Do Not Blame Obamacare for the High Costs of Healthcare

Under control of third party payers, healthcare spending has been increasing steadily since the 1960’s.  Here is the raw data as published by CMS:

https://docs.google.com/spreadsheets/d/18zZmm5bHFL3N3k7AYtZ64DQvqBg48WrNHeZ-Pilp5P8/edit?ts=588e1b92#gid=0

Rate of increase in healthcare spending:
Reagan years –    95.7%
Clinton years –   44.5%
GW Bush years- 61.3%
Obama years  –   28.5%   This includes only the first 7 years. When the 8th year is added, it will likely increase to about 33%.

 

In other words, our extremely high healthcare costs have been created by a broken system that long preceded Obamacare.  The last 8 years have seen the slowest growth in healthcare spending on record in the US.   Since cost is the single biggest problem of our healthcare system, repealing Obamacare is not a solution.

Rethinking the Medicare ACO

Medicare is orchestrating a change in the way healthcare providers are reimbursed for their services. The goal is to replace the current fee for service system which offers no impediment to high volume, wasteful spending, with new systems that link provider reimbursement to the achievement of higher quality, lower cost care. To that end, two approaches have emerged: one utilizes the traditional fee for service system but adjusts pay to the level of performance; the other gives a fixed fee to groups of providers to care for their population, and rewards them with a bonus if they improve quality and lower the cost of care. The latter are referred to as “Alternative Payment Models” (APMs) and include bundled payments for single episodes of care, and Accountable Care for a year of all-inclusive healthcare.

Momentum is building for expanded use of the APMs. The announcement last year by HHS Secretary Sylvia Burwell of the goal to have 50% of Medicare reimbursement through an APM by 2018 has set the stage for rapid change.  This past summer, Congress reinforced that goal by passing the “doc fix” law, MACRA (Medicare Access and CHIP Reauthorization Act), which will go into effect in 2019. The law incorporates value-based payment strategies either through the APMs, or through fee for service with performance incentives (MIPS, Merit-Based Incentive Payment System). By offering an annual 5% bonus from 2019-2024 to providers using the APMs, MACRA is clearly promoting the alternative models. Since the ACO model encompasses the full spectrum of care, and will involve more providers than bundled care, it is considered the ultimate goal of Medicare’s value-based payment strategy.

The ACO Experience, 2014

The ACO (Accountable Care Organization) program was in its third year of operation in 2014. The participating ACOs included 20 Pioneers that accepted downside risk from the outset, and 333 Shared Savings Plan ACOs that are not accountable for financial losses but can share in any savings that are generated if quality scores allow. Data from CMS detailing the quality improvements and expenditures by the Pioneer and Shared Savings ACOs in 2014 were recently released and revealed the following:

  • Medicare Accountable Care Organizations (ACOs) saved a total of $411 million in 2014 after spending nearly $60 billion on their patient population (Table 1)
  • Bonus payments totaling $401 million were given to some of the ACOs in 2014 making the net savings to Medicare $9.2 million (0,01% of costs).
  • ACO benchmarks (funding per patient per year) varied from $5,017 to $21,546 in 2014.
  • The higher the benchmark, the easier it was for an ACO to generate savings.
  • ACOs in the top benchmark quartile received nearly five times more bonus money than those in the bottom quartile in 2014 (Table 2).

Table 1: Financial Summary of the ACO Programs, 2014

  Shared Savings ACO Pioneer ACO All ACO’s
Number of Programs 333 20 353
Average Benchmark $10,285 $10,901 $10,349
Total Target Benchmark (billions) $52.89 $6.93 $59.82
Total Amount Saved ( millions) $291.5 $119.6 $411.1
% of Benchmark Saved 0.55% 1.79% 0.69%
Total Bonus Paid to ACOs (millions) $341.2 $60.6 $401.8
Net Savings for Medicare (millions) $49.8 $59.0 $9.2
% Savings by Medicare -0.09% 0.85% 0.01%

 

Table 2: Shared Savings ACO Bonus Based on Benchmark Quartile

Quartile Average Benchmark % Savings Over Benchmark Bonus Paid (Millions) % of Total Bonus
I $7,874 0.80% $33.1 9.70%
II $9,047 0.37% $63.8 18.70%
III $10,400 1.10% $90.0 26.40%
IV $13,778 2.35% $154.3 45.20%

 

Discussion

The performance of the US healthcare system is improving in many ways, facilitated by the introduction of electronic medical records. As the process of healthcare delivery improves, so too can the quality of care, particularly if providers have an incentive to make this happen. Linking reimbursement to performance is well underway with all third party payers, thus ensuring a path to higher quality healthcare. ACO and non-ACO providers alike are fully engaged in this effort.

