,

July/August 2017 Issue Health

The Right Way to Reform Health Care

To Cut Costs, Empower Patients

By Sejal Hathi and Bob Kocher
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Perhaps no U.S. law has been more passionately opposed by Republicans than the Affordable Care Act. For the past eight years, they have repeatedly pledged to abolish Obamacare, with the House of Representatives voting more than 50 times to repeal it. U.S. President Donald Trump took office promising to do just that. In May, after months of heated negotiations, including two failures to corral votes within their own party, House Republicans managed—barely—to pass their first real replacement, the American Health Care Act.

Despite this victory, the bill will likely face months of deliberation in the Senate, where legislators on both sides of the aisle have already deplored its hostility to the poor, the old, and the 24 million who stand to lose coverage. Yet the biggest obstacle goes beyond legislative politics. It’s the subtle but unmistakable shift in perspective that Obamacare triggered among the public: for the first time in history, most Americans — 60 percent, according to a January 2017 poll by the Pew Research Center — believe that it is the government’s responsibility to ensure access to quality health care. So even though Republicans have full control of the government, they have found it acutely difficult to push through a plan that growing numbers of Americans philosophically oppose.

The most likely outcome, then, is that the efforts to repeal Obamacare will die in the Senate. If that happens, the more pressing question will become, How can the Trump administration address the very real flaws of the U.S. health-care system, improving care without taking coverage away? The answer is to fix Obamacare rather than replace it.

To accomplish this, policymakers must target the underlying problem afflicting health care in the United States: it costs far too much. Not only does the country spend much more on health care than its peers—18 percent of GDP in 2016—but that investment has failed to translate into better outcomes. The United States persistently lags behind other high-income countries on such measures as life expectancy, infant and maternal mortality, and rates of chronic disease. This discrepancy between spending and quality surfaces at the local level, too: as a 2017 study by Yusuke Tsugawa of Harvard and his co-authors found, even within the same hospital, physicians who spend more do not have happier patients or achieve better outcomes. The corollary to such findings is that providers could reduce spending while maintaining or even improving the quality of care.

Already, hospitals across the country are experimenting with ways to offer better care at a lower cost. Eight years ago, Grand Junction, Colorado, became the poster child of health-care reform when it was singled out by Atul Gawande of The New Yorker for investing in preventive care and changing the way doctors were paid in an effort to slash Medicare costs without sacrificing quality. La Crosse, Wisconsin, has achieved the lowest costs in the country for end-of-life care by having nurses ask patients to fill out advance directives about how aggressive they want their treatment to be. And Geisinger Health System, a network of hospitals in Pennsylvania, has reduced emergency-room admissions by focusing on delivering high-quality primary care, with a view toward customer service. (It even offers refunds to patients who report “uncompassionate care.”) Meanwhile, a bevy of start-ups inspired by the Affordable Care Act are doing everything from matching patients with caregivers to helping people shop for insurance plans. 

If policymakers really want to curb costs and improve quality, they should focus on accelerating the growth of such game changers—by enhancing the incentives of existing high-value providers to expand their market share and by unleashing the forces of capitalism to create new such providers.

An uninsured patient has her eyes tested at a clinic in Venice, California, June 2009
Lucy Nicholson / Reuters

An uninsured patient has her eyes tested at a clinic in Venice, California, June 2009

A MORE DEMANDING DEMAND SIDE

No effort to encourage higher-value health care can succeed without the support of patients. Accordingly, the first goal of policymakers should be to raise demand for higher-value services by giving patients the information, incentives, and tools they need to make better decisions about their care. Several bodies have already sought to do just that. In 2011, the American Board of Internal Medicine rolled out Choosing Wisely, a campaign that seeks to get patients more involved in decisions about their care, and various insurers have experimented with shifting certain costs to patients. Despite heavy fanfare, however, these efforts have had little effect: health-care costs continue to climb faster than inflation, and the multiplicity of new efforts aimed at improving outcomes has resulted in a system that is confusing and hard to navigate.

