INTRODUCTION TO
CED’S POSITION ON HEALTHCARE REFORM
As you may know, CED’s Healthcare Reform Subcommittee is on the job producing a
report on the evolution of our proposal to restructure the nation’s costly and inefficient
healthcare system. Over the next few weeks, we hope to take some major strides forward
on a new policy statement. I would like to take this opportunity to begin to present ideas
for that report to you. You can expect to see some additional contributions over the
coming weeks, as we develop the succeeding sections of the report. If you are interested,
we would be pleased to have you join the efforts of the Subcommittee as this report takes
shape.
For your background: Almost a decade ago, the Committee for Economic Development
(CED), anticipating the need for fundamental change, undertook a research project on our
nation’s healthcare system. CED had already issued a policy statement on how
employers, working both on their own and cooperatively among themselves, could
improve healthcare quality and efficiency. However, although we believed that those
recommendations were sound, we observed that few if any firms found it to be in their
own interest to put our recommendations into practice. As a result, healthcare costs
continued to mount, while quality continued to lag behind any level commensurate with
what society spent.
Accordingly, CED’s new policy statement, released in October of 2007, found that the
United States would need to take collective action to achieve greater quality of care at
lower cost. Our policy statement explained our vision, in which greater consumer choice
among competing private health-insurance plans would motivate greater efficiency and
higher quality on the part of both plans and providers. We proved to be right that
dissatisfaction with the healthcare system would lead to early legislative action.
However, we were not successful in bringing our vision to implementation. There are
reflections of our vision in the subsequent Patient Protection and Affordable Care Act of
2010, often referred to as the “ACA” or “Obamacare.” But the resulting system has been
described even by some supporters as incomplete, and it of course has many virulent
detractors as well.
As much as CED would prefer a fundamentally different alternative that would reflect
our vision, the ACA is the law of the land. Millions of insurance contracts have been
written according to its terms. Therefore, simply repealing the ACA today is not a viable
option. Rather, the task is to find a way forward from this new starting place to a better
end point – in our view, to a system that is more market-driven, along the broad lines of
CED’s vision as expressed in 2007, but with refinements that we will describe later in the
project.
FIRST PRINCIPLES: A CENTRAL ROLE FOR GOVERNMENT OR A
MARKET-BASED APPROACH?
The ACA organizes the purchase and delivery of health care in a rather jumbled and
disorganized way; that would be a part of CED’s critique of the law. But the ACA’s
central tendency is toward a lead role for the federal government to control costs,
increase access and improve quality – for government as the prime mover in health care.
CED, in contrast, favors a fundamentally market-driven approach to control costs,
increase access and improve quality.
These differences of belief should not be subject to caricature. The vast majority of both
advocates of a central role for government and advocates of a market-driven approach
agree that everyone should have access to health care and that no one should be denied
care because of lack of ability to pay. This might fairly be characterized as a shared
American value. And to be sure, CED’s system requires government rule-setting – such
as is essential in many other industries – to ensure that the market is fair and that there is
true and effective competition. So there is considerable overlap between the two views –
perhaps on the questions that are most important to most Americans.
The fundamental disagreement is whether health care resources are best allocated through
mechanisms put in place by the federal government or through market-based mechanisms.
In the end under CED’s vision, many more decisions would be made by consumers, careproviders and insurance plans than is likely to be the case under the ACA.
Those who advocate a central role for government envision a system with the
government as essentially the single payer, and as such, playing a key role in deciding
what health care is appropriate to provide – a system that they believe would be the most
equitable in the allocation of healthcare resources. Those who advocate a market-based
approach envision a system with expanded access to private insurance with government
playing a limited role similar to that played in other sectors of the economy. Decisions
about what health care to provide would be made primarily between doctors and patients
– a system that they believe would be more effective at allocating healthcare resources
than a single-payer system.
Again, although the ACA left much of employer-provided insurance, and even to a
degree Medicare, essentially untouched, the Act’s clear inclination is toward a central
role for the federal government. However, the influence of those who advocate a marketbased approach has been increasing. Their ideas are reflected in the design of the
Medicare drug benefit enacted into law about a decade ago. The drug benefit is a
government entitlement, but it is delivered through competing private plans. The
Medicare drug benefit has lower costs and wider choice among private plans than had
been projected, and arguably has achieved higher levels of satisfaction among seniors
than was expected by many. Advocates of the market-based approach cite this outcome
to reinforce their arguments.
