Pilgrim’s Progress

How Massachusetts Could Lead the Way in Controlling Health Care Costs

By Christine E. Eibner

Christine Eibner is a health economist at RAND.

As the U.S. Congress has moved closer toward passing landmark legislation for national health care reform, attention has shifted to the reform’s long-term financial cost. To get a glimpse of what the future might hold for the national budget, many eyes have turned to Massachusetts.

In 2006, Massachusetts passed its own groundbreaking legislation ensuring near-universal health insurance coverage for residents of the state. By 2008, only 2.6 percent of Massachusetts residents were uninsured, considerably below the national average of 15 percent. However, continued increases in the cost of health care services now threaten the long-term viability of the state initiative, having ominous implications for the national effort unless costs can be contained.

In the absence of changes to the Massachusetts policy, health care spending in the state is projected to nearly double to $123 billion in 2020, increasing at a faster pace than the state’s gross domestic product (GDP). If health care spending could be held to the rate of growth in the state’s GDP, then health spending in the state would be only $107 billion by 2020, representing a cumulative savings of 8 percent between 2010 and 2020 and keeping health spending from consuming an ever increasing portion of the state’s economy.

As in the rest of the country, finding a way to reduce spending on health care is a major focus for private and public policymakers in Massachusetts. Federal policymakers are looking to the Massachusetts experience for insights about the possible outcomes of national health reform.

No Silver Bullets

The Massachusetts Division of Health Care Finance and Policy asked RAND to develop a menu of cost-containment options. From an initial set of 75 broad approaches to cost containment, we modeled the impact of a subset of 12 options for which there was some evidence of savings potential and some available data for making projections. We developed high and low estimates of the cumulative cost savings associated with these options over ten years. For an additional nine options, we conducted an extensive literature review but did not attempt to project savings, generally because the evidence was uncertain or the options held limited promise for reducing health spending in Massachusetts.

There are multiple options that would reduce spending. The most promising options involve changing the current methods of paying for health care services.

We found that there are no silver bullets for closing the gap between health spending growth and GDP growth in Massachusetts, but there are multiple options that would reduce spending. The most promising options involve changing the current methods of paying for health care services. Some infrastructure-related options, such as increasing the use of health information technology, will not produce substantial savings themselves but are needed to implement other options.

Some popular strategies, such as disease management and “medical homes,” do not appear likely to yield substantial savings. Two factors explain why some options are less promising than hoped: The size of an affected population might be limited (at least for state spending purposes), or an option might offer no clear mechanism for changing the price or quantity of services.

We estimated the impact of the 12 options individually. Although some combination of options will likely be necessary, the savings estimates for many individual options cannot be summed, because they target the same dollars. For example, several options offer different ways to reduce the use of hospitals and emergency departments; consequently, savings from any one such option would dilute the savings potential from the others. Moreover, the estimates of savings from all 12 options are very tentative, because none has a proven history of reducing spending.

Weighing the Options

In our high-savings estimates, all 12 options would produce some level of savings by 2020. Even in our low-savings estimates, six options would produce savings. This suggests that health spending can indeed be reduced. However, the amount of the reduction is highly uncertain, as indicated by the spread between the high and low savings estimates in the figure. To reduce the growth of health spending to the GDP rate, a combination of strategies would likely be needed.

All of the Most Promising Options Would Shift Away from the Fee-for-Service Payment Model

All of the Most Promising Options Would Shift Away from the Fee-for-Service Payment Model

SOURCE: Controlling Health Care Spending in Massachusetts, 2009.

The options at the top of the figure show the most promise for reducing spending. All of the top four options — bundled payment, hospital all-payer rate setting, rate regulation for academic medical centers, and elimination of payment for adverse hospital events — would change the current method of payment for health care services, shifting away from the fee-for-service model. The sixth most-promising option — reference pricing for academic medical centers — is also a change in payment methods.

Among the five changes to payment methods that we studied, bundled payment strategies would encourage insurers to pay a single total amount for all services related to a treatment or condition, including services delivered by multiple providers and in multiple settings. The total amount would theoretically be set high enough to allow profits to be made but low enough to discourage the overuse of services, such as duplicative medical tests.

Hospital all-payer rate setting would establish a regulatory board to determine rates for hospital inpatient, outpatient, and emergency department care; limit payment to the minimum amount necessary to cover hospital operating expenses; and require all payers (insurers) to adhere to the rates set. Rate regulation for academic medical centers would limit reimbursement for most of the care at these centers to the average reimbursement rate for hospitals in the community.

Eliminating payment for adverse hospital events would entail specifying serious, preventable medical errors (and other indicators of poor care) and allowing public and private payers to deny or reduce payment for the costs associated with such care. Reference pricing for academic medical centers would encourage insurers to base reimbursement on the community hospital rate and require consumers to pay the difference if they obtain care at an academic medical center.

Payment reform of the kinds outlined above is an essential tool of cost containment. This conclusion is consistent with the recommendation of the Massachusetts Special Commission on the Health Care Payment System to move toward “global payments,” which are designed to reduce both the price and the number of services delivered over the next five years.

Beyond payment reform, the next most promising area of cost containment is infrastructure investments.

Beyond payment reform, the next most promising area of cost containment is infrastructure investments, which would increase spending in the short term but could yield savings in the long term. These investments include the increased adoption of health information technology and the expansion of primary care capacity (by either increasing the use of nurse practitioners and physician assistants, promoting the growth of retail clinics, or creating medical homes).

