James Surowiecki suggests that Obamacare is already part of a process that will help control health-care costs

"Bob Kocher, who was a special assistant for health care in the White House in 2009 and 2010, did a report for Lawrence Summers on the past sixty years of health-care legislation, and found that when Congress seriously considered enacting health-care reform the rate of health-care spending often slowed for a year or two. Just talking about medical costs, it seems, limits medical costs."

-- James Surowiecki, in his New Yorker "Financial Page"
piece this week (Dec. 9), "Controlling Health-Care Costs"

by Ken

After venturing the thought "Just talking about medical costs, it seems, limits medical costs." based on Bob Kocher's report, James Surowiecki continues:

Kocher, a physician turned venture capitalist (and currently a guest scholar at the Brookings Institution), dubs this "the health-care-policy placebo effect." As he told me, "When you've got politicians going around the country making speeches about how out-of-control health-care spending is killing the economy, health-care providers come to feel that it might make sense to be less aggressive in setting prices."

Of course this situation is only temporary. However, says, Surowiecki, "there's good reason to think that the moderation of health-care spending will persist." Why? Because "we're beginning to see deeper structural changes in the health-care system," from our nearly universal fee-for-service system, where "the more things [hospitals and doctors] do, the more money they get," and patients with insurance typically pay "only a small fraction of the cost of their care," and insurance companies pass the costs on to employers and the government, so that none of the people involved in the actual health-care process have any incentive to control costs, to a "value-based" system, where providers are paid "based on the value they deliver, rather than on the services they perform."

Jason Yeung, "an investor at Morgan Stanley's Growth Team," explains to Surowiecki:

"What we're moving toward instead is a world in which everybody in the system is sharing financial risk. And therefore everybody has an incentive to control costs."

"For consumers," says Surowiecki, "this means higher deductibles and co-pays, and having to think more about prices."

A peculiar feature of the American health-care system is the enormous variation in prices that hospitals charge for a procedure, which often are not correlated with quality. So in 2011 California adopted a system of "reference-based pricing" for state workers and retirees. If you needed hip-replacement surgery, say, the state would cover you for the amount charged (minus a deductible) at forty-one "value" hospitals in the state. If you went for a costlier option, you had to make up the difference. Most people chose one of the value hospitals, and their outcomes were similar to those of people who chose the more expensive hospitals. The state saved money, and the threat of losing customers, in turn, led the more expensive hospitals to cut prices; one study found that the price of joint-replacement surgery fell by about a third.

The California experience, says Surowiecki, has inspired others in the health-care system, including the insurer WellPoint. One result is the widely reported narrowing of hospital and doctor choices in the policies offered on the health-care exchanges. "Narrower networks let insurers push their customers toward cheaper hospitals, and also give them more leverage in bargaining down prices."

Obamacare is having a cost-controlling effect in other ways too, "by changing incentives for hospitals and doctors."

For instance, it penalizes hospitals when Medicare patients with certain conditions are readmitted within thirty days, on the assumption that this will encourage hospitals to offer better care initially, and to be diligent in following up. And the penalties are having an effect -- since the A.C.A. passed, readmission rates have fallen. "Once hospitals feel that gut reaction of not getting paid when the patient has to be readmitted on the twenty-fifth day," Yeung says, "that reverberates through the whole system."

Surowiecki stresses that "we're in the early stages of that process."

Kocher points out that fee-for-service likely still accounts for more than ninety per cent of health-care spending. And changing the system is going to be politically challenging. In theory, after all, reining in health-care spending sounds great. But in practice things like narrower networks limit patients' ability to see the doctors they want, while less money spent on health care means lower incomes for many doctors and hospitals. So some blowback is inevitable. Still, the changes we've seen in the past few years are going to be difficult to stop, because just about everyone now recognizes that when it comes to health care we spend far too much for the results we get. "No one knows when things are really going to change," Yeung said. "But, even if you're in a room with no clocks, you can know that when it strikes midnight the world will be different."

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