Health Care Costs in Michigan: Drivers and Policy Options
May 2013
Report 383

Unequivocally, health care expenditure growth is unsustainable at current and historical rates and is a cause for concern for individuals, employers, and governments at all levels. National health care expenditures are expected to grow about 4 percent in 2013 and then accelerate 7.4 percent in 2014. Through 2021, experts believe the annual average expenditure growth rate will be 5.7 percent.1 Adjusting for inflation, national health care expenditures per capita grew five-fold in the last 50 years and rose from 5.2 percent of gross domestic product (GDP) in 1960 to 17.9 percent in 2013.2 Health care expenditures as a percent of GDP are expected to rise to 19.6 percent by 2021.3 Despite higher spending per capita, the United States does not achieve better health outcomes than countries that spend less, and, in fact, by some health measures achieves worse outcomes.

As Michigan emerges from a decade of economic decline, a review of the state’s health care spending is particularly important. While per capita health care expenditures in Michigan are below the national average, several unique policy and demographic characteristics may be causing expenditures to be higher than they would be otherwise. Factors such as the payment system and malpractice regulations are major cost drivers both nationally and at the state-level. In Michigan, the state’s no-fault auto insurance, incidence of chronic disease, prevalence of adverse health behaviors such as smoking, population demographics, and fewer hospitals relative to population may be driving expenditure levels and cost growth. And there is still much academic and policy debate regarding other factors, like the state’s certificate of need program, which was designed to contain cost growth, but some critics believe may actually be raising prices and total expenditures.

In some ways, reducing the cost of health care is more easily achieved at the federal level rather than the state level in that some policies are more effective if they are broadly and uniformly implemented rather than enacted in only one or a handful of states. For example, if the federal government enacted consistent administrative and transparency requirements, health insurers that provide coverage in multiple states would have fewer regulations to meet. Similarly, the federal government has greater power to incentivize health insurance design through tax policy since the federal income tax is higher than the state income tax for the majority of taxpayers. Federal policy also limits some negative competition among states; it is difficult to enforce payment rates in one state if providers and suppliers know they can be more richly compensated in other states.

However, some similar policy options are available to state legislators that can help to control the extreme cost burden of health care on Michigan’s families and businesses. States are taking the initiative to mandate or encourage insurers to adopt alternative payment systems in an effort to reduce wasteful spending and encourage high-value medical care. Some states, including Michigan, are promoting healthier behavior among residents, because a healthier population reduces long term health care expenditures. Increasing transparency, developing evidence-based guidelines for provider practice, reducing fraud and abuse, standardizing administrative practices, and reforming medical malpractice policies have all been demonstrated to result in some cost savings and many states are attempting to implement these changes, if they haven’t done so already.

Beyond universal agreement that health care costs are growing at an unsustainable rate, there is not much consensus about why and what to do about it. A great deal of research identifies health care cost drivers and addresses potential solutions; the intent of this report is to synthesize this research and to apply it to the unique conditions that exist in Michigan. This report does not discuss actions that specifically address state government health care spending, such as those for Medicaid. While actions to contain or reduce state government health care spending could translate to increased investment in other state programs or a reduction in taxes, the focus of this paper is on state actions that impact the rising health care costs for all payers. The paper begins with a high level discussion of the health care cost problem and then provides an overview of the main cost drivers and associated state policy solutions. More details about each cost driver and its policy solutions are in the Appendix.

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