AARP: Policy and Research Information for Professionals in Aging

Spending Health Dollars Wisely

Of all the factors that affect the quality of life in later years, health is the most fundamental. Improving the health care system is critical. Indeed, Dr. Henry E. Simmons, president of the National Coalition on Health Care, characterizes the nation’s current health care problems as "a perfect storm," consisting of three inter-related elements: poor quality, decreasing coverage, and rising costs.39 Together, these elements create a need for fundamental health care reform that results in affordable coverage for, and access to, quality health care and supportive services.

The GAO, CBO, and other agencies and organizations point out that slowing the growth of health care costs is also critical to meeting the fiscal challenges ahead. Indeed, the CBO has concluded that "fiscal policy could be financially sustainable if the growth of health care costs slowed significantly from historical rates," but that even in this scenario, tax revenues would probably have to be higher than in the past."40

While improving the health care system may sound like a straightforward charge, actually doing so is complicated by several factors, including the size and complexity of the system and the highly fragmented nature of health care delivery. In addition, there are many views of the relative value of different health care expenditures. Because not everyone has the same view of relative value and because not everyone is motivated by the same incentives, other dynamics enter into the effort to contain costs. Therefore, one must be careful not to minimize the challenge inherent in improving the health care system.

Spending on clinical preventive services illustrates one aspect of the complexity of the health care system. There is broad consensus that such services produce better health outcomes and lower future costs over the long run. Making them available now, however, may well drive up current cost through increased demand. Similarly, many projected quality improvements cannot be achieved without significant upfront investment in technology. Nevertheless, without such investments of resources to support the transformation of the system, the nation is unlikely to realize the full potential in lives saved, reduced disability, and healthier people—as well as the reduced costs that should ultimately flow from these improvements.

Biomedical research is another area where investments today will pay dividends in better health outcomes in the future. In testimony before the U.S. House of Representatives Appropriations Committee, National Institutes of Health (NIH) Director Elias Zerhouni detailed a broad range of advances made possible by biomedical advances. He went on to predict that current research in molecular biology and molecular genetics would pay off in new medical interventions that would "thwart diseases before they strike, at potentially reduced costs."41

Another key part of improving the system is ensuring that health care resources are used efficiently so that people have access to high quality health care services. Reducing the number of uninsured and underinsured individuals has merit in its own right, but may also contribute to lower total costs in the longer term.

Currently, 45 million Americans lack health coverage; the uninsured account for one in six individuals under the age of 65. Far from being a cost saving to society, this represents a huge future liability. A recently completed six-part study by the Institute of Medicine (IOM) of the National Academy of Sciences estimates that the potential economic value (e.g., less morbidity and mortality, greater sense of social equality, reduced family stress, greater workplace productivity) to be gained in better health outcomes from uninterrupted coverage for all Americans would be between $65 billion and $130 billion each year.42 The IOM study concludes that it is "both mistaken and dangerous to assume that the persistence of a sizable uninsured population in the United States harms only those who are uninsured."43

A similar situation exists with prescription drugs. Prescription drugs are a cornerstone of modern medicine and have contributed greatly to improved quality of life for Americans. But the inability to afford prescription drugs can be a barrier for some people whose quality of care and health status depend on them. The enactment of the Medicare Prescription Drug Improvement and Modernization Act of 2003 was a significant step toward resolving this problem for older Americans and those with disabilities.

Under the newly created Medicare drug coverage, the federal government will incur additional costs for which it was not previously responsible. There exists, however, a potential for future savings in health care spending as a result of making prescription drugs available to more people who need them.44 In particular, there is evidence that, for certain populations and certain medical conditions, not taking necessary drugs is more costly than providing the medicine.45 Several other studies have documented lower total spending for patients with particular illnesses and diseases due to declines in the number of hospital stays, bed days, or surgical procedures despite an increased use of certain prescription drugs.46

But more needs to be done. As Figure 4 illustrates, drugs are one of the fastest growing components of health care spending. Controlling the overall cost of health care without addressing the high cost of prescription drugs is unlikely. To achieve that goal, objective research that evaluates the comparative effectiveness of alternative drug and non-drug therapies is needed. This information can be used to stimulate price competition between similar drugs, identify when less costly drugs are at least as effective as more costly products, and determine when expensive drugs are the most effective. The goal should be to make prescription drugs more accessible and affordable not only for people in Medicare, but for everyone, including the large number of uninsured and under-insured between the ages of 50 and 65.

Historically, technological advances have contributed to the growth in Medicare spending. Recently, for example, use of expensive imaging services, such as magnetic resonance imaging and computerized axial tomography, has grown rapidly.47 On the one hand, research shows that the average worth of Medicare spending since its inception has been high (as measured by greater life expectancy and reduced morbidity).48 On the other hand, despite high returns on medical innovation, substantial evidence shows that those resources have not been allocated very efficiently. Examples include Medicare paying different amounts for the same type of service provided in different settings, significant geographic variation in practice patterns and use of supply-sensitive services in the United States. In addition, overall the U.S. health care system has higher prices and administrative costs relative to other developed countries.49

Addressing inefficient and irrational use of health care resources is another vehicle for getting better value from dollars spent on health care. Efforts along this line have already begun. Research will help physicians make better clinical decisions about using specific interventions.