Getting a grip on excessive healthcare spending

By Adam Miller, MPH, CEBS

As fiduciaries, plan sponsors must address the root causes of excessive health care spending. While recent discussions have focused heavily on high prices, a new study revives the argument that utilization is the primary driver of health care costs.

The role of geography in health spending variation

It is well documented that patients in high-spending areas often receive more care without achieving better outcomes. This discrepancy stems from localized practice patterns, referral habits, and medical infrastructure. Studies have shown that some markets operate efficiently—delivering lower-cost, higher-value care—while others remain inefficient, marked by high costs and lower-value outcomes. In many ways, geography is destiny in health care.

New data reinforces an old argument

The University of Washington’s Institute for Health Metrics and Evaluation (IHME) recently analyzed over 40 billion claims (2010–2019) from Medicare, Medicaid, private insurers, and out-of-pocket sources across 3,110 U.S. counties. The study found that:

• 65% of county-level variation in spending was due to utilization
• 24% was due to price
• The remaining variation was attributed to demographics and disease prevalence

These findings reinforce the need to focus not only on how much care costs, but how much care is being delivered—and whether it’s truly high quality and appropriate.

What can plan sponsors do?

Effectively tackling the root causes of spending requires a balanced strategy that addresses both price and utilization. Plan sponsors can consider a variety of plan design and cost-containment strategies, such as:

• Value-Based Insurance Design (V-BID)
• Tiered Networks
• Narrow Networks
• Reference Based Pricing
• Centers of Excellence
• Alternative Sites of Care

Partnering for success

Rael & Letson helps plan sponsors identify viable strategies, evaluate local market conditions, and find the right operational partners to make these initiatives successful. Contact us for help uncovering strategies that might work for your plan and participants.

Sources:

Disparities in Hospital Pricing Are Costing Multiemployer Trusts

The Cost Conundrum – The New Yorker

JAMA Health Forum – County-Level Variation in Health Care Spending