Solving the Health Care Cost Challenge: Leveraging RAND Expertise

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In its second term, the Obama Administration and the 113th Congress must address the relentless growth of health care spending, a major contributor to America's long-term fiscal imbalance.

Growing health care spending is fueling the federal budget deficit, crowding out other priorities in state budgets, hindering the competitiveness of American businesses, restraining job growth, and jeopardizing the finances of American families. Victor Fuchs, considered by many to be the father of health economics, summarized the enormous payoff of confronting this issue: “If we solve our health care spending, practically all of our fiscal problems go away.”

However, while there is no lack of ideas for how to slow spending, action is hindered by a lack of consensus.

In a series of research briefs dedicated to flattening the trajectory of health care spending, RAND Health outlines four broad strategies for constraining spending growth in our market-oriented health care system:

Read the Series Summary

Strategies to Restrain Spending Growth — Without Compromising Quality

Accountable Providers

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Fostering Efficient and Accountable Providers

Health care providers drive the bulk of spending through their purchasing decisions (e.g., tests, treatments, hospital admissions, etc.) and the fees they charge patients. Thus, the U.S. cannot hope to control cost growth without active provider participation. Unfortunately, fee-for-service payment, the prevailing approach to reimbursement, gives providers a powerful economic incentive to boost costs.

Nonetheless, there are many ways that motivated providers can deliver better care at lower cost:

  • Focus on value rather than volume. Payment policies must change to motivate providers to deliver value (broadly defined as health benefits per dollar spent) rather than volume (the number of exams, tests, procedure, and treatments).
  • Apply the best available evidence to eliminate wasteful and inappropriate care. The best prospects for success are likely to come through the leadership of medical specialty societies, which can identify ways to reduce waste without compromising care. These groups could draw from emerging comparative effectiveness reviews and provide guidance that physicians can use to determine which procedures are necessary, appropriate, equivocal, or inappropriate in various situations.
  • Enhance patient safety. Medical errors cause needless complications, injuries, readmissions, and deaths. They also increase providers' liability. Measures to enhance patient safety and improve quality must be tailored to specific patients and settings.
  • Strengthen primary care. Strengthening primary care could help reorient our health care system from episodic treatment to keeping patients out of the hospital, thereby lowering costs and improving care.

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Empower Consumers


Engaging and Empowering Consumers

In most sectors of the economy, competition drives efforts to enhance quality and tends to keep prices low. But health care does not behave like a normal market.

For example, because health insurance shields many consumers from the financial consequences of their health care choices, they may defer purchasing decisions to their providers. Moreover, Americans with the most serious health problems are often too ill or overwhelmed by the complexity of our delivery system to shop around for a better deal. Finally, those who are uninsured or underinsured are often charged higher prices because they do not have an insurance plan to bargain on their behalf.

To level the playing field, two things must happen:

  1. Patients need to have a financial interest in their decisions—“skin in the game”—to be motivated to think like consumers. The RAND Health Insurance Experiment demonstrated that more health care is used when it is free, whether it benefits the patient or not. Cost-sharing reduced use, but patients tended to reduce use of appropriate care as well as inappropriate services. For that reason, the size and structure of co-payments must be carefully designed to encourage prudent choices.
  2. To effectively function in a marketplace, consumers need to be informed. Today, many consumers cannot easily access the information they need to make important decisions about health care, such as picking a provider. Public cost and quality reports are intended to meet this need. However, in order to have the desired effect, the information they convey must be valid, easy to read, and presented in a way that is meaningful to consumers. (view example)

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Population Health

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Promoting Population Health

In 2000, a committee of the Institute of Medicine noted that the majority of premature deaths in the U.S. were due to behavioral or environmental causes. Initiatives to develop and implement effective interventions to reduce risk behaviors could improve the nation's health and possibly help lower health care costs.

RAND Health has focused on two of the most important causes of preventable death and chronic diseases in America: obesity and smoking. Researchers have studied how peers, coworkers, and environmental cues influence individual decisions to consume too many calories, take up smoking, and make other choices that increase risk of developing a costly chronic disease.

In many instances, these cues can be modified in subtle ways to discourage youth from starting to smoke and to encourage the general population to make healthier choices about diet and exercise. In particular, communities and workplaces can be valuable arenas for promoting health.

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Facilitate Innovation

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Facilitating High-Value Innovation

Existing economic, regulatory, and legal incentives are aligned such that the American health care system rapidly adopts expensive technologies irrespective of cost. In fact, developers have little reason to create health care technologies for the U.S. market that offer the prospect of providing effective care at substantially lower cost.

Potential steps that could realign existing incentives include:

  • identifying changes to policy that could facilitate high-value innovation
  • enhancing the efficiency of federally sponsored research
  • more effectively harnessing the potential of health information technology
  • using states' experiences to assess innovative health policies.

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