Karen Davis, President, Commonwealth Fund: Toward a 21st-Century Healthcare System
Americans spend approximately $1.4 trillion a year on health care, and for those with insurance the expense is worth every penny. Life expectancy at birth for the U.S. population as a whole reached an all-time high of 77.2 years in 2001, while the gap between African Americans' and whites' life expectancy has narrowed. Infant mortality rates for all racial and ethnic groups have declined, as has the mortality rate among persons sixty-five years of age and over. Incidence rates for all cancers combined have also declined, continuing a decade-long trend.But for too many Americans — nearly forty-four million at last count — affordable health insurance is beyond reach, and the resulting consequences of that reality, for the uninsured as well as society at large, are profound. With seventy million baby boomers moving into retirement over the next twenty years, the sustainability of publicly financed programs like Medicare and Medicaid is being questioned, and the only thing one can say with any certainty about the nation's healthcare system is that change is coming.
In April 2004, Philanthropy News Digest spoke with Karen Davis, president of the New York City-based Commonwealth Fund, a national philanthropy engaged in independent research on health and social policy issues, about rising healthcare costs, the Medicare Modernization Act of 2003, the future of Medicare, and measures needed to transform health care in the U.S. into an affordable, high-performance system for the 21st century.
Before joining the Fund, Davis served as chair of the Department of Health Policy and Management at the School of Hygiene and Public Health at Johns Hopkins and held an appointment as a professor of economics. From 1977-1980 she served as Deputy Assistant Secretary for Planning and Evaluation/Health in the Department of Health and Human Services, where she was the first woman to head a U.S. public health service agency, and prior to that was a senior fellow at the Brookings Institution, a visiting lecturer at Harvard University, and an assistant professor of economics at Rice University. [Ed note: Davis retired from the Fund in 2012 and took up a position as a professor in the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health, where she also served as director of the Roger C. Lipitz Center for Integrated Health Care.]
Philanthropy News Digest: What are the Commonwealth Fund's current goals and how do they relate to its long-term mission?
Karen Davis: We think of our long-term mission as improving the health and productivity of Americans, especially those with serious and neglected health problems. Our current goals focus specifically on improving health insurance coverage and the quality of care. Our board also sets what we call Goals 2005, which translate those priorities into more specific, measurable objectives, such as improving developmental services in pediatric practices and improving minority health care.
PND: What is the Fund's total grantmaking budget?
Davis: We make about $16 million in grants each year. We devote another $6 million or so to developing programs, conducting research, and communicating the results of the work of our grantees to influential audiences. To be effective in complex fields like health policy and health care quality improvement, you need to have very skilled professionals able to work in partnership with grantees in designing projects and communicating results.
PND: The American healthcare system is frequently described as the best in the world. It's also frequently described as the costliest. Are Americans getting full value for the approximately $1.4 trillion they spend annually on health care?
Davis: I think it's clear they're not getting full value. In fact, we issued a report not too long ago titled Mirror, Mirror on the Wall: Looking at the Quality of the American Health Care System Through a Patient's Lens, and in it we offer evidence that raises questions about whether the American healthcare system is really the best in the world. We're able to do that because we have an international program in Health Policy and Practice that includes five major English-speaking countries — England, Canada, Australia, New Zealand, and the U.S. — and we've done surveys in those five countries since 1998 that explore various aspects of their respective healthcare systems, things like the quality of primary care, the quality of care for sick adults and the elderly, the problems hospital CEOs say they are facing, physicians' perceptions of the quality of care in their respective countries — a whole range of things. And I can tell you, the U.S. does not always come out on top in those surveys.
