Monthly Archives: September 2014

Medicare Price Caps as a Flawed Cost Control Model

Recent articles have suggested capping health-care prices at a percentage above Medicare payment levels as a way to bring down health costs. But evidence suggests that, rather than reducing overall spending levels, Medicare’s price caps don’t effectively control health costs.

The August blog post proposing the idea, published on the Health Affairs site, suggested that “every patient and every insurance company” should have the option of paying 125% of what Medicare charges for a given service, as a way to rationalize reimbursement systems notorious for their lack of transparency. Ironically, the authors of the Health Affairs post are affiliated with the Dartmouth Atlas of Health Care, a project that attempts to explain geographic variations in health spending (why Medicare spends much more per patient in Miami than in Minneapolis, for example). Much of its analysis has concluded that differences in physician behavior may account for much of the unexplained variations.

And therein lies the problem: Medicare’s payment system may be to blame for the higher levels in spending. Providers, when paid less per procedure, have sought to increase their incomes by performing more procedures over the past decade. According to the Medicare Payment Advisory Commission, while price levels rose 9% between 2000 and 2012, overall physician spending per Medicare patient skyrocketed by 72.4% in the same period–because doctors provided more services to beneficiaries.

These problems of low prices driving volume increases seem most acute in Medicare itself. In 2009, the town of McAllen, Tex., became famous after a New Yorker article by Atul Gawande profiled its high-spending health system. McAllen was shown to have abnormally high rates of Medicare per-patient spending than comparable areas. Yet research published in 2010 found that when it came to private health insurance, McAllen actually spent less per patient than the similarly situated town of El Paso. The researchers concluded that “health care providers respond quite differently to incentives in Medicare compared to those in private health insurance programs.”

One co-author of the 2010 study concluding that Medicare creates different provider incentives than does private insurance was Jonathan Skinner, who also co-wrote the August Health Affairs blogpost calling for Medicare’s price caps to be extended to all medical providers. Unfortunately, the former questions the wisdom of the latter. Price caps could well function as a politically appealing “solution” whose knock-on effects mean it won’t ultimately solve much of anything.

This post was originally published at the Wall Street Journal’s Think Tank blog.

Health Savings Accounts Controlling Costs

Last week’s release of the largest annual survey of employer-provided health insurance drew renewed attention to the ongoing debate about ways to slow the growth of health costs. The survey, conducted by the Kaiser Family Foundation, provided further evidence of one model making an important contribution in reducing health costs.

The survey found that health savings accounts tied to high-deductible plans with lower premiums have grown in popularity. Overall, 14% of all those with employer-provided insurance participate in health savings account (HSA) options.

While some employees may initially blanch at the high-deductibles associated with HSA-eligible insurance policies, most employers make cash contributions to the tax-preferred health savings accounts to help their employees pay for routine health expenses. The Kaiser survey found that more than three in four workers participating in HSA plans receive account contributions from their employers—an average of $769 for single policies, and $1,347 for family plans.

Even after accounting for employer contributions to workers’ accounts, HSA-eligible plans feature much lower premiums than other forms of insurance. The average family HSA plan costs $960 less than the national average for employer plans, and $1,330 less than plans without consumer-driven features. These results are consistent with a 2012 study in the influential journal Health Affairs, which found that further expansion of the HSA model could reduce health spending by as much as $73.6 billion a year.

The overall news on health spending remains mixed: While spending has grown at below-average rates in recent years, costs continue to rise faster than inflation and wages—and may accelerate further as the economy improves. However, the sustained popularity and effectiveness of health savings accounts since their introduction in 2004 could represent a critical piece of the puzzle in slowing health spending.

This post was originally published at the Wall Street Journal’s Think Tank blog.

Brookings v. Dartmouth on Health Costs

The Brookings Institution released a study last week that could turn the debate over health spending on its head. While many health analysts—including several key advisers to the administration during the debate over Obamacare—believe that variations in physician practice patterns could represent the key to unlocking a more efficient health system, the Brookings paper questions the degree to which such variations even exist.