Quality improvements, however, do not necessarily produce lower costs. No correlation was found between quality scores and savings among the 333 Shared Savings ACOs in 2014.   Many of the savings that accrue from better care will take years or decades to be realized.   Therefore, quality improvement alone will not satisfy the urgent need to reduce healthcare spending.

APMs are fundamental to the cost cutting strategy chosen by HHS, and the ACO model is the most important component. The data on ACO performance in 2014, however, were not very promising.  Most of the current ACOs (74% of the Shared Savings ACOs and 45% of the Pioneers) did not receive a bonus in 2014 and are still footing the bill to participate in the program. It is estimated that ACOs have invested a total of $1.5 billion over the past three years for set up and maintenance.  Bonus payments have partially covered these costs, but more than $800 million has been funded by providers.  Since only enthusiastic medical centers signed up for the ACO program in its early stages, their inability to reduce spending and cover their costs reinforces the decision by thousands of practices to stay on the sidelines.

The best predictor for receiving a bonus in the ACO program is the height of the assigned benchmark.  The nearly five fold difference in bonus payments between high and low cost ACOs indicates that CMS is giving more financial support to the higher cost, higher volume, lower “value” centers – precisely the opposite of their stated goal.   Without major revision in the method of setting benchmarks, the ACO program will have little appeal to providers working in low cost regions of the country.

Although the data on cost reduction gives little reason to be optimistic, HHS and CMS are committed to the success of the ACO program.   The 5% bonus for participation in the ACO program from 2019-2024 may entice many providers to join before its benefit has been proven. The incentive may also encourage more provider consolidation which will likely result in higher costs for both government and private payers.

“Paying for value, not volume” is a popular slogan that touts the objectives of the ACO model and targets the abuses of fee for service, but after a five year demonstration project and now in the third year of the program, ACOs have had no impact on the cost of healthcare. This challenges the very premise of the APM risk-sharing strategy – that providers will reduce spending when given a financial incentive to save. Either the incentive is too small to change behavior, or the amount of “wasteful” spending under provider control in a fee for service model is overstated. In any case, MACRA encourages adoption of APMS despite such underwhelming preliminary data.

Will the ACO Improve With Time?

Some might argue that it is too early to pass judgment on the ACO program which was only in its third year in 2014.   Indeed, the performance of the Shared Savings ACOs in their first and second years was well below that of the third year programs. The dramatic decline between year 3 and year 2 programs (Table 3) is hard to explain based on just 6-8 months less experience. The lack of significant progress between the year 1 and year 2 programs also casts doubt on the benefits of more experience.

Table 3: Performance of Shared Savings ACOs in 2014 by Years of Involvement

Years in the ACO Program 1 2 3*
Total Benchmark (billions) $15 $18 $20
Total Savings (millions) $5 $7 $294
Total Bonus Paid (millions) $68 $95 $179
Savings by Medicare (millions) $63 $102 $115
# of Programs/# that Saved Money 119/57 103/57 111/67

*Year 3 programs were either 6 or 8 months into their third year during 2014.

 

Liability Risks

Thus far, little attention has been paid to the liability risks associated with ACOs.  However, this was the subject of a recent address by Dr Agrawal of CMS at a meeting of the American Bar Association.  Liability risks increase when providers are given a financial incentive to restrict care.  Decisions by ACO providers not to offer expensive diagnostic and therapeutic options are not likely to be discussed with patients or documented in the medical record.  This is quite different from the liability risk in a fee for service model where the provider may have an incentive to use more healthcare services, but all options are discussed with the patient who can refuse unwanted services.

The incentive to reduce spending imposes a conflict of interest on providers that will likely have deleterious effects. When providers have to make clinical decisions under pressure to reduce spending, and do so without involving the patient, more errors will be made. Furthermore, providers often recommend less expensive options for care that are entirely appropriate, but may leave the patient wondering whether this is sound advice or just a bonus opportunity.  The doctor-patient relationship may erode over the perceived conflict of interest.

The Transparency Option

For all of the reasons above, many providers may opt out of the APMs, forego the 5% bonus, and stick with an upgraded version of fee for service. MIPS creates incentives for providers to improve quality, enhance the delivery process, and reduce spending that mimic the incentives of the ACO program. Again, the financial incentives to providers are small, and alone, they will probably do little to reduce overall spending. In fact, because it was designed to be cost neutral, Medicare is not expecting to save any money through the fee for service option.

