Budgeting Health Care Is Only a Matter of Time

Alain Enthoven, the Stanford University economist who provided the intellectual firepower for the Clinton Health Plan, rejects the cost-control elements of the current reform legislation as grossly inadequate. As regular readers of this blog know, I largely agree with that assessment: there is little in the House or the Senate measures that would immediately start to bend the cost curve. But I disagree with Enthoven's views about the extent of the problem and the nature of the solution.

First of all, Enthoven, echoing Atul Gawande in a recent New Yorker article, dismisses the cost control measures in the Senate bill-the stronger of the two bills in this area-as little more than pilots, except for the "Cadillac tax" on high-cost health plans. However, the value-based purchasing aspect of the Senate bill, designed to encourage provider quality and efficiency, goes into effect immediately for hospitals, and a few years later for physicians. We don't know yet how much of doctors' income will be at stake, but the AMA and other medical societies are already protesting this approach. Hospitals fought an earlier version of the concept in the Senate Finance Committee bill and managed to reduce the initial amount of their payments that Medicare will hold hostage. But the principle of value-based purchasing will nonetheless start to move us away from fee-for-service, one of the primary causes of the rapid health cost inflation we have today.

Another cost-control initiative in the Senate bill that Enthoven slights is the one that incentivizes hospitals and physicians to form "accountable care organizations" (ACOs) that could share in any savings they produce for Medicare. This, too, goes into effect immediately. As I've noted before, the fragmentation of the care delivery system will be an obstacle to ACO formation, but large hospital systems that employ physicians could jump into this program fairly rapidly. "Payment bundling," designed to prevent hospital readmissions by having Medicare give hospitals a single payment for acute and post-acute care, is only a pilot in the Senate bill. But many hospitals already are preparing for this payment approach, which they regard as a done deal. So the Senate measure is a potential game changer.

Enthoven contends that the only way to contain costs is to give consumers a free choice of health plans, which he says would force health plans to become more efficient. This, of course, is the central idea of "managed competition," the Enthoven theory that was at the heart of the Clinton plan. But there is no evidence that more competition among health plans lowers costs; in fact, providers often negotiate higher payments when they have more insurers to bargain with. Only when competition among providers replaces competition among insurers will consumers have real choices and the power to drive costs down. Also, the kinds of plans Enthoven favors-vertically integrated, group-model HMOs like Kaiser Permanente, Intermountain and Geisinger-have succeeded in only a few parts of the country, mainly because neither patients nor doctors accept this approach in most areas.

In fact, the biggest problem-and the one that neither the Democrats nor the Republicans want to discuss-is that the American public is not yet ready for healthcare budgeting, although that is where the current reform measures are quietly heading. I was reminded of this when I saw a news story about the Ontario provincial government's proposal to freeze funding for 154 publicly financed hospitals. (They might also get an increase of up to 2.1 percent, the same as this year.) Citing a huge government deficit, the health minister said that the hospitals might get no increase for fiscal 2010-which would represent a payment cut because of inflation. "A freeze would lead many hospitals to cut services that affect patients," the article said.

Can you imagine the political firestorm that such an announcement by Medicare would set off in the U.S.? While there have been protests against the Medicare cuts proposed in our reform legislation, those reductions would only reduce the rate of growth in hospital payments, not freeze them at the current level. Yet Ontario hospitals, which are used to operating within a budget, know that they have no real choice; if push comes to shove, they say, they might have to shut down some beds or reduce emergency services. So far, Canadians have not taken to the barricades.

In this country, many people would cite this situation as an example of why the government should not manage healthcare. But what they fail to grasp or don't want to admit is that, even under our private/public system, we will have to submit to budgeting, and sooner rather than later. The alternative is to have healthcare gobble up the lion's share of our GDP and squeeze out every other form of government spending except defense. Since we're not going to let that happen, there must be limits on healthcare. The challenge is to make the best use of our limited resources.