• Health reform’s failure modes

    This is a TIE-U post associated with Jonathan Oberlander’s Political Dynamics and Policy Dilemmas (UNC’s HPM 757, Fall 2011). For other posts in this series, see the course intro.

    A year or so ago, the conventional wisdom was that legislative repeal of health reform was a near impossibility. The only hope for opponents of the ACA was via the judiciary, the thinking went. Things have changed since then.

    In my mind, the relative odds have flipped. The individual mandate may be litigated before the Supreme Court as early as next spring. In NEJM, Wendy Mariner [1] covered the various angles and issues. However, the chances of a majority opinion against constitutionality seems unlikely. Not impossible, of course, but against the odds.

    I draw this conclusion from the sentiments of proponents of repeal, even those involved in bringing the suits. Several of the participating attorneys spoke at an AEI event about the case (part of a good podcast series, by the way). They admitted that they could not easily find five justices that were likely to rule for unconstitutionality of the individual mandate.

    However, the individual mandate is not the only point of attack. It’s just the easiest one to pursue while the government is not fully controlled by the Republicans. If the Supreme Court rules that it is, in fact, constitutional, expect opponents of the law to continue in pursuit of repeal, a point made by Jon Oberlander [2]. The chances that pursuit will end successfully for reform opponents will increase if Republicans sweep in 2012. In contrast to conventional wisdom of the past, it now seems plausible that much of health reform could even be repealed with a simple majority in the Senate (via Reconciliation). The filibuster provides protection against non-budgetary items only. So, while judicial repeal seems remote, (partial) legislative repeal may not be.

    However, even if the law is not repealed, elements of it are still in potential jeopardy in at least one other way. Parts could be paired back if its budgetary assumptions prove unrealistic. Douglas Holtz-Eakin and Michael Ramlet [3] (ungated pdf here) make the case that they are, in direct opposition to predictions of the CBO (pdf) [4].

    Putting most of Holtz-Eakin’s and Ramlet’s analysis aside, I want to focus on one issue, raised with more clarity and precision by the actuaries of CMS (pdf). CMS actuaries note that the law requires Medicare payments to hospitals and physicians to be reduced annually to account for growth in productivity. However, the productivity growth factor is that of “private, non-farm multifactor productivity,” not health care-specific productivity, which has been negative. The long-run private, non-farm productivity growth has been (positive) 1.1% per year. Hence, provider payments will be reduced by that factor, whether health care providers become more efficient or not. Paying less for care that is costing more is not a sustainable strategy.

    Here’s what this looks like graphically, for hospital and physician services (from the CMS report):

    It is not plausible that Medicare rates will fall to roughly 30% of private rates. There is simply no reason to believe that providers would accept such rates. Nor is there reason to believe Congress would sustain them. Instead, several things could happen. One, and most obviously, is that the statutory rate updates will be canceled. In that case, health reform will cost more than predicted, jeopardizing our ability and willingness to fund coverage expansion and benefits generosity in the amount anticipated by the law.

    There are other possibilities. The charts above are based on the assumption that there will be no further reform or innovations that change the nature of private health insurance. It could be that private health insurance rates come down along with Medicare’s. To the extent that occurs, Medicare rates will not fall as far below private ones as shown. Note that there is nothing (or little, if you count the Cadillac tax or whatever the IPAB might recommend) in the law to encourage such change on the private side. But the private sector can, in principle, innovate its way toward lower payments on its own. Private market advocates suggest it will or can. Congress could pass reforms to encourage it. In other words, another way to address a widening gap between private and Medicare rates is not to increase Medicare rates, but to push down private ones.

    Finally, it is possible that lower Medicare payment growth will, itself, encourage lower private payment growth. This possibility has historical precedent. One, but not the only, reason private payment-to-cost ratios grew in the late 1980s is that Medicare payments were pushed downward, which encouraged hospitals to cut costs. In other words, hospitals can cut costs. In an insurance market capable of taking advantage of that through negotiations–as occurred  in the 1990s via managed care–private payments could come down.

    It’s far from evident insurers could put adequate pressure on hospitals to reduce payments. Hospitals have considerable and growing market power. But, this is, at least, a theoretical possibility. It won’t be encouraged by weakening insurer market power relative to providers, however. So, it is critical how we continue to reform the insurance market.

    My point in all of this is to suggest that there are hidden assumptions in all analysis of health reform budgeting. I do not know which assumptions are likely to be closer to the truth. Time will tell. However, I do know that, one way or another, the payment differentials illustrated in the figures above will not come to fruition. About this, opponents of health reform are correct. Just how reality will deviate from those projections is unclear. It could lead to pairing back of health reform. Or it could usher in more reforms that alter the dynamics of the private market and the wider health care system in ways that improve the chances of reform’s success as envisioned.


    [1] Wendy Mariner et al. 2011. Can Congress Make You Buy Broccoli? And Why That’s a Hard Question. New England Journal of Medicine: 364: 201-203.

    [2] Jonathan Oberlander. 2011. Under Siege—The Individual Mandate for Health Insurance and its Alternatives. New England Journal of Medicine 364: 1085-87.

    [3] Douglas Holtz-Eakin and Michael J. Ramlet. 2010. Health Care Reform is Likely to Widen Federal Budget Deficits. Not Reduce Them. Health Affairs 29: 1136-41.

    [4] Congressional Budget Office. 2010. Cost Estimate of the Final Health Care Legislation.

    • Okay, let me put a simple example.- If I put myself in a position of graphics, trends and assumptions, with my little son when he wants to learn to ride a bike, I will destroy the possibility of success for my little son.

      He does not know whether he can, I do not know either. But we both know something for sure, he has to try.

      The question is, do we need? a change in the health system. If you who have written this, you agree, or at least you know that things have not worked well.

      So, being pessimistic, it’s something that does not help in the possibility of success.

      We humans have got where we are today, for our “insistence to change”, “although” we have not known for certain whether the change will result or not, but the risk has been necessary.

      One more thing, the world has suddenly changed in the last 3 years, more than two decades together, but we are still here, arguing that reform is a failure.

    • Does ACA, or other existing legislation, allow for the kind of competitive bidding talked about on this website (e.g. for Medicare Advantage) or for initiatives that will reduce the number of unnecessary–I realize that can be very hard to determine–physician services provided through Medicare?

      • Yes the insurers in ACA’s exchanges will bid competitive. This is covered in some posts.

        • Depends. If states run HIEs tightly, they might opt for selective contracting/active purchasing. Bidding, in some sense, will take place upstream, and states will make choices as oppose to patients when they confront purchasing choices.

          The Utah model (“competitive bidding”), which has not gotten a nod from the Feds in terms of future waivers, is an open book. Whether that kind of marketplace will get the green light is uncertain, but a more regulated format is certainly plausible.


    • Herb Stein said it as well as anyone quite a while ago “If something cannot go on forever, it will stop,”

      Having said that – there seems to be an infinite supply of persons who believe that it’s possible to replace market prices with bureaucratic subsititues without bringing about a failure to coordinate supply and demand and the catastrophic resource missallocation that follows.

      Setting the “right” price for money via the interest rate is orders of magnitude less difficult than setting the “right” price for the tens of millions of dynamic inputs required to coordinate all of the economy activity required to deliver health care to 300 million plus persons. What bureacratically determined interest rates did for housing, the RVBRS is doing for medicine.

      The silver lining is that the ACA, if implemented, will hasten our progress towards the failure mode that awaits all price control schemes dramatically enough for someone (voters) or something (the bond market) to pull the e-brake before we get there. My money is on the latter of the two.