Focus must now turn to getting exchanges right, cutting healthcare costs

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States—especially red states—must expand Medicaid to all Americans under 133% of the federal poverty line.  From an economic perspective this is a “no-brainer”. Essentially the expansion is like at 90% off sale—with an additional coupon worth more than the 10% price. The federal government pays 100% of the costs of the Medicaid expansion from 2014 through 2016 and the percent declines to 90% by 2020—the 10% sale price. Simultaneously, the “added coupon” means states and localities save because the cost shift part of health insurance premiums for state and local workers will decline as there are fewer uninsured. That is, as hospitals and physicians can collect payment for more people, they will have less uncompensated care whose costs will be loaded into the bills charged to private insurers, including insurers of government workers. In addition, many states and localities distribute “uncompensated care” funds to private hospitals and other health care providers and provide services to the uninsured through “free clinics” and other facilities. The need for these funds and services will also decline substantially. Consequently, not expanding Medicaid is economically irrational. Most states will eventually expand their Medicaid programs.

Launch day for the exchanges is just about 1 year away. While the uninsured will get access to insurance on January 1, 2014, open season to sign up for insurance will have to occur several months before. Thus the exchanges will have to be operational roughly a year from now. And the time between now and then will have to be occupied with securing insurance products, testing of the web site, marketing, setting up call centers and the support services.  Having a successful launch, is critical. If the exchanges are perceived as easy to navigate, quick to respond, and information rich but not overwhelming with good support services much of the uncertainty and resultant opposition to the individual mandate—and the ACA more generally—will dissipate. 

Getting the exchanges right is an extremely complex endeavor. Fortunately, Massachusetts and Utah have successful exchanges that can help development. Unfortunately, politics has hampered the process. Many states have adopted an incoherent strategy of not wanting federal government to operate their exchange but of postponing the decision of whether to launch an exchange until very late – despite the availability of generous federal funds for their development. According to the latest Kaiser Family Foundation data, only 17 states have done enough work to be able to launch their own exchanges, and 17 states explicitly refused to establish one or have no discernable activity. Consequently as many as two-thirds of states will have exchanges operated by the Department Health and Human Services. HHS needs to get this one right enough to dispel skepticism of health care reform.

Probably the most important federal action will be around cost control. While health care inflation has declined, much more will need to be done if for no other reason than as part of a deficit deal. It will be too easy to opt for either cutting Medicare payments to physicians, hospitals and other providers or to enact premium control. But neither will improve the system, quality of care, and reduce costs. The real solution is to change how Medicare pays for health care—to create a schedule end to fee-for-service medicine and price setting for other medical services.  

The key to long term cost control is to change how care is delivered to patients especially the high cost 10 or 15% of patients whose care consumes over 65% of costs. These high-cost patients are the chronically ill, patients with heart disease, emphysema, asthma, diabetes, cancer, and other chronic conditions. The goal is to keep these patients healthier, and out of the emergency room and hospital. The only way to do that is to deliver much more comprehensive care out of the hospital through medical teams that prevent development of problems, engage these patients in improving their own health through compliance with medications, diet, exercise, and other programs. Doing this is not trivial, it requires a re-engineering of how doctors deliver care. Fortunately, there have been successful models of this kind of transformation.  

But this re-engineering is impossible with the current fee-for-service system. Doctors and hospitals lose money when they provide high quality care that keeps patients healthy. The necessary pre-requisite to changing the system—and thus saving real money—is to change how we pay doctors and hospitals. To that end, Medicare must rapidly introduce episode-based payments, beginning by expanding their ACE demonstration which has proven to save money on cardiac and joint replacement procedures and scheduling introduction of episode based payments for cancer and other chronic conditions. There should also be a definitive deadline—a decade from now, 2022—when 75% of Medicare payments are shifted away from fee-for-service. Such decisive action and a clear timeline would allow the health care system time to adapt.  And it would save real money.

The other action Medicare could promptly take to significantly reduce costs is to get out of the price setting business and use the market to determine prices through competitive bidding. While the ACA requires Medicare to expand competitive bidding for durable equipment, prosthetics, orthotics and supplies by 2016. More could be done. The expansion for these items could be implemented immediately. More importantly, competitive bidding should be expanded to laboratory tests and radiological services as well as  to Medicare Advantage programs.

The key health reform issues for the immediate future are clear. On the access side, the most important challenge is to ensure that the exchanges when launched are easy to use, responsive, and offer good insurance products are reasonable costs. On the cost side, the most important issue is for Medicare to rapidly shift its payment away from fee-for-service to enable re-design of care delivery. 

Emanuel is the chair of medical ethics and health policy at the University of Pennsylvania and a senior fellow at the Center for American Progress. He previously served as a health policy advisor in the Obama Administration.