How Obama's Plan to Control Health-Care Costs Could Fail

Medicare is betting on new payment models. The early results are thin

A nurse applies a saline wash through an IV line in Orem, Utah.

Photographer: George Frey/Bloomberg

When Barack Obama went to Congress to pitch his health-care law in 2009, he said the U.S. needed to expand access to insurance and control the cost of care. "We spend one and a half times more per person on health care than any other country, but we aren't any healthier for it,” he told lawmakers.

The law he signed five years ago succeeded in expanding access, with 16.4 million uninsured people gaining coverage.

How's the president doing on cost control? 

The Affordable Care Act let the administration create several experiments designed to transform how health care is paid for. The goal is to find alternatives to the fee-for-service system that pays doctors and hospitals more for doing more tests and treatments. That system has long been blamed for hundreds of billions of dollars of wasteful spending that doesn’t help patients and sometimes harms them.

In January, the Obama administration announced plans to accelerate a shift to new experimental payment models it has tested in the past few years. Medicare, the federal insurance for Americans 65 and over, already makes about 20 percent of its roughly $350 billion in annual payments through the new models, and the administration wants to raise that to 50 percent by the end of 2018.

There’s little evidence that those experiments meaningfully control costs.

"The savings they create are modest,” said Alan Weil, editor in chief of Health Affairs, a must-read policy journal for health wonks. Weil has said the reforms move in the right direction but has criticized them for being “insufficiently disruptive.” While changing doctors’  and hospitals' incentives is important, Weil said, "I just think humility in what we can expect is needed."

Medicare declined to make officials available for an interview and didn't respond to written questions.

The Obama administration has placed its bets on two approaches. The first is a model called accountable care organizations (ACOs), arrangements that encourage doctors and hospitals to collaborate to reduce costs while improving the overall health of their patients. Providers can get a share of the money they save. The second approach is called bundled payments, which attempt to limit the total price Medicare will pay for an “episode of care” such as a hip replacement. Bundled payments encourage doctors to avoid complications from surgery that can extend hospital stays, for example, because they won’t get paid more for extra treatment.

The early evidence from those programs is thin. Since 2012, health-care providers have formed 220 ACOs that attempt to save money for Medicare. Fifty-eight of those have demonstrated savings, according to the latest federal data. The total savings of $695 million works out to less than $200 saved for each person on Medicare covered by an ACO since 2012. Medicare pays, on average, more than $10,000 per patient per year. Another flavor of the ACO program, designed to make hospitals share more risk for patient outcomes, saw 13 of 32 participants exit.

The bundled-payments experiment started in early 2013. It has even more limited results than the ACO approach. The first analysis of Medicare’s bundled payment program, published last month, was based on just 15 providers. The review found that “the small sample sizes and early experience preclude drawing conclusions,” though the preliminary results suggest that the model may affect the way doctors and hospitals deliver care. For example, patients spent less time in nursing homes after a hospital stay and more time with home health aides, a lower-cost way to care for convalescents.

The consulting firm Lewin Group, which evaluated the policy for the administration, noted that next year it will have more data on how bundled payments work, allowing for “more statistically powerful results.”

The White House doesn’t have time to wait. Medicare's commitment to payment reform was meant to signal to hospitals and private health insurers that the days of the old system were numbered, said Farzad Mostashari, chief executive officer of Aledade, a company that helps independent doctors create and manage ACOs. (He also worked in the Obama administration, leading the effort to digitize patient records.) The administration had to turn to the new models at hand to demonstrate a commitment to change. 

“Look, the cupboard’s kind of bare,” Mostashari said. "It’s not like there’s 25 different programs poised to grow by millions of patients a year.”

While the evidence to support the new payment models may not yet be clear, and their effect won't be clear for years, the problems with the existing system are, he said. 

"What we have abundant evidence of is that fee-for-service is horrible," Mostashari said, "and having a really toxic effect on cost and quality and safety." 

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