The U.S., of course, comes out well on things like waiting time for elective or non-emergency surgery — for instance, only 5 percent of Americans wait four months or more, compared to 23 percent to 38 percent in the other countries. And relatively few Americans have to wait a long time to be admitted to a hospital. But on equity issues, our system performs comparatively poorly: 36 percent of lower-income Americans have medical problems but do not visit a doctor due to cost, compared to 9 percent for lower-income people in Canada and 4 percent in the UK. The percentages are the same in each of these countries for lower-income people who do not get recommended tests, treatment, or follow-up due to cost. Similarly, 39 percent of lower-income Americans do not fill a prescription due to cost, compared to 22 percent in Canada and 7 percent in the U.K. There are efficiency issues, too: 22 percent of sicker adults in the U.S. report being sent for duplicate tests by different healthcare professionals, compared to 13 percent in the UK and Australia.
We've also supported an effort to develop what we call quality indicators across these five countries and to collect comparative data such as five-year survival rates for transplant or heart attack patients, five-year survival rates for breast cancer patients, that kind of thing. That work, which represents the first major step toward having scientific, clinical-quality comparisons across different healthcare systems, was released in early May, and we eventually hope to expand the effort to include a broader set of measures and about thirty countries.In addition, we host an annual symposium for the ministers of health in these countries where we present the latest data on healthcare expenditures from the Organization for Economic Cooperation and Development, and we publish that work in an annual edition of Health Affairs magazine. Uwe Reinhardt, who chairs our International Coordinating Committee, and Jerry Anderson at Johns Hopkins published an article in Health Affairs last year titled "It's the Prices, Stupid: Why the United States Is Different from Other Countries" that puts the blame for the difference in healthcare costs in the U.S. versus other countries on higher prices and higher administrative costs — not only in terms of higher prices for prescription drugs and hospital and physician services, but also for specialized procedures — for instance, MRIs or cardiac procedures — which American physicians order a lot more of, regardless of whether or not they substantially improve outcomes or quality of care.
PND: In other words, your research shows that there isn't a direct correlation between healthcare costs and quality?
Davis: Yes. In fact, when we look at the question internationally, it's simply not the case that cost and quality go together. Even within the U.S., you see wide variations from state to state, and from hospital to hospital, and from doctor to doctor. Which is why in our grantmaking we are beginning to focus on establishing valid indicators and getting information about the quality of individual physicians and pushing to have that information made public so that people can make more informed choices, so that hospitals can know where they stand relative to other hospitals, and so that we can all learn from the best practices of the high performers.
We'll be releasing a report in a couple of weeks that describes a major thrust in our quality program around the idea of "pay for performance." The report posits the notion that public-sector programs such as Medicare as well as private insurance plans should be rewarding providers that deliver high-quality care at reasonable cost. We're also drawing attention to work we've helped stimulate in the UK, where the National Health Service recently negotiated a contract with general practitioners to base 30 percent of their income on achieving quality targets. That work grew out of a fellowship exchange program we funded, and we'd like to draw attention to what is happening on incentives for physicians in the UK as a model that could be adopted here in the U.S.Last but not least, in California we're funding an evaluation of a PacifiCare bonus incentive system for physicians and comparing it with results from Oregon and Washington, where PacifiCare physicians don't get quality bonuses, to see not only whether pay-for-performance acts as a spur to improvements in the quality of care, but also whether it results in a decline in the quality of care in areas that aren't measured.
So, yes, there is not a systematic relationship between cost and quality of care, and in fact there are examples all over the place of providers that are providing high-quality care at reasonable cost, which is our definition of a high-performing healthcare system. We are trying, to the best of our ability, to move the United States toward that kind of system by getting better data on performance, learning about best practices, and sharing that knowledge with a broader public.
PND: After rising substantially in the 1980s, healthcare costs in this country moderated in the 1990s. But over the last year or two costs have been rising much faster than the rate of inflation. What's driving that rise?
