July 17, 2014


Orszag: It's time for some optimism about health care spending (Adrianna McIntyre on June 15, 2014, Vox)

Adrianna McIntyre: Can you set up what's been happening recently with health care spending and why it's such a big deal?

Peter Orszag: We have had incredibly good news over the past three to five years. If I'd been told when I was director of either CBO or OMB that we would have a 12-month period when Medicare spending was basically flat in nominal terms -- and therefore on an inflation-adjusted, per-beneficiary basis, significantly negative -- I would have thought impossible and yet that's exactly what we're living through.

If this continues, it's massive -- everything you think you know about the nation's long-term fiscal gap would be wrong. [...]

PO: I believe three things are driving the deceleration. One is that consumers are playing a bigger role in choosing their own health care and they face higher cost-sharing in the commercial space. That's not relevant to Medicare. Another factor relevant to the commercial space is the economic slowdown. That's also not relevant to Medicare; there's no evidence that Medicare is significantly affected by the state of the business cycle.

So that leaves us asking, what's affecting the slowdown in Medicare? One factor is that the systems are being digitized, so hospital executives have a much better sense of what's going on within the hospital and can target waste. The second thing is that the payment system is changing, and it's expected to continue to change.

The vignette I like to use is that lots of hospitals across the country have succeeded in reducing their readmissions. One example here is Mount Sinai in New York, where I'm on the board. They started a program to screen people at high risk of readmission; they assign social workers to those people. The intervention works very well: emergency room visits and readmissions are down 50 percent for this high-risk population.

Why is Mount Sinai doing this? Right now, it's losing a ton of money on that program -- it's bleeding money. Effectively, it's losing revenue on those lost readmissions.

But it's doing this because it expects the payment system to be different within three to five years. In particular, it expects the system to be much more value-based, with a fixed payment per patient. In that situation, incentives get flipped on their head; you really want to reduce readmissions.

There are things being done today in anticipation of what the payment system will look like tomorrow.

AM: How much of a role do you think the Affordable Care Act is playing, if any?

PO: I would say the ACA is a small part of this. If you survey hospital executives, most of them they expect the majority of their revenue to be value-based within five years. Part of that is driven by the ACA, part is driven by private insurers, and part is driven by employers pressuring private insurers to change their payment practices.

I'm not going to try to hazard a guess about exactly what share is due to health reform. I would just say that bundled payment, ACOs, and other reforms are directionally consistent with this expectation of value-based payment. The ACA has contributed to a general perception that this is the direction the system's moving.

Posted by at July 17, 2014 3:38 PM

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