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Cost Growth Facts Cost Growth In Medicare Consistently above real per capita GDP growth – By about 2% – Cost growth exceeds real per capita GDP growth for EVERY 10 year period since at least 1945 Michael Chernew Commonly attributed to medical technology (new knowledge and stuff) June 4, 2007 AcademyHealth – Residual studies – Affirmative studies Cost growth can add value – We can sustain some real cost growth Types of Technology Changes Costs of Technology 1951 - 1971 : little ticket items Costs of technology – lab tests – X-Rays – Relative to alternative 1971 - 1981 : big ticket items Upstream/ down stream costs – CABG – C-section radiation & chemotherapy for breast cancer – Better diagnosis leads to tx – Better tx leads to diagnosis Health status effects – Use more unrelated stuff if healthier – Live longer (maybe not in great health) Early and Mid 1990s – Pharmaceuticals Spending Equation An Inverted U? Spendingt = # of Beneficiariest * $ per Beneficiaryt $ per beneficiaryt = Xtβt + et Cost • Technology affects each of these terms • What would happen if technology were constant? • Some change in X’s: health behaviors • Some change in β’s: Low cost Poor outcomes Higher cost, better outcomes Lower cost, best outcomes Time Continued diffusion of existing ‘stuff’ (depends on coverage/ reimbursement) • Cost growth would likely be manageable 1 What Drives Technology Coverage/ Reimbursement Controlling Cost Growth Tools – Finkelstein 2005 Medicare is a key driver of cost growth/ technology diffusion – How strict would we need to be? – What restrictions would we tolerate? Coverage and technology are interrelated – Weisbrod (1991) Some exogenous factors – Comparative effectiveness research – IT – System redesign Incentives (coverage/ reimbursement changes) Organization Focus on value No magic bullet Level vs. Trend Costs Baseline Constant cost reduction Time •Savings that reduce spending (or tech adoption/ use) by a constant % will not solve the cost growth problem •Managed care generally thought of as constant savings 2