Obamacare Is Lowering Healthcare Costs By Paying For Healing Nor Farting Around

CONTROLLING HEALTH-CARE COSTS

BY JAMES SUROWIECKIDECEMBER 9, 2013

KEYWORDS

HEALTH CARE;

 

HEALTH;

 

AFFORDABLE CARE ACT (A.C.A.);

 

OBAMACARE;

 

HOSPITALS;

 

DAVID CUTLER;

 

NIKHIL SAHNI

When it comes to health care, all anyone can talk about these days is Obamacare. And, while that may be understandable, the political furor over the program has obscured a quieter but arguably more consequential development: health-care costs in this country may finally be coming under control. As a new report from the Council of Economic Advisers details, after half a century in which medical spending has well outpaced G.D.P. growth, something has changed. From 2007 to 2010, per-capita health-care spending rose just 1.8 per cent annually. Since then, the annual increase has been a paltry 1.3 per cent.

The slowdown in spending is due in part to the recession and the tepid recovery—but not as much as you’d think. A recent paper by the Harvard economists David Cutler and Nikhil Sahni estimated that the recession explained scarcely more than a third of the spending slowdown. Oddly enough, the public debate over Obamacare has also played a role. Bob Kocher, who was a special assistant for health care in the White House in 2009 and 2010, did a report for Lawrence Summers on the past sixty years of health-care legislation, and found that when Congress seriously considered enacting health-care reform the rate of health-care spending often slowed for a year or two. Just talking about medical costs, it seems, limits medical costs. Kocher, a physician turned venture capitalist (and currently a guest scholar at the Brookings Institution), dubs this “the health-care-policy placebo effect.” As he told me, “When you’ve got politicians going around the country making speeches about how out-of-control health-care spending is killing the economy, health-care providers come to feel that it might make sense to be less aggressive in setting prices.”

Both those effects are bound to be temporary. But there’s good reason to think that the moderation of health-care spending will persist, because, according to Jason Yeung, an investor at Morgan Stanley’s Growth Team, we’re beginning to see deeper structural changes in the health-care system. Historically, costs have been hard to contain because most of the players in the system have had no incentive to do so. Hospitals and doctors have typically been paid on a fee-for-service basis: the more things they do, the more money they get. Insured patients have paid only a small fraction of the cost of their care, and insurers have just passed costs along to their customers. Employers and the government, meanwhile, have been left to foot the bill. “What we’re moving toward instead is a world in which everybody in the system is sharing financial risk,” Yeung told me. “And therefore everybody has an incentive to control costs.”

For consumers, this means higher deductibles and co-pays, and having to think more about prices. A peculiar feature of the American health-care system is the enormous variation in prices that hospitals charge for a procedure, which often are not correlated with quality. So in 2011 California adopted a system of “reference-based pricing” for state workers and retirees. If you needed hip-replacement surgery, say, the state would cover you for the amount charged (minus a deductible) at forty-one “value” hospitals in the state. If you went for a costlier option, you had to make up the difference. Most people chose one of the value hospitals, and their outcomes were similar to those of people who chose the more expensive hospitals. The state saved money, and the threat of losing customers, in turn, led the more expensive hospitals to cut prices; one study found that the price of joint-replacement surgery fell by about a third.

The success of the experiment has inspired other players—like the insurer WellPoint—to follow suit. Meanwhile, a McKinsey study of almost a thousand plans on the A.C.A.’s health-care exchanges found that nearly half had narrower networks of hospitals and doctors than most plans currently offer. Narrower networks let insurers push their customers toward cheaper hospitals, and also give them more leverage in bargaining down prices.

The Affordable Care Act is also helping hold down costs by changing incentives for hospitals and doctors. For instance, it penalizes hospitals when Medicare patients with certain conditions are readmitted within thirty days, on the assumption that this will encourage hospitals to offer better care initially, and to be diligent in following up. And the penalties are having an effect—since the A.C.A. passed, readmission rates have fallen. “Once hospitals feel that gut reaction of not getting paid when the patient has to be readmitted on the twenty-fifth day,” Yeung says, “that reverberates through the whole system.”

What all these initiatives have in common is the idea that health-care providers are going to be paid based on the value they deliver, rather than on the services they perform. We’re in the early stages of that process: Kocher points out that fee-for-service likely still accounts for more than ninety per cent of health-care spending. And changing the system is going to be politically challenging. In theory, after all, reining in health-care spending sounds great. But in practice things like narrower networks limit patients’ ability to see the doctors they want, while less money spent on health care means lower incomes for many doctors and hospitals. So some blowback is inevitable. Still, the changes we’ve seen in the past few years are going to be difficult to stop, because just about everyone now recognizes that when it comes to health care we spend far too much for the results we get. “No one knows when things are really going to change,” Yeung said. “But, even if you’re in a room with no clocks, you can know that when it strikes midnight the world will be different.” ♦