Cutting Healthcare Costs: Back to Basics

This was the week to state the problem.  Obama told the AMA that healthcare costs are "unsustainable" and "a ticking time bomb"--on a trend to consume one in three dollars of GDP in three decades (see here).  The CBO released a report saying that reforms currently on the table might raise costs, not lower them (see here).  Three former majority leaders issued their own plan to pay for healthcare--higher taxes and lower reimbursements (see here).  Then The New York Times weighed in with stories that Democrats may cut Medicare (see here).

It's not at all certain that any of these reforms will be enacted.  The politics of fiscal pain have eluded Congress in recent decades.  The opposition will include those with self-interest in the status quo as well as conservatives who fear nationalized healthcare.  Perhaps the best argument Republicans have to scuttle reform is that the reforms won't do the job, since none promise to change the delivery system sufficiently to make universal care affordable.

But the new willingness to confront the flaws in the framework of healthcare delivery could lead towards what's really needed--a complete overhaul of the reimbursement, regulatory and liability structures of healthcare.  These structures, like legal concrete poured over daily decisions, have neither the virtues of market discipline (there's no incentive by patients or providers to be frugal) nor the focus of central planning (the single payer countries at least understand that primary care is where first dollars should go).  Add to the mix a complete and justified paranoia about lawsuits, and voila, you have the world's most inefficient health delivery--doctors doing whatever they can be reimbursed for, mindful of always protecting themselves legally, with patients demanding miracle cures after neglecting basic responsibility to take care of themselves.  This is a "system" (actually more of a bureaucratic junkyard) without focus or discipline.  That's the main reason it costs almost twice as much as healthcare systems in other countries that deliver better outcomes.

Some of the worst aspects of this undisciplined system were cited by President Obama in his speech to the AMA--the fee-for-service reimbursement model that tolerates unnecessary care by entrepreneurial doctors, brought to life in Atul Gawande's recent essay in The New Yorker (see here).  Obama even ventured out to where few Democrats have gone before--acknowledging that "defensive medicine" could not be solved until doctors were given a system of reliable justice, that can be trusted to distinguish between good care and bad care.  (A seismic shift given the Democrats long-standing deference to trial lawyers and their political money.)

But American healthcare is unlikely to become affordable by layering one or two reforms on top of the current system.  The idea of holding providers accountable for their "comparative effectiveness"--i.e., not squandering money on unnecessary treatments--is an excellent component of a payment reform, but, if applied by rigid formulas, could potentially become a bureaucratic nightmare (similar to the focus on test scores in the No Child Left Behind law, which has transformed educators into idiot savants concerned about scores, not education).  A "public option" or "mandates" to acquire coverage may be useful to cover the uninsured, but is unlikely to do much to wring inefficiency from the current system (except, perhaps, by introducing competition in areas where providers and insurers enjoy an effective monopoly).  But the cost problem will not be solved merely by more competition (all providers and health plans are stuck in the bureaucratic Rube Goldberg machine), nor by reliance on choice in the marketplace (see Professor Tim Jost's analysis in Health Care at Risk: A Critique of the Consumer-Driven Movement (Duke U. Press, 2007)), nor by reducing payments to providers already squeezed to the point of pain.  Containing costs requires a fundamental overhaul to re-align incentives towards healthy lifestyles, preventive care and effective results.

Doctors, nurses, hospital administrators...even executives who run health insurance companies, are real people.  They get up in the morning, and set out to do a good job caring for people.  They are in many respects the best in the world--the best trained doctors in state of the art hospitals.  But all these people operate within structures that have been imposed upon them--reimbursement systems mandated by Medicare and Medicaid; the differing regulations of 50 states, with literally thousands of rules; as well as mind-numbing bureaucracy and paperwork from the health plans.  Without too much overstatement, it would be fair to say that the people who deliver health care services are crushed and demoralized by accumulated bureaucracy, legal fears and cynicism.

America can't solve this looming crisis by reforming from the top.  We must put ourselves in the shoes of all those dedicated, frustrated caregivers, and create conditions under which they can make the judgments needed to deliver effective care.  We must harness their energy and intelligence towards our common problem, not extrude them through even more bureaucratic machinery. 

What I'm proposing might be called the human approach to healthcare reform.  The governing principles are these: Simplification, Accountability and Reliable Authority.  Here is a sketch of how this approach might work.

1. Simplification.

--Reimbursement simplification.  The fee-for-service model is hopelessly inefficient--inducing unnecessary care, with oceans of paperwork.  Primary care and chronic care should be delivered on a "capitation" model (X dollars per patient annually), with end-of-year reviews to true up for unexpected developments and account for effectiveness.  This reimbursement idea can work with any type of healthcare provider, private or public, healthcare system or single practitioner.  Special medical events--surgery, specialists, hospital stays--require some version of fee-for-service, but need more discipline--perhaps bundled payments for a universe of patients, with true-ups at the end of the year. 

Presented by

Philip K. Howard is a lawyer and author, and the chair of Common Good. He most recent book is The Rule of Nobody.

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