Thus, these fundamentally different world views about the ultimate design of the health
care system, and which approach would achieve the most equitable and effective
outcomes, can create major conflicts when deciding how to go about expanding access,
improving quality and controlling costs. The nature of these conflicts becomes apparent
when trying to answer the following questions.
Is health care a public or a private good?
As was noted earlier, and despite some of the heated rhetoric over healthcare legislation
in the last five years, almost no one seeks to deny or “ration” care to any American. And
most advocates of these vastly different approaches tend to be pragmatic and to recognize
that both the government and the private sector have roles to play. Still, there are major
differences over whether the government role should be central or limited. Those who
advocate a central role for the federal government would tend to characterize health care
as a public good, and as such, as a service that is appropriate for the government to
provide either directly of under relatively explicit guidance. Because they see health care
as a public good, also, advocates of the government role would tend to espouse a system
that delivers care in a fairly uniform way across the entire population. Advocates for a
market driven approach, in contrast, would be more likely to characterize health care as a
private good that should be primarily the responsibility of the individual and should be
provided through the private sector. Furthermore, individual choice would be seen by
this camp as likely – and properly – to lead to differences among many alternative
healthcare plans that reflect differences among people’s preferences for modes of care,
which may result in differences of cost from person to person.
How much should be spent on health care?
Most exponents of both schools of thought recognize that costs under the current system
of delivery of care are rising unsustainably. Thus, although some of the most aggressive
advocates of a central government role might believe that care can be essentially
unlimited and paid for by government fiat, most thinkers on health care from both camps
are highly motivated to find ways to achieve the complex task of slowing the growth of
cost. Those who favor a central role for government are likely to believe that there
should be an upper limit, or cap, on the amount of healthcare spending, probably
expressed as a percentage of the GDP. This belief is consistent with the view that the
system should be financed by the government, which then makes health care a budget
issue. These advocates of a central role of government would use “global budgeting” to
limit spending if the demand for health care exceeds what government determines it can
afford. The task of government in these circumstances becomes how best to allocate
healthcare spending among the competing demands in the most equitable fashion.
Advocates for a market-driven system would tend to argue that the amount spent on
health care should be the sum of millions of individual decisions to buy health care – the
same way that spending is determined in the rest of the economy. The upper limit of
what is spent and the allocation of how it is spent should be determined by patients in
consultation with their doctors about the improved health outcomes that will result from
additional expenditures. Implementation of this market-driven approach in a world of
limited resources would require greater transparency about quality and costs than is now
available, and would require that the patient have a meaningful personal financial stake in
the outcome of the decision, which is not usually the case today.
Who should decide what health care will be provided?
Once advocates of a central government role have decided that health care is a public
good, largely financed by government, and that government should cap the amount spent
on health care through global budgeting, it follows that the government should play a
central role in deciding what health care is appropriate to provide. Otherwise,
government could not carry out its task of allocating equitably the limited resources
across competing demands. The underlying assumption is that capable and
knowledgeable people can design a comprehensive approach to health care that will make
these resource allocation decisions in an optimal manner. This underlying assumption
leads to attempts to reform the entire system from the outset according to this
comprehensive design.
Medicare already functions in this way, but the impact on patients is somewhat muted
because providers shift costs to the private sector to compensate for being underreimbursed by the government. Certain new procedures are restricted and delayed, but
apparently not yet to an extent sufficient to trigger a protest. With an entire healthcare
system operating under conditions where government plays a central role, the approaches
such as those used to control Medicare spending would have to be expanded significantly.
Tools and techniques such as health benefits measured in “quality adjusted life years,”
“comparative-effectiveness studies,” and “cost-benefit analyses” would be brought into
wider play to assist the panels and commissions that would be established to make the
reimbursement and allocation decisions. This general outline perhaps characterizes the
forthcoming role of the Medicare Independent Payment Advisory Board, or IPAB, which
will be discussed further below.
