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Healthcare Reform Won't Slow Medical Costs Until Doctors Get Paid Differently

Just as the election season starts in earnest, the Centers for Medicare and Medicaid Services (CMS) has thrown out a study projecting that healthcare reform will increase health costs between now and 2019. This report, which will undoubtedly heat up the reform debate, will not surprise those who understand that the Affordable Care Act is primarily designed to expand insurance coverage. But what the CMS actuaries aren't taking into account are the economic and social forces that will reshape the healthcare delivery system over the next decade.

Comparing the current figures to earlier estimates that CMS' actuaries published in March 2010, the new report predicts that average annual health spending growth will be 6.3 percent from 2009-2019, or 0.2 percent higher than the previous estimate. At that rate, national health spending will increase from $2.5 trillion, or 17.3 percent of GDP, in 2009, to $4.6 trillion, or nearly 20 percent of GDP, in 2019. That's just slightly more than the pre-reform estimate.

The big variables are these:

  • Medicare payments to physicians. Costs are expected to rise 4.2 percent -- one percentage point below the previous estimate -- in 2011, mainly because a repeatedly postponed 23 percent cut in physician pay is scheduled to take effect in December of this year. You'd have to be a CMS actuary to place a bet on that happening, so we can expect spending to rise even more.
  • Expansion of coverage. Starting in 2014, an estimated 32.5 million people will gain coverage, more than half through Medicaid. Healthcare spending growth that year is expected to increase 9.2 percent, vs. the 6.6 percent earlier predicted. Out of pocket spending on health care will decrease as more people obtain insurance.
  • Government spending shifts. From 2015-2019, health costs will grow at a slightly slower clip than originally projected. While costs associated with coverage expansion will keep rising through 2016, ACA-mandated cuts in Medicare provider payments, plus the excise tax on high-cost plans, will decelerate spending during that period.
Let's set aside the usual political rhetoric about how reform is a bust because it won't cut costs. Informed observers who support the reform law knew that going in. The overarching concept was that if most people were brought into the system (93 percent, according to CMS), we'd be able to control costs by making sure that people got the preventive and chronic disease care they needed. That, in turn, would reduce the costly complications and hospitalizations that account for the bulk of health spending.

Neither CMS nor the Congressional Budget Office has been able to get a very good handle on how much this approach could save. The problem is that this kind of population health management will require a major restructuring of the system for delivering health care. That means wholesale changes in the financial incentives of doctors and hospitals and the business relationships between and among them.

As someone who writes daily about the healthcare industry, I know that the larger players, at least, are well aware of the need for these changes and are actively preparing for them. It's doubtful that many physicians in small practices or the myriad businesses that occupy various specialized niches in the industry understand much of what's going on. But I'm convinced that within the next few years, their eyes will be opened, and they will be forced to pay attention.

The reason lies in plain view in the CMS projections. The only thing that will stop healthcare costs from shooting up to $4.6 trillion in 2019 is our collective inability to pay the bill. If consumers vote with their feet by avoiding healthcare, as they have to some degree this year, healthcare providers and insurers will have to rethink their business models. That, plus a Medicare-led change in reimbursement methods, could really bend the cost curve.

Until then, I wish good luck to all those who are taking on the brutally hard work of transforming healthcare, one brick at a time.

Image supplied courtesy of Flickr.

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