Medicare Savings We Can (Almost) Count On
I want to highlight a few ideas from yesterday’s post by Randall Brown and his Kaiser Family Foundation report upon which it is based. First of all, Medicare is going bankrupt so cost cuts are needed, and fast. Fortunately there is reason for optimism that some of the Medicare cuts and savings proposed in health reform legislation can be made and sustained. I’d be the first to admit such a thing won’t happen without a fight and considerable political will, but the evidence suggests it is at least possible provided the programs that produced that evidence are generalizable (another valid concern).
Much has been made lately about the extent to which the planned reforms will “bend the cost curve.” Some say not at all (e.g. Tyler Cowen) and others are more optimistic (Matt Yglesias and Kevin Drum cite a CBPP report to that effect; see also Ezra Klein’s interview with one of its authors). But that optimism is based on an historical analysis of congressional will to pass and uphold cost cutting reforms.
For a subset of potential reforms there is reason to be even more hopeful. That’s what we learned from Randall Brown. Empirical results from recent demonstrations and studies have shown that some types of efforts to cut costs in Medicare have actually worked. These may not be as sexy or receiving as much attention as electronic medical records, accountable care organizations, etc. (all of which hold some as of yet unproven promise for savings in the future), but they can be implemented far more quickly and have already demonstrated efficacy.
Randall cited studies and reports that have demonstrated cost savings due to payment incentives designed to encourage reductions in unnecessary hospital readmissions:
Randomized trials, the most rigorous and credible type of evidence, showed these programs reduced readmission rates by 18 to 35 percent, resulting in reductions in costs that substantially exceed the intervention costs…Furthermore, the effects on readmissions last well beyond the end of the intervention period.
He also cited work yielding evidence in reduced costs due to improved care coordination for beneficiaries with chronic illnesses:
For a subgroup of beneficiaries at high risk of near-term hospitalization—which comprises 18 percent of Medicare beneficiaries and 38 percent of Medicare expenditures …–[four] of the programs in the Medicare Coordinated Care Demonstration had significant and sizable reductions in hospitalizations over the 6-year life of the study.
To be sure, these two approaches alone will not yield all the savings some policymakers wish to wring out of Medicare. That’s why other methods are proposed, like accountable care organizations, electronic medical records, and the like. But there is no evidence to suggest that those other methods can yield cost savings quickly (if at all). Nevertheless, at least several proposed cost saving reforms have empirical support. If the approaches that provide that evidence are generalizable and if the reforms based on them are not squelched by political forces there is hope that Medicare in something like its current form can survive the crisis it faces.
Hard Evidence, Information, and Incentives—The Real Keys to Reducing Medicare Costs
The following is a guest post by Randall Brown, Vice President and Director of Health Research at Mathematica Policy Research, Inc. He is a nationally recognized expert in health care policy issues related to care for the chronically ill and Medicare populations, among other areas. He is also author of the Kaiser Family Foundation report Strategies for Reining In Medicare Spending Through Delivery System Reforms: Assessing the Evidence and Opportunities, upon which the following post is based.
Let’s cut straight to the point—despite the skepticism of many, it is possible to bend the cost curve for Medicare spending over the next 10 years, but not the way most people think. Electronic medical records and changes to the way providers organize will take many years. But recent scientific evidence and new tools suggest Medicare savings are available now and in far simpler ways.
Two primary factors account for much of the higher-than-necessary fee-for-service (FFS) Medicare costs: (1) people with complex chronic illnesses, who consume most of the resources, cost more than they should because they often do not receive the best evidence-based care for their condition; they have difficulty adhering to physicians’ recommendations; their multiple physicians do not communicate effectively with each other or with the patient; their problems are often not identified until it is too late to stave off a hospital admission; and exacerbation of these problems after a hospital discharge leads to high readmission rates; (2) many providers deliver care in a manner consistent with the current financial incentive, which is to provide more services, not more efficient care.
