Cracking the code on health-care costs.

• Position: Excerpt

The following is an excerpt from Cracking the Code on HealthCare Costs, a report by the State Health Care Cost Containment Commission. The full report is available at http://millercenter. org/policy/commissions/healthcare.

The cost of health care in the United States has reached a tipping point as spending by individuals, governments, and businesses has grown steadily for over five decades. In 1960, annual health-care costs per individual averaged $147; by 2011, this figure had reached $8,860. This is more than twice the average spent by all other developed countries in the Organization for Economic Cooperation and Development. Although there has been a recent lull in the growth of health-care spending, it is likely temporary If current practices in health-care delivery and compensation remain the same, projected annual costs will reach $14,103 per person by 2021.

Despite their massive investment in health care, Americans are far less healthy than their peers elsewhere in the developed world. U.S. health quality is average or below that of other countries on several important measures, including life expectancy, infant mortality, obesity, diabetes, chronic lung illnesses, and heart disease. Moreover, although some of the most advanced medicine in the world is practiced in the United States, surgical errors, medical mistakes, and poorly coordinated care are not uncommon.

Past trends do not necessarily dictate the future, however. The nation's health-care system is now entering a unique period of change. Over the next decade, millions more Americans will be enrolled in health insurance plans, which will encourage the creation and reorganization of health-care delivery systems to accommodate the newly insured. Healthcare purchasers and many providers are becoming more cost conscious.

TRANSFORMATION IS POSSIBLE

Urged by health-care payers, which include federal and state governments, many provider organizations and hospitals are forming partnerships to improve the efficiency and quality of care. This is a positive trend that may lead to more cost-effective, higher-quality care in the future, but this transformation is slow and not universal. Moreover, other trends such as the consolidation of hospitals and provider groups to gain market leverage may counter the positive aspects of this transformation.

Nevertheless, the opportunity exists to transform how health care is delivered. The State Health-Care Cost Commission believes that governors, along with key members of state cabinets and legislatures, are in the best position to lead that change.

The goal is straightforward but ambitious: Replace the nation's reliance on fragmented, fee-for-service care with comprehensive, coordinated care using payment models that hold organizations accountable for cost control and quality gains. Achieving this will take time. There is inertia in the current system and few incentives for changing it. However, the states are in a strong position to achieve meaningful reforms and create the needed incentives, with the support of payers, providers, insurers, and consumers. As the nation's "laboratories of democracy," states can serve as a proving ground for new approaches that raise the efficiency and value of health care.

WHAT DRIVES U.S. HEALTH-CARE COSTS

Health-care costs are high in the United States because of several interrelated factors:

* Physician, facility, and drug costs are high. Average unit costs for physicians, facilities, and drugs in the United States are almost universally the highest in the world. Even the lowest U.S. costs often exceed those in all other countries.

* Americans use a higher proportion of expensive medicine. Even though Americans visit doctors less frequently, enter hospitals less, and have shorter hospitals stays than other OECD countries, they make up for it by using more expensive medical technologies and costly procedures. For example, although an average of 46.3 magnetic resonance imaging diagnostics are conducted per 1,000 individuals throughout the OECD, the U.S. rate is 97.7--more than double the OECD average.

* Care is fragmented and uncoordinated, for the most part, with minimal clinical information transferred across care settings and infrequent consultation among providers treating the same patient. This contributes to unnecessary and redundant services, errors and hospitalizations, delays in treatment, patient dissatisfaction, and excessive expense.

* Consumers do not weigh costs when making health-care decisions. Other than insurance premiums and out-of-pocket expenses, consumers pay little attention to the cost of care. In fact, numerous studies have shown that consumers generally equate high-cost treatment with high-quality care and will choose the most expensive treatment among options that are equal in quality but vary substantially in cost.

* The traditional fee-for-service payment model promotes fragmentation and higher spending. The most common payment model in the United States is fee for service, which compensates physicians for each service they deliver. For many experts, fee for service encourages providers to maximize the amount and cost of the services they deliver.

* Billing and...