More can be done. For starters, both insurers and providers need to simplify and expand access to data on costs and outcomes. Patients are already seeking this information: a 2014 survey conducted by Public Agenda, a nonpartisan research group, found that more than half of Americans had tried to find out the prices of various medical services before seeking care, and one-fifth had comparison-shopped. And when patients get the information they’re looking for, they use it to choose providers with better track records. In a 2015 study of Medicare claims data from the last decade, Amitabh Chandra, Amy Finkelstein, Adam Sacarny, and Chad Syverson found that even for emergencies such as heart attacks, patients were willing to travel an extra 1.8 miles to receive treatment at a hospital with a one-percentage-point higher survival rate. They also found that hospitals posting superior outcomes saw their market share expand, pulling up the overall survival rate for Medicare patients. 

As things stand now, however, the data that would help patients make more informed choices are often inaccessible or indecipherable. Part of the problem is a lack of competition among providers. As health-care systems have expanded, they have abused their market power to obscure information about cost and quality, most commonly by inserting gag clauses into provider contracts that forbid such disclosures. Since providers even within the same area often charge widely varying prices for their services, suppressing this data represents nothing more than a ploy by the dominant players to protect their competitive advantage. This lack of transparency deprives patients and their insurers of any power to negotiate for higher-value care. Companies that allow employees to comparison-shop among providers, for instance, cannot operate without access to key performance data such as physician-level costs. In 2012, California passed a law prohibiting gag clauses in health insurance contracts; more states should follow suit.

Another challenge is the lack of infrastructure to digest and present data. In recent years, a growing number of states have established large databases to collect and organize claims data, which can help identify low - and high-value providers. Here, too, however, vested interests have fought back against data sharing, and in 2016, the U.S. Supreme Court sided with insurance companies in ruling that states can no longer require employers that fund their employees’ insurance plans to submit claims to a central database. At the federal level, the Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare and oversees HealthCare.gov, has expanded access to its data, creating a special program enabling researchers and businesses to access its full data set on claims. But that data set (which is expensive and far from user-friendly) involves only Medicare; no equivalent information is available about the pediatric population covered by the Children’s Health Insurance Program or about patients with commercial health insurance. The Trump administration should fix Obamacare rather than replace it.

The federal government can help solve this problem. It should provide financial incentives for more states to create central databases, and it should require employers that fund their employees’ insurance plans to share their privacy-protected claims data — if not through new legislation, then through rules issued by the U.S. Department of Labor under the Employee Retirement Income Security Act, the 1974 law that regulates employers’ health insurance plans. (In spite of the Supreme Court’s ruling, the secretary of labor retains the authority to issue new reporting requirements.)

Of course, if newly released data are to make a dent in health-care costs, then the information must be made meaningful to patients. The health-care sector has long struggled to distill the morass of quality measures into a single, intuitive index of value. Currently, for every physician, the average medical practice spends 15 hours per week navigating disparate quality reporting requirements. Patients, for their part, face a dizzying variety of quality rankings, from the CMS’ Hospital Compare to the ratings on the website Healthgrades to those published by U.S. News & World Report. So discordant are these rankings that many hospitals considered top performers in one system sink to the bottom in others.

Even Hospital Compare, the gold standard of performance rankings, has major shortcomings. Its data are obsolete, dating back at least three to six years, and cover only a limited set of diseases and procedures. But no part of the program is more in need of updating than its process for generating final scores. Hospital Compare ranks hospitals in just three categories—worse than the national average, no worse than the national average, and better than the national average — and 97–98 percent end up in the middle category. A system that exposes such a small percentage of hospitals as below average can hardly be expected to cultivate major improvements in performance. To solve this problem, the CMS should increase the number of performance categories and weight its scores by taking into account the demographics of hospitals’ patient populations. 

Better information alone will not reduce costs; patients also need the power to act on it. Accordingly, policymakers should seek to increase patients’ sensitivity to variations in quality and give them the tools to reward higher-value providers. Traditionally, efforts have focused on getting patients to assume a greater share of the cost of their health care, but that has proved to be a blunt instrument, indiscriminately reducing the use of both necessary care and discretionary care. In recent years, insurance companies have rolled out new plans designed to encourage patients to make smarter decisions: patients pay more out of pocket for services that evidence has shown to be less beneficial (say, surgery for back pain that could be treated with physical therapy) and less for services deemed more beneficial (such as colonoscopies for patients at risk of colon cancer). Studies have shown that such schemes improve outcomes by steering patients toward primary care and preventive services, which can catch conditions before they become serious, and by making patients more likely to adhere to their medication regimens, which keeps chronic diseases in check. 

