Thursday, June 26, 2014

The bipartisan consensus on healthcare cost control

It would be inaccurate to say that there are two main methods of controlling healthcare costs. But it's fair, I think, to say that there are two poles, with an important if unproven class of measures between them.

One pole is government control over the price of medical services, procedures and products, including drugs. The means vary widely, from direct government payment of providers (the U.K.) to regional government approval of rates negotiated by all insurers (Switzerland, for hospitals). Government rate-setting is employed by every wealthy country except the United States, which is also to say every country that provides universal health insurance to its citizens. Not coincidentally, the U.S. spends two-and-a-half times the OECD per capita healthcare spending average and almost twice as much as a percentage of GDP (as of 2011).

The other pole is to offload an ever-increasing share of the healthcare tab onto consumers, causing them to restrict their healthcare consumption.  The U.S. has de facto taken this route. According to Kaiser Family Foundation research, the percentage of workers who pay an annual deductible of more than $1,000 for a single-person plan provided by the employer rose from 10% in 2006 to 38% in 2013. From 2003 to 2013, while premiums overall rose 80%, the cost of the average worker's share of the premium rose 89%, from $2,412 for a family plan in 2003 to $4,565 in 2013. According to the 2013 PwC Touchstone Survey of major US companies, 44% of employers were considering offering high-deductible health plans as the only benefit option to their employees in 2014; 17% did so in 2013.  Deductibles have also skyrocketed in the individual market, a trend accelerated by the Affordable Care Act. In the ACA exchanges, the average bronze plan's single person deductible was just over $5,000 and the average silver plan's, just under $3,000.

This approach does seem to reduce healthcare spending, whatever its effect on health (and financial health). Healthcare inflation has been slowing in the U.S. since 2002; at present, it may be slowing to a really astounding degree.  According to freshly updated Bureau of Economic Analysis figures, U.S. healthcare spending fell 1.4% in the first quarter of 2014, even as millions of uninsured Americans gained insurance under the ACA (the ranks of the uninsured have fallen by about 11 million since implementation, but many of the newly insured had not yet gained coverage by March 31, the quarter's end). Whether or not that result is anomalous, annual healthcare spending growth has not exceeded 4% since 2008 (though, given slow GDP growth post-recession, healthcare spending has not dropped as a percentage of GDP). While the recession and anemic recovery have doubtless played a part, so has cost-shifting to the consumer.  According to research by a team led by Harvard healthcare economist Amitabh Chandra, increased out-of-pocket costs for the insured may have led to a  10-15% drop in use of health care services from 2006 to 2013 (Chandra et al do not expect the slowdown to last, however chiefly because they expect expensive new health technologies to develop apace).

Between those two poles are a set of measures designed to move payment away from fee-for-service, employed by the federal government in Medicare, state governments in Medicaid and state employee health plans, and private insurers.  These include contracts with Accountable Care Organizations, medical homes and Medicaid managed care programs that pay per patient or per episode rather than for each separate procedure, and risk-based payments that reward providers for hitting cost and quality targets while penalizing them for missing those targets. Also in this category are carrots and sticks to induce hospitals to reduce infection and readmission rates. There's evidence that these measures are having some effect: hospital readmission rates have fallen since 2011, and surgical infections are also dropping. There's no clear evidence as yet that managed care programs are reducing costs.

Agreement on three points

Step back from hysterical GOP opposition to the Affordable Care Act, and a striking fact becomes clear: there is substantial bipartisan consensus about how to reduce healthcare costs.  That consensus may be mistargeted to a large degree, but it's there. Take these three focal points of cost control efforts in turn.

Almost no one in the U.S. is talking seriously about government rate-setting. Maryland, alone among the states, sets fixed per-procedure hospital reimbursement rates for Medicare and Medicaid, and is now on the cusp of capping growth in hospitals' revenue increases to a rate no higher than the state's overall economic growth. Other blue states will doubtless be watching, but there is hardly a mass movement on this front, and rate-setting on a national level is universally regarded as politically inconceivable for the foreseeable future.

Republicans are ideologically committed to "consumer-driven healthcare," i.e., putting consumers on the hook for high deductibles and out-of-pocket costs, and Democrats are effectively unopposed -- though the ACA did effectively cap out-of-pocket spending and index it to income. While the ACA set minimum actuarial value for plans, it set them at pretty low rates: the lowest-tier bronze plans cover only 60% of the average patient's estimated annual costs.