Improving chronic care. We need to create incentives for providers to follow the evidence about how to practice cost-efficient health care. This means paying hospitals with low readmissions rates slightly more for every admission, and paying those with high readmission rates a lot less (after accounting for differences in their case mix). Mary Naylor and Eric Coleman provide clear, rigorous evidence on how to reduce the appallingly high readmission rate (20 percent within 30 days) for Medicare patients discharged from a hospital. Their “transitional care” programs reduce the need for re-admissions by providing much closer attention to patients and their families as patients move from hospital to home. Randomized trials, the most rigorous and credible type of evidence, showed these programs reduced readmission rates by 18 to 35 percent, resulting in reductions in costs that substantially exceed the intervention costs [Naylor, M.D., et al. Transitional care of older adults hospitalized with heart failure: A randomized clinical trial. Journal of the American Geriatrics Society, 2004, 52(5): 675-684; Coleman EA, et al.The Care Transitions Intervention: Results of a Randomized Controlled Trial, Archives of Internal Medicine. 2006, 166: 1822-8]. Furthermore, the effects on readmissions last well beyond the end of the intervention period.
Following the evidence also means establishing a care coordination benefit for a well-defined high risk population of beneficiaries, and requiring that providers of this benefit follow the protocols of the few proven programs to date. If accountable care organizations or medical homes are implemented, as recommended in the health reform bills, they should be required to adopt these proven features and focus their care coordination efforts on the high risk population. Randomized trial studies of programs serving beneficiaries with chronic illnesses have found that targeting is critical. For a subgroup of beneficiaries at high risk of near-term hospitalization—which comprises 18 percent of Medicare beneficiaries and 38 percent of Medicare expenditures (those with congestive heart failure, coronary artery disease, or chronic obstructive pulmonary disease and a hospitalization in the past year)–4 of the programs in the Medicare Coordinated Care Demonstration had significant and sizable reductions in hospitalizations over the 6-year life of the study.
Giving physicians information and incentives to practice cost-efficient care. To reduce the widespread differences across physicians in practice patterns and costs, as documented by the Dartmouth group, we need to give physicians information on how the efficiency and quality of care they provide compare to that of their peers, locally and nationally, and then change payment methods and incentives to reflect those differences. The evidence suggests that more care does not yield better patient outcomes. Providers delivering efficient care of good quality should receive higher compensation per patient, and those who provide either inefficient or poor quality care should get much lower amounts. Reporting cost and quality information to the public, and to insurers, will provide additional pressure for providers to reduce excessive testing and imaging, overly aggressive referrals to specialists, and preventable hospital admissions and readmissions, while ensuring that high quality care is delivered. It also provides an incentive for them to work collaboratively with effective care coordination providers. While there is little evidence that public reporting alone affects provider behavior, there is ample evidence that medical providers respond strongly to financial incentives. CMS contractors have been developing the necessary tools for preparing fair report cards for Medicare physicians for several years, and a study currently in progress will be preparing reports for a large pilot sample of physicians. Several states are also implementing “peer-group” reports for physician groups. This approach is more attractive than, but not incompatible with, accountable care organizations, because it does not require individual physicians to give up their autonomy and does not depend on the voluntary formation of collaboratives to parcel out revenue shares.
The challenge. The primary barrier to implementing changes that could save money is the formidable opposition of hospitals and physicians, and Congress’s usual unwillingness to confront them. A problem with the current health reform strategies for Medicare is that they pay scant attention to who will lose—reducing health care expenditures means that some providers are going to lose revenue. The suggestions above are intended in part to reduce opposition to such changes by not just “taxing” the most inefficient providers but by sharing some of these savings with the efficient ones so they can further enhance their performance. Yet the suggestions preserve the autonomy so prized by physicians and hospitals, and do not require massive reorganizations of physicians into accountable care organizations, which seem to be essentially HMOs without any real authority. Physicians may be more amenable to the suggestions above if they are posed as the alternative to the sustainable growth rate (SGR) regulations that currently require annual reductions in fees paid to physicians if volume has increased. Congress and physicians should welcome an approach that provides a vehicle for cost control while eliminating the annual battles to roll back the fee reductions mandated by the SGR (calculated as 21 percent for 2010). While we should continue to invest in electronic health records for the future, we should not expect them to reduce costs in the next 5 to 10 years. We should also encourage medical homes as a potential vehicle for improving care coordination, provided they are required to build on the lessons above about what actually works. Creating incentives for providers to change practices in ways that have been proven in rigorous analyses, and giving them the information they need to succeed, yields the best opportunities for reducing the growth in Medicare costs.