These studies, when done well and when their limitations are understood, have merit. The
issue is who decides what procedures and technologies are made available based on these
studies – a government panel or the doctor and patient? Market-economy advocates
come down on the side of the doctor and patient, and see these studies as important
assists to the doctor and the patient when deciding what procedures are appropriate. The
underlying assumption of those who advocate a market-driven approach is that the
healthcare delivery system is far too complex for any group, no matter how
knowledgeable or expert, to manage from the top down. The belief is that the sum of
many, many individual doctor and patient decisions will provide outcomes that are
superior to top-down management. This underlying assumption leads to a more
incremental approach to reform the system.
Who should decide the price of health care?
Those who advocate a central role for government are adamant that markets do not work
in health care and that price competition does not exist. Their solution is a regime of
administered prices and centrally established reimbursement rates, which is the approach
used in Medicare. The Medicare prescription drug benefit is an anomaly in that
pharmaceutical prices are not set by the government, but some members of Congress
continue to introduce legislation to authorize the government to negotiate the prices
directly.
The advocates of a market-based approach believe that price competition exists and can
be expanded. They cite the Federal Employees Health Benefits Program (which covers
members of Congress and federal employees), several state-government-employee
systems including California and Wisconsin, university systems including Stanford, and
some private-employer systems as successful examples of market competition among
private health-insurance plans. Each individual member chooses the plan that best fits his
or her needs each year from a wide variety of competing plans. Such health plans have
generated vigorous price competition among providers, including pharmaceutical
companies supplying the Medicare prescription drug benefit. Congressional Budget
Office studies indicate that this competition would continue to be more effective in
holding down pharmaceutical prices than if the government moved to negotiate prices
directly.
What is the best way to achieve improvements in healthcare quality and
productivity?
Advocates of a central role for government believe that improvements in healthcare
quality can be achieved through incentives built into the reimbursement system. Various
payment schemes have been proposed to reward hospitals, for example, for demonstrated
improvements in the quality of care; the IPAB is intended to advance those mechanisms.
Advocates of a central role for government do not believe that patients can be relied upon
to demand quality improvements because of their inability to judge quality and interpret
quality data. Productivity is seldom mentioned, but a lower administrative cost of a
more-centrally-managed health system is often cited as an advantage of a single-payer
approach.
Advocates of a market-driven approach believe that increased competition within the
healthcare system will drive improvements in quality and productivity, and that the same
approaches used in other parts of the economy for quality improvement can work in
health care. In fact, some hospitals have become case studies of how to use these
techniques. Advocates of a market-driven approach would tend to encourage the growth
of specialty hospitals and specialty clinics, which they believe have demonstrated
superior outcomes at a lower cost, to compete with integrated healthcare systems. They
call for broader dissemination of information to patients about outcomes, quality
indicators and prices to facilitate competition.
What is the role of technology?
Advocates of a central role for government believe that technology – and the overuse of
technology – is a major cost driver in the healthcare system. In their view, the use of
technology should be limited until studies have confirmed its benefit in excess of cost and
its effectiveness compared to existing procedures.
Advocates of a market-based approach believe that technology has great potential to
bring productivity and quality benefits to the system. They are concerned that requiring
some minimum level of studies to justify the use of the technology would inhibit
innovation and improvements in the initial versions of the technology. They point out
that cell phones and computers are nothing like the products that were first introduced.
The issue, as far as they are concerned, is how to capture the maximum productivity
benefits as expeditiously as possible. For example, major advances in same-day surgery
in lower-cost settings have not led to the reductions in prices that would be expected to
occur due to the productivity gains made possible by medical technology. The influence
of Medicare reimbursement is seen as a major inhibitor of price competition.
What are the appropriate performance metrics for the healthcare system?
Advocates of a central role for government criticize the efficiency and efficacy of the
healthcare system by pointing out that the United States spends a higher percentage of
GDP for health care but has a shorter life expectancy than other countries, among other
negative indicators. Those who advocate a market-driven approach point to metrics such
as the superior outcomes in cancer care and cardiovascular disease in the United States,
the shorter waiting times for treatment, and the early availability of innovative medical
treatments, while citing demographic and measurement factors that could lead to some of
the negative indicators that we see. The two schools of thought might agree that our
system always can do better, and that performance improvement at affordable prices is
one of society’s highest priorities.