Davis: First of all, it's important to note that health insurance premiums are rising faster than costs. A lot of the news coverage of this issue has focused on the 14 percent to 15 percent increases in health insurance premiums we've seen recently. The actual rise in healthcare costs is more like 10 percent, which, as you point out, is still higher than it has been in a decade. And yes, I think we need to worry about why insurance premiums are going up much faster than costs, but that's a separate issue.Now, when you talk about costs, the recent rapid rise in healthcare costs in this country is being driven by three things: higher administrative costs; increases in the price of services; and an increase in the amount of services, particularly specialized services, being ordered and delivered. The fastest-growing element of the equation is administrative costs, which rose 16 percent in 2002. The reasons for rapidly rising costs have a lot to do with the complexity of and excessive choice promoted by our healthcare system.Let me give you an example. As I mentioned earlier, we're seeing an increase in the quantity of services being delivered — for example, physicians ordering more MRIs or doing more pacemaker implantations or angioplasties. Now, some of those procedures take advantage of new technology that is truly beneficial. But some of them overuse or over-rely on technology in a way that is not justified by clinical guidelines. One of the problems we have in the U.S. is that there is no scientific body or federal agency charged with really evaluating the cost effectiveness of specialized procedures or, for that matter, drugs. The Food and Drug Administration looks at the efficacy of drugs but not at their cost in relation to their therapeutic benefit.
PND: Let's talk about Medicare. What percentage of the U.S. population is covered by the program?
Davis: Basically there are about forty million Americans — about 12 percent of all Americans — who are covered under Medicare. It covers virtually everyone sixty-five and over — that's about thirty-six million people — and about four million people under the age of sixty-five who have been disabled for two years or more. If you throw in Medicaid, you have public-sector coverage of 25 percent of all Americans. But since those people tend to be sicker than other people, they account for about 45 percent of all U.S. healthcare expenditures.
PND: The Medicare Modernization Act of 2003, which was signed into law in December, includes the largest expansion of benefits in the program's history. Why does everyone seem to hate the legislation?
Davis: On balance, I personally think it's a positive step. I would have preferred a somewhat different strategy, but I do think it's an important commitment of federal funds to improving prescription drug coverage for elderly and disabled beneficiaries. Ninety-five percent of non-elderly people who have employer-provided insurance have prescription drugs included in their coverage. It's a critical benefit — you really can't control people's conditions and provide good medical care without prescription drugs — and the cost of drugs is a major financial burden on the elderly and disabled who don't have employer-provided coverage. So it was important for the government to do something. And we're talking about a substantial commitment of funds — some people say $400 billion, others $535 billion — targeted to low-income and catastrophically ill beneficiaries. Those who are most in need of financial assistance get it under this bill, and will get it even before it is formally implemented in 2006. For example, low-income seniors with incomes below 135 percent of the poverty level qualify for a $600-a-year prescription drug benefit starting this year. So, I think the legislation is a step in the right direction.
Those who criticize the bill tend to have a more liberal perspective and believe it overpays private plans and pharmaceutical companies. For example, there's a provision in the bill that prohibits the Secretary of Health and Human Services from negotiating drug prices with pharmaceutical companies. Critics of the bill believe that that will lead to an increase in already-high drug prices beyond what is fair or justified. They also point to the fact that Medicare is paying private managed care plans anywhere from 10 percent to 25 percent over what it would pay to cover those people in traditional fee-for-service plans, and that it provides $88 billion dollars to employers to induce them to keep their retiree plans in place — money that could have been better spent in other ways.
The conservative point of view is that it's a new entitlement at a time when the baby boomers are nearing retirement age and that there's not enough money in the program to insure its provisions over time without major increases in taxes. They feel the cost of the prescription drug benefit was seriously underestimated, that there's a lot of waste in the healthcare system that the legislation doesn't deal with, and that it doesn't provide for sufficient competition. They also think that private plans are an important alternative to Medicare but would have rather seen a defined-contribution approach, in which the government sets aside a fixed amount for the care of Medicare beneficiaries — not just for drugs but for physicians, hospital stays, and other services — and then lets people take that benefit and either enroll in a Medicare fee-for-service program or a private plan. The beauty of such an approach, in their view, is that it gives the government the ability to control the amount of money that's invested in the program, while letting beneficiaries vote with their feet for less-expensive options.
