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Healthcare Markets Show How to Bend The Cost Curve

While the debate over cost cutting in healthcare reform continues, some healthcare markets around the country are already showing how to bend the cost curve.

In Richmond, VA, for example, the number of hospital beds has shrunk by 600 since 1996, mainly because of state certificate-of-need laws. There are now three hospital beds per 100,000 people, compared to 4.8 beds in the mid-'90s. Though some might call this rationing, Medicare data shows that Richmond hospitals score above the national average on the treatment of heart attacks, heart failure, and pneumonia. Meanwhile, Richmond's costs have risen more slowly than the national average. From 1992 to 2006, the city's ranking in Medicare spending fell from 126 to 39 out of 305 metropolitan areas nationwide. So, despite losing 15 percent of its hospital beds, Richmond has seen care improve and costs drop.

The same thing has happened in other markets where hospital capacity has decreased. Health care inflation in Rochester, NY, is below the national average, partly because the closing of two hospitals in the city left the others operating at full capacity. In addition, there are fewer ambulatory surgery centers in Rochester than in most other markets. The reason is not New York's certificate of need law, but a local organization called the Community Technology Assessment Board (CTAAB). Using data supplied by a regional health services agency-the legacy of a 1970s federal law that was gutted by President Reagan-CTAAB makes recommendations on the need for healthcare facilities, and local insurance companies enforce them by refusing to pay for care delivered in new facilities that are deemed unnecessary.

A comparison of two other markets-Dallas and Sacramento-shows how healthcare spending got out of control in the former, but not the latter. In 1994, Medicare spending per beneficiary was nearly identical in the two cities: $4,783 in Dallas and $4,793 in Sacramento. By 2006, the per-capita cost had climbed to $10,103 in Dallas; but in Sacramento, the cost was only $7,324, 12 percent below the national average.

Observers attribute the difference to two factors: First, Dallas rejected HMOs and paid providers mainly fee for service-which, by the way, was at rates far above those paid in most other areas of the country. Sacramento, in contrast, was and still is a market heavily dominated by managed care. Second, to compete with Kaiser Permanente, the dominant player in Sacramento, the other providers in town consolidated. Hospitals formed large healthcare systems, and thousands of doctors gave up their private practices and went to work for hospital-affiliated groups. The result was greater efficiency and better coordination of care. The two big hospital systems in Dallas-Baylor and Texas Healthcare Resources-are starting to do the same, but the market remains much less consolidated than Sacramento.

One signpost to the future is Baylor's formation of an accountable care organization (ACO) similar to those proposed in the Senate reform legislation. The ACO will receive budgets from insurers and will pay fixed amounts to physicians and other providers for various kinds of treatments. Catholic Healthcare West, based in California, is planning to launch a pilot ACO this month. If this looks like the rebirth of capitated integrated delivery systems--the 1990s managed care ideal--we shouldn't be surprised. After all, "the more things change, the more they stay the same."