“A Dysfunctional Market.” What This Foundation is Doing to Control Healthcare Costs

That healthcare costs in the United States are high—often prohibitively so—is a familiar lament by now. This week, a Kaiser Family Foundation tracking poll found that nearly 90 percent of Americans are concerned about increasing healthcare costs for individuals. And for good reason: Even routine procedures or precautionary visits can lead to unexpectedly high bills. And we’ve all heard the horror stories of incomprehensible, bankruptcy-inducing costs associated with more serious conditions and care.

Much of philanthropy’s work on healthcare policy over the past couple of decades has focused on increasing access to insurance coverage. But since passage of the Affordable Care Act, a growing number of funders has become interested in ways to lower healthcare costs—while also increasing the quality of care.

This is a main focus, for example, of the Peterson Center on Healthcare, which the late private equity billionaire Pete Peterson founded with an initial $200 million gift a few years back. We’ve also reported on a collaborative effort by foundations focused on chronic and complex care patients. These patients, also known as high-need, high-cost (HNHC) patients, make up about 5 percent of the U.S. population, but by some estimates, account for 50 percent of healthcare spending.

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The Laura and John Arnold Foundation (LJAF) is another funder interested in tackling healthcare costs. It’s been working in this area for a few years, with a primary focus on reining in prescription drug prices. But the foundation’s many grants for healthcare since 2015 also point to a wider interest in changing how the healthcare market writ large operates.

In its latest move, the foundation is making an initial investment of $3.4 million to support a multi-pronged approach to rising healthcare costs that aims to better understand its causes and develop solutions. The new initiative will include partnerships with the Brookings Institution, the National Governors Association, Yale University, Johns Hopkins University, the Health Care Markets Research Lab at Harvard University, and professional services firm Manatt.

“A Dysfunctional Market”

We still have an uninsured problem in the U.S., but we have a far broader healthcare affordability problem—and it hits sicker people especially hard. Since 2007, healthcare prices in the United States have increased by 21.6 percent, outpacing inflation. Over 61 percent of the U.S. population has private health insurance, which accounts for nearly 34 percent of total health spending. In 2017, the average insurance premium for employer-sponsored health coverage for a family of four was $18,764, and between 2007 and 2017, premiums increased by about 55 percent. And the news only gets worse. Employers and insurers expect a 6 percent increase in healthcare costs in 2019.

A recent survey from the West Health Institute and NORC at the University of Chicago found that patient payments now account for a whopping 35 percent of provider revenue, the third-largest source of provider income, behind only Medicare and Medicaid. By comparison, in 2000, patients paid just 5 percent of healthcare provider revenue. This pocket-emptying trend is expected to continue, with patients bearing a growing portion of the financial responsibility for their care. More striking: Nearly half of all people in fair or poor health have affordability problems despite having coverage. It’s not surprising that people who are sicker and need more care would have more problems paying for it, but an insurance system should work best for people who need it the most.

According to LJAF, these skyrocketing costs are the product of a “dysfunctional market” that is a result of a substantial increase in provider consolidation. It’s a view confirmed by a new analysis released by the Council for Affordable Health Coverage and Willis Towers Watson, which identified three dominant trends in healthcare that are fueling rising costs. First, employers are offering increased access to care by new categories of healthcare providers, such as retail and urgent care clinics, and electronic consultations. Consolidation in hospitals and other providers is another cost driver. And increasingly, physicians are shifting from private practice to hospital companies, which charge 14 to 30 percent more than private practitioners.

Recent work by the Altarum Institute provides additional perspective: People seem to be getting sicker, or at least getting treated for more conditions. From their latest trend report, as well as their recent annual symposium, comes evidence of the significant role played by increasing morbidity, particularly the prevalence of multiple chronic conditions, in driving costs higher. It costs more to treat greater numbers of chronic conditions, so the shift into higher multiples drives spending up. In 2008, 24 percent of the population was treated for three or more chronic conditions and accounted for 62 percent of health spending. For example, diabetes, hypertension and hyperlipidemia were common as a cluster. And this trend is increasing.

Recently, a presentation from Altarum's Charlie Roehrig noted that, difficult as it may be to control health care prices, controlling that alone may not be sufficient. Unless we improve population health, we may be dooming ourselves to the spiral of increasing costs.

Philanthropy and Health Costs: The Bigger Picture

In addition to their work on improving health systems, many U.S. foundations are keenly focused on improving the overall health and wellness of Americans, as we regularly report. In particular, they are funding upstream initiatives that address the social determinants of health. This work could eventually do much to lower costs—especially by reducing obesity rates.

Meanwhile, a growing flow of research grant money is addressing two of the most costly health challenges facing America: fast-rising rates of neurodegenerative diseases and rates of diabetes. If biomedical scientists can make major breakthroughs on these fronts, it could bend the curve of future healthcare spending.

One thing is for sure: The issue of health costs isn’t going away. In fact, it’s likely only to become more explosive as the baby boomers retire and entitlement programs face intensifying fiscal pressures.