THE AFFORDABLE CARE ACT AND CED’S VISION
Why is CED dissatisfied with the healthcare system under the ACA, and what in the
broadest terms would we do to change it?
We conclude that the ACA does both too little and too much. At the same time as it
leaves the deficient core of coverage under employer-based insurance and even Medicare
substantially unchanged, it also imposes what we believe is excessive government control
of health care. We fear that this combination will be detrimental to the innovation and
process improvement that we need to achieve higher-quality, more-affordable care. We
recommend a different approach, more in line with a market-driven system, but with a
smaller but appropriate role for the federal government to ensure healthy competition as
fertile ground for quality and efficiency to grow.
For all the sturm und drang associated with its enactment, the ACA was not intended to
change the fundamental structure of the U.S. healthcare system: fee-for-service care.
Most people pre-ACA received their care through either employer-provided insurance or
Medicare. Though both of these systems have widely recognized basic flaws, and the
ACA has struggled to change how they deliver care, both remain driven at their core by
fee-for-service delivery – to the extent that all of the ACA’s well-intentioned appendages
or add-ons cannot deflect the fundamental forces that ultimately determine outcomes of
inadequate quality and excessive cost.
The problems inherent in fee-for-service reimbursement are fundamental and well known.
CED does not question the good intentions of healthcare providers, who after all chose
careers of caring for the sick. The question is not intentions, good or ill. It is, rather, that
the reimbursement system provides constant rewards to the most expansive view of the
patients’ needs. Any service or treatment that provides any potential benefit to the
patient may be paid for – and often on essentially a cost-plus basis. Cost-plus
reimbursement means that every service adds to the provider’s profit margins. As has
been demonstrated time and again in contracting in other fields, such incentives are
clearly perverse.
But the problem extends beyond incentives of commission. It includes incentives of
omission as well. Providers under fee-for-service reimbursement have less reason to
adopt cost-saving practices – even purely business practices such as personnel
optimization or back-office management that could cut costs, often with no possible
effect on the quality of care. Elsewhere in the economy (other than in education, which
too often is subject to similar perverse incentives), producers seek every opportunity to
cut any and all costs without reducing the quality of their product or service. This
contrary predisposition in health care (and education) is caused by the absence of
pressures toward efficiency that are felt in true market systems.
Perhaps not surprisingly, some actors in health care – including most recently the authors
of the ACA – have attempted to simulate market forces within the current system. As an
example, Medicare’s central planners have tried to restrain pure fee-for-service
reimbursement with “bundling” – providing a single payment for all of the care involved
in one episode of the treatment of a single condition. The reasoning behind bundling is
that providers will have no incentive to provide other than what is called for, because
they will not be reimbursed by the piece for any additional services. Thus, it is argued,
bundling would lead to more-economical care.
A second example is the Medicare Independent Payment Advisory Board, or IPAB,
created under the ACA, and thought by some to be healthcare reform’s trump card in the
cost-reduction game. If Medicare cost growth exceeds rates specified in the law, the
IPAB will be required to recommend changes in reimbursements and other policies that
are estimated to bring growth down to below those rates. (The IPAB is prohibited by law
from “rationing” care to achieve those savings.) The earliest cost-growth measurement
period that possibly could trigger action by the IPAB does not end until 2015; and for that
matter, no members of the IPAB have been nominated yet. (In the absence of triggered
recommendations from the IPAB, the Secretary of Health and Human Services is
required to submit recommendations in their place.)
These examples of simulated markets either have failed (bundling) or can reasonably be
expected to fail (the IPAB). This is not surprising, on two main counts. First, simulated
markets typically underperform real markets. Conditions and incentives are not the same.
And second, healthcare providers feel incentives to circumvent the confines of the
pseudo-market systems.
Bundling has failed, as would be predicted by these principles. Instead of choosing
simple diagnoses and conditions and working to the bundled-payment budgets, some
providers have used computer technology to find the most lucrative possible diagnoses
and payment codes, or even to search for multiple diagnoses and payment codes, to
maximize their reimbursements under the law. In one notable example of such a strategy,
facilities that provide acute care have handed off patients at the end of their acute
treatment to their own rehabilitation facilities, which can provide follow-up care under a
new payment cycle for separate and additional fees. In sum and ironically, health
information technology – which was supposed to reduce healthcare costs – has been used
with some frequency instead to maximize costs for any given ailment, and therefore has
in some instance defeated its own intended purpose.
