Centralized cost containment fails in health care

Joseph R. Antos and James C. Capretta write,

Accountable Care Organizations were supposed to give hospitals and doctors incentives to become more efficient and cut Medicare costs, but they have yet to produce any overall savings. In 2016 only 56% of the 432 ACOs hit their benchmarks for reducing costs. Even worse, after taking into account their bonus payments, ACOs actually increased Medicare spending, by $216 million in 2015 and $39 million in 2016.

The theory was that if you give health care providers a new incentive system, then they will offer better quality care at lower cost. In practice, the most important incentive you give them is to game the system.

The piece as a whole points out that although health care spending growth has slowed in nominal terms, on an inflation-adjusted per capita basis, health care spending has picked up.

9 thoughts on “Centralized cost containment fails in health care

  1. Link for those who would like to read the full article.

    ACO bonuses are about 0.1% of total Medicare spending. Let’s say you are hiring a contractor to work on a year-long project for $200K, which maybe half of that being labor. With a hundred dollar bill in each hand and waving them in his face, you say, “Hey buddy, I know you’re got a years of training and practice and expertise-based judgment built up, and your reputation and legal liability and all other kinds of incentives to worry about too, but if you forget all that and take a much different approach to the way you do business, and lower your estimates a little, these sweet babies could be yours!”

    Well, it’s probably not much of a surprise that the contractors will either blow you off, or occasionally lower their estimates by around $200.

    On the other hand, here’s an excerpt from a ten-year old Forbes article:

    Miami-Dade County, in South Florida, is now the most precarious place for doctors to practice when it comes to lawsuits. In 2007, OB/GYNs paid on average $275,466 annually for malpractice insurance. That number is a slight drop from 2006, when the average cost was $299,000, according to Mike Matray, editor of the newsletter Medical Liability Monitor.

    Doctors have to practice defensive medicine, and their insurance rates are so high,” says Matray. “But rates are leveling off and coming down right now. However, if history repeats itself, they will go up in a few years. A lot of doctors right now are not encouraging their kids to be doctors.”

    $300K a year, just for the insurance for malpractice law suits. What kind of bonus are you going to have to offer that guy to nudge him away from expensive defensive medicine practices?

    On the other hand consider the effects of regulatory safe haven provisions, “If you do what we say you should, you will be immune from most tort claims, which will be dismissed at summary judgment.” Wouldn’t cost a dime in taxes, would save doctors a huge amount of money, and would definitely get them to do whatever the government wants them to.

    Point being, while the ACO bonus approach was always obviously dumb despite all the media cheerleading from the usual suspects, it hardly serves as a good counterexample to the principle that regulatory incentives matter a lot and could produce big changes. It’s just that this is not what the ACO scheme was actually supposed to do. It was just supposed to help sell Obamacare.

    Maybe in OpenMind version 2.0, Jonathan Haidt will move on from his fixation with Newt Gingrich and recognize that the “by any means necessary” way Obamacare became law was a much more definitive turning point in the history of recent political polarization.

    • I think you are right that ultimately, the best of a number of bad choices is for carefully applied regulatory safe haven provisions. However, I hope everyone considers exactly what is involved and is willing to see how often regulatory tradeoffs, ugly as they are, are sometimes better than letting the free market just fail.

      Application of health care is an intrinsically risky process. A pure free market in healthcare would almost certainly produce results like $300K a year insurance for malpractice, or worse, would result in many procedures being avoided simply out of liability risk. Regulatory safe haven provisions will allow public access to important services at a more accessible price, but will suffer from all of the normal problems of top down regulation. They will cause all types of problems with distorting and blocking feedback in the system. But it may just be the best way to handle a difficult problem.

      Sometimes markets won’t go places unless public accommodation accepts some measure of risk and provides protection to the markets. In exchange, we require regulatory conditions. In these necessary cases, we need to be able to balance making those regulations add as little cost as possible with being as effective as possible. Just having binary arguments about regulations being all bad or all good isn’t helpful.

      • A pure free market in healthcare would almost certainly produce results like $300K a year insurance for malpractice, or worse, would result in many procedures being avoided simply out of liability risk.

        I don’t think that’s accurate, but it depends on what you mean by “pure free market”. Can I accept the risk and waive my right to sue in a “pure free market” system? Binding arbitration in front of panel of doctors in the defendant’s specialty, with liability being imposed over if the doctor deviated so clearly from the the standards of the progression that he loses his guild-issued certification to practice?

        But the broader point is that the cost and practice of medicine is already effectively regulated in a quasi-centralized manner by the tort system of civil suits, with the expected value of the body of case law, awards, and precedents acting as a kind of central authority after a fashion, and where jury verdicts are consistently and completely untethered from reality in terms of both judging whether the appropriate level of care due in the case was applied, and also in the calculation of damages. (For a recent example of tort awards rising to insane levels, see the several thousand recent baby powder / ovarian cancer lawsuits against Johnson and Johnson, in one of which a Californian woman was awarded over 400 Million dollars – though that particular verdict was set aside on appeal as the matter is so uncertain there is still ongoing debate whether the use of talc even makes ovarian cancer more likely or not!)

        It makes no sense to try to administratively regulate the practice and cost of medicine in parallel with a judicial regulation system operating via the tort system that does not align at all with the administrative regulator’s beliefs about best practices, due care, tabulated valuations, and cost-benefit analyses. “No man can serve two masters.” Trying to do both at the same time is guaranteed to produce the worst of all possible worlds.

        I love metaphors, so imagine some ‘officious intermeddler’ Brainy-Smurf whose job it is to pay you for every step you take on your way to school in the morning. He think he is paying you too much, so he analyzes your route, and discovers you aren’t taking the shortest, cheapest path. Aha! He offers you one free lunch voucher if only you agree to take the shorter path. He doesn’t understand why you refuse the offer. Meanwhile, he forgets that Hefty-Smurf is the school bully and he stands in the middle of the shortest path every morning, really to pulverize anyone who takes that route with super-strength behind his brass-knuckled fists. “Gee, Brainy, thanks but no thanks.”

        Brainy can rule or Hefty can rule, but not both. If Brainy tries to rule, but Hefty is still standing there, then it doesn’t matter what Brainy says or does, or how confused he as to why everyone always ignores him, because Hefty still rules.

        The point is, when it comes to incentives for commanding obedience, the court system is by far the stronger horse compared with spending 0.1% of your budget on meager bonuses.

        Which is why it ought to be one or the other system, but not both.

        Maybe you could offer consumers a choice between judicially-regulated medicine (answerable only to judges and only liable to tort claims) and administratively-regulated medicine (which must comply with all those technocratic rules and payment systems, but with all providers otherwise held harmless so long as they colored within the lines.) But that’s not where we are, not even close.

        • “… Can I accept the risk and waive my right to sue in a “pure free market” system? Binding arbitration in front of panel of doctors in the defendant’s specialty, with liability being imposed over if the doctor deviated so clearly from the the standards of the progression that he loses his guild-issued certification to practice?”

          That might be the way things would evolve under a free market system. I would think that would be the worst possible outcome.

          We have two often conflicting goals: providing feedback to the system, and cost reduction. The best solution will do some of both. Arbitration systems in asymmetrical transactions almost always just cut costs and deter feedback.

  2. It is a stretch to call ACOs centralized cost containment. If you want to look at true centralized cost containment, you look at Europe, Japan, Australia, etc. They do cost a lot less.

    Steve

  3. The incentive to game the system is always there, starting with the political system. Don’t expect much progress until you can fix that.

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