Is there a hole in the heart of U.S. healthcare cost control?

It's a given that the sine qua non of providing universal access to quality healthcare is effective cost control. That's especially true in the United States, where healthcare costs 50% more per capita than in the next most expensive country, Switzerland, and more than twice the OECD average, notwithstanding the fact that the U.S. is the only wealthy country that does not insure all its citizens.

This high-cost starting point is the Affordable Care Act's pre-existing condition, the reality underlying bitter complaints about high premiums for the unsubsidized and narrow networks in exchange plans.  As Yogi Berra might say: if you want to make healthcare affordable to all, healthcare has to be affordable. To be successful, the ACA has to bend the cost curve -- or at least, maintain the windfall spending growth slowdown that seems to have taken hold over the last ten years -- at the same time it's expanding access.

The ACA's main efforts to control costs fall broadly into two categories. First, in Medicare payments, a series of pilot programs seek to move healthcare providers away from fee-for-service, via per-patient and per-episode payments and incentives to reduce costs and meet quality benchmarks. Second, in the exchanges, competition and price pressure induce insurers to reduce costs by a) putting a good deal of the cost burden on patients, via high deductibles and co-insurance payments, and b) offering narrow networks -- that is, limiting covered doctors and hospitals to those who meet the insurer's price (and, theoretically, quality) demands. In the broad category of putting price pressure on payers of all kinds also belongs the ACA's excise tax on the most expensive employer-sponsored plans, which is driving employers too toward both narrow networks and more cost-shifting to employees.

Cost control without cost controls?

Atul Gawande has expressed the hope that by seeding myriad experiments, the ACA will grow a few cost-saving sequoias  -- as an analogous outpouring of experiments and demonstration projects spurred by the U.S. Department of Agriculture revolutionized food production and drove down food prices in the early 20th Century.

I hope Gawande is right. He may be. But it might also be argued that all this experimentation is "designing around" the one cost control element that works in every other wealthy and is lacking in the U.S.: uniform pricing per procedure, imposed or at least overseen by government. (It's "overseen" in Switzerland, where hospital rates in each canton are negotiated by hospitals and insurers acting collectively, subject to approval by the cantonal government. Physicians are paid on a national fee-for-service scale.) Without that core shift in leverage away from healthcare providers, reforms are balkanized and incentives may fly in various directions.

Narrow and straightened paths
 
Take narrow networks. Absent government price controls, insurers do need to gain some pricing leverage, and it could be that over time, as more and more insurers essentially tell providers, meet our price or stay out, that hospitals and physician practice groups will fall in line.  Economists like narrow networks, and so do politicians, especially Republicans who use "choice" as a euphemism for "get it if you can afford it" (except when they pivot to bash the ACA for offering plans with the features they've long touted, also including high deductibles and copays). But I strongly suspect that most people who can afford a wider choice of doctor and hospital opt for it -- especially those who are either older, and so more accustomed on average to seeking treatment for a wider range of ailments -- or in regular need of treatment, e.g., for a longstanding pre-existing condition.

As Reed Abelson's story in today's Times on the growing prevalence of narrow networks suggests, though, increasing numbers of Americans won't be able to afford avoiding them:

Nonetheless, for people who are directly picking plans in the open markets, insurers say price is turning out to be critical. People “are weighing affordability and breadth of network,” said Karen Ignagni, the chief executive of America’s Health Insurance Plans, an industry trade group. “What we’re finding is individuals are experiencing a preference for affordability,” she said.

The tradeoff between cost and provider choice is real. It's only real, though, because the U.S. suffers from such enormous variation in cost between hospitals and doctors providing the same service.  Insurers profess that they are screening providers for quality as well as price -- which has a bit of an I-buy-Playboy-for-the-articles whiff. Narrow networks can be used for quality control, and they support coordinated care, another primary focus of reform. But their most compelling financial impetus would be gone if providers were subject to uniform price schedules.

