What's in a health economist's toolbox for controlling cost growth?

Last week, I attended the American Society of Health Economists' biennial conference in Los Angeles, where this year's theme emphasized the translation of economics to policy. Thus, it wasn't surprising that the conference organizers chose to discuss payment reform in a plenary session. Unbeknownst to most consumers, both the government and private-sector insurers have been making significant changes to how they reimburse hospitals and physicians for the services they provide to patients. Are economists being too hard on healthcare providers? Certainly not. Economists can offer strategies to control costs, while maintaining or improving the quality of care. Doing so can make healthcare and insurance affordable to more Americans.

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The session moderator asked two prominent health economists and fiscal expert Alice Rivlin what policy lever they would pull to reduce healthcare spending (while maintaining quality) if they could pick only one strategy. Which proposal do I favor? As you will see, all of them

Healthcare costs have risen faster than GDP growth for decades, for a multitude of reasons. Incentives are out of line for consumers, healthcare providers and health insurers. Healthcare expenditure growth has finally started to slow in the last three or four years, but only because of multiple steps taken by all parties to restrain cost growth.

James Robinson, a professor at the University of California, Berkeley who is well known for his research on value-based purchasing, suggested that we offer consumers financial incentives to lower healthcare spending. Currently, both Medicare and private insurers offer many large physician practices or physician-hospital organizations a share of the savings they generate if they can lower spending for the patients they care for relative to their current trend line. Robinson suggests that we apply the same strategy to consumers.

Suppose a physician requires her patient to obtain a diagnostic MRI to determine whether surgery is necessary. Once the insurer receives word of this request, the insurer would provide a list of all qualified MRI facilities the patient can choose from and offer a rebate to the consumer if he chooses one of the lower-cost MRI providers. Some large employers are working with their insurers to implement reference pricing, where patients are told the maximum amount the insurer will pay for a procedure and the patient must pay the remainder of the cost out-of-pocket if she chooses a particularly high-priced provider for care. Reference pricing will appear more like a stick (or negative penalty) to consumers who are inclined to choose a high-cost provider, while shared savings will seem more like a carrot (a reward for good behavior). Research in behavioral economics tells us that consumers respond more positively to carrots than sticks.

Michael Chernew, a professor at Harvard Medical School who conducts research on the underlying causes of growing healthcare expenditures, stressed the need to restrain growth in reimbursement rates under the Medicare fee-for-service system. He pointed to the Sustainable Growth Rate (SGR) method used by Centers for Medicare & Medicaid Services (CMS) to reimburse physicians, which has turned out to be anything but sustainable. The SGR was designed to restrain federal spending on physician care for Medicare beneficiaries to the growth in gross domestic product. Year after year, physician expenditures exceed GDP growth, and Congress has suspended or adjusted the formula so that physician reimbursements have been allowed to grow well beyond the growth rate for the overall economy. Chernew is keenly aware of the role that politics and the power of lobbying groups can play in bypassing the good intentions of enacted legislation, and he warns us not to make similar mistakes in the future.

Rivlin, former director of the Office of Management and Budget, former vice chair of the Federal Reserve Board and a member of Simpson-Bowles Commission on the federal budget, made the recommendation that surprised me the most. While Rivlin is viewed as more of a liberal than a conservative, she endorses premium support for Medicare as a way of controlling spending. Think of premium support as a defined contribution for health insurance. Instead of receiving health insurance directly from Medicare, beneficiaries would receive a fixed dollar amount from the CMS that they would use to purchase insurance from a private insurer. Beneficiaries would have to pay an additional amount out-of-pocket for insurance policies that charge more than Medicare's defined contribution.

Rep. Paul Ryan (R-Wis.) is known as an avid supporter for premium support. Rivlin does not support Ryan's plan for premium support, because she believes that the level of subsidies that the Ryan plan specifies would be too low in the long run for most elderly Americans. However, she supports the notion that allowing private health insurers to compete for beneficiaries would lead to lower health insurance premiums. In addition, placing the financial burden on beneficiaries for choosing more expensive (and presumably more generous plans) would control health costs. The question of whether competition among private health insurers would lead to lower costs than what Medicare can offer is still hotly debated amongst economists. I am expecting my colleagues to conduct further research to determine who is right.

Ho holds the Baker Institute Chair in Health Economics at Rice University. She is also a professor of medicine at Baylor College of Medicine.