Bending the Cost Curve
In the national debate leading up to the passage of the Patient Protection and Affordable Care Act (PPACA), President Obama said on several occasions that he would veto any bill that did not lower the growth rate of health care spending. So now that the Act is law, you would expect to find a lot of people focused on how that is going to work.
Yet an informal scan of news stories, opinion pieces, journal articles and even conference agendas reveals that “cost control” is probably the least talked about feature of the new law. An exception is a Health Affairs study produced by analysts at the Office of the Medicare Actuary — concluding that costs will go up, not down, as a result of the new legislation. Other exceptions are all the members of Congress who voted for PPACA who are now campaigning for reelection by claiming, “If we had not passed this law, health care costs would have…”
Okay, so how does the new law promise to control costs? I’m going to skip over efforts to control fraud, waste and abuse, electronic medical records, managed care, coordinated care, teamwork care, medical home care, cost effectiveness research, etc., as ideas that, however meritorious, have not been shown to control costs and probably won’t control costs. As I explained at the Health Affairs Blog the other day, that leaves us with three cost-control initiatives that are new, unique to PPACA and worth discussing.
1. Refusing to Fund the Supply Needed to Meet the Demand. This is a little-noticed feature of the new law that has been almost completely ignored by everyone other than yours truly. The demand for care will almost certainly soar. Start with 32 million to 34 million newly insured people, who will try to double their consumption of care — if economic studies are to be believed. Add to that another 70 million or so who will have much more generous insurance than they currently have. Almost everybody else is promised an array of preventive care services, with no copayment or deductible. How can you have all this newly created demand for care without an enormous increase in health care spending? PPACA’s answer: make sure there is no new supply to meet the demand. Although early versions of the bill contained subsidies to increase the number of doctors, nurses and paramedical personnel, these items were all zeroed out before final passage.
But will this work? In a normal market, when demand exceeds supply, prices rise. If supply is prevented from increasing, prices will rise even more. If the demand is relatively insensitive to price, total spending will rise. This is Economics 101. In terms of the nuts and bolts, the ability of third-party payers to use their bargaining power will be severely undermined. As demand explodes, the third-party payers’ threat to withhold their contracts will become an increasingly weak bargaining ploy.
Bottom line: this control device is not only unlikely to work, it may make things worse than they otherwise would have been.
2. Squeezing Medicare Providers. Once you get past the rhetoric about doctors becoming more “productive,” you will discover that the new law’s mechanism to control Medicare spending is to ratchet down payments to doctors and hospitals. The only person (in the federal government) to have really explained this is the Office of the Medicare Actuary, which actually produced a chart showing how bad things are going to be. Medicare payment rates will fall below Medicaid rates in 2019 and fall increasingly behind Medicaid in future years.
Were there the political will to do this, Medicare enrollees would be getting Medicaid-like services in just a few years and, beyond that, the elderly and the disabled would be in a completely different (and inferior) health care system. The problem is, there is not a smidgen of evidence that the political will is there.
3. Experimenting with Pilot Programs. The third major weapon is the funding of pilot programs to try out different ways of reducing costs and improving quality. But how can pilot programs be valuable? They can’t, unless there is a way to “copy and paste” anything we discover that we like. The problem is that we already have a slew of “natural” pilot programs — islands of excellence that have sprouted up here and there throughout the health care system. And although many of these have been studied, no one has found a way to replicate them.
So here’s the bottom line: The new health reform law does have three notable cost-control mechanisms — two of which are very aggressive. None of the three, however, are likely to achieve their objective.
Policy wonks and the Medicare Actuary all know Congress doesn’t have the political will to go through with the cuts to Medicare providers (with the exception of cuts to Medicare Advantage plans).
Congress has continually pushed back the automatic cuts required by the sustainable growth formula — because they know providers would leave the Medicare program and seniors would lose access to care.
It is also unlikely that the demonstration programs will find anything that is scalable over large numbers of Medicare providers. If pilot projects found a way to lower the costs (i.e. reduce provider revenue), Medicare providers would lobby Congress to prevent those cuts as well. What we really need is competition among providers looking for ways to boost efficiency because they share in the savings or benefit in some way.
Great synopsis, John.