Both parties are on board with transitioning hospital and doctor payment away from fee-for-service and with encouraging coordinated care and managed care. The so called "doc fix" bill, which would replace the current formula for reimbursing doctors under Medicare with a scheme varying payment according to performance on various quality measures, had bipartisan support, foundering only on the means of offsetting the projected cost (the bill was forecast to increase the deficit only because current spending forecasts are based on the unsustainable current payment formula, which gets adjusted up every year).  Another bill encouraging managing care for the sickest Medicare beneficiaries, the Better Care, Lower Cost Act of 2014, also has a bipartisan pedigree.

In sum, both parties agree on 1) making insured Americans responsible for a substantial portion of their healthcare costs, and 2) using the federal and state government's role as payer for Medicare and Medicaid services to foster managed care and bundled and risk-based payments.  Both also mainly agree not to talk about empowering federal or state government to set uniform per-procedure reimbursement rates for all payers.

That's too bad, because government rate-setting has proved to be the sine qua non of cost control in the rest of the world -- the common denominator among wealthy countries that provide their citizens with better healthcare outcomes at lower cost than the United States -- i.e., all of them.  There's no evidence that health reform now in progress in the U.S. will close the gap, because spending growth has slowed even more dramatically since 2008 in the rest of the OECD than in the United States.

In short, health reform will probably continue on established tracks in the U.S., regardless of which party is in power. Whether the current bend in the cost curve can be sustained with stronger direct government control over pricing remains to be seen.

P.S. Hovering back-of-mind while writing this was my April conversation with liberal Dem, conservative doc  Greg Dworkin, Kos blogger and pulmonary pediatrician. In his practice, Dworkin deals every day with the growing cost-consciousness of patients navigating high copays and tiered drug coverage -- and he sees how they restrain costs. Over decades, he's rolled with various bundled payment and coordinated care mandates -- and he's more agnostic (and perhaps, as a doctor, ambivalent?) about their effects.  Meanwhile, he takes it as a given that the U.S. political system will not produce government-imposed unit pricing for medical services.


  1. Good summary.
    The Republicans are a lost cause on this issue, and even the conservative Arnold Kling has written that consumer-directed cost control has never worked anywhere in the world.

    Why are the Democrats so unwilling to consider price setting?

    I do not have all the answers, but here are some thoughts:

    a. Even the Medicare Act of 1965, a liberal victory if ever there was one, did not consider price setting. In fact it allowed massive price increases.

    b. Democrats need political contributions too.

    c. The medical industry has accounted for a majority of new family wage jobs over the last 20 years. (see Michael Mandel article on this.)
    Price setting would basically stop the job growth. (the job growth in health care has already slowed down with the baby steps of the ACA.)

  2. Hi Andrew,

    You continue to be a bright light in the healthcare cost trend world. I just had a fairly long twitter exchange with Larry Leavitt at Kaiser asking him whether it might not be time for Kaiser to relook at its model that says most of the current cost slowdown is due to the Recession. He agreed with me that Medicare is apparently very different, and is working to a different drummer than other healthcare costs.

    Medicare cost growth from 2010 through 2014 (8 months) has averaged 3.3%/year. With 3% average annual enrollment growth, that's about a .4% annual per enrollee cost increase. CBO's 2014-2024 Budget Outlook calls for 3% annual per enrollee cost growth. CBO's 2013 Long Term Budget Outlook uses 4-5% per enrollee cost growth after 2024. If that number has been .4% for the last five years, and stays in the 0-3% range going forward, our structural budget, long term debt/GDP and entitlement problems all go away. And I think there's a good chance this is the range we will see.

    Medicare is not influenced by the Recession, and there is no cost-shifting to the individual. There are some price control effects, as a 1.0-1.1% productivity factor is taken out of the annual price adjustment metric, but on CMS urging, CBO pulls this out after 2029, worrying that this would put too much pressure on providers.

    So what's happening in Medicare? The 2010-2014 have very little of this ACA inflation cost adjustment in it. No recession effects. No cost shifting. And only .4% 5 year average per enrollee cost growth, 4-5% below the long term average. What's up?

    Utilization is down, though I don't know yet how to document this. Providers are getting smarter and finding ways to treat patients in such a way that they need the provider system a bunch less. This is part of the movement away from FFS and part of all the provider payment method experiments. It's happening. And it will continue to happen, I am sure. And almost nobody is really looking at it.

    This is an emerging miracle that will herald a complete transformation of our budgetary picture. An amazin,g yet-to-be-told story!!