Better information alone will not reduce costs; patients also need the power to act on it.

But the government can do more to promote value. For patients with health savings accounts, which allow people to set money aside tax free for medical expenses — the Internal Revenue Service should expand its list of eligible expenses to include more preventive services. Patients with hypertension, for example, should be allowed to deduct the cost of home blood-pressure-monitoring supplies. For the 55 million patients on Medicare, the CMS should consider adjusting copays for services based on how appropriate they are for a given patient. Diabetics, for instance, are susceptible to vision loss, so they should be charged less out of pocket for an annual eye exam than everyone else.

Private insurance companies can embrace the same approach by building their coverage networks around specific medical conditions or treatments instead of around facilities, as they currently do. Under such a system, insurance plans would narrow their networks to doctors who have established an excellent track record dealing with a single major condition—in the case of eating disorders, nutritionists, endocrinologists, psychiatrists, and primary-care physicians who have demonstrably better histories of treating these diseases.

As they seek to encourage the use of the highest-value care, policymakers must make sure they don’t further perplex patients already struggling to make sense of their plans. No consumer product rivals health insurance when it comes to complexity, and most Americans remain in plans that they do not understand and do not wish to spend time trying to understand. One survey, by Aflac, found that nearly a quarter of Americans would rather clean their toilet than attempt to decipher their benefits.

The most sustainable innovations, then, will be those that reimagine insurance not merely to boost value but also to design plans that make intuitive sense. Some new insurance companies, such as Oscar, have made strides by offering standardized, easy-to-understand plans that simplify the process of comparison-shopping—an approach the federal government has emulated, debuting “simple choice” plans on HealthCare.gov last year. But there is much room for improvement. Little wonder, then, that the fastest-growing category of venture-backed health-care companies is so-called navigators, concierge services that help patients use their benefits smartly. Once patients better understand their insurance and take an interest in the cost of their care, demand will become more elastic and competitive, pushing overall costs down.

Mike Hutchings / Reuters Clouds gather over the Washington monument, August 2016

SHAKING UP SUPPLY

Just as patients must demand higher-value care, providers must be given the incentives to deliver it. The overarching goal of reforms on the supply side of health care should be to increase the market share for those providers that achieve better care at a lower cost. Often this means changing the way providers are paid.

So far, that has proved difficult. There are some bright spots, with innovative companies such as ChenMed, Iora Health, HealthCare Partners, and CareMore pioneering new models of primary care for the sickest patients. But these firms are all dwarfed in the markets they serve by large health-care systems that are committed to high prices and the fee-for-service model. Even Kaiser Permanente, a massive California-based consortium that practices integrated care (as opposed to the more fragmented fee-for-service model), has struggled to grow. The company entered its first new market in 20 years this past January, having previously suffered heavy losses in its attempts to expand beyond California.

On this front, the biggest challenge is to stem the tide of hospital consolidation. The last 13 years have seen more than 800 mergers of hospital systems in the United States, leaving many urban areas with just a few large providers. Although the big players claim that consolidation allows them to better coordinate care and achieve economies of scale, researchers have repeatedly shown that mergers raise prices. One study, published by the National Bureau of Economic Research in 2015, found that prices in monopolized markets are 15 percent higher than in markets serviced by four or more hospitals. Another study, by three Stanford University economists, documented a four percent price hike for every one-percentage-point increase in market concentration. The truth is that smaller practices perform just as well as, and often much better than, the big hospital networks—and rack up far greater savings in the process. 

To discourage mergers, the Trump administration should bolster the enforcement of antitrust laws by increasing funding for the Federal Trade Commission, the agency within the U.S. Department of Justice charged with fostering and safeguarding competition. Congress should also pass a law capping all hospital prices at a fixed percentage above Medicare rates, which would make consolidation less attractive by reducing the market power of larger practices. A cap of 25 percent, large enough to allow providers a healthy profit margin but small enough to discourage consolidation, would be ideal.

