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“Viewpoints: Health Economics” | Reduce Prices, Bend the Cost Curve

At a health services research conference more than a decade ago, shortly after passage of the Balanced Budget Amendment of 1997, I had a conversation with a few colleagues on whether the payment reforms in that legislation would be fully implemented. I was one of several people who argued that legislators would be unlikely to follow through with the necessary cost discipline. Even if they did, some of us argued, any savings would be spent on creating new benefits.

Not surprisingly, Congress blinked as we moved through the last decade, and the date of the insolvency of the Medicare trust fund went from 2030 to 2017. Congress piled onto the Medicare problem with a prescription drug benefit that seemed to suggest the idea that the public sector should demonstrate responsible limits on pharmaceutical prices as something akin to Soviet-style administrated prices.

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This week’s post is the last in our five-part series “Viewpoints: Health Economics.” This series of posts from invited authors will examine issues in health economics and health policy following the passage of health reform.

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Why do I dredge up these pieces of ancient policy history? I do so to highlight the heavy lifting on reducing health care prices that will have to be part of any future success in America’s health care cost control effort.

You don’t hear much about that idea in discussions of health reform and the Patient Protection and Affordable Care Act, but a significant part of those deficit-reducing savings will come from reductions in payments to Medicare providers—reduced payments to Medicare Advantage plans and reduced payments and payment updates to hospitals, nursing homes, hospices, and other providers. Many of the payment system reforms will also necessarily involve paying less to those who cannot demonstrate good outcomes so that we can pay more to those who do.

We caught a glimpse of the angst that this will cause in health care in the recent “doc fix” debacle. Despite desperate last-minute maneuvering in Congress and a steady drumbeat from physician groups, legislators failed to act in time. As a result, the Centers for Medicare & Medicaid Services began paying doctors 21 percent less for services on June 19. Of course, this was not a courageous act of budgetary discipline being exercised in Washington. It will likely all be undone in time, as has been the case in past years. For all the complex problems that do exist in the sustainable growth rate and Medicare payments, the doc fix illustrates a simple truth: No one wants to say no on prices.

That’s going to be a problem if we truly want to bend the curve. The critical need to address prices often gets lost in the discussions of “overtreated in America” and the differences between McAllen, Texas, and the rest of the United States. All of us would like to think that if we just eliminated waste and reduced unnecessary variations in care, we’d have the necessary savings to pay for expanding insurance coverage. There is certainly much that we can do in those areas, but there is just as much undertreatment as overtreatment in American health care, and we need to recognize that real health reform has to address prices, too.

That critical reminder for me comes from a 2003 Health Affairs article in which Gerard Anderson, Uwe Reinhardt, and their co-authors argued, “It’s the prices, stupid,” in explaining a fundamental difference between the U.S. and other nations. Subsequent reports from the Organization for Economic Cooperation and Development and the Congressional Research Service supported that notion, with the OECD concluding, “There is no doubt that U.S. prices for medical care commodities and services are significantly higher than in other countries and serve as a key determinant of higher overall spending.” The CRS identified several international studies that found that the U.S. paid 50 to 100 percent more for many procedures, excluding physician costs, where American costs are also significantly higher.

Yet, as the debates over the doc fix and any conversation with a hospital executive will reveal, the overwhelming impression among doctors, hospitals, nurses, and the rest of the American provider community is that they are underpaid. As physicians fight the 21 percent cut in payments, hospitals complain that Medicare pays only 91 cents of every dollar of hospital costs, forcing them to shift costs onto private payers. The problem, of course, is that the price that we all are paying is some health care provider’s income.

The battle over prices will intensify during the coming decade for at least two reasons. First, the debt and budget deficit issues that constrained the payment gymnastics necessary to work out the doc fix will continue. The positive impact of the PPACA on the budget deficit is predicated on the savings from reduced Medicare payments. The hope, of course, is that the revisions in the process for payment updates and the Independent Payment Advisory Board will make implementation of those changes more effective than the 1997 reforms. We will see. It’s no surprise to me that the Obama Administration delayed the Medicare Trustee’s Report from earlier this year until June 30, as they tried to account for those hoped for savings in the report. As the history that I’ve noted illustrates, however, those savings will never materialize without the exercise of price discipline by public payers

Second, many of the reforms contained in the PPACA have created and will continue to create the tendency for consolidation among health care providers. Fundamentally, reforms to the health care payment system will mean that health care providers will be asked to take on more risk in the form of accepting risk for poor-quality outcomes and for care transitions. One of the main ways to handle risk and improve care coordination is to get bigger so that you can spread that risk over a larger population. The growth in provider consolidation, which is already happening with a wave of mergers and acquisitions in physician practices, may swing the balance of power in price negotiation in the private sector toward providers. The balance of power may swing further, since the Obama Administration has shown much greater concern about the market power of insurers than about that of providers. Providers feeling the squeeze from Medicare will look to use that change in the balance of power for better private payment.

There may be many who hope that America can bend its cost curve with the elimination of “overtreatment” and unnecessary variations. Others may hope that the implementation of information technology will streamline care and generate the savings. Still others may believe that the incentives for improving quality will lead to the changes necessary for cost control.

An important part of bending the cost curve, however, can be achieved only through a substantial reduction in prices paid to health care providers.

“Viewpoints” blog postings are intended to allow non-Altarum Institute authors to pose their own opinions and policy positions in the realm of health care and health policy. As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions. Read more.

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