By Maggie Mahar

The evidence is building: As we move toward making the Affordable Care Act a reality, Medicare spending is slowing, and even in the private sector, for the first time in more than a decade, insurers are focusing on reining in health care costs.

The passage of reform legislation two years ago prompted a change in how both health care providers and payers think about care. The ACA told insurers that they would no longer be able to shun the sick by refusing to cover those suffering from pre-existing conditions. They also won’t be allowed to cap how much they will pay out to an desperately ill patient over the course of a year –or a lifetime. Perhaps most importantly, going forward, insurance companies selling policies to individuals and small companies will have to reimburse for all of the “essential benefits” outlined in the ACA–benefits that are not now covered by most policies. This means that, if they hope to stay in business, they will have to find a way to ”manage” the cost of care–but they won’t be able to do it by denying needed care.

As for providers, they, too, will be under pressure. A growing number will no longer be paid “fee for service” that rewards them for “volume”–i.e. “doing more.” Bonuses will depend on better outcomes, and keeping patients out of the hospital–which means doing a better job of managing chronic illnesses. Meanwhile, Medicare will be shaving 1% a year from annual increases in payments to hospitals. If medical centers want to stay in the black, they, too, will have to provide greater “value” for health care dollars– better outcomes at a lower cost.

This summer the Supreme Court’s decision sealed the deal. The ACA is constitutional. Health care reform is here to stay.

(Granted, if Mitt Romney wins the White House in November, all bets are off. But the Five Thirty Eight forecast, which has an impressive track record, suggests that Obama has a 70 percent chance of winning. That said, liberals should not be smug. The economy remains the greatest threat to President Obama’s re-election.)

Medicare Spending

The Obama administration should be broadcasting the news: Medicare spending is no longer growing at an unsustainable rate. Bloomberg columnist Peter Orszag commented on the “sharp deceleration” in Medicare’s outlays. “A common way to evaluate the growth in spending for Medicare is to compare the increase per beneficiary to income per capita,” the former director of the Office of Management and Budget (OMB) wrote. “Over the past 30 years, this excess cost growth for Medicare has averaged about 2 percent a year. The goal of many policy proposals, including provisions in the 2010 Affordable Care Act, is to reduce the future excess cost growth to about 1 percent annually.”

What is astonishing is that Medicare is now exceeding that goal. Over the past year, “excess cost growth has been much less than the target of 1 percent,” Orszag reports. “According to the most recent figures from the Congressional Budget Office, total Medicare spending this year through June rose 4 percent from the previous year. Meanwhile, the number of Medicare beneficiaries rose by almost 4 percent, too, and income per capita rose by about 3 percent. So excess cost growth has been significantly below zero let alone below the target of 1 percent a year.”

This suggests that the nation’s Medicare bill does not have to pose a threat to the economy, even as the number of Americans on Medicare’s rolls grows. Widely accepted reserach reveals that at least one-third of Medicare dollars are wasted on over-priced products and unnecessary treatments. Cut that fat, and we can accommodate an aging population.

Sweden faced the problem of a greying population years ago, and has managed to avoid what many who would like to slash “entitlement programs” insist is an “inevitable” explosion in medical spending as a nation grows older. Health care spending in Sweden has remained remarkably stable since the 1980s, costing roughly 9% of GDP, and when it comes to quality of care–and patient satisfaction– Sweden’s health care system is rated as one of the best in the developed world.

The Decline in Medicare Spending Began in 2010

Last August I wrote about the recent slow-down in Medicare spending on HealthBeat. “While our elected representatives wrangle over slicing entitlements, virtually no one seems to be paying attention to an eye-popping fact: Medicare reimbursements are no longer accelerating at a break neck-pace.

The new numbers should be factored into any discussion about healthcare spending: From 2000 through 2009, Medicare’s outlays climbed by an average of 9.7 percent a year. By contrast, since the beginning of 2010, Medicare spending has been rising by less than 4 percent a year.” At the time I argued that while some of the decline might be attributed to the recession, it wasn’t the main cause of the slow-down. Since most seniors on Medicare are retired, the rise in unemployment had not had a major impact on their use of healthcare. Unlike the rest of us, they were not losing their health insurance along with their jobs, and Social Security remained a stable source of income. Meanwhile younger Americans who depend on employer-based insurance were facing climbing co-pays and deductibles, but the out-of-pocket costs for Medicare patients were not rising rapidly. The vast majority have supplemental “wrap-around” insurance in the form of Medigap or Medicare Advantage plans that, in many cases, reduces co-pays to zero. Thus, unlike Americans under 65, Medicare patients had far less reason to postpone doctors’ visits and elective procedures.

