The Concentration of Health Care Spending

National Institute for Health Care Management
July 2012

Spending for health care services in the United States is highly concentrated among a small proportion of people with very high use. For the overall civilian population living in the community, the latest data indicate that more than 20 percent of all personal health care spending in 2009 — or $275 billion — was on behalf of just 1 percent of the population. The 5 percent of the population with the highest spending was responsible for nearly half of all spending. At the other end of the spectrum, 15 percent of the population recorded no spending whatsoever in the year, and the half of the population with the lowest spending accounted for just 3 percent of total spending.

With numbers like these, it is clear that per-person spending among the highest users is substantial and represents a natural starting point when thinking about how to curb health care spending. For instance, the average expenditure for each of the approximately 3 million people comprising the top 1 percent of spenders was more than $90,000 in 2009. The top 5 percent of spenders were responsible for $623 billion in expenditures or nearly $41,000 per patient. In contrast, mean annual spending for the bottom half of distribution was just $236 per person, totaling only $36 billion for the entire group of more than 150 million people.

Implications of Concentrated Spending

The concentration of health care spending has several implications for health policy, particularly as we think about how to control overall spending for health services. First is the obvious need to “follow the money.” With half of the population incurring just $36 billion in health care costs, it simply is not possible to realize significant contemporaneous or short-term savings by directing cost-control efforts at this group.

Strategies to improve management of chronic conditions, end-of-life care, and expensive episodes hold more promise, but raise challenges as well. To begin, accurate prospective identification of patients who can most benefit from disease management can be tricky since many of the same chronic conditions associated with higher spending are also present — and in the case of the elderly, highly prevalent — among lower-spending groups. Furthermore, even when these conditions are less prevalent for low spenders, the number of low spenders with the condition will be high simply because many more people are low spenders. Thus, interventions based solely on the presence of a chronic condition are bound to include a significant number of people who would not incur high costs, at least in the short term. Managing high spending at the end of life can also be problematic. Not all persons with high spending will die soon, and predicting timing of death and distinguishing between care that may extend life in a meaningful way and care that does little good is something that is often accomplished only in retrospect. Societal reluctance to discuss end-of-life care and fears of rationing only complicate the matter. Finally, although it might be possible to manage some of the expensive episodes more efficiently through use of clinical pathways, for example, it is virtually impossible to predict or avoid these random high-cost events.

A second implication of the highly concentrated spending pertains to the acceptance of risk by providers and payers. Emerging payment and delivery system reforms, such as accountable care organizations, rely on integrated provider organizations to accept some degree of risk for a defined patient population. These organizations will need a patient base that is large enough to balance out the sizeable downside risk of attracting just a few high spending cases. Additional risk-adjustment and other means of protection against high-cost outlier cases may also be needed. Similarly, in a world of community rating and guaranteed issue, insurers face a significant risk of adverse selection and negative financial implications if they happen to attract a disproportionate number of high spending patients. Here, too, adequate means of protecting against adverse selection and the risk posed by high spenders are required.

The healthier half of our population accounts for only 3 percent of health care spending, whereas the top 5 percent was responsible for nearly half of the spending. This study also confirms the 20/80 rule: 20 percent of the population is responsible for 80 percent of health care spending. This concentration of spending is of great importance as we evaluate methods of containing costs.

Perhaps the most significant factor is that cost-containment strategies targeting healthier individuals will have very little impact on total health care spending since so little is spent on this sector in the first place. This explains why the current trend to increase price sensitivity through high-deductible health plans will produce very little savings even though it will act as a barrier to beneficial health care services. Reducing spending by 10 percent in the 150 million people who use only 3 percent of health care will reduce total health care spending by only 0.3 percent – a drop in the bucket of our national health expenditures. It is a small price to pay for being certain that people will seek appropriate care when they should.

What about high-deductible plans for the 5 percent who account for half of our health care spending? The costs for each patient would far exceed the deductibles, thus most care in this group – that provided after the deductible is met – would not be reduced since price is no longer a factor.

The brief mentions problems with other strategies to control costs in populations with skewed concentrations of health care needs.  Many strategies under consideration would be ill-advised, both because of the paucity of savings and because of the distortions in access and equity.

We really don’t need to look for inevitably-flawed strategies to try overcome these distortions. A single payer system – improved Medicare for all – is an ideal model to cover all appropriate health care expenses no matter how much they are skewed within a population.