An Alternative To Health Care's Logic-Defying Payment System

Recently President Obama provided an assessment of the Affordable Care Act (ACA or "Obamacare") in an article published in The Journal of the American Medical Association (JAMA). The president acknowledged the program's successes and shortcomings, and offered up some advice about how to improve it going forward. It is unusual for a sitting president to critique his own legislative achievements and many of his points have been and will continue to be debated. But by writing the article, the president demonstrated concern over the need to continue efforts to improve the state of health care in America.

ACA's main goal was to increase health care coverage for Americans. A necessary corollary to increasing coverage, which costs money, was to reduce costs in the system. As President Obama points out in the article, the growth in Medicare spending per enrollee has decreased since the ACA roll-out. The article also notes that rates paid for Medicare services have been reduced. When providers (hospitals, doctors, etc.) are paid less for the same services, the reduction in Medicare cost growth should come as no surprise.

While Medicare rates are being reduced, insurers are asking for significant rate increases for plans they are offering on insurance exchanges. Blue Cross and Blue Shield of Texas is proposing an increase of almost 60%. In Oklahoma, the proposed increase is about 50%. Insurers are justifying these rate hikes by citing the significant claims they've had to cover for members enrolled in their programs. In Oklahoma, Blue Cross paid $1.38 in claims for every dollar in premiums collected. Losses like that have driven many insurers out of the insurance marketplace altogether. After losing about half a billion dollars in ACA exchanges last year, UnitedHealthcare, the nation's largest health insurer, announced that it would only offer health insurance in a handful of states.

Americans are cautioned not to panic about these proposed rate increases for several reasons. First, the rate increases are proposals and must be approved by regulatory bodies. Additionally, proposed increases vary considerably around the country, and from plan to plan. The proposed increases are only expected to apply to individuals buying insurance on the open market. About half of these individuals, or 12 million people, do not qualify for subsidies to help pay for the cost of insurance. They will feel the effects of the proposed changes. However, the other 12 million individuals do qualify for subsidies, and may not feel the impact of the increases at all.

But somehow, somewhere, someone is subsidizing the subsidies. About 50% of Americans receive health insurance through their employers. For years, employer-based plans have reported cost shifting to employees. Between 2005 and 2015, premium increases for covered families increased 61%. During the same period, the contribution that workers had to pay towards their coverage rose 83%.

Consider a lawsuit recently filed by UnitedHealthcare against American Renal Associates, a company that provides dialysis services. The suit alleges that American Renal Associates schemed to shift insurance coverage for patients currently enrolled in Medicaid to private health insurance. The motivation was that private insurers were paying 20 times more than Medicaid per treatment. The difference in reimbursement was an astonishing $200 to $4,000. In the whack-a-mole world of health care cost sharing, rates cut in one program manifest as cost increases in another. In the end, it's hard to determine exactly what the right rates of service should be.

One of the biggest frustrations with the American health care system is that it is incapable of accurately pricing goods and services. The reimbursement that providers receive varies considerably based on which insurer is paying. This structure motivates providers to prioritize access to patients whose insurance pays the most. It also encourages more procedures and tests that reimburse at the most attractive rates to be performed.

In order to address some of the sketchy incentives that are by-products of the health care payment system, both ACA and industry leaders are embracing the notion of outcomes- or value-based bundled payment models. In such models, a provider would receive one payment that is tied to a patient's outcome. The approach is expected to lead to more coordinated care that puts patients first and reduces unnecessary testing.

Philosophically, value-based care is a terrific idea, but the mechanics of implementing it are still being debated. How one defines an outcome, what services should be included in the bundle, and how results will be measured are questions that are still being hashed out. Assuming that the industry can settle on implementing this care delivery model, the pricing problem will still be in effect. If the system can't accurately price a single procedure, how can it accurately price a bundled payment? If past is prologue, the government will set rates for the bundles, private insurance will try to price the services in a profitable plan, and price variability and erratic cost sharing will still define the market.

Maybe it's time for a new health care payment model that promotes market-based rates. Providers could establish their own rates of service and offer these rates directly to patients. This approach requires providers to have a better understanding of their own cost structures, and motivates them to compete and perform in order to gain and retain customers.

Further, studies have shown that increased patient engagement improves patient outcomes. With market-based pricing, patients will be much more circumspect about what health care services to buy, and will demand value for their payments. This model also eliminates the significant administrative burden borne by both providers and insurers related to negotiating rates of service and processing claims and payments.

Funding such a shift in payment structure could come in the form of vouchers or accounts provided by the federal government. All Americans would be allocated an equal amount to be spent on the providers they choose. Amounts would vary by age to accommodate for the variability in demand for services. If individuals believe the allocated amount is insufficient for their health care needs, services could be purchased in cash. Further, individuals could purchase insurance - which would pay providers at the same market rates - to cover catastrophic or life-threatening events. States and local communities could band together to fund coverage for individuals who need but cannot afford or choose not to purchase supplemental coverage.

Market-based pricing could reduce administrative costs, increase patient accountability, and encourage providers to practice medicine in a way that supports local market preferences. The proper implementation of market-based pricing should reduce healthcare utilization, enable a more effective use of heath care funds and importantly, promote better heath.

What do you think, Secretary Clinton? Mr. Trump?

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