• Health care cost control is hard, and humbling

    The following is the text of 3 November 2010 Kaiser Health News column. It has been cited in the 11 November 2010 edition of Health Wonk Review.

    Let’s be honest. We really don’t know what’s going to control health care costs, long term. Today’s politically winning idea could be tomorrow’s platter of humble pie.

    There are lots of different thoughts about how best to do it. But which of them deserve political and legislative support? On the private side, one big idea centers on high-deductible plans, sometimes coupled with health savings accounts. The theory is that individuals, acting as prudent purchasers and spending their own money, will make more efficient health care decisions. This approach, the consumer-directed health plan concept, puts more of the cost risk on individuals.

    On the public side there are accountable care organizations. Under this model, an integrated delivery system would be responsible for providing all the health care required by a defined population. Higher quality and lower cost would be rewarded through a new type of administrative payment system, yet to be developed and tested. This could put more of the cost risk on providers.

    But will either consumer-directed plans or accountable care organizations really help solve the health care cost problem? Before we answer with confidence, keep in mind that our past track record with potentially cost-saving innovations is not good.

    One such innovation began in California and was replicated elsewhere in the 1980s whenlaws were passed across the nation to permit insurers to selectively contract with hospitals. The network-based HMO was born and, by the 1990s, it looked like managed care would finally crush health care cost inflation. And it did, for a few years. Perhaps some politicians and health policy wonks had predicted just that. Perhaps some thought the battle had been won. They were wrong.

    HMO market share grew and the plans kept ratcheting up constraints on providers and consumers, trying to maintain profitability. Then they went too far. The backlash was fierce. The kinder, gentler PPO replaced the HMO, politicians supported benefits mandates and patients’ bill of rights laws and high health care cost inflation returned. As hopeful as some might have been about managed care, and as promising as the concept seemed, HMOs ultimately proved to be a failed model.

    And what about Medicare prospective payment systems, Congress’s best attempt yet at controlling Medicare costs? They were implemented first for hospitals in the early 1980s and, later, for physicians and post-acute and long-term care facilities. They too had some years of success, keeping Medicare prices in check. But with no direct control over volume, they ultimately could not tame costs. Their original objective and flawed design makes a mockery of the notion of public health care cost control as, each year, Congress overrides scheduled cuts to physician payments.

    The story of comprehensive, private Medicare health plans is no different. Once touted as cost savers, and paid at rates guaranteeing just that, the payment system under which they operate has spun out of control. Political meddling in response to special interests pushed payments to Medicare Advantage plans well above the cost of traditional Medicare. Congress has resisted a more efficient, competitive bidding payment system that would be immune from this problem.

    We could not have known in 1995 what we know today about how each of these ideas would suffer a market or political failure. Perhaps some experts and policymakers were not duped, but enough were that these innovations were accepted by legislators, supported by businesses, and generally regarded as reasonable steps forward on health care cost control.

    Is the same outcome the destiny of consumer-directed health plans and accountable care organizations or any other model we envision today? Even if they work here and there or with low market share, will they serve us well over the long term and as dominant models for the financing and provision of health care? Or will they suffer the same fate as managed care, prospective payment and private Medicare plans — becoming victims of their own success, their own limitations, or political meddling? We can’t know. But that doesn’t mean we shouldn’t try or that some of those ideas can’t work if tweaked in certain ways. It just means that we should be humble, prepared to fail and keep thinking of new ideas to replace the ones that don’t work out.

    The history of health care cost control suggests that the chances of long-term success of any particular idea are low. This concept or that may be a political winner today, but that doesn’t make it a fiscal winner of tomorrow. Do you think you know how to control health care costs? Don’t bet on it.

    • I think that your review of HMOs is an important point. As people complain about mandates, they need to remember why we have them. While some are probably pure rent seeking on the part of special interests, many of them came in response to HMO policies that the public found unacceptable. Any proposed solution to health care costs must be, as you often point out, politically feasible. Look at what happened with the ACA. Medicare Advantage was cut, a program spending more than traditional FFS Medicare, and it is then used against the party that passed the bill.

      I think that we have lots of options for cutting costs that will probably work, it is jus our politics which make it difficult to do so.


      • @steve – Part of my point–one I’ve emphasized before–is that it isn’t evident to me we (collectively) really, deep in our hearts, want to cut costs. That is, if we (collectively) reject every possible way to do it, doesn’t that tell us something? This argument, which I’m not saying I buy just that it’s a possibility, relies on evidence we don’t have yet. We haven’t tried ACOs for Medicare, though we’ve tried elements of them. We haven’t had an IPAB. We haven’t rolled back the employer-sponsored insurance tax subsidy. If those ideas fail, I’ll be very pessimistic about cost control. The only control I may believe in is that imposed by math. At some point we simply run out of money.

    • Great post, I would really, really like to try policies that promote much higher deductibles but I am not sure that they would work.

      Also economist Dean Baker advocates allowing more foreign doctors to come and work in the USA. Ge calls it free trade in the professions.

      I really think that we have exercise rules on who can give what treatments and I think that medical licensing is too strict, so I would like like to try liberalization in these areas. Again I am not sure that they will bring down cost but they might. I would like for people to be allowed to get meds at a pharmacy with going through a doctor.

      Finally yours might be reasons that this should be done at the state or local level. It would be interesting if one of states gave minimum level of health care free to all citizens a la Italy.

    • Scott Sumner has a good post that talks a little about cost control in health care. It talks about the Nordic model and localizing healthcare cost control.

    • Austin,

      Thanks for your excellent historical overview of the futile efforts to externally control health care costs in the U.S. over the last 30 years.

      There is one approach to minimizing costs while ensuring high quality that has succeeded in many other industries, but has never been implemented in the $2.5 trillion U.S. health care market.

      It would require federal and state policy makers to legislate and maintain three categories of major policy reforms. These are:

      (1) Create a truly free national marketplace with the sellers of both health care products and services incentivized to use freely generated and transparent price and quality to compete for empowered customers.

      (2) Eliminate the distortions on resource allocation now produced by the Medicare and Medicaid monopsonies and growing private insurer and provider monopolies and oligopolies involving hospitals and/or physician groups.

      (3) Meaningfully reform the malfunctioning state markets for medical liability insurance, the lottery-like tort system and physician licensure and discipline based on the triad of reforms and seven years of experience in Texas.

      Especially since the gory details of the perverse effects and absolute unsustainability of the 2,700-page PPACA have been revealed, there are many physicians and other Americans who agree with these recent observations of Edward H. Crane, President of the Cato Institute:

      “We call it a free market for a reason. Capitalism is the most dynamic economic system that has ever existed–and the only one consistent with individual liberty and political freedom. Based on private property, the rule of law, respect for contract, and sound money, it has been described by economists such as F.A. Hayek, Ludwig von Mises and Milton Friedman as a “discoveryprocess.” Hundreds of millions of individuals use the information contained in freely generated prices to determine how to allocate their limited resources. At least until recently, that system has mmade America the economic envy of the world.”

      Now if only our federal and state governments can overcome the efforts of the “Iron Triangle” (politicians, bureaucrats and special interest group beneficiaries) to perpetuate the status quo!