Beyond King v. Burwell: How New Prices and Payments are Changing the Way We'll Receive Healthcare under the Affordable Care Act

In the wake of the recent King v. Burwell Supreme Court decision to uphold subsidies for the 34 state health insurance exchanges under the Affordable Care Act, it's worth understanding why losing them would've made insurance for nearly 6.4 million Americans unaffordable. It boils down to two numbers: the cost of delivering care and the rate that hospitals are paid to do so.

Most physicians are currently paid under a 'fee-for-service' model, a flat sum for each individual test or procedure provided to a patient. It's no surprise then that the number of prescribed tests has skyrocketed over the past two decades as hospitals attempt to increase revenue. For any given condition, the United States both orders and spends more on unnecessary screens and treatments than any other country on Earth, often with no better outcome for the patient. An MRI in the United States costs five times as much as the same MRI in France. Most countries negotiate with healthcare providers to set rates at acceptance levels. Prices are either directly set by the government or are negotiated upon by providers and insurers prior to delivering care. In both instances, the price of healthcare is generally much lower than that of the United States, where, outside of public programs like Medicaid and Medicare, providers can usually charge whatever they can get away with to make up for the high costs of pharmaceuticals and medical devices. Furthermore, the amount paid for a given service is identical regardless of whether the outcome is good or bad. Imagine going to a restaurant and paying the same amount for a meal that left you satisfied and another--that you likely didn't order but were given anyways--that gave you food poisoning. That's how fee-for-service works.

The lack of accountability on the quality of care compounded with a healthcare financing model that rewards hospitals for increasing volume, not value, was a recipe for disaster, causing healthcare spending to jump to nearly 20% of GDP, but left the rate of increase in life expectancy in the dust compared to Europe and Japan.

The U.S. first tried to address rising healthcare costs in the 1990s through a model known as 'global capitation'. Providers were paid a single pre-defined sum to cover all treatment for each patient. If a physician or healthcare organization delivered care to a patient at a cost less than the sum it received, it turned a profit. If it overshot the sum, it lost money. While this model rewarded physicians for spending less, it did nothing to reward physicians for improving outcomes. As a result, physicians had a financial incentive to avoid expensive treatment plans and costly patients, resulting in poor quality care.

In 2012, as an extension of the Affordable Care Act, the Obama Administration launched the Pioneer Accountable Care Organization (ACO), a 'global payments' model that rewards hospitals that deliver quality care at costs lower than a pre-defined benchmark and punishes hospitals that overspend. If hospitals in the program spend below expected costs, they keep 70% of the savings; the other 30% goes to the federal government. If they spend more than expected, they pay the federal government the difference.

Some policymakers and physicians worry that the Affordable Care Act's global, or bundled, payments model is simply disguised capitation. Although bundled payments have a cost control structure similar to global capitation, they have been flexibly designed to avoid its pitfalls by rewarding value-based patient care. Physicians are paid for each patient based on how much treatment would cost for a given clinically defined episode of care. This risk adjustment allows for variability in global payments based on the illness burden of a provider's patient population. Additionally, unlike capitation, providers are directly rewarded for improving patient outcomes, incentivizing consistently-measured, high-quality care. Some global payment models do not involve any punishments for overspending, as opposed to the Pioneer ACO, but continue to reward strong physician performance.

Over the last two years, the Pioneer ACO program has saved $384 million in healthcare costs. In combination with the Medicare Shared Savings Program (MSSP), another global payments initiative, it has contracted with 154 organizations in forty states. All hospitals involved showed improved performance quality measures, readmission rates, and cholesterol level monitoring. Furthermore, patients gave similar rates of satisfaction compared to previous models of care and even reported better access to physicians. The end result is higher quality care at a lower cost for patients.

While Pioneer is illustrative of a step towards progress in managing healthcare costs, it hasn't been perfect. Most 2012 Pioneer participants were large, sophisticated hospital networks with the capability to rapidly change their method of delivering care, very different from the public hospitals that serve the populations that need health reform the most. Of the 32 hospitals that registered for Pioneer in 2012, 13 dropped out and 14 failed to produce any substantial savings. However, most dropout hospital networks still plan to pursue less-aggressive value-based payment models, such as MSSP, and found their experience with Pioneer to be an effective transition for both patients and providers to the global payments model. Additionally, the practice of measuring and collecting data on physician performance and patient outcomes will give both the federal government and providers a more transparent understanding of what treatments work, providing evidence-based information to set prices based on the value of individual treatments. If there's any one change that will reduce U.S. healthcare costs in the long term, it's lowering prices.