I also noted that both Standard Poor’s (which tracks healthcare spending with the help of Milliman Inc. an independent actuarial and consulting firm.) and the Congressional Budget Office agreed that Medicare seemed to be “breaking the curve” of health care inflation.

In a telephone interview, S&P’s David Blitzer said: “I’m hesitant to say that this is a clear long-term trend. But it’s more than a blip on the screen.” In a S&P report on healthcare spending released on July 21 of last year, he went a little further: “Many participants [in the healthcare system] have indicated that providers are trying to address health care reform and are looking for ways to control costs. If true, this combination certainly would be a contributory factor to the moderation in cost we have witnessed since early 2010.”

When I talked to Zeke Emanuel, an oncologist and former special adviser for health policy to White House OMB director Peter Orszag, he agreed: “This is not mere chance: this is directly related to the initiation of health care reform.” It is not the “result” of reform, Emmanuel emphasized. The reform measures that will rein in Medicare inflation have not yet been implemented. But, he explained, providers are “anticipating the Affordable Care Act kicking in. They can’t wait until the end of 2013: They have to act today. Everywhere I go,” Emanuel, added, “medical schools and hospitals are asking me, ‘How can we cut our costs by 10 to 15 percent?’

“This is doable, since there is so much fat in the system” said Emanuel, a doctor who is well aware of just how often unnecessary tests and procedures hike medical bills, while exposing patients to needless risks. “Hospitals know that either [they] get volume under control, or prices paid both by private insurers and by Medicare will drop. This is why they want to make their systems more efficient.”

At the time I observed that Emanuel is far from cavalier about cutting Medicare coverage that could help patients. A medical ethicist, he has recently been chosen to lead the medical ethics department at the University of Pennsylvania’s Perelman School of Medicine. But Emanuel understands that patients do not benefit from waste, and that today, our medical culture encourages health care providers to “do more,” without always considering whether medical evidence justifies another test or treatment.

A few days after I published that post I heard from Peter Orszag, who confirmed that Medicare payouts were decelerating. Later that week, he published an opinion piece on Bloomberg, explaining how some hospitals were beginning to use information technology to rein in wasteful spending. Toward the end of last August, he posted a second post that made the case: “Medicare Spending Slowing as Hospitals Improve Care.”

“The data don’t yet allow a definitive conclusion about what’s causing the recent deceleration and whether it will last,” he wrote, “but it may be an early signal of a shift toward value in the health sector. My conversations with various hospital executives, for example, suggest they anticipate less generous reimbursement and more focus on value in the future – and are therefore trying to become more efficient now. That’s the discussion taking place in the strategic planning process at Mount Sinai Medical Center in New York, where I recently joined the board of directors.”

In his recent Bloomberg column, Orszag sounded more hopeful: “Health-care providers are anticipating a shift away from fee-for-service reimbursement,” which rewards them for “doing more”, he observed, “and they are increasingly using computer software to inform clinical decision-making and are ‘benchmarking’ physicians — that is, comparing their practice norms with those of other doctors — to move toward better care. These structural changes are essential to maintaining slower health-care cost growth.”

Can We Keep A Lid on Spending?

Now, the question is this: How do we sustain the trend toward more affordable care? Orszag offered a few excellent suggestions, including this one: “Rather than have Medicare set prices for lab tests and medical devices we should put all such purchases out for competitive bidding. In 2011,” he pointed out, “bidding reduced Medicare spending on wheelchairs and other equipment by more than 40 percent.” http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/DMEPOSCompetitiveBid/Downloads/Competitive-Bidding-Update-One-Year-Implementation.pdf

I would add that Congress initially blocked that shift to competitive bidding. No surprise, lobbyists representing equipment makers were not happy about the change, and so Congress stalled for eight long years. But eventually, concern about Medicare inflation forced a vote.

