Health-Care Goal Should Be Quality, Not Quantity

Sept. 5 (Bloomberg) -- The Independent Payment Advisory Board is perhaps the most mischaracterized part of the health-care reform law -- which is saying something, given how many false charges have been hurled at the Affordable Care Act. The IPAB was designed to be a backstop to make sure the health-care system makes a transition from fee-for-service payments to payments based on value.

Because both sides of the political aisle agree that we need to move away from fee-for-service, you would think the IPAB would enjoy support from Democrats and Republicans alike. That bipartisan appeal was reflected in the vaunted bipartisan Bowles-Simpson budget commission report, which proposed strengthening the board.

The IPAB -- a group of 15 health experts -- was designed by the Barack Obama administration, however, and so by the new, hyperpartisan laws of political economy, conservatives have a duty to criticize it. The most recent critique can be found in a misguided Wall Street Journal editorial.

Before we get to the IPAB, let’s look closer at the needed shift in the way payments are made for health care. A white paper from TriZetto Group Inc., a health information-technology and management company, assessed this core problem more accurately than the Wall Street Journal editorial board did.

“Providers, especially physicians, control the majority of healthcare costs through decisions about diagnosis and treatment,” the TriZetto authors wrote, and they correctly emphasized the need for “direct modification of the behaviors of providers (versus consumers or payers).” The Wall Street Journal, like Republican vice-presidential nominee Paul Ryan in his budget proposal, instead focuses on pushing consumers and payers to make more economical choices. (Disclosure: In 2010, TriZetto paid me to speak at a conference.)

Concentrated Expenses

Focusing on providers is key because health-care expenses are so concentrated: High-cost cases account for the vast majority of the total. In those cases, the care provided is, as it should be, mainly the services and tests recommended by the provider. So if you do not influence provider recommendations in those cases, you cannot do all that much to improve the system.

The evidence suggests, furthermore, that shifting away from paying for quantity and toward paying for quality affects what providers do in those high-cost cases. Although other quality-improvement measures -- checklists, clinical-support computer software, benchmarking physicians and malpractice reform -- can also influence provider behavior, the payment system is arguably the single most important determinant.

Providing a single comprehensive fee for treating a particular disease, a so-called bundled payment, rather than shelling out for each procedure is especially promising. In the 1990s, a Medicare pilot project that bundled payments for bypass surgery reduced costs by 10 percent without diminishing the quality of patient care. (Unfortunately, Congress did not respond by moving Medicare in this direction.) Likewise, a recent analysis of the Alternative Quality Contract in Massachusetts, an innovative program that includes a pay-for-performance component, showed that it reduced costs by 3 percent in its second year of operation, while improving quality.

None of this is surprising. Presumably the Wall Street Journal editorial board believes in the power of incentives (in this case, for providers). If you pay providers for quantity, that’s what you get. We need to instead pay them for quality.

Shift Anticipated

The health-care-reform law moves significantly in this direction, and I believe that one reason health spending has decelerated so much over the past few years is that providers are anticipating a drastic shift away from fee-for-service in the years ahead. We should be doing everything possible to continue this progress.

That’s where the grand debate over the future of Medicare comes in. A recent article in the New England Journal of Medicine, which I co-wrote as part of a group assembled by the Center for American Progress, set a goal for the next decade of making at least 75 percent of payments on some basis other than fee-for-service.

The question is how to get there. The Wall Street Journal, in supporting the Ryan budget, says insurance companies can lead the way. Because the Ryan budget doesn’t expand the role of insurance companies until 2023, however, it wouldn’t meet the 75 percent target over the next 10 crucial years. The health-care system is making a transition now, not 10 years from now.

More fundamentally, even if the timing of the Ryan budget were accelerated, it wouldn’t work as well, because to change the structure of a big market often requires a dominant player to lead the way. Which single insurance company has such a dominant position that it can transform the health-care payment system in the foreseeable future?

For better or worse, only Medicare is large enough to lead the health-care system toward a new structure of payment for providers. By pushing more Medicare beneficiaries into private plans, Ryan’s budget would dissipate Medicare’s market share across numerous insurance companies -- making it harder to transform the payment system because none of the insurance firms is big enough to pull it off on its own.

Which brings us back to the IPAB. Given that changing provider behavior is the single most important step in moving toward higher-value health care, and that Medicare has to play a vital role in that shift, the question becomes whether Congress can direct that change by itself. Perhaps it can, but there is a good chance it cannot, when you consider how lobbyists work to protect their narrow interests and the relative lack of medical knowledge in Congress. The large number of sensible payment-reform proposals from the Medicare Payment Advisory Commission that Congress has not acted on in the past illustrates the risk.

Legal Authority

The IPAB was designed to be a backstop in case Congress is unable to overcome its inherent challenges. The board has the legal authority -- if the growth in health-care costs exceeds specific thresholds -- to propose measures that take effect automatically unless Congress enacts alternatives.

The board’s critics claim that the IPAB will either ration care or simply cut payment rates. By law, though, it is not allowed to ration care. And Congress itself has proved capable of reducing payment rates in a blunt fashion -- that doesn’t require a panel of experts.

In the future, the board may be needed to gradually push Medicare away from fee-for-service, if Congress is unable to do so. Employers, payers and providers who are interested in shifting the health-care system toward value should therefore take a second look at the IPAB. Paying for quality will probably turn out to be much harder without it.

(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

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To contact the writer of this article: Peter Orszag at

To contact the editor responsible for this article: Mary Duenwald at

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