Getting to Affordability: Spending Trends and Waste in California’s Health Care System

RAND Corporation


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While California has made impressive strides in increasing the number of residents who have health insurance coverage — and proposals for reaching the remaining uninsured continue to be debated at the state and federal level — health care is still far too expensive for the three million Californians who lack coverage and the 37 million who do not. The average cost of a family health insurance plan in California is nearly $20,000 per year, almost one-third of median family income in the state. Premiums for the average family health plan in the employer market in California have increased 133% since 2002, vastly outpacing inflation. The average deductible facing a California family now exceeds $3,000, while the average copay for a physician office visit is nearly $25.1

Why Health Care Costs Matter

Californians are desperate for relief from these costs. In a 2018 statewide survey, more residents were extremely or very worried about paying for health care than those worried about paying for housing, transportation, or utilities.2 This fear at least partially reflects Californians’ direct experience. About one out of five Californians reported problems paying medical bills for themselves or a family member in the past year, leading them to cut back on basic household spending, use up all of their savings, or delay or forgo medical treatments or prescription drugs.3 Nearly half experienced some type of cost-related access problem for themselves or a member of their family.4 Part I of this report further explores how health care costs are affecting the state’s residents and forcing state officials to make unnecessary trade-offs.

A Snapshot of Health Spending Trends in California

Part II of this report describes sources of health insurance coverage in the state, spending by payer, and trends in spending over time. Individuals with employer-sponsored insurance are the largest segment of the population, and they account for the largest percentage of health spending in the state. Both inflation-adjusted premiums and deductibles for employer-sponsored insurance increased substantially from 2000 to 2017, with worker contributions to health care more than tripling at businesses with fewer than 25 workers. Office-based visits, inpatient hospital stays, and prescription drugs drive much of health care spending across market segments in California.

Disparities That Signal Wasteful Spending

There is nothing inherently wrong with rapid growth or high absolute levels of health care spending if the increased expenditure expands coverage or leads to improved care. However, Part III uncovers a troubling pattern in the state: Prices for the same medical treatments vary widely across California, even though these differences do not necessarily reflect higher-quality care. Significant evidence shows that health spending could be reduced without reducing access or undermining quality.

Six Contributors to Wasteful Spending

Part IV explores six areas of focus for understanding cost containment approaches targeting unnecessary spending across the state’s health care system: (1) overtreatment, (2) failures of care delivery and inadequate prevention, (3) failures of care coordination, (4) administrative complexity, (5) pricing and market inefficiencies, and (6) fraud and abuse.

These areas suggest significant opportunities to reduce health spending without adversely affecting patient health outcomes. In 2010, the Institute of Medicine (now the National Academy of Medicine) estimated that almost one-third of the nation’s health care spending was wasteful and unnecessary. Shrank et al. updated the IOM estimates using more recent data and found that between 20% and 25% of national health spending can be attributed to waste.5 Assuming that California has a similar proportion of unnecessary spending, we estimate that the state could save between $58 and $73 billion per year by eliminating unnecessary spending.

Conclusion

Crucial to any cost containment effort is a detailed understanding of what costs are being reduced, where they are coming from, and who has the potential to capture the savings. This report focuses on the landscape of health care spending and a framework for understanding cost containment approaches in California. The financial impact of a wide range of policy proposals aimed at reducing health care spending will be the subject of a second, follow-up report in this series.

About the Authors

Christine Eibner, PhD, is a senior economist and the Paul O’Neill Alcoa Chair in Policy Analysis at RAND Corporation. Also from RAND are Christopher Whaley, PhD, policy researcher; Kandice Kapinos, PhD, senior economist; Nicholas Broten, MS, assistant policy researcher; J. Luke Irwin, MPH, assistant policy researcher; Mary Vaiana, PhD, senior communications analyst; and Erin Duffy, PhD, adjunct policy researcher. Serafina Lanna is a former research assistant at RAND.

This work was conducted independently by RAND Corporation, a research organization that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier, and more prosperous. RAND is nonprofit, nonpartisan, and committed to the public interest.

Notes

  1. The statistics reported in this paragraph were compiled based on California-specific data for 2018 reported by the Agency for Healthcare Research and Quality as part of the Medical Expenditure Panel Survey Insurance Component State and Metro Area Tables.
  2. Liz Hamel et al., The Health Care Priorities and Experiences of California Residents, KFF, January 24, 2019.
  3. Hamel et al., Health Care Priorities.
  4. Hamel et al.
  5. William H. Shrank, Teresa L. Rogstad, and Natasha Parekh, “Waste in the US Health Care System: Estimated Costs and Potential for Savings,” JAMA 322, no. 15 (Oct. 7, 2019): 1501–09: doi:10.1001/jama.2019.13978.