PND: In March, the trustees of the Social Security and Medicare trust funds released their annual report to the American people, which found that while Social Security was in reasonably good shape, Medicare outlays were on track to surpass Social Security expenditures by 2024. The report also projected that, if unchecked, Medicare outlays would comprise roughly 14 percent of the gross domestic product by 2078 — roughly twice the size of projected Social Security outlays at that point. Given the impending retirement of seventy million baby boomers over the next twenty-five years, can we continue to fund Medicare as we have, or will we have to make changes in the program to ensure its sustainability?
Davis: Well, I certainly think it's troubling that the trustee projections advanced the insolvency date for the hospital trust fund some seven years, from 2026 to 2019. But when you look at the reasons for the new, earlier date, you see that a lot of it — as much as two years — is related to the overpayment of private managed care plans. A third year can be blamed on something called inadequate risk adjustment — basically, the failure to accurately assess the health of the people enrolling in managed care plans. So, yes, the deterioration in the solvency of the fund is troubling, but it isn't as dire as some of the press coverage has made it out to be.Now, as I've mentioned, some of that deterioration stems from higher payments to private plans, and I think some corrective steps need to be taken to make sure that we're not overpaying private plans. But beyond that, I think we have to take a deep breath and accept the fact that twenty-five years is about as far out as you can look with any degree of accuracy. For example, we simply don't know what kinds of breakthroughs are coming — whether it's a cure for certain kinds of cancer, or a cure for Alzheimer's, or something totally unforeseen — to have the ability to credibly estimate costs two decades out. There's also the fact, as Treasury Secretary Snow has pointed out, of how sensitive these projections are to changes in healthcare costs. Under current assumptions, federal spending on Medicare/Medicaid will be 11.5 percent of GDP in 2050, up from 3.9 percent in 2003. But if, instead, Medicare/Medicaid spending increases at the rate of current GDP growth plus one percent, the figure drops to 6.4 percent of GDP in 2050 — a five-percentage-point difference based on one modified assumption. And, as I've said, there are many assumptions built into the projections. So I think the environment is just too uncertain at this point to get excessively concerned about the long-term health of Medicare.
On the other hand, if one is being honest, one has to wonder whether a payroll tax as the basis for financing the hospital part of Medicare really makes sense. We don't finance physician services that way; we don't finance prescription drug services that way. We finance those through general revenues — income and corporate taxes. The problem with the payroll tax is that revenues to the fund go up as the number of workers and wages go up, and expenditures flowing out of the fund and costs go up as the number of elderly increases. Now in future years, the number of elderly people in this country is going to rise much faster than the number of working people who contribute to Medicare, while hospital costs are going to rise much faster than wages. So the payroll tax is not an ideal revenue source for Medicare, given those diverging trends.If, on the other hand, you financed the program through income taxes, revenue would increase as the number of elderly — including better-off elderly — increased. It's just a better revenue source than the payroll tax, and a lot of Medicare's problems, present as well as future, have more to do with the way in which we've chosen to finance the program.
PND: So you're reasonably confident that, even if it's funded differently, Medicare itself will be around in twenty-five years?
Davis: Yes. And, you know, that's been the history of the program. We've all heard projections that the program would be bankrupt in seven years, or two years, or a year. But Congress has always acted to make whatever corrections were needed to keep the program solvent. Even small corrections, like the 1997 Balanced Budget Act, have a major impact on a program as large as Medicare. I mean, that piece of legislation eliminated $1 trillion in federal spending on the U.S. healthcare system and was a major reason why the budget deficits of the 1980s and early '90s turned into budget surpluses by the end of the decade — until we spent them in the form of tax cuts.The point is, it's always possible to make small corrections in how much you pay doctors, how much you pay hospitals, et cetera. But the real savings will come when we figure out how to more effectively manage high-cost patients so that they aren't in and out of the hospital all the time. And there are some exciting new developments in that area that will be more of a focus for us, and the field in general, over the next few years.
PND: You and your colleagues at the Fund frequently talk about a supply-side approach to reforming the U.S. healthcare system. What does that mean, and how does the supply-side approach differ from the prevailing approach to healthcare delivery?