The adoption of health information technology could be accelerated through financial incentives, direct provision of hardware and software, regulatory mandates, development of standards, and establishment of health information exchanges. Making greater use of nurse practitioners and physician assistants could require changes in laws, regulations, and financing practices that now limit the use of these professionals as primary care providers.

Danielle Marks, poses with her husband, Tad Marks, and their children in front of their home in Plymouth, Massachusetts.


Danielle Marks, top left, poses with her husband, Tad Marks, and their children, Jesse Marks and Susana Nickerson, in front of their home in Plymouth, Massachusetts. Danielle, laid off from her job, and her husband pay just $78 a month for the required, state-subsidized health insurance that covers doctor visits, prescriptions, and hospital stays.

Policymakers could promote the growth of retail clinics by expediting reviews of their applications, relaxing the physician oversight requirements for nurse practitioners, and modifying other regulations. Medical homes, the final infrastructure option that we studied, would potentially reduce costs by having comprehensive primary care provided by physician-led teams available round-the-clock for improved management of care for chronically ill patients.

The least promising strategies include some of the most popular ones, such as reducing the intensity of resource use at the end of life for the non-elderly; this might be done by promoting the use of community hospitals, hospice care settings, and other sources of care that are less expensive than hospitals. Other popular policies aim to reduce spending on chronic illness through improved disease management for the non-elderly; this might be done by encouraging healthy behaviors, adherence to medications, and appropriate utilization of care. Although these approaches might improve quality and value, they are unlikely to moderate current cost trends.

The remaining option we studied, value-based insurance design, would tie copayments to the expected benefit of the health care service being consumed. The greater the expected benefit, the lower the copayment. This option has not been well specified or tested, but it could be developed over time and reconsidered when more evidence is available about its effectiveness.

Because we focused on options that state policymakers could implement without changes in federal legislation or regulation, we generally excluded the Medicare population. And because people age 65 and older will represent 35 percent of health spending in Massachusetts in 2010, many of the 12 options can affect only 65 percent of state spending. Likewise, state spending on health care for people under age 65 with one of six chronic conditions that are commonly targeted by disease management programs (asthma, chronic lung disease, heart disease, heart failure, depression, and diabetes) will represent just 21 percent of the total in 2010.

The options with the largest estimated savings typically offer a clear and direct mechanism for reducing spending. Bundled payment, for instance, would directly specify the amount paid for health services. Hospital rate setting would impose statewide controls on hospital prices. Other options, in contrast, were developed with the primary aim of improving the quality of care; so the spending reductions, if any, would be a secondary effect.

Several popular options — including comparative effectiveness research, pay-for-performance, and prevention — were among the nine options we reviewed but for which we did not produce savings estimates. Either there was little or no evidence of the potential effects of these options, or the best evidence suggested that savings would be unlikely. In addition, a specific mechanism by which each of these options would reduce spending was often lacking. While these reforms should not be excluded from further consideration, any claim that they will result in significant spending reductions should be interpreted with caution.

Richard and Susan Cohen and Morris Azrin listen during a town hall meeting on health care reform and financial issues held with U.S. Rep. Barney Frank (D-Mass.).


Richard and Susan Cohen, left, and Morris Azrin, right, listen during a town hall meeting on health care reform and financial issues held with U.S. Rep. Barney Frank (D-Mass.) at MassBay Community College in Wellesley, Massachusetts, on September 12, 2009.

Moving Forward

Our analysis suggests that the best opportunity for reducing state spending over the next decade is to change the method of paying for health care services. Moving toward bundled forms of payment appears most promising. Massachusetts has already taken steps to eliminate payment for adverse hospital events, another promising strategy in the category of payment reform.

The two most important options in the infrastructure category are accelerating the adoption of health information technology and expanding primary care capacity. Although these options do not appear likely by themselves to produce significant savings, they are foundational to other efforts. For example, accelerating the adoption of health information technology would facilitate not just improvements in health services delivery but also innovations in payment methods. It could allow medical homes to operate effectively, retail clinics to communicate seamlessly with other providers, and payment reform to take account of clinically important variations in patient need. Increasing the utility and availability of health data would also enable the state to evaluate its progress in implementing policy changes and to make necessary mid-course corrections.

Likewise, expanding primary care capacity would ensure that more patients have access to primary care providers, thereby reducing the use of emergency departments and other costly services for primary care and laying the groundwork for further reforms involving better care management. Some of these infrastructure options might cost more than they save in the next ten years, but failing to get started on such transformations today would only delay the opportunities to improve the health care system tomorrow.

From an initial set of 75 ideas, we identified a few options that offer the potential to slow the rate of increase in health care spending in Massachusetts over the next decade. Considerable work remains to be done to move from promising options to an action plan. However, if policymakers focus on those areas most likely to achieve the goals of significant spending reductions, the second round of health reform in Massachusetts will once again provide a model for the nation. square

Related Resources

Controlling Health Care Spending in Massachusetts: An Analysis of Options, Christine Eibner, Peter Hussey, M. Susan Ridgely, Elizabeth A. McGlynn, RAND/TR-733-COMPASS, 2009, 244 pp.

Options for Controlling Health Care Spending in Massachusetts, Christine Eibner, 2009.