The 'Doc Fix' Is In, and Cost Controls Are Out Again
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The Fiscal Times
February 26, 2014

Despite a recent slowing in the growth of health care expenditures, it remains a Herculean battle to rein in medical spending in the U.S.

A number of forces are aligned against lowering costs. Growth in the economy will certainly put upward pressure on prices, combined with the aging of the population. And the private sector will have little incentive to control costs without a powerful public mandate, which the Affordable Care Act lacks.

Related: Finally Doing Real Math on Obamacare Policies

Even modest attempts to control costs are proving to be inadequate. The so-called “Sustainable Growth Rate (SGR)” for doctor payments in Medicare is an example. The subject of fierce lobbying opposition from doctor's groups, the SGR law sought to impose cuts on what physicians were paid by the public program. The law has been on the books since 1997, but never fully implemented as Congress would regularly punt and approve "doc fixes" to compensate physicians above the SGR.

Last year, Congress approved a $30 billion doc fix. It has spent $150 billion over the past decade. Unless Congress makes a similar measure this year — or throws out the SGR entirely — doctors will face a 24 percent pay cut for Medicare reimbursement.

Lawmakers are moving to fix this farce. Under a new compromise plan moving forward in Congress, the SGR would be scrapped and replaced with payment rates tied to outcome-based care. The idea is to reward doctors whose patients fare well with higher compensation.

Although the SGR "fix" has rare bi-partisan support and the backing of the physician's lobby, it's expected to cost some $116 billion over 10 years, according to a Congressional Budget Office estimate. Congress has yet to find a way to pay for the measure. 

Hospitals Resist Price Cuts
As Congress comes up short on reducing doctor's bills, it's doing even worse on curbing hospital costs.

Largely triggered by the ACA, hospitals are in the midst of a wave of consolidations. There have been more than 1,000 hospital mergers since the 1990s.

Provisions in the ACA have called for providers to work together more closely in "accountable care organizations" in an attempt to reduce costs and improve care. But overall costs may not drop as hospitals become bigger and control more of regional — or national — market shares. According to a study by the non-profit Robert Wood Johnson Foundation, these types of consolidated hospital systems can push prices 20 percent to 40 percent higher.

"If a newly merged health care system is so dominant in a community that local insurers must have the system in their networks, the hospital has enormous leverage," the report stated.

Related: Obamacare Sticker Shock Found in Deductibles, Not Premiums

Because doctors and hospitals are represented by powerful lobbies, Congress is unlikely to ask them for more concessions or cost-cutting over the next two years as mid-terms and a presidential election loom.

In the interim, the hospitals and doctor groups getting larger through consolidation are further increasing their political and economic clout. But reduced competition has never been beneficial for consumers. Larger entities control prices and aren't likely to discount. Fewer providers can gain more local and regional market control.

This economic reality may explain why medical costs are higher in some places when compared to a national average. Where there are fewer providers, costs are higher. A recent Kaiser Family Foundation report highlighted this fact: "The causes of the stratospheric premiums vary from region to region, although a recurring theme is that in some areas the limited number of hospitals and specialists allows them to demand high prices from insurers."

What Kaiser found is that health care is most expensive in rural or isolated areas where there are few doctors and hospitals. Those locales included Alaska, Colorado mountain resort counties, Southern Georgia, Southeast Mississippi, Western Wisconsin and Vermont. For example, in Pitkin County, CO (Aspen is the county seat), the average doctor charge was $1,932 per insured person, which is more than twice the state average.

Lack of competition, though, wasn't the only factor in these high-cost areas. Kaiser found that rural areas tend to have sicker residents who are less likely to have medical insurance, thus forcing hospitals to take on more "charity" cases and pass along the expenses to insured patients.

The combination of providers consolidating into larger organizations, price "stickiness" in areas of hospital dominance and lack of transparency is unlikely to put major downward pressure on medical expenditures. 

Measures That May Work
Three "big stick" measures are likely to have more impact:

1. The reform of the health care system to end "fee for service" payments, in which providers get paid for every office visit, test and procedure

2. A national public buyer of services that dictates large discounts

3. A transparent system that fully discloses the costs of services, which can be a fulcrum for competition.

While all have been discussed in recent years, the ACA doesn't lay the direct groundwork for these changes, which are so politically contentious that they gain little or no attention during election cycles.

The only recent salvo on health reform has come from a group of Republican Senators lead by Orrin Hatch, Tom Coburn and Richard Burr. Their proposed Patient CARE Act would repeal the ACA and replace its financing mechanism of taxes with tax credits and caps on health insurance write-offs.

Although the GOP plan calls for more pricing transparency and curbs on "defensive medicine" (in other words, reforming medical liability), it doesn't address the fee-for-service system or have any direct cost-reduction measures.

Since the GOP plan is new and details are scant, it's unclear how it would play out or compel providers to lower their prices. It appears to be more focused on how to pay for existing coverage through employers while focusing on limiting tax write-offs of health care. That's a good place to start, but won't sway providers to control costs on the supply side.

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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.