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Let Efficient Providers Prosper

Article · December 6, 2016

The American health care system is the most expensive in the world, with little evidence that the higher spending is justified by better outcomes. The current effort to shift from a mostly fee-for-service payment system to one that relies on some combination of population- or episode-based payment represents one strategy to improve health system efficiency. We saw the latest step in the effort with CMS’s release of the MACRA rule that favors alternative payment models. But payment transformation will only be successful, and avoid the pitfalls of our current payment system, if the government sets broad fiscal and quality targets but then allows providers the flexibility to innovate — and reap sufficient rewards, if they meet those targets.

The theory behind payment reform is simple and well understood, but it bears repeating. Efficiency, by definition, requires more judicious use of resources. Fee for service, however, discourages greater efficiency in two key ways. First, under the current system, we use too much care, in part because wasteful care is profitable. Providers who find ways to avoid wasteful services and use a more efficient mix of services may suffer the penalty of lower incomes. Second, under the current system, we pay too much for the care we use. Incentives to avoid high-price service or sites of care or to make referrals to low-price providers are weak at best. The provider who refers a patient to a high-quality, lower-price specialist or hospital captures none of the savings. This not only increases spending in the short run, but it also fosters a market dynamic that leads to ever-rising prices.

With efficiency gains as the ultimate goal, if payment reform is to work, then physicians and hospitals must have flexibility and incentives to combine services in a way that produces better outcomes with fewer resources. This might involve new technologies such as telemedicine or e-visits. It might involve group visits instead of individual visits, wise use of non–health care services, or expansion of prevention to reduce expensive disease complications. It might involve changes in the mix of labor used (nurses instead of physicians, primary instead of specialty care), low-cost drugs instead of comparable high-cost drugs, or drug interventions instead of surgery. The fundamental principle of efficiency producing innovation is one of substitution and wise use of technology (including information technology) to improve care.

Streamline Rules and Reward Efficiency

As the federal government takes on the work of designing alternative payment models, basic market principles can provide key lessons. First, in our quest to improve quality measurement, we should minimize the degree to which such measurement puts a tax on providers and prevents innovation in care delivery. To the extent possible, policy makers should focus on outcome measurement, as opposed to process and structural measures. Where possible, they should specify what outcomes they want to achieve rather than dictating how they should be produced.

Our existing system likely errs on the side of too much data collection burden and too many micro-measures. We place too many structural requirements for ACO governance and reporting. Overly complex quality measures and ACO oversight rules may distract providers from real quality improvements, driving them to game the system rather than find ways to deliver better, more efficient care.

Second, we must allow providers to capture efficiency gains. In other markets, more efficient producers keep all of the savings — unless they choose to lower prices to capture more market share, or competition from other efficient producers pushes prices down. Consumers benefit from this dynamic. A similarly virtuous dynamic could be achieved in health care by allowing producers to keep all of the savings generated by their efficiency gains in the short run, while over time allowing a slower increase in the population- or episode-based price or lowering those prices if providers have systematically reaped a windfall.

Fundamentally, if society does not share the savings, there will be no savings to share. Our greatest concern should be low-cost, high-quality production of health (not health care) over the long term. We should strive to pull the savings out of the health care sector over time. If providers do not have strong incentives to disrupt the system, we may extract short-term savings, but we’ll lose the opportunity to put health care on a high-quality, fiscally sustainable trajectory over the longer term.

Finally, the government’s desire to create payment models that could suit all providers creates confusion and possibly gaming opportunities among providers. We have the MIPS system created under MACRA, a number of ACO models, and an ever growing number of episode-based models. Outside all of this sits the Medicare Advantage model. Far too much provider time and energy is spent sorting out which payment model to follow and how best to work the system rather than pursuing solutions to create better health care. Reducing the number and complexity of options and signaling the basic strategy for moving forward would go a long way to support effective system transformation.

If our society can seize this moment to unleash the power of innovators to create better models, which allow them to profit from removing waste and finding new efficiencies, we can put ourselves on the path to a satisfying and sustainable health care system.


Disclosure: Dr. Chernew holds equity in V-BID Health and sits on advisory boards for the Commonwealth Fund, the National Institute for Health Care Management, and Archway Health.

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