Some might interpret these stories as examples of sheer venality; but that is not the case.
First of all, no one would expect or ask providers to request or to accept reimbursements
less than those to which they are entitled by law – just as no one would ask taxpayers
voluntarily to pay more than is legally due. Once we were to start down that road, where
would we stop? Would we begin to judge some providers’ billings as not sufficiently
understated? And who would set the standard for the degree of understatement that
would be acceptable, and how would it be enforced?
But there is a further and more fundamental problem with artificial market incentives,
and it is more difficult to resolve. The ACA today is beginning to impose standards and
restrictions on the practice of medicine in the interest of reducing cost. Providers are
beginning to use those revised practices. However, in many instances, providers still are
reimbursed according to what amounts to fee-for-service standards. Thus, to the extent
that providers are following new standards (such as reducing hospital readmissions) but
still are being reimbursed by fee for service (under which they would have been paid for
those readmissions), they can find that they are doing what they are told to do and are
running losses as a result. This is partly a transition issue; it can be difficult to adopt a
new business model while the old business model still is paying the bills. But it also
reflects inevitable internal contradictions when pseudo-market incentives are grafted on
to a command-and-control, third-party-payer fee-for-service system.
Another issue with bundling is that the list of diagnosis codes, though vast, is still not
necessarily exhaustive. Furthermore, the list of services for which providers are
reimbursed does not include some common-sense interventions that would save money.
Thus, for example, a patient with mobility issues who makes frequent, costly trips to the
emergency room for falls might be kept out of the hospital with far cheaper
improvements to the home (like railings) – which may not be reimbursed and so might
not be undertaken. Another patient suffering from problems caused by dehydration in an
overheated house might be kept well with air conditioning. A patient who cannot afford
a taxicab to obtain routine preventive care from the primary physician might eventually
call an ambulance for far-more-costly treatment in an emergency room.
All of these problems, and many more, can result because of gaps around and between
bundled diagnostic codes. They could be avoided if bundling were made perfectly broad,
such as through comprehensive capitated prepayment. The predisposition of our
Medicare system toward fee-for-service reimbursement – even if some fees are
“bundled” as described above – results in such inefficient and sub-optimal care. Systemwide reform must resolve these problems if health care is to attain the highest quality and
yet remain affordable.
It is not likely that the IPAB will fare much better than bundling. First and most
obviously, the IPAB has constrained statutory authority, with its own built-in gaps.
Second, the IPAB is one group of people reporting from one point of view. Markets
drive process and productivity improvement because they provide the widest possible
range of ideas – some relating to the primary line of business, some relating to generic
back-office business practice – which give managers ideas for ways to beat the
competition. The IPAB will not represent that broad perspective, and given the deficient
structure of the healthcare system itself, there is no motivation from the existence of the
IPAB (or from anything else) for providers and plans to pursue vigorously such essential
process improvement.
Beyond those weaknesses, the dictates of the IPAB will provide only yes-no, check-thebox incentives, rather than the kind of open-ended motivations created by the market.
Market-driven enterprises earn rewards for every degree of additional improvement.
There is never enough improvement, because greater reward always can be had from any
measure of additional improvement, however small the improvement and however
satisfying the previous level of performance might have seemed. By contrast,
declarations from the IPAB almost certainly will be closed-ended; if you can check the
box, you can avoid the penalty or pocket the incentive payment. The box may not
constitute one of the most important areas of potential improvement, and checking it may
or may not denote the greatest possible degree of improvement to be had; but once the
box is checked, the game is over. Thus, the IPAB is most likely to be a poor substitute
for real market forces.
In sum, the ACA promises artificial market incentives, grafted onto a deficient
underlying command-and-control fee-for-service system. The track record of existing
artificial market incentives is not inspiring. It should not be surprising that CED and
many other observers remain skeptical, and seek a better alternative.
In future installments of the CED Healthcare Reform Subcommittee’s work, we will
move beyond what we do not like about the existing system, and tell you more about
what we propose as an alternative. Please join the Subcommittee if you can, and watch
for our blog posts and join our future monthly Trustee calls to add your insights to our
work.