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Containing Health Care Costs


Roger I. Schreck

, MD, The Manuals

Last full review/revision Dec 2021| Content last modified Dec 2021
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Conceptually, total health care costs can be contained or decreased only by some combination of the following strategies:

  • Decreasing use of health care services

  • Decreasing reimbursement for services that are used

  • Decreasing overhead (payor, provider, or both)

Some strategies adversely affect access to care or outcomes; others may improve care. Evaluating different strategies is difficult, partly because accurately measuring patient-centered health outcomes (eg, morbidity, mortality, or quality-adjusted life years [QALY]) tends to be expensive and require large numbers of patients and long follow-up periods. As a result, most measurements used to assess health care quality reflect processes (how care was delivered) rather than outcome. How well these process measurements predict ultimate health outcomes is not always clear.

Decreasing the Use of Health Care Services

Many strategies can decrease the use of health care services. Many involve limiting access to care (aimed at unnecessary care but sometimes affecting necessary care), but some limit need by improving health.

Limiting access to health care

For example, insurance companies could limit access to care by denying coverage to people likely to need care (eg, those with preexisting conditions) and by dropping coverage of heavy users (rescission). The ACA now prohibits these practices.

The government could tighten eligibility criteria for medical assistance programs (although now the ACA expands Medicaid eligibility).

Payors could increase out-of-pocket costs, creating an economic incentive for patients to limit their own health care use. For example, payors could

  • Limit the type and number of visits that are reimbursed (eg, mental health care, physical therapy)

  • Increase deductibles and co-payments

  • Decrease allowable amounts for covered procedures

These strategies probably adversely affect outcomes because evidence indicates that many patients avoid necessary as well as unnecessary care. For example, women may have avoided screening (eg, Papanicolaou testing, mammography) and subsequently presented with late-stage cancer, and at-risk patients may have avoided influenza vaccination. However, coverage of these practices and other minimum essential coverage is required in ACA health plans, and limits are set on allowable out-of-pocket expenses.

By erecting administrative hurdles to care (eg, required approval for tests, referrals, and procedures; complex enrollment procedures and regulations), payors, although not technically denying care, decrease use by a small amount.

State agencies may limit issuance of construction permits for new facilities and laboratories (called certificates of need).

Limiting access to health care can cause problems. For example, people lacking access to routine care may be more likely to become seriously ill and require treatment in a hospital when a disorder has advanced. This care is largely uncompensated (not paid for by patient, insurance, or other source), increasing the burden on people who pay into the health care system and costing more than if routine care had been provided.

Eliminating unnecessary care

Unnecessary care is easy to define (care that does not improve patient outcome) but often difficult to recognize and still more difficult to eliminate. Unnecessary care increases both costs and risk of harm to patients. First steps in eliminating unnecessary care include conducting more and better studies of comparative effectiveness and cost-effectiveness, so that evidence-based best practices can be identified. Comparative effectiveness studies can evaluate areas other than drugs, such as effects of exercise, of physical therapy, and of different providers, non-drug therapies, tests, systems, settings of medical care, and reimbursement systems.

Education and monitoring of students and providers may decrease practice variation and increase cost-effectiveness.

Eliminating the economic incentive for providing more intensive care (fee-for-service model) by using prospective payment systems Prospective payment systems Conceptually, total health care costs can be contained or decreased only by some combination of the following strategies: Decreasing use of health care services Decreasing reimbursement for... read more and pay-for-performance models may encourage providers to eliminate cost-ineffective care processes.

Better coordination of services among providers (eg, by closer communication and use of universally readable electronic medical records) may make evaluation and treatment more efficient (eg, by eliminating duplication of tests).

Encouraging palliative hospice care, when appropriate, may help decrease use of costly, often technology-intensive, cure-directed care.

Preventive care

Increased use of relatively inexpensive preventive services (eg, screening, diagnosis, and treatment of diabetes, hypertension, and hyperlipidemia, and screening for breast and colon cancer) may decrease the subsequent need for expensive treatments (eg, for myocardial infarction, stroke, or late-stage cancer).