Antitrust After Health Reform: Are Economists Ready?
In my post yesterday on the 2009 AcademyHealth Annual Research Meeting I mentioned accountable care organizations and antitrust. There is a relationship between the two and implications for health economics.
First of all, what is an accountable care organization? An ACO is a group of health care providers and institutions that are collectively responsible for (and held accountable to measures of) the health of a population. An ACO has an organizational structure that permits the encouragement of improvements in quality and lower costs through payment incentives.
That’s a little hard to grasp so let’s get concrete. The Veterans Health Administration (VHA) is the largest ACO in the U.S. It is a clearly defined set of providers and facilities that are responsible for the care of groups of veterans enrolled in the VHA. Quality performance measurement and low cost are routine within the VHA and it is not hard to imagine a variety of possible payment systems that would (or currently do) promote quality improvement and/or cost efficiency. Other currently existing ACOs include Kaiser Permanente, Geisinger Health Systems, and the Mayo Clinic. In one way or another, from a collective pool of revenue physicians in an ACO that are associated with higher quality get paid more than those associated with lower quality.
(For further reading on ACOs see Creating Accountable Care Organizations: The Extended Hospital Medical Staff (Fisher et al, Health Affairs, December 2006) and the January 27, 2009 press release from The Dartmouth Institute for Health Policy and Clinical Practice and the Engelberg Center for Health Care Reform at Brookings.)
Almost by definition an ACO implies a degree of collusion between providers. After all, under an ACO structure a set of providers must agree on how to distribute a bundled payment. Thus, if the U.S. health care system moves toward an ACO model we will see greater provider consolidation, all other things being equal. Provider groups’ greater market power to negotiate higher payments will be a countervailing force against the promise of the ACO model to provide higher quality care at lower cost. Therefore, there would seem to be a set of antitrust issues associated with ACOs. I’m not an expert in such matters but I am willing to bet that considerations of antitrust will either be explicit in legislation that defines and authorizes ACOs or be raised latter in legal battles.
While ACOs suggest greater market power on the provider side, there has been considerable rhetoric about increased market power on the insurer side. One of the purposes of an insurer is to bargain provider payments downward. The greater the insurer’s market power (i.e. the more policyholders it represents) the better prices it can negotiate, all other things being equal. This, in fact, is one of the functions of a public plan and one of the reasons Medicare, the VHA, and other large purchasers can negotiate (or set) relatively low prices.
Recent publications suggest a high degree of market concentration among health insurers already exists, at least in certain markets (see Robinson, Consolidation and the Transformation of Competition in Health Insurance, Health Affairs 23(6) and Dafny, Are Health Insurance Markets Competitive?, NBER working paper 14572). Will health reform, should we get any, lead to a more or less competitive insurance market? More critically, what degree of market power among insurers is ideal? Greater market power may provide leverage to negotiate lower provider prices but it also makes it less likely the insurer will pass those lower prices on to consumers through lower premiums.
There must be an optimum degree of insurer power given the degree of provider power, one that maximizes benefits to the consumer. This is a complicated two-sided market problem. So far I have not found much evidence that economists are able to tackle such a complex problem (I’m still looking). Platform competition in two-sided markets is hard to model and this area of specialty is relatively new.
I worry that some issues will be settled and constraints imposed via antitrust lawsuits before the economics community can makes sense of things. Consumers will likely be harmed if courts do not have the tools necessary to make rational judgments. It wouldn’t be the first time.
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