However, a fee for service model can take advantage of an untapped resource, the healthcare consumer. In the face of co-insurance or high deductibles, healthcare consumers are well known to be a potent force for cost control. If a portion of the 20% coinsurance built into Medicare were restored, then synergies between patient and provider would emerge to reduce healthcare spending. This new dynamic would encourage open discussions about the costs and benefits of care, which will enhance the importance of the doctor-patient relationship and add a new dimension to quality care. Such discussions will not occur in the exam rooms of the alternative payment models.

Harnessing the consumer’s drive to reduce healthcare spending should be a high priority, but must include strategies to prevent underutilization, and to ensure fairness across the socioeconomic spectrum. Engaged patients armed with reliable data on cost and quality will finally be able to shop for healthcare “value.” It is time to test the benefits of transparency. Medicare should lead the way.

 

The Single Payer Option – Feasible or Not?

No country in the world spends more money per capita on healthcare than the United States.  Despite this, the quality of care delivered to the US population does not measure up to that of the OECD countries.  Higher quality, lower cost care delivered in these countries is, to a large extent, delivered by nationalized healthcare systems. The success of government run healthcare systems stems from their significantly lower overhead, the absence of a profit motive, and the ability to control prices for healthcare services, pharmaceuticals, and medical devices.

Government run, single payer systems are not without flaws. Long wait times for routine care is a frequent complaint in countries with national health systems.  Reliance on government agencies to make the best decisions for healthcare allocation requires a leap of faith.

Many in this country view the single payer option as the best solution for what ails us.  Vermont Governor Peter Shumlin spent four years investigating a single payer for his state but abandoned the project in Dec 2014 because the “risk of economic shock” was too great.  Colorado will have a referendum on the ballot this November to establish a single payer. Senator Bernie Sanders has made a single payer system one of the central policies of his campaign.

Despite the success of single payer systems in many countries, and the acceptance of this approach by many in this country, there are substantial obstacles to such a change:

  1. As long as Congress is beholden to special interests, it is not likely that a single-payer system can ever be adopted by the federal government. Consolidation of health insurance companies, hospital systems, and pharmaceutical companies is augmenting their control in Washington.
  1. Distrust of government would make the tax increase to cover healthcare less palatable to many than the costs associated with private health insurance.
  1. Our healthcare infrastructure is built on the current price structure where private insurers pay much higher fees than Medicare or Medicaid. These fees support the healthcare sector which is the fastest growing area of the economy and accounts for 12% of all jobs in the US. A drop in reimbursement to Medicare levels would have a huge impact on the stability of the healthcare job market and on the industries that contribute to it.  All told, this accounts for 18% of the GDP.
  1. The electronic medical record has brought about many positive changes for our healthcare system but at a substantial cost. Declining fees would likely delay or eliminate some of the progress that has been made.
  1. Basic coverage offered by a nationalized healthcare system will not include many costly procedures and medications, and may delay access for many services. The millions of Americans that have enjoyed easy access to the physician of their choice may find the national system much less satisfying. Of course, those with poor access or none at all would be greatly helped by a nationalized system.
  1. State efforts to convert to a single payer will have all of these obstacles. In addition, they will have to independently purchase pharmaceuticals and medical devices at fees that differ from the rest of the country, as well as attract workers at lower salaries than in neighboring states. These are unlikely scenarios.
  1. Healthcare pricing in the US supports healthcare industries that provide their products worldwide at lower costs. The pharmaceutical industry is the best example. Reducing prices in the US will likely cause increases around the world.

All told, it seems very unlikely that a nationalized healthcare system will take over in the US  any time soon.  Does this mean we are locked into our current high cost, low quality, low value healthcare system?  Are there other ways to decrease costs and improve quality?  There are 2 very different strategies on the table right now.  This will be the subject of my next post.

Healthcare Transparency Forges Ahead

Healthcare transparency took a quantum leap forward with the report from economists at the Health Care Pricing Project.  The report analyzed the costs of healthcare from claims data for 88.7 million Americans from 2007-11 with employee-sponsored insurance from Aetna, Humana, and United Healthcare.   An outstanding summary of the findings by Quealy and Sanger-Katz appeared recently in the NY Times.

The data highlight information that the health insurance industry has previously wanted to keep from public scrutiny – namely that the fees paid for healthcare vary widely from one region to another, and from one provider to another.  Prices for routine medical services can vary 10 fold or more within a single community.  A CT scan can be $210 or $1900, an MRI can be $425 or $4800 within the same community, just depending on where the service is provided.  No one would buy gasoline for $30 per gallon when it is widely available for less than $3 per gallon, but we have been purchasing healthcare this way for many years.

While healthcare consumers have been oblivious to price variation, third party payers have made little effort to close this information gap.  The absence of price transparency has been a major factor leading to annual increases in healthcare costs and health insurance premiums.

