A Spoonful of Sugar: On the Affordable Care Act
Were Dean and the others right? Was the public option really the signal way to extend care and reduce costs? Starr shows that the issue is much more complicated today than it might have been, say, when Medicare was launched and economies of scale were the only way to reduce transaction costs—when, that is, only the government had the money to buy the IBM counter-sorters. Obama had not just seen the writing on the wall in Congress before his left accusers; he seemed to have grasped the problem of costs more deeply. This is why he hinted early on that he might favor Senator Conrad’s idea of promoting health cooperatives as an alternative to a Medicare-like plan. (In Conrad’s North Dakota, “agricultural and other co-ops have historically played an important role.”)
Think, for example, about the bill for a knee replacement under Medicare. (I have; my wife just received one.) There is the cost of the surgeon, the anesthesiologist, the surgical support staff, the hospital room, the nurses, the prescribed hospital procedures, the drugs, the physical therapy and claims processing. Virtually every one of these costs is driven by different considerations, some susceptible to being lowered by government action, some not, and some more likely to be lowered by private sector competition. True, if all surgeries of this kind were estimated with doctors and hospitals in advance, and paid according to a fixed budget—the way home repairs might be negotiated with a contractor, or Ontario negotiates with its providers—then all-in costs would be contained. Powerful customers—in my wife’s case, Medicare—could use their market power to bargain down at least the part of the bill related to professional services, doctors and nurses, and hospital beds (though, again, payments vary in different states, and Medicare patients would not want the best surgeons, such as those at Massachusetts General, where my wife’s surgery was performed, to refuse them). On the whole, moreover, there might be other advantages to fixed budgeting. Hospitals would be induced to focus on measuring financial outlays against the quality of outcomes. Physicians would have incentives, as at Mass General, to communicate about patient care more as a team, or to institute the kind of cost-reducing quality procedures you find in airplane maintenance or computer chip fabrication. Starr recalls Atul Gawande’s famous New Yorker article, which Obama circulated among his staff, showcasing the Mayo Clinic, a facility that has emphasized just such teamwork since its inception, and has been among the highest-quality and most cost-effective in the nation. (Cost control through fixed budgeting was the logic behind the rise of HMOs in the 1980s until, Starr explains, patients began to realize that unregulated HMOs controlled costs by denying needed care.)
Anyway, to have imagined the wholesale reinvention of the American healthcare system as a big network of Mayo Clinics, however tantalizing, would have been fanciful. Yes, over time the proliferation of best practices, especially those established by Medicare’s professional oversight boards and hospice counselors (it was in this context that the “death panel” charge exploded on the scene), would systematically bring costs down. But Starr shows that in Teddy Roosevelt’s day, the AMA—fearing, precisely, that the Mayo model would restrict doctors’ compensation—had turned against health insurance altogether. From that time on, fee-for-service medicine became the norm: providers charge, patients have no notion and insurance pays. Even Medicare, for all its scale, could restrain costs only around the edges; this is why healthcare in America eats up almost double what it does in other Western democracies.
Dean supposed that the proposed public option would compete with private insurers on the exchanges and cause the costs of premiums to fall. But would they have? Dean was right that a public option keyed to Medicare rates would have saved the government considerable money—$110 billion over ten years, according to the Congressional Budget Office (CBO). But, again, states where Medicare payments were low killed the idea. Pelosi was stymied. Without Medicare as the basis, any imaginable public plan would not have been cheaper than private plans. A public one would have been more expensive, because it would have drawn from a higher-risk pool of people who for whatever reason had been uninsured. The CBO reckoned that only about 2 percent of people seeking insurance would opt for it. Ironically, Starr says, the left was backing “the high-cost option as an example for the conservative case that the government is incompetent.” True, one could hope that if a public plan started up, and if it launched with compromise rates between Medicare and private plans, and if panels could be established to bend reimbursements down later on, then such a plan could both grow and reduce costs. Then again, what politician from a disadvantaged state was prepared to embrace a question loaded with three ifs?
