What an Affordable Health Care System Would Look Like

Posted: Dec 07, 2015 9:34 AM
 What an Affordable Health Care System Would Look Like

As I explained in last week’s column, the U.S. health care system is an unsustainable mess: One dollar of every five worth of economic activity is spent on someone’s medical care; Medical costs are growing twice as fast as incomes; Medical prices are rising at three times the rate of consumer inflation. The Affordable Care Act was supposed to fix those problems and make health care “affordable.” However, the method used required everyone to purchase overpriced health insurance. That’s like throwing gasoline on a fire hoping to smother it. As a health economist, it’s hard to imagine a policy agenda that could be any more damaging to the health care system -- or less effective.

Obamacare enrollees with cost-sharing subsidies bear little consequence when they are wasteful and little benefit when they are prudent. Once their deductibles are met, Obamacare bans any limits on the services patients consume. Neither does it do anything to mitigate the perverse incentives for providers to squander resources. For example, medical providers have few financial incentives to control costs and keep beneficiaries out of the hospital -- especially if the provider is a hospital. These problems could be improved with better incentives and better plan design in virtually all programs, whether Medicare, Medicaid or private insurance.

A dozen years ago health reformers promoted Health Savings Accounts (HSAs) coupled with high-deductible plans. A fair criticism of HSAs is that hospitalized patients have long since exceeded their deductibles. Moreover, critically-ill patients are unlikely to forgo a potentially beneficial medical service merely because they bear a portion of the marginal cost. Much more needs to be done.

Our health care system could be dramatically improved, but it must involve more efficient care for our sickest patients. Consider this: about 5 percent of patients spend nearly half of all health care dollars, while the sickest 1 percent consume nearly one-quarter of health care expenditures. These figures suggest there are more opportunities to reduce health care spending by carefully managing the sickest 5 percent instead of wasting our efforts on the 80 percent who are relatively healthy. Thus, health reform requires improving incentives that positively affect the sickest patients.

Increasingly, controlling costs means keeping people out of hospitals, where nearly one-third of health care spending occurs. Health reform must focus on reducing hospital spending on beneficiaries in poor health. It can only do so by better managing their chronic conditions.

To sufficiently slow medical spending, policymakers must allow plan designs that create price sensitivity among patients long after they have met their deductibles. To reduce health spending from the supply side, policymakers must allow insurers to promote competition among providers. In addition, plans and providers must be rewarded when they implement cost-saving programs that provide high-quality care at a lower cost.

A few health plans are experimenting with a concept known as reference pricing, designed to boost price sensitivity for high-cost procedures. Reference pricing is an arrangement where enrollees face unlimited cost-sharing for all costs of a treatment or a procedure above a stated reference price set by the health plan. It is generally set close to an average or median price readily available in the market. Because enrollees are very sensitive to marginal costs above the reference price, providers have an incentive to price their services close to the reference price to avoid losing business.

More needs to be done to help enrollees ascertain the price of medical services when shopping for medical care. A recent study confirmed high-deductible plans lower spending but not because patients shop for lower prices. High cost-sharing merely causes people to skip care. Although skipping unnecessary care is a good idea, forgoing beneficial care is not. Patients who comparison shop and negotiate for services provide better price signals to the market than ones who suffer through a condition until they improve on their own. Without interacting with potential customers, medical providers won’t have a clue they lost a sale due to high prices.

There are other methods that plans could use to raise quality and reduce costs. Enrollees’ cost-sharing could be reduced in return for working closely with a plan’s care coordinator. Patients who first call their medical home to inquire about medical tests, prescription drugs could be rewarded. Some health plans are hiring firms -- such as Vitals and Compass Professional Health Services -- to assist enrollees and provide price transparency tools. Exchange plans are increasingly relying on narrow networks, where providers have negotiated lower prices.

Reforming our dysfunctional health care system requires more than high deductibles and HSAs. We must consider where the money is spent: on high-cost patients. Increasingly, slowing the growth in health care spending must focus on improving the care for patients in poor health. Health reform must also include improving end-of-life counseling and hospice care.