April 13, 2010

It’s the Law

After all the rancor and the political posturing and the delays, we finally have major health reform legislation. The new law will result in 30 million currently uninsured Americans buying health insurance and it will abolish some of the most egregious practices of the insurance industry, such as use of pre-existing conditions to refuse coverage. But what effect will it have on controlling the cost of medical care?

The rate of rise of health care costs is a problem, as Peter Orszag (formerly of the CBO and now director of the Office of Management and Budget); Rand Corporation researchers; and the conservative think tank, the Heritage Foundation, all agree because it is a major threat to the American economy. The long-term projections of the CBO, published last July, are that total U.S. spending on health care, which was 16% of GDP in 2007, will rise to 25% of GDP in 2025 and 37% of GDP in 2050. The new law has the potential to result in a significant decline in the percent of GDP we spend on health care each year. But whether it achieves this end depends on how several key provisions of the bill are actually implemented.

The provisions of the health reform legislation that could have a profound effect on the rate of growth of spending on medical care have to do with payment reform. And the potentially most potent payment reform strategy that appears in the bill is “bundling.” The legislation calls for the establishment of a national Medicare pilot program to “test, develop, and evaluate” bundled payment for acute inpatient hospital care, physician services, outpatient services, and post acute care for a single episode of care. According to estimates by researchers at Rand, a system of bundled payments, could potentially decrease national health spending by as much as 5.4% in the next 10 years (if applied to both Medicare and the private sector). The same researchers propose a 6.2% target for reducing spending on health care over the next 10 years; hence bundling alone could make an enormous difference.

The new law also provides incentives to health care systems to form “accountable care organizations” (essentially networks of providers that agree to capitation, another form of bundling) by offering them a share in the savings they generate for Medicare if they meet quality targets. It remains to be seen how widespread accountable care organizations will become. Health care reform also provides for an “Innovation Center” within CMS to evaluate, test, and expand different payment structures. Whether this provision will lead to savings depends on what payment structures are tested, how effective they are, and whether they are then disseminated. A final provision in the domain of payment reform is the establishment of an Independent Payment Advisory Board, charged with submitting legislative proposals to reduce the per capita rate of growth in Medicare spending whenever spending exceeds a target growth rate. However, the Board is prohibited from submitting proposals that will “ration care,” a provision, like the notorious “reasonable and necessary” language of the original Medicare statute, which will no doubt serve as the basis for rejecting any plan that restricts potentially useful treatment on the basis of cost.

Beyond payment reform, the new law will establish a Patient Centered Outcomes Research Institute to conduct research comparing the clinical effectiveness of alternative treatments. In principle, this kind of information could change medical practice to avoid the use of unnecessary or unnecessarily expensive treatments. But the bill has a built-in guarantee that the information will not be used in this way. It states that the findings of the Institute “may not be construed as mandates, guidelines, or recommendation for payment, coverage … or used to deny coverage.”

A powerful new law is on the books. With it, the U.S. finally joins all the other countries in the developed world in assuring a basic level of health care for its citizens. But will it constrain the rate of growth of spending on medical care? Only if we can depoliticize the boards, centers, and institutes that are the key to change.

A modified version of this article was posted on the Health Care Cost Monitor on March 19, 2010.

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