* * *
But wait. Wouldn’t a public plan enjoy critical savings in claims-processing and administration, especially if it didn’t have to pay dividends to share-holders or engage in marketing? This, Starr shows, is also an illusion. According to former White House adviser Ezekiel Emanuel, administration does account for “roughly 14 percent of what the United States spends on health care, or about $360 billion per year,” about half of which is borne by Medicare, Medicaid and insurance companies, the other half by doctors and hospitals. But the most important issue in claims processing, Starr argues, is a “unified or standardized” system. He doesn’t pursue the point in his book; but as his Princeton colleague Uwe Reinhardt has stressed, savings could be realized only through a common taxonomy for diseases and procedures and standard reporting methods for billing from hospitals and medical offices. Emanuel elucidated the six steps necessary to standardize the billing process in a recent article in the New York Times: “determining a patient’s eligibility for services; obtaining prior authorization for specialist visits, tests and treatments; submitting claims by doctors and hospitals to insurers; verifying whether a claim was received and where in the process it is; adjudicating denials of claims; and receiving payment.”
The key issue here, and one not to be underestimated going forward, is the integrative power of information technology. Once, nothing less than a single bureaucracy, exploiting centralized information databases, was required to execute claims-processing transactions efficiently. No more. So long as standards are adhered to—which the Affordable Care Act mandates—nodes in distributed networks (doctors’ offices, hospitals, pharmacies) are perfectly capable of supplying or aggregating data from federated sources without transaction costs that are appreciably higher than what was once available only from a mainframe. Physicians wouldn’t need a single-payer system to gain efficiencies and curtail administrative costs any more than they would need, say, all patients who pay with a credit card to be customers of a single bank. Streamlined electronic billing and credentialing could save $32 billion a year. Incidentally, co-ops and nonprofits—other kinds of public options—would benefit the same way private insurers would.
But much more important to costs than claims processing is the nature of the risk pool. Obamacare—in denying private plans the right to sign up only the young and healthy—promised to move all plans closer to an average pool: to use the business school lingo, it promised to obviate “cherry-picking” and yet “commoditize” procedures. Assuming the promise is realized, moreover, all plans will have incentives to reduce costs by accepting industry-standard taxonomies and reporting forms. Private insurance companies will have an even greater incentive than nonprofits to do so first, because innovations in claims processing, streamlining and specializing in the delivery of procedures and so forth will be the only way for them to gain the profit margins they need to satisfy share-holders if they can’t take it from the care of patients. (Think of how Southwest Airlines, the most consistently profitable airline in the industry’s history, moved to simplify its logistics and standardize maintenance.) All plans, correspondingly, will have a common incentive to use peer-to-peer networks to create buying alliances and bid down the cost of drugs.
Arnold Relman, former editor of The New England Journal of Medicine, has been hammering away at these points for many years. Quantum savings in healthcare delivery will be impossible to realize until fee-for-service is gradually curtailed. The public option could not curtail it. In the meantime, and as the act warrants, Medicare can only empower expert panels to determine best practices and mandate how these will be proliferated. And the only way for society as a whole to cover the excess cost of the uninsured is to collect more revenue from the wealthy.
This last point, of course, is the timely one. Starr is priming us for the 2012 election, the run-up to which will pose a fundamental choice. All the costs of the act, including leaving Medicare’s cost-curve unbent, could be covered more or less by letting the Bush-era tax cuts on people earning more than $250,000 a year expire, which would yield more than $900 billion. Americans will soon decide whether or not to leave in place a president who, among other things, will leave the act alone. It would be a shame, Starr warns, if the president who husbanded this once-in-a-lifetime legislation to victory is beaten by a Republican claiming the need for “leadership” in the White House—a double shame if misinformed Democrats, nursing their “disappointment,” continue to help make that need seem plausible.