A Healthcare Fix That Works, Now Being Rolled Back

Jason Furman (PIIE) and Bob Kocher (Venrock)

August 20, 2017

President Trump is correct: Health care is "complicated." If you've ever received a hospital bill, you've seen it for yourself. America's healthcare system is a tangle of providers, all paid separately for each and everything they do. One emergency-room visit can result in a dozen different bills.

This fee-for-service model, which has dominated American health care for decades, is hardly efficient. Paying for inputs—tests, procedures, hospital stays and the like—creates incentives for overtreatment, with little regard for coordinating care or improving patient outcomes.

Both political parties have supported shifting Medicare to "advanced payment models," new ways of compensating health providers to reward careful spending and high-quality care. One such model is "bundled payments," under which providers earn a fixed amount for a given course of treatment. For instance, everyone involved in a knee replacement splits a single fee, with a bonus for better patient outcomes. This is a way to get improved results at a lower cost.

Unfortunately, the Trump administration is halting the shift to advanced payment models. Last week the Department of Health and Human Services announced plans to scale back bundled payments in joint replacements and cardiac care. This is bad news for patients and doctors alike.

Bundled payments provide more certainty about what treatment will cost—a critical element in enabling the competition and consumer choice conservatives have long advocated. Patients get a single statement instead of a pile of bills, allowing them to determine more easily whether the charges accurately reflect the services they received.

At the same time, bundled payments give doctors and hospitals an incentive to select the most efficient treatments while avoiding redundant tests and unnecessary referrals. This approach enables competition around performance on quality measures associated with each bundle. It encourages better communication and coordination among patients, caregivers and physicians. It puts doctors, not Medicare, in charge of how best to provide care. When outcomes improve, health providers reap the rewards.

Designing bundled payments takes significant effort. Experimentation is required to ensure that treatments and outcomes are properly defined and the payments for them are set correctly. The Affordable Care Act authorized the Department of Health and Human Services to test payment models and then scale up those that either reduced costs without hurting quality or improved quality without raising costs.

In January 2011, Medicare launched bundled payments for dialysis after years of testing and research. As expected, the new system led to better outcomes. Fewer patients missed treatments and ended up in hospitals. Costs grew more slowly. There is similarly compelling data for bundled payments on cancer care, hip and knee replacements, and cardiac surgery.

Now the Trump administration is re-embracing the old fee-for-service model. In six months, the Department of Health and Human Services has gone from driving innovation to dragging health care backward. Another troubling sign: Earlier this month Patrick Conway, director of the Center for Medicare and Medicaid Innovation, announced he would leave government.

The reversal in Medicare will spill over into the private insurance market. Insurers like United Healthcare, Anthem, Cigna and Humana had followed Washington's lead to test and expand bundled payments. That helped United Healthcare cut costs by a third across a set of cancer bundles it tested over three years. Startups like Aver and Coda emerged to support participants in bundled-payment systems. Large employers like Wal-Mart and Lowe's began incorporating bundles into their benefit designs. All these efforts were helped by the scale of Medicare's testing.

Bundled payments are an important component of the reforms to shift Medicare to advanced payment models. In 2015, Congress overwhelmingly demonstrated its support for this approach. Ninety-two senators voted for a bill to give physicians incentives to shift into such models. In 2010 essentially no payments were made through these alternatives; today about 30 percent are—including not just bundled payments but also pay for performance, shared savings (also known as accountable care organizations) and capped and uncapped risk for total cost of care. As part of broader reforms, these models helped push down real Medicare costs per enrollee by an average of 0.3 percent a year between 2010 and 2015, after the figure had risen an average 3.6 percent a year over the previous decade.

The Trump administration is making health care complicated again. This will result in longer bills and potentially shorter lives. Rather than reversing the progress that has been made with bipartisan support, the administration should aggressively pursue advanced payment models. America's health—both medical and fiscal—depends on it.