You are too kind to the pilot programs. They have been going on for years as a way to pay people to build astroturf coalitions supporting the elements of ObamaCare.
They generally study the same old stuff with the same old tired techniques to reach the same conclusions supported by convenience samples, poor cost definition, or no data at all. However, the names are changed to make old ideas look new. Thus we have progressed from HMOs to primary care providers, to medical homes, to accountable care organizations.
Governor Pawlenty issued an executive order barring Minnesota government from accepting ObamaCare money for pilots because they increase state spending. He has the right idea.
Dr. Goodman highlights an important aspect of this policy and that is “refusing to fund the supply needed to meet the demand”. Taking a broader look at the lofty and amiable goal of the act in an economic perspective, “obamacare” strives to provide healthcare as public good. By the simplest definition, that is a service/good being both non-excludable and theoretically non-subtractable. However, administrative rhetoric (pointed out by Dr. Goodman) sounds like they are talking about treating it as a toll good (large restriction) for cost control. Doing so would be a plausible way to control rising cost, but it would mean that healthcare is then excludable. Failing to adequately address the supply would make this a common pool resource. One just has to look to the North or to Europe to see the consequences (good and bad) of that type of system. Purely public goods run the risk of becoming public monopolies noted by gross inefficiencies (ie. postal service) due to limited market competition. I would hate to see health clinics closed on Saturdays due to insufficient funding. Currently, the system resembles a private good being excludable and subtractable. Speaker Pelosi was noted on saying you have to pass it to see what’s in the act, but ultimately it sounds like the administration has an identify crisis of what healthcare is, and what it means to our society.
A question related to supply:
It seems fairly clear that the American medical system arbitrarily limits the number of people that can become doctors. It limits hospitals beds and surgical facilities.
Why does the field of education not limit teachers? Or does it? I suppose it’s much harder to limit the number of desks at a school. But, why has education changed to meet demand when medicine has not?
The problem with government pilot programs is that bureaucrats never get a strong enough conclusive answer that allows them to take the risk of implementing the solutions. They get no value of implementing a solution when the implementation becomes a national program. In the employer market multiple options are developed and dropped if not successful. Thousands of new ideas are tested and if successful are passed on to other plans and benefit managers. It takes about 9 years for a good benefit idea to spread widely throughout the industry. There are early adopters, fast followers, followers and laggards, and “never will doers.” That happens in a free market. Under government mandates, you can never get to solutions because the implementation choices become political rather than economic. There is an old saying, “Legislation tends to crowd out the future.” This is the real danger of ObamaCare. We will never get to solutions and new ideas, because there is no constituency for ideas that are never allowed to prove themselves.
Although some people are convinced that the ACA will bend down the cost curve, I am not convinced either and agree with John on that. In fact, I have said so in a NYT blog post.
My sense is that if we bend the curve at all, we will do so through rationing ever more health care by price and ability to pay.
All we need to market this approach is to find a good name for it. Any ideas?
A new name? Create one out this: To paraphrase the economist John Cassidy, no central authority, however brilliant [or good willed] the managers, can accomplish the functions of freely determined prices for the allocation of labor, capital, and human ingenuity (Cassidy J. The price prophet. The New Yorker. February 7, 2000:44-51.)
Bob
Bob:
I prefer Consumer Diirected Health Care (CDHC). Much more mellow. I’m going to register it as a trademark.
Uwe
Why don’t we call it capitalism with socialistic incentives. If all we do is ration by price and leave all the perverse provider incentives in place, we will have accomplished little. What is needed (as has been said at this blog many times) is competition for patients based on price and quality. That is the only thing that is going to bend the cost curve.
How to really bend the cost curve, give patients and doctors the necessary tools, see my policy paper that can be downloaded from my blog, http://drkennethfisher.blogspot.com. Kenneth A. Fisher, M.D.
I proudly recommend the essays found in the following link: http://www.soa.org/library/newsletters/health-watch-newsletter/2010/september/hsn-2010-iss64.pdf – ideas by the arguably most knowledgeable of health care financing professionals, though the ones most often ignored by parties on all sides of the debate. This link is to the latest edition of Health Watch, the newsletter of the Health Section of the Society of Actuaries, and contains the prize winning essays in their spring contest for ideas on provider reimbursement reform.
