President Barack Obama signs the bill that launched a thousand op-ed articles.

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What Brill's 'Bitter Pill' Gets Wrong on Obamacare

Peter R. Orszag is a Bloomberg View columnist. He is a vice chairman of investment banking at Lazard. He was President Barack Obama’s director of the Office of Management and Budget from 2009 to 2010 and the director of the Congressional Budget Office from 2007 to 2008.
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Steven Brill's new book about the process of passing the Affordable Care Act is so meticulously reported, I found myself surprised by many details of a process I myself was deeply involved in. I learned from “America's Bitter Pill,” for example, that in October 2009 one of my White House colleagues apparently wrote a memo arguing that I had misled President Barack Obama in highlighting the potential for the legislation to slow the growth of U.S. health-care costs. Brill approvingly quotes a staff member saying that the point of the memo was that “Peter overstated to the president how great the bill was on costs.”

If the reporting is accurate, the anecdote is not just surprising but also telling. A substantial amount of skepticism, perhaps even within the White House, existed about whether the health-care legislation did enough on costs. Yet the cost curve in health care is bending more drastically than even I believed possible in the fall of 2009. That’s because the collective impact of the legislation’s individual measures, along with similar changes in the private sector, has produced a shift in perspective and therefore behavior among health-care leaders.

This is a significant point that Brill fails to acknowledge -- to the great detriment of his thesis. Ironically, though, it's noted toward the end of the book by Gary Gottlieb, the outgoing chief executive of Partners HealthCare in Boston, who says, “There are a lot of problems with Obamacare. But the attention it focused, at least in the industry, on costs with those pilots made a lot of us realize we have to change how we operate.”

Change is indeed happening. The results thus far have been astonishing. In 2014, Medicare spending per beneficiary fell, in inflation-adjusted terms. Total Medicare spending was $126 billion, or a whopping 18 percent below what the Congressional Budget Office, in 2009, projected for last year, according to a recent Kaiser Family Foundation analysis. And this Medicare deceleration has substantially affected the long-term U.S. budget outlook.

Why have Medicare costs stopped rising as fast as expected? The biggest explanation is the direct effect of policy changes, including reductions in how much Medicare pays hospitals and Medicare Advantage plans, according to the Kaiser report. The rest of the effect is unexplained, but I suspect it is tied to the indirect effects of Obamacare. (The analysis for total health spending is more complicated, because it has been affected by the weak economy. Not so for Medicare.)

In particular, as I have written for several years now, three big trends are affecting the health-care sector. The first is the expectation, along with the growing if modest reality, that we are moving away from fee-for-service payment and toward paying hospitals and doctors for value. The second is that the U.S. health-care system is rapidly digitizing; in 2013, almost 60 percent of hospitals had at least a basic electronic health record, up from only 10 percent in 2009. And the third trend is that consumers are being presented with more information about how much their treatments cost and more incentives to avoid unnecessarily high charges.

While these developments are not due solely to the health legislation, Obamacare (and the 2009 stimulus) contributed, by varying degrees, to each of them. One clear aim of the law, for instance, was to shove health care away from the practice of paying for each test and procedure, because when we pay for quantity that’s what we get.

As this shift is undertaken through accountable care organizations and other mechanisms, providers are given the incentive to provide better care, rather than more care. This process results in blurring the distinction between a provider (a hospital, say) and a payer (an insurance company). After all, when a hospital benefits from lower-than-expected utilization, it has the incentive to effectively act as an insurance company. Brill himself recommends that, in order to control costs, hospitals be turned into insurance companies. He doesn’t seem to realize that that’s effectively what occurs when the payment system is reformed.

To be sure, the measures we were finally able to include in the Affordable Care Act that promote paying for value were not all that I or others wanted. But they were apparently enough to generate the response noted by Gottlieb. And his point -- that the legislation shifted expectations -- was both the basis for my guarded optimism in the fall of 2009 and also something that could never be modeled by the Congressional Budget Office.

An important note of caution is in order: We are still early in this process. Medicare payments, in particular, are still dominated by fee-for-service. More progress is now being made outside Medicare. Indeed, in 2014, 40 percent of commercial payments to doctors and hospitals contained value-based provisions, according to Catalyst for Payment Reform. That's up from only 11 percent in 2013. Unless Medicare leads the way, though, even these efforts may falter.

 The Obama administration therefore needs to forcefully apply the authority the law provides to make the shift toward value-based payment irreversible. It should, for example, declare a clear timetable with specific goals for value-based payments within Medicare. And it should act over the next few months, before the upcoming presidential campaign causes people to assume, again, that fee-for-service is here to stay. If that happens, the progress made to date would probably dissipate.

Brill has written an outstanding book about the administration’s efforts to pass Obamacare. Now it is up to the administration to prove him wrong about what the legislation does to the trajectory of health-care costs.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Peter R. Orszag at porszag3@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net