At the state level, policymakers should empower agencies to take a more activist approach to combating anticompetitive behavior. A good model comes from Massachusetts, which in 2012 established the Massachusetts Health Policy Commission, a body that conducts detailed reviews of the impact of hospital consolidation plans. In 2014, its recommendations led to the blocking of three acquisitions by the state’s largest provider network, Partners HealthCare, which the commission estimated would have increased regional health-care spending by nearly $50 million a year. In a similar vein, states and the federal government should also lower the barriers to entry in the health-care market. For instance, they should put an end to regulations that require doctors to meet their patients in person, a change that would encourage the use of low-cost but still effective telemedical services.

As important as all these reforms would be, perhaps the most powerful lever for promoting value is a 2015 law that changed the way doctors get paid for treating Medicare patients. Passed with broad bipartisan support, the Medicare Access and Children’s Health Insurance Program Reauthorization Act was designed to shift health care away from the fee-for-service model and toward one based on value. The act requires any physician who sees more than 100 Medicare patients a year to choose one of two structures through which to receive payments from the government: the Merit-based Incentive Payment System (MIPS) or Alternative Payment Models (APMs).

The former builds on the traditional fee-for-service system by adjusting payments to providers up or down according to various performance measures they report, whereas the latter moves beyond that system, rewarding providers who use new, value-based approaches to payment. For example, so-called medical homes—where a patient’s care is overseen by a single team led by a personal physician—qualify for APMs. Under fee-for-service models, the government must reimburse providers for services regardless of their clinical necessity. APMs, by contrast, offer bonuses for cost-effective care.

Donald Trump turns to greet Paul Ryan (R-Wis.) following the House of Representatives' passage of the AHCA, May 2017 Carlos Barria / Reuters

Donald Trump turns to greet Paul Ryan (R-Wis.) following the House of Representatives' passage of the AHCA, May 2017

The CMS has set a goal of moving at least 50 percent of providers to APMs by 2018. But as of today, only ten percent qualify. To reach its goal, the agency will have to make APMs more attractive. The CMS currently creates incentives for providers to move to APMs by eliminating the reporting requirements they face under MIPS and by dangling a five percent payment bonus. These inducements do not nearly go far enough.

Under current rules, medical practices that sign up for MIPS can select which six of more than 200 performance indicators to use in calculating their score. The CMS should dramatically reduce this flexibility, both to make sure the metrics chosen are relevant and to remove the perception that MIPS offers an easier path to earning bonuses than APMs. And to further discourage providers from sticking with the fee-for-service model, the CMS should either curtail or cancel the upside payments under MIPS—in other words, emphasize penalties for poor performance over rewards for good performance. At the same time, the CMS should make it easier for small medical practices to participate in APMs by reducing the financial risk they must take on in order to sign up. And the agency should increase APMs’ reward payments. 

By rewarding providers that stress primary care, APMs decrease the amount of time patients spend in hospitals or nursing homes and lower the number of visits they make to specialists. A few innovators using APMs have already achieved impressive results. ChenMed, a Miami-based primary-care practice, serves over 60,000 low-to moderate-income Medicare patients who suffer from multiple chronic conditions. By emphasizing preventive care and physician accountability, the company has delivered world-class care for these patients at costs that are 40 percent lower than the market average. CareMore, a California-based network of medical centers that focus on integrated primary care for the elderly, serves the highest-risk, highest-need patients. By investing in early intervention and social service programs, the group has reduced hospital admissions for its members by 20 percent compared with its fee-for-service counterparts. Both companies demonstrate that primary-care doctors can create tremendous value for their patients while building businesses that scale. Indeed, in 2012, the kidney-care company DaVita paid $4.4 billion to acquire HealthCare Partners, a leader in integrated care. The key now is to foster an environment in which more such companies can succeed. 

A BETTER PATH FORWARD

All these fixes will help slow the growth of costs, but to make the biggest impact, they need to be grounded in a well-implemented health-care law and a stable health-care market. To attain the Holy Grail of high-quality, affordable health care—a system in which costs grow no faster than GDP—policymakers must take bolder steps.

Above all, they should require everyone to have health insurance. Congress must enforce the individual mandate of Obamacare, and states should follow Wisconsin’s example in introducing automatic enrollment for patients eligible for Medicaid. To induce younger, typically healthier adults to enroll, the CMS should relax the Obamacare rule prohibiting insurers from charging seniors rates that are more than three times as high as the rates they charge 20-somethings. Instead, insurers should be allowed to charge seniors four times as much, which would broaden the price range of available plans and lower premiums for younger people. To offset that change, the CMS should expand tax credits for older patients. Making these tweaks would maximize participation in the insurance market and thereby make premiums more affordable for everyone. Above all, policymakers should require everyone to have health insurance.

