Affordable Care Act’s Survival Depends on Reducing Costs

An Opinion by Andreas Lauritzen

It is no secret that Americans are spending more money on health care than they can afford. According to the OECD, Americans are less healthy than people in countries spending half their gross domestic product on health care. Yet only a single measure of President Barack Obama’s signature program, the Patient Protection and Affordable Care Act, is dedicated to curbing the increase in health care costs on a national scale: the establishment of Accountable Care Organizations (ACOs).

The Affordable Care Act contains many mechanisms aimed at lowering insurance costs, such as offering health insurance through state exchanges and widening the insurance pool through the individual mandate. But these provisions do not decrease the rate at which health care costs are rising in relation to gross domestic product. They only make it more affordable to buy health care insurance. Thus, it is more appropriate to call President Obama’s new law insurance reform rather than health care reform.

The purpose of an Accountable Care Organization is to provide better care for patients without augmenting costs. Studies have shown that improving the transparency of communication and increasing cooperation among different health care actors can significantly drive down costs and increase health care quality. Often doctors’ offices cannot communicate with hospitals. The standardization of electronic health records by ACOs helps to solve this problem.

The Mayo Clinic in Minnesota is an example of an ACO which has driven down costs to unparalleled levels while simultaneously providing some of the best care for patients in the world. It has achieved this by, among other things, promoting better communication and cooperation between health care agents.

Currently, there are about 1,400 independent ACOs across America. The Center for Medicare and Medicaid Services is the federal entity allocating and overseeing funds to create and develop ACOs. Many of those already existing are small practices at decidedly different stages in their ability to change incentives that drive down costs. Thus, the Center is charged with grouping and transforming these smaller practices into larger units in order to more effectively manage care.

The success of Accountable Care Organizations rests on three highly critical points:

First, the current political reality creates pressure on the government to create ACOs at a fast pace.The danger is that these organizations will not significantly effect rising health care costs in the near future. If there is a lack of progress in curbing costs, then not only will it mean cuts in health care, but it will also hand the Republicans vital political capital to overturn the health care law.

Second, Congress has the power to perform draconian cuts in 2017 through the Independent Payment Advisory Board. If there is a lack of progress or if the political climate changes to oppose the Accountable Care Act in national elections, then these cuts are likely to occur. Removing funds will be a serious blow to the facilitation of affordable care.

Third, there is a danger that ACOs become Health Maintenance Organizations (HMOs) in disguise. In the 1990’s, managed care stood for everything that is bad about the American health care system. Helen Hunt expressed America’s frustration in her 1997 Oscar winning performance in: “As Good as it Gets,” when she exclaimed: “Those [bleep] HMOs pieces of [bleep]!”

Managed care is not a public favorite. In 1981, the Reagan Administration removed the requirement that HMOs be non-profit organizations. The idea was that if someone could make a profit and save money, it should be allowed.

Today, all HMOs are for-profit, except for Kaiser Permanente in California. The result is devastating. These organizations went from caring about their patients to caring more for their shareholders by, among other things, ensuring that patients not overuse the system.

In most HMOs, every dollar spent on actual care is deemed a loss because it does not go to shareholders. Much is lost, such as the freedom to see any doctor one wants and the ability to visit any specialist without prior authorization. Even if a patient is in desperate need of a specialist, he or she will not receive further treatment if the insurance company decides not to pay.

While HMOs restrict patient choice, ACOs are designed to preserve them. A significant difference is that patients are not forced to choose a network of doctors. Instead, they can choose any provider they wish.

But if accountable care begins to resemble the failed model of HMOs, it will prove devastating for President Obama’s signature legislation and for the Democratic Party. While it is unlikely that health care providers will want to relive the 90’s, it is a fact that accountable care shares some of the same cost-effective measures of managed care; namely, capitated payment.

Capitated payment allocates a fixed budget per patient. In capitation, the doctor’s incentive is to provide the care needed until the patient is cured. But because of the fixed budget, any unnecessary care is eliminated and costs are kept down to a minimum. This is in contrast to traditional fee-for-service in which the physician is paid for every single service and procedure performed, and costs are high because there is no incentive to refuse to provide unnecessary treatment.

ACOs have to work fast and show significant results in reducing health care costs. Any failure can place significant political capital in the hands of Republicans in the next presidential campaign. Surely, Hilary Clinton, for one, will not stand a chance if the 2016 election is all about the failure of health care reform.

4 thoughts on “Affordable Care Act’s Survival Depends on Reducing Costs

  1. Excellent analysis! Perhaps your next blogpost should be on how to curb prices on medicine? I think the point is that Obamacare was “a foot in the door.” It always required improvements along the way. However, these improvements require some success. Otherwise, things might turn out exactly as you fear…

    • Given the heavy influence that the pharmaceutical industry has on Washington, curbing prices on medicine is perhaps a more daunting task than health care reform itself. We saw in 2003, how lobbyists from the pharmaceutical industry asserted their power (and money) to serve us the “Donut hole.” 60 minutes did a report on this in 2007:

      The cheapest medicine is prevention. Reducing the burden of illness on the health care system to begin with is the safest way to keep costs down. But changing the underlying physical and social determinants of American health is a long struggle – a whole different “Donut hole.” There is $10 billion for disease prevention and health promotion in the ACA. But because Obamacare was always “a foot in the door,” it will be very hard to keep that money in place.

  2. Many congratulations on the op-ed. Exceptionally well-written. I wonder however, if a survey of healthcare costs needs to consider supply and demand issues rather more fully. Healthcare is after all yet another commodity, (arguably even when it’s “decommodified”). And efforts to influence market prices through either government regulation or government-encouraged initiatives of the type you describe do not have a happy track record.

    • Unlike other market commodities, healthcare is a service we all require at some point or another. Granted, government involvement in the market, in any sphere, is not a recipe for success. But healthcare is an odd commodity, in which the higher the level of exchange of goods, the higher the rate of GDP. Not exactly a perfect good. Changing the incentives of doctors and patients towards cost-control and less, yet more efficient, care is the task at hand. As such, government regulation of the private market is necessary, in order to change incentives to keep the rate of services and costs down. Patients (and not shareholders) must be on the receiving end of any healthcare product.

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