Barring a Republican landslide in 2016, it looks like the Affordable Care Act (ACA) is here to stay. By and large, we think that is a good thing. While there are many things in the ACA that we would like to see changed, the law has provided needed coverage for millions of Americans that found themselves (for a variety of reasons) shut out of the health insurance market.
That being said, since its passage the ACA has evolved and the rule makers in CMS continue to tinker around the edges. We are especially encouraged by CMS’ willingness to relax some of the restrictions on insurance design, but remain concerned about some of the rules governing employers and the definition of what is “insurance.” In the next few blogs we will examine some of the best, and worst, of the ongoing ACA saga.
We start with one of CMS’s best moves—encouraging reference pricing. The term reference pricing was first used in conjunction with European central government pricing of pharmaceuticals. Germany and other countries place drugs into therapeutic categories (such as statins or antipsychotics) and announce a “reference price” which insurers (either public or, in Germany, quasi-public) that insurers will reimburse for the drug. Patients may purchase more expensive drugs, but they were financially responsible for all costs above the references price. Research shows that reference pricing helps reduce drug spending both by encouraging price reductions (towards the reference price) and reducing purchases of higher priced drugs within a reference category. Other research has found suggestive evidence of similar results for reference pricing for medical services.
While the ACA does little to govern pricing in the pharma market, the concept of reference pricing can and should be extended other medical products and services. In particular, insurers can establish reference prices for bundled episodes of illness such as joint replacement surgery. Under the original ACA rules set forth by CMS, insurers were free to establish a fixed price for bundled episodes. They could even require enrollees to pay the full difference between the provider’s price and the reference price. But there was a catch. It wasn’t clear if any spending above the reference price would count to the enrollees by enrollees out of pocket limits (currently $6,600 for individual plans and $13,200 for family plans). Obviously, allowing the out of pocket limit to bind on reference pricing would limit the effectiveness of this cost control measure.
A simple example may help. Consider knee replacement surgery for a patient who already paid $2,000 in medical costs this year. An insurer might set a reference price of $15,000. Then providers can charge any amount over $19,600 and the out of pocket cost to the patient would be capped at $4,600. And if the patient had any other medical expenses that year, the out of pocket cost would be capped even lower. This would hardly discipline providers whose prices are well above $19.600. Considering that one study suggests there will be substantial differences between prices charged by the top and median quintile providers of bundled services, such kind of market discipline is sorely needed.
Last year the Department of Labor (DOL) solved this problem, issuing a new rule so that payments above the reference price do not count towards the out of pocket limit in large group and self-insured plans. So now the formula for reference pricing under the ACA resembles the successful formula for reference pricing in Europe. We would actually prefer the that the regulators go a step forward and say that spending above the reference price also cannot be counted towards the individual’s annual deductible.
But even this new rule will only go so far to introduce market discipline. Insurers must be willing to bundle payments and this won’t happen in any big way until there are more “bundlers” – organizations capable of accepting bundled payments. Providers need not integrate to do this; indeed, the organizational problem of paying and incentivizing individual providers (be they doctors, technicians, nurses, or therapists) remains regardless of how the bundler is organized. But someone has to be the bundler.
More pragmatically, there are only so many conditions that lend themselves to bundling. The study of price variation that we mentioned earlier covered most of the high priced conditions for which bundling is popular – joint replacements, CABG surgery, and back surgery. Unfortunately, these represent just a small fraction of total health spending. It is difficult if not impossible to delineate the boundaries of chronic care for diabetes, cancer, asthma, and many other high cost conditions. One solution is to capitate providers, but many providers and their patients will object to this complete reversal of economics. Shared savings under ACA is the half-hearted version of capitation. But there is a way to incentivize patients to be more cost conscious.
The key is to recognize that deductibles might be a good way to get healthy people to pay attention to prices, but the U.S. health spending crisis is not driven by profligate healthy people. It is driven by the 18 percent of us, mainly with chronic conditions, who spend 80 percent of our health dollars. But patients with chronic conditions routinely blow through their deductibles. So the increased reliance on first dollar deductibles seems woefully misplaced. CMS can and should allow insurers to creatively redesign cost sharing so as to increase the price sensitivity of chronically ill patients, without increasing overall financial risk.
For example, consider a typical plan with, say, a first dollar deductible of $5000, and a coinsurance rate of 10%. A diabetes patient will spend $5000 in just a few months, and the savvy diabetes patient will realize that the marginal price of all spending throughout the year is just 10 percent of the full price. This hardly encourages price sensitivity. Here is an alternative plan that the ACA should allow. Insurance covers the first $20,000 of medical bills. Beyond that, the patient pays 33 percent of the next $20,000, up to their $6600 out of pocket limit. (Of course, the exact thresholds would depend on the predicted medical needs of the patient.) The patient faces less financial risk than previously, yet is faces higher marginal prices. It is a win-win. The point is that it is always possible in this way to encourage patients to be more responsible without increasing their total out of pocket burden.
Admittedly, this plan may force CMS to redouble its efforts to limit insurer cream skimming. For certain this plan won’t do such a good job of encouraging price sensitivity among the healthy. But that is a feature and not a bug of our proposal. Instead of imposing costs on the low spending individuals who are not causing the run-up in health spending, we prefer to follow the advice of great sage Willie Sutton and concentrate our efforts on “where the money is” not where it isn’t.
The authors are economists at the Kellogg School of Management.