Policymakers should also take steps to stabilize the market for individuals purchasing insurance on their own. Uncertainty over the future of Obamacare has caused many insurers to withdraw from markets across the country. In order for there to be adequate coverage options for all Americans and for premiums to remain stable and not spiral upward, both insurers and consumers must feel that it is safe to participate in the insurance market. Some counties are now at risk of having no insurers that offer Obamacare coverage. Ideally, the CMS would fix that problem by expanding the size of the regional markets through which insurers can sign up to provide coverage.

But if it doesn’t, more states should follow the lead of Vermont and the District of Columbia in requiring that all individual insurance policies be purchased through the state exchanges, marketplaces established by Obamacare. Currently, 40 percent of plans in the individual market are sold off the exchange, typically to higher-income, healthier consumers. Because Obamacare tax credits do not apply to plans bought outside the exchanges, some insurers are offering plans only on the higher-yield, off-exchange market. Unifying the two markets would close this loophole and help stabilize prices on the state exchanges.

At the federal level, Congress should make permanent its funding for the provisions of Obamacare that are designed to prevent insurance premiums from rising too high. The so-called risk corridor program, for instance, which compensates insurers if their enrollees prove to be costlier than expected, is particularly valuable for small states, which remain vulnerable to the possibility that a small number of patients will skew overall costs. At the same time, Congress should reclassify Obamacare’s cost-sharing reduction subsidies—federal reimbursements for insurers that cover low-income individuals—as mandatory funding rather than discretionary funding, thus insulating the program from the whims of the congressional budgetary process.

Both risk corridors and cost-sharing reduction subsidies lower overall premiums, but both have become targets of political infighting. The risk corridor program never received the funding it was supposed to, the result of a political move by Republican Senator Marco Rubio of Florida, who wanted to signal his opposition to Obamacare. As a consequence, some insurance companies lost money after setting their premiums based on the assumption that risk corridor payments would defray unexpected losses, and they have filed suit against the government, demanding payment. Congress should accept that Obamacare isn’t going anywhere and appropriate funds for the risk corridor program.

The cost-sharing reduction subsidies, for their part, are the victim of both a lawsuit brought by House Republicans and a threat by the Trump administration to stop funding them, causing insurance companies to worry about these payments, too. If their anxieties are not allayed, then insurers will likely raise premiums to reduce their exposure. It’s time for the Trump administration to pressure the House to drop its lawsuit against the cost-sharing reduction subsidies. Action on this front is vital, because cost-sharing reduction subsidies have a large impact on premiums. Without them, the Kaiser Family Foundation has estimated, premiums would surge by an average of 19 percent.

As for the CMS, there is a great deal it can do. To empower patients, it should make its hospital rating systems more actionable—first by standardizing quality measures across the government’s many health-care programs, from Medicaid to the Department of Veterans Affairs, and then by introducing personalized rating schemes based on a patient’s values and preferences. And to create effective incentives for providers, the CMS should work with Congress and state legislatures to lower the barriers to entry for providers offering innovative models of primary care.

SOMETHING FOR EVERYONE

Given the toxic political climate in Washington, it would be easy to dismiss all these proposed changes as dead on arrival. But outside Washington, legislators should find considerable support among their constituents for reforming health care with a view to lowering costs. A poll by the Kaiser Family Foundation found that three-quarters of Americans, and even a majority of Trump supporters, want the president and his administration to “do what they can to make the current health care law work” rather than make it fail so it can be replaced. Lawmakers would do well to recognize what behavioral scientists have long understood: however complicated the politics of expanding health-care coverage were, taking away coverage from millions of Americans would prove infinitely more painful.

Moreover, most of these recommendations are incremental in nature and capable of gaining bipartisan support. Both parties should find something to love in them: cutting costs and reducing the debt could motivate even stalwart Republicans, and expanding coverage to include the most vulnerable should inspire Democrats. Indeed, the benefits of reform are enticing. Billions of dollars of wasteful spending would be liberated for use in other parts of the economy. One of the biggest sources of the national debt would shrink. Millions of Americans would gain coverage. If that’s not enough to generate political will, then what is?

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