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In the Nation's Interest

Don’t Know

By Joseph Minarik

You may have read here before that it was not baseball philosopher Yogi Berra (as is often suggested) but rather Nobel Prize-winning physicist Nils Bohr who likely first said that “Prediction is very difficult, especially if it is about the future.”  If Yogi had said it, that statement might have meant just about anything; but coming from Nils Bohr, one might infer that in a changing world, past regularities might cease to hold.

That statement comes to mind as experts contemplate the causes and implications of the recent slowdown of the rate of growth of healthcare spending.  There are plenty of opinions to be had.  Perhaps not surprisingly in the current politically polarized environment in Washington, about half of the pundits want to prove that the cost reduction is caused by President Obama’s Affordable Care Act (ACA, aka “Obamacare”), while the other half want to prove that it isn’t.  If carried out on that basis, this argument wastes an awful lot of perfectly good time.  But truly answering even that highly political question would be worthwhile, because given the near-existential role of healthcare cost growth going forward, we need to consider carefully anything and everything that works.

But on this comparatively narrow question – and in fact on even the broadest conception of why healthcare costs have slowed, and what that portends – Nils Bohr is absolutely right.  These times are so extraordinarily unusual that it is even more difficult than Bohr’s baseline – indeed, it is impossible – to foresee the future, or even to get a good reading on the recent past.

Let’s start with the “Obamacare” question.  Cost savings up to this date might conceivably come, to generalize perhaps excessively, from two parts of the ACA (and this is my own generalization from more elaborate arguments).  The first, reductions in premiums paid to Medicare Advantage plans, is fairly straightforward.  There is little doubt that those cuts have reduced the federal government’s spending on health care.  However, they save only a fraction of the total spending slowdown thus far, and like all reimbursement cuts, they cannot be repeated multiple times into the future.  You cannot cut Medicare costs relative to costs in the rest of the healthcare system repeatedly and without limit.  Some argue from history that Medicare spending changes, up or down, have spillover effects in private health care.  However, not all Medicare spending changes are created equal; and there likewise can be an opposite cost-shifting effect to simple reductions in reimbursements.  Thus, in my judgment, the potential of such premium reductions to solve the remainder of the problem is nil.

The second part is far more complicated.  The ACA will in the future impose reimbursement cuts and penalties upon providers whose performance is judged deficient by stated standards; hospital re-admissions are often cited as an example of performance shortfalls to be penalized.  The hypothesis favorable to the ACA is that providers see those penalties coming, and even in anticipation of the effective dates they are beginning to raise their games.

Is it possible that providers, seeing penalties for bad behavior looming somewhere down the tracks, are preparing now to avoid falling victim to those penalties in the future?  Sure.  But can we be certain, and demonstrate that fact convincingly?  I cannot imagine the statistical test that could possibly yield any convincing results – certainly not now, and probably not for years to come.

But certainty and statistical demonstration aside, what are the prospects for cost restraint from the ACA?  This is a question of fundamental disagreement between partisans on both sides.  In reflecting on similar efforts in our past policy statements, CED has been highly skeptical.  Not to overdose on loaded words, but the ACA’s approach leans heavily toward micromanagement and command-and-control directives, where we believe that creativity and market incentives would yield much better outcomes.

In the most conceptual terms:  The ACA itself (and its yet-to-be-born institutional creature, the Independent Payment Advisory Board, or IPAB) provide healthcare plans and providers with lists of “thou shalts” and “thou shalt nots,” along with regulations defining success or failure on each point, and penalties or rewards should the regulations be obeyed or violated.  With all respect for the skill and good will of the people who wrote the law and the regulations, and who will populate the IPAB, we are left with troubling questions:

o Will the list be complete?  Will all of the items on it be well chosen?  Will it be kept up to date as technology and the healthcare environment change?
o Will the implementing regulations accurately reflect the items on the list?
o Will providers find ways to “check the box” to earn the reward or avoid the penalty without actually improving their performance and reducing system-wide costs?

There are those who believe that the ACA is the perfect expression of the healthcare system’s needs and failings, that the IPAB will have 20-20 vision, and that the regulatory implementation of both will be precise.  We are skeptical.  We see much greater prospect for success if instead the incentives inherent in the marketplace are allowed to drive behavior.  There is no harm in an IPAB (like the existing Medicare Payment Advisory Commission (MedPAC) and the many private not-for-profit organizations that play such a role) as an additional pair of eyes and ears to call attention to any problems in healthcare delivery that they should see.  But providers and plans should use not a predetermined list but rather a clean sheet of paper.  They should attack any and all process weaknesses that they see – not only those that are identified by one single law or governmental authority.  And they should remedy those weaknesses in the way that yields the best system-wide results – not in a fashion whose sole criterion is complying with one particular set of regulatory standards.  Plans and providers will be much more likely to achieve superior outcomes if their goal is to satisfy consumers who are motivated on grounds of quality and price – not if success is defined as checking a regulatory box to avoid a penalty or earn a reward, and no more.

