Saturday, January 22, 2011

Health Wonk Review Review: Does PPACA Control Health Costs?

Cross-posted from The Agenda on National Review Online.

The latest edition of Health Wonk Review was hosted by Joe Paduda of Managed Care Matters. Fittingly, it touched on Republican efforts to repeal PPACA. Count Joe among those who are irked by the “Obamacare” moniker: “the President signed a bill that was sent him by the Senate; BaucusCare would be much more accurate.” Does this mean we get to refer to the “Bush tax cuts” as the Lott/Daschle tax cuts, and the “Clinton balanced budget” as the Gingrich balanced budget?

Paduda also weighed in on the debate regarding the CBO’s assessment of PPACA’s fiscal impact, arguing we should trust the CBO because “they’ve no axe to grind, unlike the pols.” (My take on the matter is somewhat less sanguine.)

Austin Frakt of the Incidental Economist is the left-of-center health wonk who is most engaged with right-of-center analysts. So I was surprised to see him approvingly cite this quotation from health economist Henry Aaron:
[T]he bill contains, at least in embryonic form, virtually every idea for cost control that any analyst has come up with…The most practical cost-control strategy that is now available to Congress is to accelerate the implementation of these provisions, not to stymie them.

This argument that “every idea for cost control that any analyst has come up with” was incorporated into PPACA is only true of you entirely exclude the right side of the spectrum. I can tick off a laundry list of cost-control strategies that weren’t included in the law: means-testing Medicare benefits; defined contribution reforms; indexing Medicare eligibility to life expectancy; serious tort reform; FEHBP-modeled reforms, etc. etc.

Furthermore, I and most other free-market-oriented health policy analysts argue that PPACA will increase costs by further subsidizing the overconsumption of health care. If you increase demand, while keeping supply constant, prices go up.

The opportunity for cost control that most excites center-to-left health wonks is PPACA-sanctioned accountable care organizations, or ACOs. Indeed, the January 2011 issue of Health Affairs is devoted to the topic. ACOs work by assembling a group of hospitals, doctors, and clinics who agree to be paid based on quality-driven measures, instead of simply on a fee-for-service basis. With this in mind, Jason Shafrin of Healthcare Economist has identified some legal barriers to ACO implementation that ACOs will need to seek waivers from.

Jeff Goldsmith of the Health Affairs Blog has an unconventional approach to Medicare’s “doc fix”; i.e., Sustainable Growth Rate, problem: “writing off the SGR ‘debt’ to the federal budget as ‘uncollectable’ and demanding both sacrifice and reform from the physician community in exchange.” The end result of the proposal put forth by the President’s deficit commission was somewhat similar: various Medicare and health spending cuts used to offset a long-term doc fix.

Rich Elmore of Healthcare Technology News links to a report from the International Federation of Health Plans that finds that the U.S. has the highest hospital and physician fees in the world. Could this mean that the “doc fix” doesn’t need to be fixed?

David Harlow of HealthBlawg has an interesting piece on an ongoing lawsuit to overturn one aspect of the Massachusetts individual mandate. The issues are quite different from those surrounding the PPACA mandate, as you can imagine.

The rest of this fortnight’s Health Wonk Review can be found here.


  1. Avik, you put out a lot to chew on. A couple of comments.

    Re: "Furthermore, I and most other free-market-oriented health policy analysts argue that PPACA will increase costs by further subsidizing the overconsumption of health care. If you increase demand, while keeping supply constant, prices go up."

    Again, health care consumers generally cannot make rational choices. So they can't determine what "overconsumption" is. Replace the doctor in my shingles anecdote with a layperson. He presents with shingles in the ER, a neurologist does a quick look and says "Hmmm...maybe a brain tumor..." No way the patient is going to challenge the $4,000 MRI. What the heck does he knows? If he has a high deductible insurance plan, he'll still acquiesce and hope for the best.

    The thing about technology insertion is that the capital costs are sunk and the clinical risks are low. Since the marginal costs are also low the incentive by the provider is max utilization of the machine. If the occasional patient skips on an MRI bill, it's more than made up by keeping the queue long generally.

    The same thing with pharmaceuticals. The the GERD clinical problem was effectively solved with Prilosec. Now OTC Omeprazole is available at less than 50 cents a pill. But doctors still prescribe branded Nexium and Aciphex right and left at 10X the cost. Likewise with most of the me-too psychotropics. But how many patients can rationally challenge a doctor's prescription even if the co-pays were made very high?

    I'm not sure what an ACO is, but it sounds like a variant of the HMO model. Which pretty much failed because people did not like the level of managed care. Well in the end, some kind of rational insertion of clinical and economic oversight has to be embedded in the system.

    I'm not saying that there are no savings available from economic incentives/penalties to patients. I'm just saying that until providers are forced to consider benefit/cost+risk in their decision making, the opportunity space is probably pretty limited.

  2. Hi SteveM,

    Your basic assumption -- that patients don't know what's good for them, and that therefore government experts are best equipped to guide their care -- is one I think you should put more consideration into.

    Especially in these days of the internet, patients do have the ability to gain more expertise about the standards of care for their conditions than was possible previously. If it's their money, they are going to resist taking Nexium if Prilosec is cheaper, unless Prilosec doesn't work for them. I know many people who say that Nexium worked for them when Prilosec didn't -- clinical trials don't bear it out, but if someone wants to pay the extra $100, they should be free to. But it should be their money.

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