The ACA now mandates that all ACA marketplace health plans and many other plans cover an extensive list of preventive services without charging a copayment or coinsurance (see Preventive health services).

Other strategies to increase preventive care include

  • Incentives to increase the number of primary care physicians (who can often provide appropriate screening measures and help prevent complications)

  • Pay-for-performance measures that financially reward adherence to preventive care guidelines

  • Elimination of co-payments for preventive services

  • Free preventive services, particularly for needy people

Whether care management programs aimed at adherence to treatment guidelines can improve outcomes or reduce costs (eg, of potentially avoidable hospitalization or complications) is unclear; some studies do not show a benefit.

Decreasing Reimbursement for Care Used

Various strategies can be used to limit payments for health care received.

Lower fees

Payors (government and private) may negotiate lower fees with providers or simply dictate such fees. In the US, reimbursement rates established by Medicare and Medicaid tend to influence rates paid by other plans, sometimes decreasing reimbursement.

Increased use of primary care

Measures may help increase the use of less costly primary care versus specialty care. For example, in the patient-centered medical home model, primary care practitioners coordinate and integrate all aspects of medical care, including specialty and interdisciplinary care, in various settings (eg, home, hospital, long-term care facility). Many authorities think that this model can decrease unnecessary specialty care, duplicative care, and care that may be inappropriate for the individual’s condition (eg, aggressive treatment vs palliation).

Measures to increase the supply of primary care physicians have been proposed. They include shifting more government funding of residency programs to primary care training and making primary care more attractive to medical students, such as by increasing reimbursement for primary care.

Prospective payment systems

In these systems, providers are paid a fixed amount regardless of how much care is provided. The amount may be based on a specified episode of care or be a fixed annual reimbursement per patient. For example, some Medicare reimbursement is based on diagnosis-related groups (DRGs); in such cases, Medicare pays a fixed amount based on the diagnosis. In capitated systems, providers are paid a fixed annual amount to provide health care for patients regardless of the services used.

Prospective payment systems reward less expensive care (which usually results in fewer services being provided), in contrast to fee-for-service systems (which reward use of more services). Although prospective payment discourages unnecessary care and overtreatment, it likewise creates an economic disincentive to care for complex patients (eg, those who have multiple disorders or who are seriously ill) and may inhibit provision of necessary care. Because a decrease in the amount of care provided has the potential to decrease quality of care, quality control systems (eg, professional review organizations) are often also established.

Accountable Care Organizations

Accountable Care Organizations (ACOs) are integrated organizations of health care providers that agree to be accountable for the costs and quality of care for a defined group of beneficiaries assigned to them. Their reimbursement is based on measures of health care quality and reductions in the cost of care for their assigned beneficiaries rather than the volume of services provided. The amount of reimbursement to the ACO is based on the cost of care provided to similar patients not in ACOs. The ACOs share the differences in such costs (gains and losses) with the insurer. The ACO can use various payment models for its own providers, including capitation and sometimes fee for service.

Denial of claims

In the US, unlike in most of the developed world, insurance carriers (including Medicare) routinely deny a significant percentage of claims for services delivered to patients. The denial rate averages between 5 and 20%; some of the claims were paid after appeal, but appealing a claim is quite costly in time and effort for patients, providers, and payors alike.


Competition among providers for patients and among insurance companies for subscribers is thought to encourage lowering of charges (eg, by those who charge more than their competitors for a similar service). However, the ultimate consumers (ie, patients) usually do not know providers’ charges in advance, and if they know, they often cannot act on this knowledge (eg, because patients are often limited to certain providers and limited in their ability to judge quality of care). Also, because the cost of medical care is subsidized for most consumers (eg, through employer-paid health insurance, tax deductions, and flexible spending accounts or medical savings accounts), consumers have less incentive to price shop than for most other purchases. Thus, competition is most effective in lowering costs and maintaining quality when it is among large organizations. For example, insurance companies can compete for contracts from employers such as corporations or the government; providers such as practitioner organizations and hospitals can compete for contracts with insurance companies.