Davis: When most people talk about healthcare reform, they look to the demand side — by that I mean patient cost-sharing. They argue that if we increase how much patients have to pay out-of-pocket, they'll become more cost-conscious and visit their doctors less often. But when you really look at the distribution of costs, you discover that 10 percent of the people in this country account for roughly 70 percent of our healthcare expenditures. That's true for the non-elderly as well as the elderly. And what it means is that we've simply got to find a better way of managing the care of these high-cost patients if we hope to do something about rising healthcare costs.So by a supply-side approach what we mean, first of all, is adopting a strategy that measures the quality and efficiency of hospitals, physicians, and other providers and then makes that data public. We can't improve the system if we don't know where we stand. The second strategy is to establish incentives and reward providers who are doing a better job of providing higher-quality care at a lower cost. And third, we have to give other providers the tools and information they need to be able to follow suit. Information technology is an important tool to that end; clinical guidelines and evidence-based medicine are important tools; cost-effectiveness information is an important tool; learning collaboratives are an important tool.
We also need a federal agency that's empowered to establish clinical guidelines and determine what Medicare, Medicaid, and private insurers should be paying for, that can help providers learn about the best practices out there and train them in implementing and improving their own performance, and that can establish effective incentives to accomplish that. What is needed in this area is something analogous to the U.S. Food and Drug Administration. Such an entity would review evidence of effectiveness, establish clinical guidelines and standards, determine parameters of care that Americans should expect, establish national performance standards, and collect and report data showing the extent to which standards are being met. Standards and guidelines set by the agency would also be used by the major healthcare payers — especially Medicare and Medicaid — in setting performance-based payment policies.
PND: Some would argue that those things already are being handled, or should be handled, by the private sector. You don't agree?
Davis: Ideally, we would look for leadership from within the industry, but this doesn't happen because of the enormous amount of fragmentation within our system. Furthermore, guidelines and standards for care and performance are what economists call "public goods" — they should be made available free of charge or at cost to any provider once developed, because of the enormous benefits they offer not only to individual providers and consumers but the system as a whole. Because it just wouldn't be profitable for any private body to develop guidelines and standards on its own, national leadership is essential. I should mention that the UK is setting a good example here: its National Institute on Clinical Excellence (NICE) is developing guidelines for the National Health Service, and doing so on a very reasonable budget of about $28 million a year.
PND: You mentioned information technology. Are we doing enough as a country to leverage new technologies to improve the efficiency and performance of our healthcare system? And what could or should we be doing with IT that we're not doing?
Davis: I think information technology has a lot of potential to improve performance. Only about 27 percent of physicians in this country are using electronic medical records, despite the fact that the use of such records provides all sorts of benefits, from providing physicians with automatic reminders about patients with chronic conditions to preventing the unnecessary duplication of tests. If patients had access to electronic medical records it would also get them more engaged in their care, and it would reduce the frequency of medical errors. Studies done in this area have shown that computerized physician order-entry systems reduce medication errors by up to 55 percent.
So we can't have a high-performance 21st-century healthcare system if we don't take advantage of modern information technology to provide tools and assistance to doctors and provide information to patients that enables them to be more active partners in their care. And right now, we're simply not doing enough of that.
PND: What else would you like to see us do over the next decade or so, both as a society and as individual consumers of health care, to build a high-performance healthcare system for the 21st century?
Davis: The Picker Institute recently held an important meeting on the future of patient-centered care. Among the useful ideas that came out of that summit was a vision of care by 2015 that would put each of us in charge of our health; healthcare providers would be there to help us gain the skills and knowledge enabling us to take charge; and each of us would get the care we need — not less and not more. This sort of vision is going to be realized only if we move rapidly on developing practice standards, not just for hospitals but for physicians as well; on collecting information on performance and making it available to payers and consumers; and on rewarding providers who are living up to or exceeding standards. I believe that our system needs to be both much more patient-centered and much more efficient. And lots of evidence suggests the two goals are not inconsistent.
MFN spoke with Karen Davis in April 2004.