I agree with Linda Gorman and others about pilot programs. They are not going to reduce any health care costs.
Bruce:
And how do we patients find out about the differential quality of different providers of health care? Just by word of mouth?
Uwe
Dr. Reinhardt,
Quality always floats to the top and distinguishes itself from its competitors. This is true in virtually every industry save for medicine, though it too boasts several “islands of execellence” (Mayo, Geisinger, etc.) that have grown in popularity through word of mouth alone. Given the proper incentives consumers will seek out quality and price data, and providers will look for innovative ways to communicate that data. Perhaps if patients had a greater financial stake in their care, or were responsible for paying their provider directly, rather than through a third-party intermediary, we might see some kind of direct to consumer advertising, a medical “blue book” like we have for automobiles, or any number of other mechanisims. The fact that we don’t see these things in medicine now is not a consequence of market failure but rather a system which prevents a proper market from functioning.
While enlightening to project events over the next few years and decade, it is quite another thing to project licensed health professionals like one would say a car. It takes an hour to make a car, while it takes a decade to make a doctor!
In matters of this subject, trends are already appearing that substandard life expectancy and other quality healthcare measurements in the U.S. has already peaked and are going in the opposite direction of all other unenlightened industrialized Nations.
Half of the current licensed professionals are “Boomers” or “Seniors” and are planning on retiring or cutting back. Cutting incomes won’t improve keeping them on! Most “new Docs” and an increasing number of established docs are cutting work hours, and when the new docs who’ll take a decade to get here, do – it will be too late and after the healthcare system will be in shambles.
The position they and all other healthcare providers find themselves in is one of being forced to work [but for no more than 40 hours a week] while finding ways to be more productive OR cutting their productivity to meet the value they see in their work hours.
As for the patients, it’s everyone for themselves! The ones most able to understand medicine to take care for themselves or those who have family members so inclined will have an easier time. As for the rest, they will all discover that having “quality and affordable insurance” only applies to government, union and big corporation workers!
On supply of health care providers:
The nursing shortage has been due, in part, to low pay for nursing school teachers. As a result, there are not enough spots for qualified applicants to nursing schools.
The ACA raises pay for those teachers. It also offers substantial scholarships and loan forgiveness for nursing school teachers.
Meanwhile it double the capacity of community clinics.
Nurse practioners will help staff those clinics.
In addition, the legislation provides generous funding for loan foregiveness and scholarships for medical students which should attract many more miniority studients.
Finally, recent reserach shows little correlation between the number of doctors per capita in a region and access to physicains. For instance, Boston has more specialists and primary care physicains per capita than most places, but access to primary care docs is difficult. Many are not taking new patients– they would rather see their existing patients more often.
As a result, their existing patients are, in many cases, being overtreated–too many tests, too many referrals to specialsts, too many surgeries. And while tests and treatments soar, we see no improvment in the health of the population.
This is, however, beginning to change. On the health care blog, Paul Levy recently wrote about how many hospitals are doing fewer tests due to growing awareness that we’ve over-testing plus financial incentives that no longer reward “doing more”.
On productivity and hospitals: go to the Insitute for Health Care Improvment’s (IHI’s) website and read about the many ways hospitals can–and have–increased productivity–not by downsizing, but by making systems more efficient.
You fail to mention that in “al” letter from the Actuary’s office makes it clear that it is quite likely that, under the ACA, hospitals and other institrutions can become more productive –he just questions whether they can improve productivity “indefinitely.” But they won’t have to. While improving productivity, they will also move away from the fee-for-service mode, which will help reduce over-treatment.
Some not-very-good hospitals will shut down–or be replaced by community clinics which will offer more preventive care and chronic disease management, to replace the unnecessary tests, hospitalizations an procedures that occur when patients use a hospital ER as their “medical home.”
Don Berwick co-founder of IHI, and the new director of the Centers for Medicare and Medicaid is keenly aware of the problem of over-treatment. Medicare will be moving away from fee-for service as quickly as possible–and insurers have said that if Medicare provides political cover, they will follow.
Levey predicts that radiologists incomes will fall from current very high levels. (The best-paid spescialists’ salaries are” in a “bubble” that like all bubbles, will burst.
