The system is fraught with overspending. Fixing that problem requires providers to respond to market incentives and for patients to become more knowledgeable.
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Most of the focus of the Affordable Care Act is on expanding insurance coverage and defining how insurance companies provide insurance to individual purchasers. These are important issues, but the real challenge for health care is to change the dynamics that have led to such unsustainable spending growth over the last several decades.
The spending problem has arisen because of a lack of accountability and responsibility by both health care providers and consumers. It's way too early to declare "success," or even to be sure the progress to date is sustainable -- but there has been some progress.
For institutional providers, most hospitals and other institutional providers have moved away from payments based on the number of days a person spends in a hospital or on the individual services provided during a hospital stay. Almost three decades ago, Medicare moved to a payment system that pays hospitals a single amount for an inpatient stay based on the diagnosis of the patient at discharge. Many private-sector payers have followed Medicare's lead and adopted similar systems of reimbursement. About 15 years ago, Medicare expanded the concept of a single payment for services provided during an encounter to home care, outpatient hospital care, and nursing home care.
Paying for a single stay or episode of care with a single payment encourages hospitals and other institutional providers to become more efficient in providing care during the hospital stay or home care episode, but it does not necessarily lower overall health care costs. In fact, the current system could be regarded as encouraging re-admissions, since it allows the institution to receive additional payments for treating the same problem. Because of such concerns, Medicare is starting a program that will penalize hospitals that readmit patients with certain diagnoses within a short period of time.
For physicians, reimbursement incentives have been particularly perverse. Medicare adopted a detailed fee schedule two decades ago, which requires physicians to bill on the basis of thousands of procedure codes -- all of which make it very hard to assess whether a physician is providing good-quality or efficient care in treating a patient. In the 1990s, Medicare adopted a strategy to keep the growth of payments to less than or equal to the growth of the economy. This led to increasing physician payments per procedure at substantially less than the growth in inflation over the last decade. Even with the small increases in payments per procedure, though, the amount Medicare has spent for physician services has grown much faster than the rate of inflation of the economy, because the volume and mixture of services provided by physicians has changed. For patients, to date most of the pressure to slow spending has been placed on institutional providers and clinicians. This has been especially true for Medicare. While Medicare doesn't cover all of the costs of acute care and only a limited amount of long-term care, most seniors have coverage that augments the acute care costs not covered by Medicare -- coverage that is sometimes provided by their employers for retirees, purchased individually or, for those who have limited incomes, supplemented by Medicaid. This has tended to make seniors less concerned about both costs and quality differences in the care they receive.