Thus, we remain skeptical of the ACA as a driver of beneficial healthcare change, in either the last three years or the years to come.  If we want better outcomes either retrospectively or prospectively, we had best look elsewhere.

We should ask a much more open-ended question as we seek the causes of the recent cost slowdown, and the prospects of those forces going forward.  However, if we do, we will find considerable frustration.  The last few years have been an extraordinary time for both our healthcare system and the broader economy within which it is nested.  Consider the following:

The recession.  In 1990 and the years that followed, healthcare cost growth slowed.  My colleagues and I remember vividly arriving at the Office of Management and Budget in January of 1993 and being told by numerous experts that healthcare cost growth was solved, it was yesterday’s problem, and so we should move on to other issues.  The reason, we were told, was the health maintenance organization (HMO) “revolution,” which would change forever and for the better the way health care was delivered.  The fee-for-service incentive toward more services (and therefore more fees) had been banished, and collaborative care would stamp out errors and inefficiencies.

Within just a couple of years, healthcare costs were off to the races again.

What had happened, in retrospect, was two things.  First, the HMO “revolution,” which had some merit, was followed in short order by the HMO “revolt.”  Employees perceived that they were being ripped from the caring hands of their own doctors and forced into restrictive HMO networks that denied important care to boot.  Employers saw that they would lose their most-valuable employees if they did not restore previous modes of coverage and care.  (Looking forward, giving employees their own choices among alternative efficient providers has been and can be much more successful.)  Exit the HMO revolution.

And second, the 1990 recession had taken the healthcare coverage from many workers and made many more feel much poorer and much less secure.  Therefore, those people stayed away from the doctor in droves, simply because they could not pay the doctor’s fee, much less any expensive treatment that the doctor might recommend.  That gave the outward appearance of a healthcare-cost slowdown.  But again, once the economy regained its legs, all of those prospective patients made up for lost time.

Fast forward to the present.  The recession caused by the financial crisis, with its painfully slow and “jobless” recovery that has followed, has taken the healthcare coverage from many workers, and made many more feel much poorer and much less secure.  And this after years of employers increasing employee cost-sharing through co-pays, deductibles, and dropping coverage of spouses and children.  Recession victims now have even more reason to postpone medical care than did those of 1990 (see here).  And this economic downturn has not stopped with the working-aged population.  The Federal Reserve’s “Hail Mary pass” of a monetary policy has sent interest rates – and the income flows of many retirees – to the floor.  One can only imagine how many older Americans have shunned the doctor and the pharmacy because they fear that they could not handle the resulting bills – even with Medicare, Medigap, and Part D.

Changes in policy and other factors.  And just as the 1990 cost slowdown benefitted from a one-time and temporary shift in the “HMO revolution,” so this cost slowdown has followed to an unknown degree from policy changes that may well prove ephemeral.  As cited above, the ACA’s Medicare Advantage cuts are a one-time change – a level shift rather than a growth-rate reduction, when viewed over a longer period of time.  But there has been much more.  The financial crisis crunched the budgets of virtually all state governments.  They, in turn, screwed down on their Medicaid reimbursements and eligibility in any ways they could – and are doing so even more with the expiration of extraordinary assistance under American Recovery and Reinvestment Act (the “stimulus bill”).

In addition, experts have observed an irregularity in the flow of new prescription drugs through the patent pipeline.  There has been an extraordinary exit of widely used pharmaceuticals that have gone “off patent” and been replaced by lower-priced generics.  Meanwhile, there has been a lesser flow of new “blockbuster drugs” under patent protection into the other end of the pipeline.  As a result, one of the most important sources of cost relief has been in spending on prescription drugs.  Unless we have come upon an “end of innovation” in pharmaceuticals – which of course is possible, but unlikely – that current cost slowdown will not continue.

In sum, the slowdown in healthcare cost growth – except in the sense that it has followed upon a most-harmful recession – is a good thing.  But it has occurred in an environment that is so noisy that it is impossible to assess whether this slowdown is likely to continue.  The role of the Affordable Care Act is difficult to assess, but likely is small; and on substantive grounds, CED would put little trust in the ACA’s future contribution as well.

This murky prospect recalls the words not only of Nils Bohr, but of John Kenneth Galbraith.  Personally, I differed with Galbraith as an economist about as often as I agreed, but he was a true gentleman, and he undeniably had a way with words.  (As my older sister’s – sorry, sis, my more-tenured sister’s – e-mail signature line reads, “Some people have a way with words.  Others not have way.”)  And Galbraith once was reported to have said, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” On the future of the healthcare cost slowdown, I don’t know.