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Tag: spending

Happy 5th Birthday, ACA

Screen Shot 2015-03-23 at 8.02.41 AMThere are dozens of ways to take stock of the Affordable Care Act as it turns 5 years old today.   According to HHS statistics:

  • 16.4 million more people with health insurance, lowering the uninsured rate by 35 percent.
  • $9 billion saved because of the law’s requirement that insurance companies spend at least 80 cents of every dollar on actual care instead of overhead, marketing, and profits
  • $15 billion less spent on prescription drugs by some 10 million Medicare beneficiaries because of expanded drug coverage under Medicare Part D
  • Significantly more labor market flexibility as consumers gained access to good coverage outside the workplace

Impressive.  But the real surprise after five years is that the ACA may actually be helping to substantially lower the trajectory of healthcare spending.   That was far from a certain outcome.  Dubbed the Patient Protection and Affordable Care Act for public relations purposes, there were, in fact, no iron clad, accountable provisions that would in the long run assure that health insurance or care overall would become “affordable.”

ACA supporters appear to have lucked out—so far.   Or maybe, just maybe, it wasn’t luck at all but a well-placed faith that the balance of regulation and marketplace competition that the law wove together was the right way to go.

To be sure, other forces such as the recession were in play—accounting for as much as half of the reduction in spending growth since 2010.  But as the ACA is once again under threat in the Supreme Court and as relentless Republican opposition continues, it’s worth paying close attention to new forecasts from the likes of the Congressional Budget Office (CBO) and the actuaries at the Centers for Medicare and Medicare Services (CMS).

The ACA is driving changes in 17 percent of the U.S. economy that, if reversed or interrupted, would have profound impact on federal, state, business, and family budgets.   A quick look at some important numbers follows:

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If We Want Lower Health Care Spending, We Are Going to Have to Pay for It

Craig GarthwaiteUltimately, spending less on health care is a relatively easy task: We either need to consume fewer services, or spend less on the services that we consume. But much like we teach our Kellogg students about maximizing profits, the devil is in the details.

It’s certainly tempting to ask the government to swoop in on a white stallion and solve the all our problems by fiat. For example, we could have the government simply exploit its monopsony power and set prices, but an artificially low price will lead to an inefficiently low quantity of services and future innovation (stay tuned, we will have more to say about this next week).

Similarly, we could explicitly ration quantities (as opposed to implicitly doing it through a large uninsured population). But how could we hope to determine the right level of care? Ultimately, if we ask the government to unilaterally fix this problem, instead of a white stallion we could behold a pale horse and all that it entails.

The good part, perhaps the best part, about the Affordable Care Act is that it attempts to address this problem using market forces. The question is whether we are ready for what these market forces will entail.

We will focus today on the role of market forces in the insurance market to control prices in the newly established ACA exchanges.

This month the Obama administration announced that it would allow insurers to use “reference pricing” for insurance programs in the exchanges. Under a reference pricing system, insurers set the maximum price they will pay for a specific set of services and if patients go to a facility that costs more than that amount they are required to pay the difference.

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Is Higher Spending Truly Wasteful?

Craig GarthwaiteTwo weeks ago, the Kellogg School of Management was privileged to host Joe Doyle, an outstanding economist from MIT.

In a broad research portfolio, Joe has focused on the effects from differing intensity of medical treatments.

This research is shattering some long held beliefs about the relationship between health spending and outcomes.

We think that Joe’s work is not known widely enough outside of the academic community, so we are using our blog to let you know what you have been missing and, in the process, perhaps change the way you think about healthcare spending.

It is well known that the U.S. far outspends other nations on healthcare, yet the outcomes for Americans (in terms of coarse aggregate measures such as life expectancy, infant mortality, and other dimensions) are quite average.

Of course, these outcomes are not the only things that we value in health care.

A lot of our spending is on drugs and medical services that improve our quality of life and won’t show up in these aggregate outcomes. For example, more effective pain management can decrease pain and improve quality of life – often with important economic benefits.

Despite this fact, most health policy analysts have concluded that we can cut back on health spending, without harming quality on any dimension.

This is not a new idea, of course. In a famous 1978 New England Journal article, Alain Enthoven coined the term “flat of the curve medicine” to describe how the U.S. had reached the point of diminishing returns in health spending. And for nearly 30 years the Dartmouth Atlas has documented how health spending dramatically varies across communities without any apparent correlation with outcomes.

The question has always been, what health spending to cut? Garthwaite’s previous work has shown that broad regulations requiring longer hospital stays for new mothers and their babies have provided only limited benefits and that more targeted rules could save money without sacrificing quality.

Beyond some wasteful regulations, we can always point to gross examples of overspending such as the rapid proliferation of proton beam treatments. But beyond those clear examples how can one identify what is waste and what is medically necessary?

In two important papers, Joe Doyle and co-authors ask a more fundamental question – is the often cited broad variation in health spending actually wasteful at all? They find that even in healthcare, there really is no such thing as a free lunch.

His work should be mandatory reading for everyone who believes that broad spending cuts will have no adverse consequences.

For those who lack the time to read these papers, we provide the “Cliff’s Notes” versions.

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It’s the Jobs, Stupid. No, Wait. It’s the Stupid Jobs.

The U.S. Bureau of Labor Statistics came out with its June jobs report this week and, consistent with usual trends, healthcare jobs are booming. In June 2013 there were approximately 20,000 new healthcare jobs in the U.S., ¾ of which were in the ambulatory care sector and ¼ of which were in hospitals. Healthcare jobs represented 10% of all new jobs created this month.

The June growth in healthcare jobs matches up to the average 19,000 new healthcare jobs we have seen created in each of the prior months of 2013 and the 12% job growth we have seen over the last five years. In a country where new jobs are viewed as even better than baseball, apple pie and mom herself, these new jobs should elicit a huge round of applause, or at least a stadium style wave, right?

Or should they?

Change the channel and a different set of policy makers, employers and industry experts will tell you that the only way to save our economy from ruin is to cut healthcare costs. Cutting healthcare costs means making the people who work within the system vastly more efficient, eliminating unnecessary medical care (and thus reducing the labor that goes along with it), and helping empower consumers to do things for themselves, including taking a more active role in reducing their own demand for healthcare services and, in some cases, doing at home what they might previously have used the healthcare system to do (e.g., diagnostics, home care, etc).

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