Under the Affordable Care Act, lobbyists will have a far harder time setting Medicare’s agenda. The Secretary of Health and Human Services will able to reduce payments for “overvalued servicers” and raise payments for “undervalued services”–without needing to go through Congress. Moreover, if a pilot program proves successful in reducing costs without harming the quality of care, she can roll that pilot out nationwide–again without having to ask Congress for permission.

It’s worth noting that the idea that Medicare put out purchases for competitive bidding was originally proposed by the Medicare Payment Advisory Commission (MedPac). I began writing my blog in 2007, I’ve been reading MedPac’s studies, and I am impressed by how much of MedPac’s excellent advice can be found in Affordable Care Act. This gives me faith that we will be able to make the structural changes needed to “break the curve” of runaway healthcare inflation.

Insurers Will Follow Medicare

I have always believed that Medicare will lead the way in reducing costs, and if it blazes the trail, private insurers will follow, and refuse to overpay for unnecessary tests and treatments.

In the 1990s, private insurers tried to “manage care”–with mixed success. Costs came down. But too often, they refused to pay for a treatment, not because it was unnecessary, but because it was too expensive.

Both doctors and patients howled, and the media took up their cause. By the end of the 1990s, the backlash had grown to a point that insurers simply gave up. They no longer wa­nted to see themselves on the nightly news, accused of having killed a mother of three by refusing to reimburse for the treatment that her family claimed that she desperately needed. (Sometimes the family was right. But in other cases, medical evidence showed that it the treatment her doctor had recommended was, in fact, futile– like the bone-marrow transplants that only increased the agony of dying for so many breast-cancer patients. ) But that story rarely made it onto the 6 o’clock news. It was too complicated, and not popular with viewers.

Ultimately, insurers stopped trying to reduce waste. They no longer asked for pre-authorization before agreeing to pay for a test. They began shelling out for most procedures that doctors recommended, and then simply passed rising costs on to customers in the form of higher premiums. Thus, since 1999, as this Kaiser Family Foundation chart shows, premiums have headed toward the heavens.

Using “Comparative Effectiveness” Research

What both MedPac’s reports and the Affordable Care Act make clear is that evidence-based medicine is the key to reform. Payers should reimburse only for products and services that medical research demonstrates will help a patient who fits a particular medical profile, providing “the right care for the right patient at the right time.”

Other countries make much better use of “comparative effectiveness” studies than we do. As long-time HealthBeat reader and occasional contributor Dr. Pat S. pointed out recently in a comment on The Health Care Blog: “Britain does not put as many people on dialysis as is typical in the US. That is because there are some patients with renal failure, especially among the elderly, who potentially do better without dialysis than with. Dialysis is extremely stressful to patients, and deaths related to dialysis are not uncommon. Some people do better without than with, and the better results for renal failure in the UK appear to be largely due to being more careful in choosing who gets dialysis and to more intense outpatient management of non-dialysis renal failure patients.”

Unfortunately, in the U.S.,  dialysis has become a big business. The dialysis industry’s lobbyists managed to infiltrate Congress, and as a result, Medicare’s payments for dialysis are extremely generous. This, in turn, has spurred the growth of the industry.

Dr. Pat S. continues: “The same thing could be said of aggressive treatments for almost everything. If surgery or other high tech treatments have significant rates of complication and death (and they almost all do,) many patients do better without the treatment than with. The fact that not using the high tech treatment as much also saves a boatload of money is a happy accident. . . . Looking for and implementing those type of happy accidents is one of the main tasks in front of both private and public insurers if we are going to salvage our health care system.”

Trimming the Fat by Reducing Reimbursements

MedPac has suggested that Medicare should begin the task of paring waste by focusing on particularly lucrative services: if volume is growing without a noticeable improvement in patient health, trimming reimbursements may curb the excesses.

As a study just published in Health Affairs explains, Medicare has succeeded in doing just that by slowing the growth of needless diagnostic imaging. From 1997 through 2007, the number of CT scans, MRIs and other diagnostic tests that Medicare beneficiaries received grew by more than 6 percent a year. It seems unlikely that seniors needed 6% more tests every year for ten years.

