Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.

“I didn’t know that!” – How Health Care Reform is Beginning to Control Costs

Clarke E. Cochran


June 1, 2012

By Clarke E. Cochran

It is no secret that the American medical system is the most costly in the world; more significantly, medical care and health insurance are increasingly unaffordable for individuals and families, for employers, and for state and federal governments. Note the recent report that the average couple retiring in 2012 will need to spend $240,000 on medical care during their retirement years. How many couples have that kind of money squirreled away? The cost of health insurance for an average working family is now about $20,000 per year (employer and employee portion combined) and is headed toward $30,000 in 10 years.

The Patient Protection and Affordable Care Act of 2010 (ACA) contains multiple provisions to control costs. Despite my initial skepticism about their likely effectiveness, I am now modestly hopeful that over the next 10 years the ACA will be successful, if allowed to continue by the Supreme Court and the elections of 2012. Here’s why.

First, the law contains explicit cost-control provisions that have only begun to be implemented. Most important are various experiments with paying physicians, hospitals, rehabilitation centers and other providers, not on the basis of how much they do to a patient (the present system), but on how well they deliver high-quality medicine and keep people well. High-quality treatment involves proven, evidence-based interventions, as well as not doing customary treatments that lack sufficient evidence of efficacy. Doing things right is less costly than doing things partly right and then fixing those results.

Second, the ACA created initiatives designed to research, experiment and promulgate better and less-costly medical treatments, as well as new ways to organize the delivery of care itself. Most prominent are the Center for Medicare and Medicaid Innovation, accountable care organizations, medical homes and the Independent Payment Advisory Board.

Ironically, these provisions may end up being the least powerful tools in the ACA’s arsenal. 2009 and 2010 produced the slowest growth in health care expenditures in a more than a decade; experts attribute only part of this slowed growth to the weak economy. Equally important are the intentional efforts of providers, especially hospitals, to reduce their cost profiles as they prepare for expected payment reductions from Medicare and private insurers.

Let me give one example. I work for a modest-sized Catholic health system that has embarked on an ambitious three-year goal of reducing our total cost of delivering care by $500 million. Looking at this another way, our hospitals have the goal of reducing our cost to care for each patient 25 percent by 2015!

Why would we embark upon such a grand goal? And why are so many other health care systems engaging in precisely the same effort? Most importantly, it’s better for patients. But second—and and paradoxically—the ACA’s insurance provisions (not simply its cost reduction experiments) are driving hospitals in that direction. It works this way: As the ACA expands the number of persons with insurance, insurance companies will be no longer be willing to pay hospitals the higher reimbursements necessary to pay for treating uninsured patients. Second, the insurance products offered on the state-based insurance exchanges set up under the ACA likely will be priced at very competitive rates for consumers, meaning lower provider reimbursements. Third, pressure on federal and state budgets will slow the growth of Medicare and Medicaid provider payments.

The upshot of these three trends is a convergence of private and public insurance provider reimbursement rates toward the lower rates paid by Medicare. A poorly kept secret in the health care industry is that most hospitals, physicians and other providers lose money on Medicare! Therefore, institutional survival in the health care system of the future will depend upon the ability to deliver high-quality care at Medicare rates. Because of this, hospitals are working now to reduce their costs through designing more efficient processes of care, eliminating excess inventory—especially expensive medical devices—partnering with physicians to reduce duplication of expensive equipment and supplies, and many other initiatives.

Will the ACA discover the Holy Grail of high-quality, low-cost health care for everyone? Not likely. Will it bring us closer to this goal? Current activity suggests a hopeful answer.

—Clarke E. Cochran is Vice President of Mission Integration at Covenant Health in Lubbock, Texas.

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