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The Coming Shock in Health-Care Cost Increases
Obama’s favorite tool for controlling the rise isn’t working. Here’s a Medicare reform that might do the job.
PHOTO: GETTY IMAGES
By upholding the legality of insurance subsidies on the federal exchange, the Supreme Court secured President Obama’s legacy of expanding access to health care. Now Mr. Obama must secure the other fundamental legacy of the Affordable Care Act: controlling health-care costs.
The growth of health-care spending has slowed in recent years, and per-person Medicare and Medicaid costs have declined. Several factors contributed to this slowdown. The Great Recession threw workers off employer plans and left others with less money to spend on health care. A long-term trend of rising deductibles discouraged people from getting care. The patents of many high-cost drugs—such as Lipitor for high cholesterol—expired, increasing the use of lower-price generic drugs.
The Affordable Care Act also contributed to the slowdown. The law cut Medicare payments to medical providers and insurance companies. It put in place initiatives to lower readmissions to hospitals and reduce infections acquired in hospitals—improving the quality of care while lowering costs. Perhaps most important, the law has changed the psychology of all health-care stakeholders, putting them on notice that the system will now demand better care at lower cost.
Still, most analysts expect that the growth in health-care costs will rise without further action. And the latest data from the Census Bureau indicate this acceleration may be starting. The country is at an inflection point: Will we let our foot off the brakes, or will we permanently bend the cost curve?
Experts from across the ideological spectrum agree that the key to long-term cost control is to pay doctors and hospitals in a way that rewards cost savings and quality. Such payment reforms would move Medicare and private payers away from paying a fee for each service—which encourages doctors to order unnecessary and even harmful tests and procedures.
The Obama administration recently announced a laudable goal: 50% of Medicare payments will be made under new payment models by 2018. But to reach this goal, the administration must change tactics and use the authority given to it under the law to rapidly expand payment reforms.
While many reforms are being tested, the administration’s main focus has been on creating “accountable care organizations.” ACOs are groups of medical providers that are rewarded for achieving savings on their total spending while improving quality.
The results so far are less than encouraging. Several studies found that ACOs achieved minimal savings after two years. This is not unexpected. Investing in technology, hiring nurses and changing the way care is delivered is complex and takes time to implement effectively. But we don’t yet have evidence that ACOs can reduce costs substantially.
The bigger problem is scale. In the advanced ACO program—which penalizes heath-care providers for overspending—13 of 32 participating groups dropped out. In the other ACO program—which rewards organizations for underspending but does not penalize them for excessive spending—the number of new participants is falling, and more than half of the participants are now deciding whether to renew. The fundamental problem with a voluntary program is that to attract participants, Medicare needs to make it easy for the ACO to be rewarded. Paradoxically, this makes it hard to achieve substantial savings.
A cost-control strategy that relies on expanding the number of ACOs won’t be successful. Before it is too late, the Obama administration must focus on a reform that can be scaled. Medicare should lump together physician services, hospital costs, tests, medical devices, drugs and rehabilitation services related to common ailments—such as broken hips, heart stents and cancer treatments—into a bundle. It could then pay a medical provider a discounted amount for the whole array of services.
The discount is possible because studies have found a large variation in Medicare payments to hospitals for common surgeries such as hip replacement and heart bypass. The variation is even greater for care after a hospital stay, so including these post-acute services in the bundle makes even larger discounts possible.
Over the past five years, Medicare, the Arkansas Medicaid program and several private insurers have gained significant experience with bundles. They have worked out many of the problems—such as ensuring that quality is improved, what services to package together and how to adjust the cost for sicker patients—and showed that they can save money while improving care. The nonpartisan Congressional Budget Office estimates (on page 224 of its 2013 report, Options for Reducing the Deficit) that bundles for hospitals could save nearly $50 billion over 10 years.
Scaling bundles offers significant advantages over the current strategy. First, the discount means that savings are immediate and guaranteed. Second, private payers, i.e., employers and insurance companies, can also adopt the Medicare bundle as their payment method, amplifying the incentive. Finally, this reform is not just for big health systems that think they will do better financially by participating. It can work in rural areas and for smaller hospitals and practices and become the standard method of payment nationwide.
Time is running out. If Mr. Obama doesn’t act soon to control costs, escalating costs may ultimately threaten the sustainability of his coverage expansion—and his entire health-reform legacy.
Dr. Emanuel is chairman of the Department of Medical Ethics and Health Policy at the University of Pennsylvania. He also is a senior fellow at the Center for American Progress, where Mr. Spiro is vice president for health policy.
