Press Release

Embargoed Until Contact

September 08, 2011

Sue Ducat
Director of Communications
(301) 841-9962


Increased Health Spending Wiped Out American Families' Income Gains Over Past Decade; Low-Income Families Hit Hardest


September issue of Health Affairs explores factors driving up health care costs and assesses emerging solutions to curb spending and improve care


Bethesda, MD -- Steadily rising health care costs are exacting a heavy financial toll on many families, leaving them with less and less disposable income while increasing the federal deficit, according to a new study in the September issue of Health Affairs. From 1999 to 2009, an average American family of four saw its annual income increase from $76,000 to $99,000 -- but nearly all those income gains were erased by higher health spending, say study authors David Auerbach and Arthur Kellermann of RAND.


The RAND study is among a cluster of articles in the issue focusing on health care costs. The topics addressed include the impact of health care cost increases on families, the drivers of health care costs, and solutions for lowering health care costs.


The Problem: Impact of Cost Increases on Families
Steadily rising health care costs are straining the family pocketbook:


  • David Auerbach and Arthur Kellermann's analysis finds that the typical median-income family of four with employer-based health insurance would have had $545 more in disposable income to spend per month in 2009 than in 1999, if medical inflation had not exceeded general inflation. But after factoring in actual increases in health insurance premiums, out-of-pocket health spending, and taxes for health care, that same family instead had only $95 more per month in available income, the researchers say. Were it not for reduced tax rates insufficient to cover government spending in 2009, families would have been left $295 in the red every month, they add. Noting the "perilous state of the U.S. economy," they conclude that "the fiscal burdens imposed on all payers by steadily rising health care costs can no longer be ignored."

  • Patricia Ketsche, of the Institute of Health Administration at Georgia State University and Georgia Health Policy in Atlanta, and coauthors confirm that growth in health care spending is hitting lower-income families the hardest. They estimate that overall national health spending is in effect consuming 22.7 percent of income for families in the lowest income grouping (those with average annual income in 2004 of $13,450) but no more than 16 percent for families in any other income group. Ketsche and colleagues say this is because private premiums, out-of-pocket spending, and state and local spending--which account for more than half of all health care spending--are financed regressively. In contrast, federal health spending is financed progressively, which mitigates but does not fully adjust for inequities across income groups. Their analysis highlights the potential for health reform to greatly alter financial burdens across families through a variety of initiatives, such as the expansion of Medicaid for low-income families and subsidized private insurance with income-based premium caps.


Drivers of Health Care Costs
One of many factors driving up health care spending is the increase in cost per case:


  • Charles Roehrig, director of the Center for Sustainable Health Spending at the Altarum Institute and David Rousseau of the Kaiser Family Foundation, conclude that growth in cost per case explains far more of the rise in U.S. health spending than does higher disease prevalence. Roehrig and Rousseau examined the number of people with a given disease--treated or not--and cost per case across medical conditions between 1996 and 2006. They found that during this time, three-fourths of the increase in real per capita health spending was attributable to growth in cost per case, while treated prevalence contributed to one-fourth of spending growth. As a result, they suggest that efforts to reduce future growth in disease prevalence--such as through disease prevention--will not be sufficient to hold down spending growth. This analysis suggests that reducing the growth in how much is spent per case will be essential if we are to tame overall health care spending.


Strategies to curb escalating health care costs include:


Care for the Uninsured

  • Well-structured and comprehensive safety-net programs could provide care for the uninsured, including both low-income and middle-class people, for 25 percent to 50 percent less than the estimated cost of Medicaid or private insurance, according to an analysis by Mark Hall, Wake Forest University, Winston-Salem, NC, and colleagues. The researchers conducted a comparative case study of four model safety-net programs in Colorado, Michigan, North Carolina, and Texas, to identify feasible solutions for providing care to the estimated 20 million Americans who will remain uninsured under national health reform. "Learning from these models as health reform unfolds could help policy makers and community leaders elsewhere to develop sustainable organizational structures for the uninsured throughout the country," the researchers write.


