States, the rate of smoking has fallen during the past several decades, a trend partially explained by better information about the associated health risks, as well as public policies that deter smoking behavior. However, a major health concern remains in that about 20 percent of adults still report being current smokers. Another major public health concern is the rapid rise in obesity rates among adults and children. Currently, more than 72 million people ages 20 and older are obese, which is defined as having a body mass index (a measure using information on a person’s weight and height to indicate body fat) greater than or equal to 30. Obesity is a known risk factor for several costly medical conditions, including heart disease, diabetes, stroke, and some forms of cancer. Continued efforts to promote healthy eating and regular physical activity are critical for reversing this rising trend.





U.S. Health Care Spending Health-related goods and services include hospital care, physician and clinical services, nursing home care, prescription drugs, and more. Over time, there have been large spending increases across all of these major categories.

Chart 7-3 shows the distribution of national health expenditures by type of service in 2006, the most recent year of data available. Hospital care represents the largest segment, at 31 percent of total expenditures, followed by physician and clinical services (21 percent), other types of health spending (which include administration, the net cost of health insurance, public health activity, and research (16 percent)), other personal health care costs such as dental care and medical equipment (13 percent), and prescription drugs (10 percent).

U.S. health care expenditures have grown rapidly during the past several decades. In 2008, the United States is projected to spend approximately $2.4 trillion, or 16.6 percent of GDP, on health care. Based on actuarial estimates from the Centers for Medicare and Medicaid Services, forecasts indicate that by 2017, the United States will spend approximately $10,592 per person (in 2008 dollars), which corresponds to 19.5 percent of GDP. Spending a larger share of GDP on health care costs is not necessarily bad; it is to be expected as a nation’s wealth rises. In addition to income effects, there are several other factors that drive up the cost of health care in the United States, including population aging, increases in input prices that are greater than inflation, technological advances, and third-party payment.

200 | Economic Report of the President Researchers who have investigated the catalysts of health care spending growth suggest that third-party payment and advances in medical technology can account for a significant proportion of the long-term, historical spending trends. Although health insurance provides valuable financial protection, benefit designs that have low out-of-pocket costs at the point of use (such as doctor or hospital visits) greatly inhibit consumers’ incentives to search for the lowest-priced providers or to engage providers in discussion about alternative treatment options and their respective costs. Health insurance that has low out-of-pocket cost-sharing can also create distorted incentives regarding the development and diffusion of new medical technologies. Of course, many advances in medicine have been instrumental in helping Americans live longer and healthier lives. For example, providers now have more advanced technologies to diagnose specific problems (such as MRI or CT scanners), treat existing ailments (such as using minimally invasive surgical procedures), and prevent the onset and spread of new diseases or illnesses (such as use of vaccinations or screening procedures). However, when providers and consumers lack strong incentives to control spending, one potential result is that new, more expensive technologies may be prescribed and received, even if they are only slightly more effective than existing therapies. As the amount of financial resources allocated to health care rises, it is important to consider

Chapter 7 | 201

the role that incentives play in determining the quantity and types of medical care that consumers receive. Additionally, it will be important to continue evaluating the extent to which greater utilization of medical services, including high-technology treatments, translates into better health outcomes.

Improving the Effectiveness and Efficiency of Health Care The terms “effectiveness” and “efficiency” are frequently used in the context of discussions about improving health system performance. But what do these terms actually mean? Effective care includes services that are of proven clinical value. It is medical care for which the benefits to patients far outweigh the risks, such that all patients with specific medical needs should receive it. Efficient care includes medical services that maximize quality and health outcomes, given the resources committed, while ensuring that additional investments yield net value over time.

In the United States, there is clear empirical evidence that many patients do not receive the highest quality of care possible. That is, patients do not receive care that fully complies with current clinical guidelines. In one well-respected study, researchers found that only 54 percent of acute care and 56 percent of chronic care provided by physicians conformed to clinical recommendations in the medical literature. Receiving better quality care, particularly for those with chronic conditions, has the potential to reduce the adverse impacts of existing illnesses and prolong life.

There are large differences in the levels of effective care provided in the United States, a result that reflects differences both in provider practice styles and in patient preferences. Researchers associated with the Dartmouth Atlas of Health Care have reported extensive geographic variation in medical care spending and in the use of medical care across a wide range of services such as preventive screenings, diabetes management, joint replacement surgeries, and end-of-life care. Differences across regions of the United States cannot be fully explained by differences in illness rates or well-informed patient preferences.

In fact, this research finds that higher rates of utilization reported across the United States do not appear to be correlated with better health outcomes, and that nearly 30 percent of Medicare’s costs could be saved without adverse health consequences if spending in high- and medium-cost areas of the country was reduced to levels in low-cost areas. The Administration has strongly advocated, in its policies, using information and better incentives to improve the effectiveness and the efficiency of health care delivery, including hospital care, physician services, and long-term care.

202 | Economic Report of the President Health Information Technology There is optimism among policymakers about the ability of health information technology (IT) to generate significant production efficiencies in the delivery of health care. This is because health IT permits the management of medical information and the secure exchange of information among consumers, providers, and payers. Using IT in health care may help reduce medical errors, provide physicians with information on best practices for diagnosis and treatment, improve care coordination, and reduce duplication of services. The most comprehensive form of health IT is an electronic health record, which is a longitudinal record of patient information that typically includes the patient’s demographic characteristics, past medical history, medication use, vital signs, laboratory data, and radiology reports.

One goal of the Administration is for most Americans to have an electronic health record by 2014. While providers have expressed interest in the potential benefits of IT for workflow improvement, adoption has been somewhat slower than anticipated. Results from a survey conducted by the Office of the National Coordinator for Health IT indicate that 14 percent of outpatient doctors currently use an electronic health record, and a study sponsored by the American Hospital Association finds that 68 percent of hospitals have or are in the process of implementing an electronic health record. Key barriers to adoption of health IT include lack of a business case to support adoption; privacy and security concerns; technical issues that make exchanging information difficult; and organizational culture issues, including providers’ resistance to changing business processes.

In response to these concerns, the Administration formed the American Health Information Community, a Federal advisory body that includes experts from the public and private sectors, to make recommendations to the Secretary of Health and Human Services about how to accelerate the development and adoption of health IT. Over the past few years, this advisory body has also provided recommendations on how to make records digital and available for providers to share easily, as well as how to assure the privacy and security of those records.



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