Where Does the ACA Go From Here?

Craig GarthwaiteBarring 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.

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6 replies »

  1. People /patients wake up! if a fat man walks into a restaurant, is the waiter going to send you for a Weight Watchers session? No, the fat man will order the special of the day. if he has no wallet the police will be called. Does this happen in sick care, in a hospital? NOOOOOOO. The social workers will sign you up for Medicare or Medicaid faster than a speeding bullet. And prices, elastic and opaque as they are, will rise.
    Doctors cannot discuss fees, we are muzzled by anti trust legislation, and we are not allowed to set prices. Only CMS and the “stakeholders” revise the fee schedules, and they vary from state to state, county to county. SO if you can find the govt fee for pneumonia where you live, good luck.
    If a poor shmuck with a brain tumor, end-stage “ends up” in a hospital it’s because nobody had an end of life talk, or a hospice talk. The poor man is going to die, and the greedy hospital sees dollars (paid for by Medicare, you and I) so the festival of procedures begins. In that situation the family and the oncologist dropped the ball. You must think about death and how you plan for it when you’re alive and healthy, because nobody gives a rats’ ass once you’re in bed 9b. Au contraire, a hospitalist you have never seen and you will never see again is now your doctor– and is an employee of the corporation running the hospital.

  2. Costs are a major issue that few really want to be honest about. Why does the U.S. spend more on healthcare than any other OECD country? The answer is simple…Waste, Fraud, and Abuse.
    My own father died lying in his own feces while the nurses who ‘cared’ for him walked by being careful not to tarnish their new manicures. How much do they make an hour?
    Meanwhile the doctors filed-in one after another asking a man with a tumor in his brain and suffering from dementia if he wanted multiple tests and treatments to coincide. Being 67 years old he was paid-for by Uncle Sam, so why not…right? Rack up those “billable events” as fast and as often as possible boys and girls. Gotta pay for those union nurses’ and doctors’ salaries!
    Let’s get honest here for a change. Greed is the driving force in healthcare today…plain and simple. And, sadly, those nurses and doctors who do strive for excellence are afraid to say anything for fear of losing a meaningful career.
    Wanna fix it? Sentence those found guilty of fraud to life in prison, take every penny and asset they have and throw their families in the street. That is what they do when they commit their fraud on unsuspecting families, and they do not care, so why should the judge? Healthcare is the new organized crime. Now, who has the balls to bring some honest, frank discussion to the table without fear of reprisal from the healthcare ‘industry’? Who is willing to pull their heads out of their textbooks and financial reports long enough to take a look at how real people have to face the second-rate care being foisted-off on them every day?

  3. Drs Dranove and Garthwaite do a good job by proposing a health plan which pays the first $20,000 for a severe diabetic.

    But per Dr. David Belk, why does a diabetic cost that much? Check him out.

    Also, drs have a reluctance to talk about the costs of care. I do not blame them at all. It is very very hard to do. I hope that Dr Dranove and Garthwaite ( who seem to be academics) recognize that.)

    A system like Canada or Germany relieves them. A large percentage of costs are paid no matter what.

  4. Bob makes a couple of good points. There are certainly cases where the patient may have some spending discretion based on the physician’s recommendations, eg, do I get an MRI for my sciatica now or wait until have had conservative treatment? Other cases, such as emergency appendectomy, chemo, etc. you have to get the treatment you need without delay, so cost debates are pointless. If you look at the “Choosing Wisely” initiatives, those recommendations are based on elective testing and procedures that may not necessarily change the course of treatment, or bring great benefit to the patient. These are areas where spending decisions by the patient can be valuable in decreasing costs.
    I also agree with Bob regarding the outrageous costs of medical care in general. If a CT really costs $4000, why is it the insurance companies can barter for less than half the costs? I realize this is based on the insurance company guaranteeing increased volumes for the provider, but my wife has had the insurance company call her to encourage going to a less expensive imaging center, so there something very fishy going on here between these large providers and insurance companies.
    Lastly, it seems insurance companies are now more interested in the denial of care than paying for high ticket items. Colleagues of mine have reams of paperwork to fill out before approval of an MRI can be obtained. Insurance companies are also going by treatment algorithms which require certain tests or treatments to be done before proceeding to the next step. In many cases these steps only delay the proper treatment or testing.
    Much, much more needs to be done in the health care arena other than just making sure everyone has insurance.

  5. We are at a point where more and more people are aware of the waste represented by an insurance premium. Simple math can tell them that despite paying monthly high premiums they have still handed over a significant amount of money directly to the care providers. The time is right to legislatively open the door to encouraging arrangements in which a greater portion of the premium goes into a two-party arrangement and the third party payer is relegated increasingly to risk-related insurance functions.

  6. Although this post is well written, as is always the case with these authors,
    I question some of its assumptions.

    When the cost of health care gets to be over $20,000, the patient is not ‘spending’ anything (in the sense that buying a new car is spending.)
    At that level of care, the patient is undergoing procedures and using drugs that their doctor has in good conscience recommended.

    ‘For that reason I feel that nearly all deductibles for hospital care are mainly just plain old financial cruelty, and ‘taxing the patient’ in the words of Prof Robert Evans.

    Patients do exercise some choice on many therapies, but I question if that choice is driven by costs or should be. (note- I am not a doctor, I could be wrong about this.) The choice might be between a risky surgery that could leave you crippled or impotent, versus watchful waiting and more drugs.

    In any event, the reader of my post might well ask how I would control health spending if I shy away from deductibles.

    I would control spending by controlling prices.

    I would have no deductibles for chemotherapy or Sovaldi or bypass. But I would set the price of chemotherapy at a level which fits the overall budget. And if chemotherapy costs spun upward, I would lower the standard price.

    Instead of having a provider charge $20,000, and make the patient pay $5,000 of that to (in theory) discourage more usage, I would cap the fee at $12,000 and pay all of it with the insurance.

    If $12,000 strains the budget, I lower the fee to $10,000.

    And of course no balance billing.

    Some providers drop out of the national plan at those fees. I let them go, not happily but I have a budget to run.

    I realize I have just described what I understand to be the basic system in Germany and Japan, especially as described by Prof Joseph White in his masterful book Competing Solutions.

    So, my alternative is not very mainstream American. So be it.

    Bob Hertz, The Health Care Crusade