Perhaps this release of claims data from 3 of the 5 largest private health insurers signals the beginning of a new era when consumers will have access to healthcare prices before, or at the time of service.   Transparency for healthcare consumers cannot come soon enough as millions began struggling with high deductibles on January 1.

 

ACO at Three Years: Not Quite What We Were Hoping For

CMS has just released the results from the third year (2014) of the ACO program.  The goal of the ACO program is to improve the quality while reducing the costs of healthcare.  It is the centerpiece of  “value-based” reimbursement that is dominating the efforts in healthcare reform.  After three years of operation involving  32 Pioneers and 404 shared savings (MSSP) ACOs, it appears that the model is falling short of its goal.

Over these three years, ACOs have improved their scores on the 33 quality measures.  However, many providers that are not part of an ACO are also hitting these same quality targets as they strive to meet Meaningful Use, PQRS, and PCMH requirements.  CMS has not compared the quality measurements of ACOs and non-ACOs because the difference, if any, would likely be small.

A financial  incentive was built into the ACO model to encourage providers to reduce wasteful spending while improving quality.   Since the program was launched in 2012, most ACOs have not saved enough money to earn a bonus.  The programs that received a bonus payment in 2014 included 11 of the remaining 20 Pioneer ACOs (55%), and 92 of the 404 MSSP ACOs (23%).

The aggregate savings of all of the ACOs has been in the range of 1 to 1.5%.   Since some of those savings are returned to the ACOs as a bonus, the savings for Medicare are quite a bit smaller.  Total Medicare savings in 2014 (year 3) was $411 million, which,  based on an ACO enrollment of 7.8 million seniors (14.1% of all Medicare beneficiaries), the savings to Medicare represent 0.49% of the total expenditures on ACO patients.  Furthermore, at least some of the $411 million must have been used to administer the program.

In the first three years, ACOs invested a total of $1.5 billion to set up and run these programs.  Thus far they have received only $656 million back in bonus payments.  The high cost of running an ACO, plus the pressure  to accept downside risk are among the reasons that many ACOs are considering an exit from the program, as indicated by Clif Gaus, CEO of NAACOs (National Association of ACOs).

Although the data gives little reason to be optimistic, HHS and CMS seem very committed to the ACO model.   Pushing forward with this model will promote more provider consolidation given the challenges of setting up and running an ACO.  The increase in costs that typically follows provider mergers will likely exceed any savings that ACOs might generate.

The ACO program is not living up to the needs of our healthcare system.  If we are looking for healthcare value, it may be time for a different strategy. Continue reading

Dramatic rise in health insurance premiums, 2016

Robert Pear, “Health Insurance Companies Seek Big Rate Increases for 2016”. New York Times, July 3, 2015

The high cost of healthcare hits a raw nerve that has long been the cause of significant pain.   The proposed increases in health insurance premiums for 2016 portend more suffering for all, individuals and institutions alike. We need some relief now.

A single payer is an obvious, but non-viable solution unless the country elects 60 senators and 218 representatives who think like Bernie Sanders.  Realistic alternatives must reshape the incentives for healthcare consumers.  In recent years, health insurers have used high deductibles and narrow provider networks to reduce healthcare utilization and mitigate premium increases.  These tools have frustrated patients, reduced their access to care, and lowered the overall quality of our healthcare system.

It is time for health insurers to get serious about cost control by disclosing their fee schedules.  If  healthcare consumers with high deductibles understood the variation in fees that insurers pay to different providers, then they could navigate the healthcare marketplace to reduce their own costs.  The fact that fees can vary 10 fold or more for the same service, in the same community, is information that consumers of healthcare, and their providers, need to know. The complete lack of transparency in healthcare is one of the primary reasons we are hitting the glass ceiling.

Consumer defense against high deductible insurance: Embrace Transparency

Re: “Unable to Meet the Deductible or the Doctor” by Abby Goodnough and Robert Pear, the NY Times, Oct 17, 2014

Consumers of healthcare are being pushed to the limit.   High deductibles, co-insurance, and narrow networks are the leading strategies of third party payers to control the rate of spending by consumers.  Unfortunately, these obstacles result in reduced access to care  – already a shameful deficiency of the American healthcare system.  What benefit do patients derive from coverage that is unusable?

Patients deserve basic consumer protections before deciding on a course of care.  This includes an understanding of the risks and the benefits, knowledge of the costs and the alternatives, and having some measure of quality about the providers.  Armed with such information, consumers with high deductibles can select low cost care rather than no care at all.  They can even select providers based on high value rather than on convenience.

Several insurance companies will be sharing their fees through the Health Care Cost Institute in early 2015.  Consumers need to embrace transparency and begin shopping for healthcare the way they do everything else.

Part of this letter was published in the NY Times