In fact, supply, not demand, was driving the growth in testing. During this period, more free-standing “imaging centers” were opening, and as they advertised for business, more patients came to them. (“Build the beds and they will come.”) Meanwhile, more doctors were buying diagnostic testing equipment for their offices. Studies published in MedPac’s reports revealed that once doctors had invested in the equipment, they had to use it in order to pay for it. Thus, the number of tests done by physicians who owned their own testing equipment spiraled.

During this time, the study reports, “Medicare paid more in some cases for imaging studies taken in a freestanding imaging center or a physicians’ office than for similar studies taken in a hospital outpatient facility.” Patients did not benefit; the tests done in imaging centers and doctors’ offices were no more accurate. Finally, Congress recognized the overpayments and “mandated that beginning in 2007, no study should be reimbursed at more than the hospital outpatient rate. The policy reduced profits for imaging centers and resulted in extensive consolidation in the industry.

“If imaging studies were ordered solely on the basis of medical criteria, the consolidation of imaging centers should have affected where a study was done but not whether it was done, so the legislation should not have affected utilization,” the researchers observe. “For reimbursement reductions to have reduced the use of imaging, one would have to argue that imaging centers were particularly active in stimulating demand.” And indeed, when lavish reimbursements were trimmed, “the slowdown in the growth of utilization was concentrated among studies taken at freestanding imaging centers and physicians’ offices.”

The cuts worked: beginning in 2007, the growth in the volume of diagnostic imaging quickly slowed from 6% a year to 1% to 3% a year.

Private Sector Insurers Reduce Costs By Once Again “Managing Care”

The Health Affairs report observes that we have a seen an equally sharp drop in diagnostic testing among patients under 65 who have private insurance. Following Medicare’s example, insurers took a closer look at these tests, and returned to requiring “prior authorization” of diagnostic imaging.

“By one estimate, at least half of all commercially insured people are now covered by a prior authorization program run by a radiology benefit manager. Under prior authorization, a physician’s order of a nonemergency study must meet the radiology benefit manager’s guidelines; if it does not, the physician must justify why the guidelines should not apply or risk losing insurance reimbursement. A variation of prior authorization involves computerized physician order entry systems that reduce utilization by providing information on appropriateness to physicians. These systems are now implemented in some hospitals and at the state level in Washington and Minnesota.”

Insurers also have raised co-pays for diagnostic imaging. .Conservatives are fond of the idea that if patients only had “more skin in the game” we would see less waste. But the Health Affairs study shows that “higher cost sharing does not explain the slowdown in growth” of diagnostic testing among Medicare patients. It turns out that that the use of diagnostic imaging slowed even though seniors were not asked to pay more toward the cost of the tests.

This suggests that slicing excessive reimbursements was the major factor behind the decline in testing, along with a growing fear that patients were being exposed to excess radiation.

Earlier this week, the Wall Street Journal reported that private insurers are quietly returning to managing care: “ Under pressure to squeeze out costs, some of the U.S.’s biggest health insurers are quietly erecting more hurdles for patients seeking medical care .The companies are in many cases reaching back to the 1990s” as they “weigh new requirements for referrals before patients can see specialists. UnitedHealth Group Inc., Cigna Corp. and others are increasingly requiring doctors to get prior authorization before patients can get certain care such as spinal surgeries.”

Many patients will be unhappy to hear this. But the truth is that we strong evidence which shows that many spinal surgeries provide no benefit to the patient. If we can weed out the futile treatments, we will not only save money: patients will be spared much agony, not to mention the risks of infections and medical errors that accompany any surgery.

The question is this: will those who make the decision be basing it on medical evidence? I have hope that the answer is “yes.” Under the Affordable Care Act more and more insurers will be working with doctors and hospitals in “accountable care organizations” (ACOs). In these cases, providers will share in the savings if they can improve outcomes while making health care more efficient—and more affordable. Thus, payers and providers would share the same goal: keeping patients healthy by providing coordinated, evidence-based care.

Maggie Mahar is an author and financial journalist who has written extensively about the American health care system. Her book, Money-Driven Medicine: The Real Reason Health Care Costs So Much, was the inspiration for the documentary, Money Driven Medicine. She is a prolific blogger, and recently relaunched her HealthBeat Blog, where this post first appeared.