Payment Reforms

  • Bundled payment systems that combine payments for hospital-based acute care with payments for postacute care provided in another setting have been proposed as a way to promote care that is both more efficient and less costly. With Medicare set to embark on a national pilot program of bundled payment, Neeraj Sood of the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California, Los Angeles, and colleagues from Harvard, UCLA, and RAND discuss promises and pitfalls of bundled payments and offer recommendations on two important design features: which conditions to include and how long an episode of care should be. Their findings, based on Medicare data, suggest that hip fracture and joint replacement are good conditions to include in the pilot because of their cost-savings potential and because these conditions pose less financial risk to providers. They also found that using longer episodes of care provides greater assurance that patients' conditions have stabilized and that patients do not need ongoing care, while only slightly increasing financial risk for providers. Overall they recommend that the Medicare pilot test alternate design features to help foster payment innovation throughout the health care system.

  • In 2009, Blue Cross Blue Shield, Massachusetts' largest insurer, launched a program that combines global payments with large quality bonuses for medical groups. Robert Mechanic, Heller School for Social Policy and Management, Brandeis University, and coauthors conducted a series of interviews with representatives of participating groups and found that most initially focused on two principal goals: building the infrastructure to help primary care providers earn quality bonuses; and managing referrals to direct patients to lower-cost settings. The groups face important challenges: improving their data management capabilities; managing conflicting incentives in their fee-for-service contracts; and establishing cultures that emphasize teamwork and patient-centered care. The groups must reduce their annual growth in health spending by half over the five-year contract If the groups succeed, "it could signal that even newly formed accountable care organizations" can navigate a shift from fee-for-service to population-based payment models.


Payer-Provider Collaborations

  • As health reform unfolds, collaborations between payers and providers are shaping new health care delivery and payment models in the private sector. However, a study by Aparna Higgins, of America's Health Insurance Plans, and colleagues finds that not all providers are equally prepared to enter into accountable care arrangements with health plans. They conclude that flexibility and the technical assistance and support of health insurance plans will be key to the success of such arrangements. The findings hold lessons for the emerging public accountable care models, underscoring providers' needs for comprehensive and timely data and analytic reports, payment tailored to providers' readiness, and measurement of quality across multiple years and care settings. "Transforming the health care system," they write, "will require bold public policy," adding that payment models under Medicare and Medicaid must offer appropriate financial incentives to compliment private sector efforts.

  • Pressed by local employers seeking to contain health care spending, Virginia Mason Medical Center, Seattle, has excised tens of millions of dollars in unnecessary care, such as routine and costly imaging for patients with migraine headaches. An article by C. Craig Blackmore, scientific director for the Virginia Mason's Center for Health Care Solutions, and colleagues describe how the health system worked with payers and employers to improve care. The evidence-based care pathways that they developed and implemented for headaches decreased use of advanced imaging by 23 percent, achieved 91 percent patient satisfaction and provided same-day appointments in 95 percent of cases. However, the researchers also note that the health system has had "only limited success" in persuading payers to reimburse for higher-quality care.



  • Treatment of chronically ill people accounts for nearly four-fifths of U.S health care spending but is hampered by a fragmented delivery system. Care coordination approaches may help address this, but can face challenges. Stanford University's Laurence C. Baker and coauthors evaluated a new approach that incorporates both care management techniques and a telehealth tool to facilitate data exchange between patients in their homes and providers in clinical settings. The researchers found that a carefully designed and implemented care management-telehealth program produced substantial Medicare savings--on the order of $312 to $542 per person per quarter--for a group of chronically ill patients in the Northwest. Such programs, they conclude, offer innovative ways to deal with the financial and clinical issues surrounding chronic care.
About Health Affairs

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears each month in print, with additional Web First papers published weekly at You can also find the journal on Facebook and Twitter and download Narrative Matters on iTunes. Address inquiries to Sue Ducat at (301) 841-9962 or