Are Hospitals Responding to a Health Reform That Hasn't Happened Yet?

The money America spends on health care has been growing at a historically slow pace over the past five years. Some of the slowdown is surely due to the economy—after people lost jobs and their health insurance, they went to the doctor less.

But it turns out that Medicare spending per enrollee, adjusted for inflation, has also dropped over the past three years—a sign that the deceleration in health spending is happening independently of the ups and downs of the economy and that policy changes might be at work.

Specifically, argues Peter Orszag, medical providers, and hospitals in particular, are preparing for the end of the fee-for-service payment system in which they make more money by providing more care. Orszag, the former director of the White House Office of Management and Budget (and Bloomberg View contributor) made his case earlier this week in a presentation to a forum on health-care spending held by the Altarum Institute in Washington, D.C.

Hospitals, it turns out, are reducing the number of patients readmitted after they’re discharged. Historically, they make more money the more patients they admit, but the hospital industry senses those days coming to an end, Orszag says. ”Providers are starting to respond to what they perceive to be a change in the payment structure that hasn’t yet occurred,” he said.

Not only has the change not yet occurred—it’s not clear when or how it might. Although some recent reforms, such as accountable care organizations, have nudged parts of the health-care system away from fee-for-service payments, it’s still how most doctors and hospitals get paid. Efforts by private insurers to reward doctors for keeping people healthy rather than for ordering more tests and treatments are also underway, but only in a halting, piecemeal fashion.

For now, most health-care companies still have economic incentives to provide more care. Orszag says they’re trying to get ahead of changes to their payment model. ”The worst place to be is one foot on the boat and one foot on the dock when the boat’s moving away from the dock,” he says. He’s not alone in making that argument. Health-care providers “do expect that the payment, the flow of dollars in the future will be constrained,” Brandeis health economist Stuart Altman told the conference.

Still, whether that expectation is contributing to a long-term slowing of health-care costs—before the payment system has changed—is anyone’s guess. Princeton economist Uwe Reinhardt is among those questioning Orzsag’s analysis. When it comes to explaining the deceleration in medical spending, he said at the conference, ”we don’t know what the hell is going on.”

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