Competition has some disadvantages. It results in multiple systems of claim submission and evaluation, which require more time from providers, their clerical staff, or both. Also, processes such as eligibility determination, referrals, co-payments, and coding must be coordinated between a large number of incompatible insurance company systems. Thus, competition increases the clerical (administrative) burden of the overall health care system.

Decreased drug costs

Using generic drugs or, when appropriate, more cost-effective brand-name drugs can help decrease drug costs. Strategies include

  • Educating providers about cost-effective drug use

  • Restricting drug marketing

  • Establishing formularies and using pharmacy benefit managers

  • Allowing the government to negotiate drug prices for patients covered by government insurance

  • Allowing importation of drugs purchased from other countries to the US

Decreased funding of medical research

In many academic medical centers, income from clinical practice has enabled physicians and institutions to participate in medical research. Similarly, income from drug sales supports pharmaceutical research. Thus, decreased reimbursement for care and drug sales may cause a decline in medical research. If other sources (eg, government or private grants) are used to fund research, these funds must be considered as health care costs and thus may offset savings realized from decreasing reimbursement.

Decreasing Overhead

Overhead is a portion of health care spending that does not go to health care providers (eg, spending for administrative costs, malpractice insurance, or corporate profits in for-profit hospitals and insurance companies).

Decreasing payor overhead

Government health care plans in developed countries (including the US) and private health plans outside the US have overhead costs that usually represent 3 to 5% of total costs (ie, 95% of all health care funds go to the delivery of health care). However, in the US, private insurers have had overhead costs of about 20 to 30%, partly because these insurers need staff to do extensive underwriting (identifying and rejecting applicants likely to require costly care, including those with preexisting conditions or a high likelihood of developing disorders), to evaluate claims for denial, and to adjudicate appeals by providers; they also typically need to show a profit. No evidence indicates that these activities and their higher administrative costs improve clinical care or outcomes. The Affordable Care Act now mandates that insurers spend 80% (for individual or small-group insurers) or 85% (for large-group insurers) of premium dollars on health costs and claims, leaving only 20% or 15%, respectively, for administrative costs and profits.

Strategies that may help minimize overhead costs include

  • Increased use of standardized electronic health records

  • Increased use of government plans and possibly not-for-profit plans, which have lower overhead than for-profit plans

Competition among payors is thought to encourage increased administrative efficiency, but it also increases the incentives to deny claims and coverage (which itself requires an extensive bureaucracy).

Decreasing provider overhead

Any payor reform that eliminates a provider's need for many billing and claims personnel to manage the billing of multiple payors, negotiate appeals, and justify claims will decrease the provider's overhead. For example, some countries that have multiple competing insurance companies (payors) require the following:

  • The payment amounts and rules are the same for all insurance companies.

  • In many cases, payors are required to pay all provider bills.

  • The cost of the same service is the same throughout the country.

Although malpractice costs are a small fraction of total health care costs, malpractice costs for certain physicians are a substantial overhead expense and can consume a considerable part of their annual income. Reforms that decrease the number of suits and settlements should lower premiums and benefit these physicians; such reforms may also decrease the use of unnecessary, defensive medicine.

Key Points

  • Because of health care reform, limiting access to health care, which payors have traditionally done to contain costs, has decreased in the US.

  • Unnecessary medical care leads to unnecessary cost and risk of harm to patients.

  • Whether improving health can reduce health care costs is unknown.

  • Many strategies used to decrease reimbursement for health care (eg, decreasing provider fees, using prospective payment systems, denying claims, encouraging competition, decreasing drug costs) have significant disadvantages.

  • Theoretically, decreasing overhead costs of payors and providers could meaningfully reduce costs.

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