Why Obamacare May Not Put a Dent in Health Spending
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The Fiscal Times
September 26, 2013

Will Obamacare really dial down health-care spending?

The Department of Health and Humans Services released a report on Wednesday that, for the first time, provided details on the premium rates in 36 states where the federal government will run or support insurance exchanges. The report found that average premiums across 48 states, not including tax credits for those eligible to receive them, would be about 16 percent lower than projected.

Yet that data doesn’t fully describe the costs for all Americans once the exchanges launch on Oct. 1. The report looks at premiums for 27-year-old nonsmokers and families of four making $50,000. The actual rates you get might be different from those listed.

Beyond that, we don’t yet know what those premiums will mean for the pace of health-care spending overall.

Although the Affordable Care Act may offer lower premiums and greater access, it will have little direct impact on overall spending because it focused so heavily on improving access to private insurance. According to new figures released by the Centers for Medicare and Medicaid Services (CMS), health spending in the U.S. is projected to increase nearly 6 percent annually from 2012-2022. That's about 1 percentage point above how much the economy is expected to grow during that period, or roughly four times the current rate of inflation.

In recent years, though, recession-era spending ratcheted back to a 4 percent growth rate. That heartened health-care policy analysts. Were Americans were actually reducing their overall health-care spending and would that trend continue?

The spending slowdown may be a short-term statistical blip. While providing health insurance to an estimated 31 million Americans, the ACA is expected to add 0.1 percentage point to annual average spending growth over the next 20 years, or about $621 billion.

While out-of-pocket spending is expected to decline some 1.5 percent for those with new ACA policies, "the use of goods and services among the newly covered is expected to contribute significantly to spending increases in Medicaid (12.2 percent) and private health insurance (7.7 percent)," the CMS study found.

The picture gets worse once Baby Boomers start enrolling in Medicare en masse: "For 2019-22 the effects of continued enrollment of Baby Boomers in Medicare, as well as the ending of the sequester in 2022, lead to a projected growth in average Medicare spending per year of 7.9 percent, compared with 7.3 percent per year for 2016–18."

The CMS projections may significantly underestimate spending growth because they rely upon an "alternative scenario" that assumes that doctors' fees will only "grow 0.7 percent annually from 2014 on." It may not be reasonable to assume that physician payments will climb slower than the overall rate of inflation.

The forecasts also are subject to "substantial uncertainty," the authors acknowledge, due to the difficulty in projecting long-term economic growth. If the economy heats up, the CMS numbers could severely underestimate health spending. In robust economic climates, Americans spend more on health care. And how will insurers and providers react to the influx of more than 30 million new customers into the health care system? Will they be able to offer a spate of basic services such as regular check-ups and drug coverage at affordable premium levels?

The same fee-for-service model that's been in place for generations, for the most part, will remain in the private sector. Insurers will pay fixed, negotiated amounts for specific services and drugs. So the cost curve may not be altered much at all and consumers and providers will have no incentive to spend less.

A DIFFERENT MODEL FOR PAYMENTS
The ACA is not designed to change the health-care payment system for patients outside of Medicare.

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Currently, doctors, hospitals and clinics provide codes for specific services, which designate a procedure and how much they should be paid. While insurers have already negotiated payment rates for those codes, they have not considered the quality and cost of services relative to the outcome. Will that back surgery reduce pain long term? Are there other less-invasive procedures that address the issue at lower costs? Is that new heart procedure going to address a cardiac issue over time or will the patient need to go back into the hospital?

A new study by McKinsey & Company, the global consultant, estimates that some $1 trillion can be wrung out of the health care system if payments are based on outcomes instead of number of procedures.

Echoing ongoing trials in the Medicare program, the McKinsey study said payments should be bundled and oriented toward "episodes of care," i.e., hospitalizations for acute conditions.

Part of the payment reform battle is semantics. Instead of specialists who provide very narrow services – e.g., diagnostics, surgeries, etc. – the McKinsey report calls for a proliferation of healers. The concept is important because it implies that the system will better manage a patient's overall condition over time and not just treat specific illnesses separately.

The goal of this approach is to reward providers for delivering a patient’s desired outcome (say, walking, remission, or hospital discharge without readmission) with as few complications as possible and for providing the best experience at the lowest possible cost. We believe that more than $2 trillion of US annual spending on health care, which currently totals about $2.7 trillion, could be paid through an episode-focused approach.

As the ACA undergoes its launch, it's too early to tell how many insurers will adopt payment reforms, which are being experimented with in 30 states.

What would advance the cause of payment reform in the private sector? More transparency, which the ACA encourages with the creation of the state insurance exchanges. Since premiums can be compared on one platform across insurers, it's not unreasonable to suggest that actual medical costs will be next. Seeing what procedures cost – and the illogic of some 100 percent variation in prices in local markets – might drive many providers to the new model.

Journalist and speaker John F. Wasik has written 14 books on subjects that range from wealth to ecology to retirement. He writes for Reuters and contributes to Forbes, The New York Times and other publications.