New Marketplace
Curbing Health Care Spending: The Provider’s Role (09:03)

Health care costs have historically grown at about 2% faster than income in the U.S., according to Harvard Health Care Policy Professor Michael Chernew. “That cannot happen indefinitely,” he says. “We will have no clothes. We will have no food. We’ll have no shelter, but we’ll just be very healthy.”

“One way or another, we are going to control health care spending growth. We do not have to cut health care spending, but we must, and frankly, we will cut health care spending growth,” Chernew says. The challenge? Being careful about how to cut.

“It is easy to reduce spending if you don’t care about the quality of care or the health of the population, but you do care about the quality of care and the health of the population, so we have to figure out ways to cut sensibly,” he says.

Who’s going to be responsible for making those cuts? A lot of the pressure is a revolt on the payer or demand side. Employers and insurers have a somewhat limited, broad set of tools to control spending, so one common approach is to shift the burden of spending to patients. “You see that with the rise of high-deductible plans and a whole slew of other things,” Chernew says. But we’re getting to the limit of how much we can charge the patient, and there’s a revolt around charging patients so much out-of-pocket for their care. So what’s left? Interventions that focus on the provider.

“It’s not rocket science, but I’ll just say it: One strategy, if you want to pay less, turns out to be pay less,” says Chernew. That puts a lot of financial pressure on physicians, with pressure to keep fees low. Chernew describes how with the public program of Medicare, the payment system for physicians used to involve a sustainable growth rate formula — which turned out not to be sustainable. It’s now replaced with MACRA, which sets out a fee trajectory for physicians and layers on top of that a pay-for-performance system called MIPS.

“MIPS is a big distraction, and what is missed is that the underlying fee trajectory is flat for roughly 80 years,” Chernew explains. “The idea is that physicians getting paid from public-sector patients will have extremely low fee increases, which explains part of why Medicare has done so well. That said, there’s very little excitement, broadly, for simply lowering physician fees.” Plus, that’s hard to do in the commercial sector, which has had closer to 6% growth and is driving a lot of this. Because of this, the energy is around paying differently.

“Having new payment models to promote efficiency is all about flexibility,” Chernew says. Broadly speaking, to produce efficiency in the health care sector, producers — who are hospitals, physicians, and other providers — use inputs in different ways to provide the output, health, at lower cost. And we need a payment system that will support that.

“I do not believe that the payment system will drive us to success, necessarily, but I certainly think the payment system, if we’re not careful, can be an impediment to success,” he says. “We need to design a payment system that will allow organizations that can find efficiencies, to have those incentives to create those efficiencies. And the notion is we share the savings. Why? Because if you won’t share the savings there will not be savings to share.”

The basic goal: Build payment models like population-based payment, where the delivery system assumes accountability for the full amount of spending and individual clinical outcomes, and bundled payments, assuming accountability, for an episode of care, and allow the provider system to rearrange the resources they need to provide that service or care for that patient more efficiently and share some of the fiscal savings it generates.

“We call those payment models, commonly, value-based payment, but in my view it’s just a misnomer,” says Chernew. “The word ‘value’ is simply the sugar that makes the medicine go down. This is about risk transfer.” Someone has to control what goes on, and someone has to have the incentives to control what’s going to go on.

“Frankly, as providers, you’ve drawn the short straw,” he says. “You may not have gone to medical school to learn how to save money, but increasingly the delivery system is put in the situation where they need to save money or at least control the rate of growth and spending.”

The question then becomes: What do you do if you’re a provider now that the incentives have changed and there’s this revolt? First, you get bigger. It’s fine to accept population-based payment if you can control the level of that payment. Scale can help you push back against revolt on the demand side when you grow bigger and reach a payment level for which you can bear risk.

Secondly, providers realize that many of these models involve capturing the patient. As we save money in health care, who gets to keep the savings? The models differ between a population base, an episode base, and in some models, the payer. In many of these models, the organization that keeps the savings is the one that employs the primary care physician who treats the patient.

“So you want the patient. You need ways to keep them in your system,” explains Chernew. By integrating in a range of ways, if you have the patient, you have the responsibility and therefore can keep the savings if care is delivered more efficiently. For services like stenting or diagnostic testing, those who keep the savings from sending someone to a lower-priced place will commoditize you as quickly as they can. We see a lot of these efforts to “control” the patient going on, he says.

“We want a really wonderful health care system. We have a really poor health care system. The bar is not that high. We don’t know yet how to build the beautiful health care system. There are just particular places where we can do a little bit better,” says Chernew. For example, we can save maybe 2–5% in certain ACOs and 20% in some of the episode-based payment models, on average 5%, though some episodes don’t do as well.

“We don’t know, so we have to continue to experiment,” he says. Payers will experiment with new benefit designs, reference pricing, tiered networks, narrow networks — a range of new payment models — and the delivery system will respond by organizing in a way that enables them to meet that need and fundamentally control spending.

“You will be more successful if you can build an organization that has the flexibility to use the services that are needed at the right time and you’re not spending more money, and you get to keep some of the savings from those efficiencies,” says Chernew. “I think you will see that health care spending growth, the numbers we’re about to see, will actually be lower than they’ve historically been.”

“We will continue to see in the near term somewhat lower health care spending, in part because of a lot of these activities that are going on,” he says. “We have to keep at it with little wins and maybe, just maybe, we’ll end up with a sustainable health care system that we eventually need to have.”

From the NEJM Catalyst event Disrupting the Health Care Landscape: New Roles for Familiar Players, held at NewYork-Presbyterian, October 25, 2018.

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