At its core, the debate boils down to a difference in two econometric models, both of which attempt to explain geographic variations in spending— for instance, why Medicare spends so much more per patient in Miami than in Minneapolis. Researchers affiliated with the Dartmouth Atlas of Health Care previously found what they consider large, unexplained variations in health spending. Their research—which examines data from individual Medicare beneficiaries, controlled for health status—led them to conclude that differences in physician behavior may account for much of the unexplained spending variations.

The Brookings study, however, uses a different model, one that examines spending data from the state level, and controls those state data using average health attributes in that state, rather than using data from individual Medicare beneficiaries. This state-based model explains much more of the previously unexplained geographic variation in spending, arguing that states with similar demographics have similar spending levels. As a result, the Brookings paper concludes—contra­ Dartmouth—that “geographic variation in health spending does not provide a useful way to examine the inefficiencies of our health system.”

It’s unclear who has the more accurate model, and why. While Brookings’ state-level model incorporates data from both Medicare and non-Medicare beneficiaries, the Dartmouth research focuses just on Medicare patients—and may therefore be skewed by traits particular to the Medicare program, or Medicare beneficiaries, that do not apply to the population as a whole.

The debate over spending variations has profound policy implications. Former Obama administration official Peter Orszag, who has cited Dartmouth research in his writings, believes that variations in physician practice patterns—doctors performing too many tests, for instance—lie at the root of the unexplained variations in spending.  Mr. Orszag and others used this theory to inform many policy choices related to Obamacare, which included a variety of carrots and sticks that attempted to change physician behavior and reduce spending variations.

The Brookings study undermines the basis of the Dartmouth thesis, and one of the reasons why Obamacare’s adherents believe the law will ultimately reduce health costs. Despite its arcane details, the debate between Dartmouth and Brookings will have profound real-world consequences for our health system in the coming years.

This post was originally published at the Wall Street Journal’s Think Tank blog.

How Politics and Policy Could Accelerate Health Spending

Medicare actuaries’ annual projections of health expenditures for the next decade emphasized that health spending will rise modestly in the coming years. However, decisions by the administration and Congress to undo future spending reductions could change that picture.

The Wednesday release showed that national health spending will grow at a 5.6% rate this year, due in large part to coverage expansions under the Affordable Care Act, or Obamacare. In 2015, the actuaries estimate that health spending will rise at a slightly lower 4.9% pace, due to “significant decelerations in Medicare and Medicaid spending.” But policy makers may yet reverse the policies behind those projected slowdowns.

With respect to Medicaid, the actuaries noted that in 2015, a “temporary increase in payments in primary care providers is scheduled to expire,” leading to slower spending growth. But spending growth would accelerate if lobbying by numerous medical groups is successful in extending — and broadening — the payment provision.

Likewise, the actuaries note that in 2015, Medicare spending will grow at a much slower rate, “mainly as a result of reduced payments to Medicare Advantage plans.” However, the Medicare Advantage payment reductions included in Obamacare have become a political albatross. In 2011, fearing seniors’ wrath at the polls in 2012, the Obama administration announced a temporary—and legally dubious—Medicare Advantage demonstration program that mitigated much of the effects of Obamacare’s payment cuts.

The administration also scaled back other rounds of Medicare Advantage cuts in 2013 and 2014. If past performance is indicative of future results, some or all of these cuts could be reversed administratively, leading Medicare spending growth to rise instead of fall in 2015.

The analysis above demonstrates the extent to which policy choices made in Washington directly influence national health spending trends. To the extent that reductions in health spending programs become politically unpalatable, and Congress or an administration feels the need to undo them, our health spending growth—to say nothing of our fiscal deficits—will only increase.

This post was originally published at the Wall Street Journal’s Think Tank blog.