As for pilot projects, in the past, Congress has blocked expansion of the most successful projects–for example “bundling” of payments to doctors and hospitals for by-passes. This saved money, and improved incomes– but also cut into revenues for some.
Under the ACA the Secretary of HHS can roll out any successful pilot project, nationwide, without going through Congress. This is radical–and will make all of the difference.
The Secretary can also lower fees for “overvalued” physicians’ service and raise fees for undervalued services. Fees for certain services provided by oncologists will be lowered next.
Finally, we don’t need more doctors in most parts of the country. In the case of medicine, we know that supply drives demand (Build the beds). In areas where we have more surgeons, we see more surgery (but no better outcomes)
Reduce overtreatment of the well-insured, including many Medicare patients(which simultaneously providing more treatment for the currently uninsured, and you will find that we have plenty of doctors.
You will also find that we can make much greater and better use of nurse-practioners, as in other courtires where costs are lower and qualify of care (particularly disease management) is often better.
According to The Dartmouth Institute For Health Policy & Clinical Practice, “nine out of ten deaths (Medicare) are associated with just nine chronic illnesses,” and “32% of total Medicare spending is in their last two years of life.” The study goes further to explain that the care provided, was not in line with the wishes of the patients, “do not have improved survival nor better quality of life,” and vary by region.
http://www.dartmouthatlas.org/data/topic/topic.aspx?cat=18
More than 80% of patients say that they wish to avoid hospitalization and intensive care during the terminal phase of illness, but those wishes are often overridden by other factors. If more intense intervention does not improve life expectancy, and if most patients prefer less care when more intensive care is likely to be futile, the fundamental question is whether the quality of care in regions with fewer resources and more conservative practice styles is better than in regions where more aggressive treatment is the norm
If this information is true and “Bending The Curve” is our goal, why don’t we deal directly with this issue? Frankly, I believe service providers often take advantage of those at the end of life for monetary reasons, which is disgusting. We need a plan that respects the wishes of terminal patients, with dignity, without expensive and invasive practices on a nationwide basis.
I don’t have to be a PHD to see the underlying reason for runaway healthcare spending. As long as we have a third party payer system, where the patient has little or no “skin in the game,” we are going to continue with this struggle. When patients take ownership of their healthcare expenses, we will see true “Bending The Curve.” HSA’s and HRA’s were a good step in the direction of patient ownership, but didn’t go far enough. There is a new business model where employers contribute healthcare funds to employee-owned accounts. Employees can use their accumulated account funds to purchase an insurance policy of their choice, and pay for other qualified medical expenses with Visa “smart” cards, all with pretax dollars. If this business model spreads, we could see a real Bending of the Curve. Here’s a article regarding this model.
http://www.washingtonstatewire.com/home/3714-how_about_a_401_k_program_for_health_insurance.htm
Yes, in a just sctieoy, that should exactly be the case, if you understand my definitions; I will use “Neon” to suggest “better than what currently exists, adequate, at the very least”. I will use “Maserati” to suggest that if somebody has the financial means to get some particular surgery/treatment he may deem beneficial, it should not be up to the government to restrict that choice, and doctors ought not be bound as to what they can and cannot do. If 95-year-old grandpa has the financial resources and wants the bypass surgery, no “just” system can deny him that–and I fear that’s where Obamacare may take us.In a just sctieoy, the government doesn’t tell me what I can spend my money on (generally speaking, of course; I’m not advocating for child prostitution, for instance). Now, that doesn’t by any stretch of the imagination mean that all choices are morally equal, that it’s perfectly moral and right to lavish myself with wretched excess while people starve–but it is to say that if I have the money to spend, it’s only “just” that government not restrict my right to spend it as I please–and if that means some exotic surgery or a 4th house in the Bahamas, then the government ought not restrict those things, however much you and I might find those choices distasteful, materialistic, etc. By all means, let’s do what we can to lift up the poor, be it in healthcare, employment, what-have-you, clearing every path for those who are willing to work to better themselves, etc. Let’s strive to have a better healthcare system for all. But let’s not fall into the mistaken thinking that we need to tear down those at the top in order to lift up those at the bottom.