Another trend pre-existing the ACA to which the law has given fresh impetus is increased patient "skin in the game," via high deductibles and co-payments. Cost-shifting to consumers has been going on for some time, and it almost certainly has contributed, in concert with the Great Recession and anemic recovery, with the slowdown in healthcare spending growth that began around 2004. (Greg Dworkin, a pediatric pulmonary specialist I interviewed recently, attests to ever-increasing engagement with the financial constraints imposed by patients' insurance plans.) There's a limit to how much co-insurance responsibility patients can bear, however, without compromising their health or suffering severe financial hardship.

Managed or manipulated?

Movement away from fee-for-service and toward managed care, capitation and payment for performance in Medicare and Medicaid has bipartisan support. Healthcare wonks are also invested in the success of accountable care organizations, medical homes, and the like.  The incentives to provide unnecessary care in a fee-for-service regime are manifest. Yet the alternatives -- ACOs etc. -- pose countervailing dangers. It's probably good that they're being funded on a pilot, experimental basis.

One danger is posed by Campbell's Law -- ""The more any quantitative social indicator (or even some qualitative indicator) is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."  As it now stands, hospital management consists in large part of minimizing performance of unprofitable services and maximizing highly profitable ones.  I suspect it's difficult to craft quality measures and incentives that can't be gamed  -- as New York Medicaid providers are now gaming new per-patient payment schemes.

A second danger is provider consolidation, which has been going on for decades and has been freshly stimulated by the ACA's ACO programs. While proof that managed care programs in Medicaid and Medicare Advantage have reduced costs has proved elusive, the measurable effects of hospital consolidation or physician group acquisition in specific markets have been dramatic. As Phillip Longman and Paul S. Hewitt noted this past February in Washington Monthly, hospital consolidations have risen steadily from 52 in 2009 to 105 in 2012. Longman and Hewitt further note that "the percentage of physicians employed by or affiliated with hospitals rose from 43 percent in 2000 to 57 percent in 2009" and that in 2013, "only 33 percent of physicians will be “totally independent,” according to estimates by Accenture." As to the effects:

According to studies synthesized by the Robert Wood Johnson Foundation, when hospitals merge in already concentrated markets, the price increases often exceed 20 percent, and sometimes more than even 40 percent. 

Longman and Hewitt cite multiple examples of regional prices skyrocketing in the wake of hospital mergers, e.g.:

More evidence of how consolidation is driving up health care costs comes from Massachusetts Attorney General Martha Coakley, who subpoenaed claims data (reflecting negotiated prices) and contracts from health plans and providers in her state. By examining the behavior of individual hospitals and physician practice groups, Coakley’s office was able to document a strong link between market concentration and price. Within markets, prices charged for the same services typically varied by 200 percent or more. This variation correlated almost exclusively with “leverage”—the relative market position of the provider. Prices did not correlate with quality, patient mix, or a hospital’s status as a research or teaching facility.

The FTC recently filed suit and won a court order blocking the acquisition of Idaho's largest physician group by the state's largest hospital.  Speaking to Kaiser Health News' Phil Galewitz, the FTC's director of the bureau of competition presented the case as something of an anamoly:

FTC officials, however, deny there is any broad conflict between the Affordable Care Act and antitrust laws.

"The issues are in those small number of cases where collaboration occurs in a way that gives participants excessive marketplace power," said Deborah Feinstein, director of the bureau of competition for the FTC.

She declined to say whether the FTC is stepping up antitrust enforcement, but noted that the agency is scrutinizing a number of consolidations.

"We have seen over the last couple of years, hospital-doctor combinations that are troubling to us," Feinstein said, referring to hospitals that own doctors’ practices buying more doctors. "And we are looking at it."

Feinstein was speaking only of physician practice acquisitions, not of hospital mergers. Consolidation on both fronts continues apace. A combination of FTC vigilance and ACO success could, theoretically, offset its impact. Likewise, any or all of the measures discussed above, or other experiments seeded by the Center for Medicare and Medicaid Innovation could yield dramatic results, and make the U.S. the first wealthy country to effectively control healthcare costs without government-imposed unit cost control.

Or else, when all else fails, government control over pricing will happen here -- perhaps first on a state by state basis.