Competing Narratives About Healthcare Inflation
January 7, 2022
John McCracken, PhD
How to deal with the seemingly inexorable rise in healthcare spending has been a central policy challenge for over four decades. In 1980, healthcare spending was approximately 9 percent of GDP; but by 2021, it was over 19 percent. Had healthcare spending grown at the same rate as GDP over this period, it would have been $1.9 trillion (50%) lower in 2021.
In recent years, two opposing political narratives have evolved to explain the primary reason for healthcare inflation, each with its own set of policy remedies. One narrative holds that it is principally the result of the actions and behaviors of patients, who have little incentive to economize on their demand for healthcare resources. The opposing narrative is it that primarily the result of the behavior of providers, who are incentivized to maximize their income in a fee-for-service payment regime. The policy solutions advanced by the proponents of these opposing narratives are entirely different. Over the past two decades healthcare policymakers have tried to implement the policy recommendations of both camps, and none of them have worked very well.
The Patient as Culprit
One narrative holds that healthcare demand is unlimited because historically insured patients have paid only a small fraction of total costs out of pocket. That coupled with the unavailability of accessible, actionable price data has discouraged patients from shopping for cost effective care. Proponents of this narrative argue that patients need to have more skin in the game, paying more of the costs themselves, as well as have ready access to transparent comparative price data. The presumption is that this combination would provide both the means and financial incentive to shop for more cost effective care.
Patient cost sharing has grown dramatically over the past decade. According to the 2020 Kaiser Family Foundation Health Benefits Survey, employee deductibles have grown 111% over the past decade, four times faster than worker earnings. The evidence suggests, however, that greater cost-sharing has been at best a crude instrument for encouraging price shopping and better decision-making. In fact, particularly among lower income consumers and the uninsured, it has tended to deter individuals from seeking all types of care, even potentially effective treatment.
High deductibles create weak incentives for price shopping because the costs associated with the more expensive aspects of care (e.g., hospitalizations and procedures) far exceed even the largest deductible, and those patients whose spending exceeds their deductible make up the majority of total spending. Thus even when faced with a higher deductible, these high cost patients have little financial incentive to choose lower-cost providers.
Moreover, even when patients are aware that price data exists, the complexity of the medical payment and billing system undermines price shopping. When patients contact providers, they receive estimates that preclude a useful comparisons. For example, some price quotes for a surgical procedure include the physician reimbursement, others include the hospital fee, and others include both. Patient surveys have shown that generally fewer than 15% of patients seek information about expected spending before receiving care, and a much lower percentage actually compare costs across providers prior to treatment. The majority of respondents also indicate a reluctance to disrupt existing provider relationships. Consequently, most patients rely on their existing provider(s) to guide their medical spending, guidance that is often uninformed about relative provider prices.
The bottom line is that increasing patient financial incentives to seek more cost effective care has proved to have had relatively little effect upon either the amount or cost of care delivered, and in fact among lower income and uninsured patients, has tended to have the perverse effect of discouraging seeking effective treatment.
The Provider as Culprit
The alternative narrative absolves patients of blame and identifies the culprit as the way we have traditionally paid for care: fee-for-service payment for doctors and per-admission or per-procedure payment for hospitals. This piecework incentive encourages doctors and hospitals to order more tests and do more procedures of low marginal value. Reform advocates argue that if we change financial incentives to emphasize prevention and paying providers for value instead of volume, cost growth will be restrained.
There is an obvious conflict between these two narratives. Those who are focused on higher deductibles and price transparency hope that patients will price shop for each component of their care. If alternatively the focus is on value and care coordination, price shopping for individual services would be discouraged, because the implicit expectation is that most care would be delivered by a single high value provider or healthcare system.
This thinking of the provider as culprit has led to a regime of micro accountability, a bewildering increase in clinician reporting requirements from both Medicare and commercial payers, and in the amount of time spent entering data into the patient medical record in order to receive payment. It has also generated the need for an extensive investment in technology and infrastructure required to support new, complex care delivery arrangements like Accountable Care Organizations and Patient Centered Medical Homes.
The ACO model emerged from efforts by both government and private payers to address quality differences and curb increasing healthcare costs. ACOs would be held accountable to patients and payers through a pay-for-value model whereby providers share in the overall savings which are presumed to be the result of achieving pre-defined cost and quality performance standards. The objective is to reorient provider incentives to focus on the total cost and quality of care instead of per service payments.
Since its inception in 2010, the Center for Medicare and Medicaid Innovation have piloted more than 50 different alternative payment models that reward providers for delivering more cost-effective care. So far, six have generated statistically significant savings, and four have met the requirements to be expanded in duration and scope.
The data suggests that ACOs can marginally reduce costs without reducing quality, largely attributable to reductions in low-value services and savings in outpatient expenses among the most medically complex patients. These cost savings, however, have been quite modest. When performance bonuses are subtracted from gross savings, most programs either lost money or saved no more than 1-2 percent, and this doesn’t include infrastructure costs or the losses incurred by those unsuccessful ACOs that elected to drop out of the program. Among all the ACOs in the Medicare Shared Savings Program in 2019, urban ACOs generated net savings of only $125 (0.9%) per beneficiary. and rural ACOs generated $64 (0.5%). The ACO model arose from laudable goals, but at least so far, reality as measured by results has failed to align with theory.
Failure of the Two Narratives
Both of these alternative narratives not only overestimate the effects of economic incentives on patient and professional behavior, they also overestimate the capacity of the healthcare system to improve the health of the population. The U.S. health system has negligible leverage to overcome behavioral issues such as smoking, substance abuse and obesity, and even less to offset the adverse effects of social determinants such as poverty, lack of education, and compromised access to care. These narratives of culpability—of patients who fail to shop for care or caregivers who attempt to maximize profits—continue to animate health policy and result in simplistic solutions that presume costs can be restrained by a simple realignment of incentives.
More importantly, though, the animating assumption that healthcare costs are the result of overuse—whether because of patients’ failure to shop for care or providers succumbing to fee-for-service—is simply wrong. Over the last two decades, research has clearly demonstrated that the principal driver of rising healthcare spending is the excessive drug and medical service prices. Between 2015 and 2019 cumulative per capita healthcare sending among individuals with employer sponsored insurance grew 21.8%, the result of an 18.3% increase in prices and only a 3.6% increase in utilization.
Healthcare spending is the product of price times quantity (utilization). U.S. policymakers have been focusing on restraining quantity, when all the while they should have been focused on the price factor. It is only by policies designed specifically to restrain the growth of drug and medical service prices that healthcare inflation can finally be brought under control.
John McCracken is Clinical Professor of Healthcare Leadership and Management in the Jindal School of Management, The University of Texas at Dallas.