The Flaw in Using Medicare Price Caps as a Cost Control Model

Recent articles have suggested capping health-care prices at a percentage above Medicare payment levels as a way to bring down health costs. But evidence suggests that, rather than reducing overall spending levels, Medicare’s price caps don’t effectively control health costs.

The August blog post proposing the idea, published on the Health Affairs site, suggested that “every patient and every insurance company” should have the option of paying 125% of what Medicare charges for a given service, as a way to rationalize reimbursement systems notorious for their lack of transparency. Ironically, the authors of the Health Affairs post are affiliated with the Dartmouth Atlas of Health Care, a project that attempts to explain geographic variations in health spending (why Medicare spends much more per patient in Miami than in Minneapolis, for example). Much of its analysis has concluded that differences in physician behavior may account for much of the unexplained variations.

And therein lies the problem: Medicare’s payment system may be to blame for the higher levels in spending. Providers, when paid less per procedure, have sought to increase their incomes by performing more procedures over the past decade. According to the Medicare Payment Advisory Commission, while price levels rose 9% between 2000 and 2012, overall physician spending per Medicare patient skyrocketed by 72.4% in the same period–because doctors provided more services to beneficiaries.

These problems of low prices driving volume increases seem most acute in Medicare itself. In 2009, the town of McAllen, Tex., became famous after a New Yorker article by Atul Gawande profiled its high-spending health system. McAllen was shown to have abnormally high rates of Medicare per-patient spending than comparable areas. Yet research published in 2010 found that when it came to private health insurance, McAllen actually spent less per patient than the similarly situated town of El Paso. The researchers concluded that “health care providers respond quite differently to incentives in Medicare compared to those in private health insurance programs.”

One co-author of the 2010 study concluding that Medicare creates different provider incentives than does private insurance was Jonathan Skinner, who also co-wrote the August Health Affairs blog post calling for Medicare’s price caps to be extended to all medical providers. Unfortunately, the former questions the wisdom of the latter. Price caps could well function as a politically appealing “solution” whose knock-on effects mean it won’t ultimately solve much of anything.

This post was originally published at the Wall Street Journal Think Tank blog.

Brookings v. Dartmouth on Health Costs

The Brookings Institution released a study last week that could turn the debate over health spending on its head. While many health analysts—including several key advisers to the administration during the debate over Obamacare—believe that variations in physician practice patterns could represent the key to unlocking a more efficient health system, the Brookings paper questions the degree to which such variations even exist.

At its core, the debate boils down to a difference in two econometric models, both of which attempt to explain geographic variations in spending— for instance, why Medicare spends so much more per patient in Miami than in Minneapolis. Researchers affiliated with the Dartmouth Atlas of Health Care previously found what they consider large, unexplained variations in health spending. Their research—which examines data from individual Medicare beneficiaries, controlled for health status—led them to conclude that differences in physician behavior may account for much of the unexplained spending variations.

The Brookings study, however, uses a different model, one that examines spending data from the state level, and controls those state data using average health attributes in that state, rather than using data from individual Medicare beneficiaries. This state-based model explains much more of the previously unexplained geographic variation in spending, arguing that states with similar demographics have similar spending levels. As a result, the Brookings paper concludes—contra­ Dartmouth—that “geographic variation in health spending does not provide a useful way to examine the inefficiencies of our health system.”

It’s unclear who has the more accurate model, and why. While Brookings’ state-level model incorporates data from both Medicare and non-Medicare beneficiaries, the Dartmouth research focuses just on Medicare patients—and may therefore be skewed by traits particular to the Medicare program, or Medicare beneficiaries, that do not apply to the population as a whole.

The debate over spending variations has profound policy implications. Former Obama administration official Peter Orszag, who has cited Dartmouth research in his writings, believes that variations in physician practice patterns—doctors performing too many tests, for instance—lie at the root of the unexplained variations in spending.  Mr. Orszag and others used this theory to inform many policy choices related to Obamacare, which included a variety of carrots and sticks that attempted to change physician behavior and reduce spending variations.

The Brookings study undermines the basis of the Dartmouth thesis, and one of the reasons why Obamacare’s adherents believe the law will ultimately reduce health costs. Despite its arcane details, the debate between Dartmouth and Brookings will have profound real-world consequences for our health system in the coming years.

This post was originally published at the Wall Street Journal Think Tank blog.

Rationing within Medicare to Begin…?

The Washington Post just this morning posted an article about an “unusual review to determine whether the government should pay for an expensive new vaccine for treating prostate cancer, rekindling debate over whether some therapies are too costly.  The review revolves around the life-extending drug Provenge, which some argue does not extend life long enough to be worth its cost.  Among the quotes from the article:

  • “This absolutely is the opening salvo in the drive to save money in the health-care system,” said Skip Lockwood, who heads Zero – the Project to End Prostate Cancer, a Washington-based lobbying group. “If the cost wasn’t a consideration, this wouldn’t even be under discussion.”
  • “Certainly no one in the Medicare program would publicly state that the price tag would have anything to do with Medicare looking at it.  But they are human beings, too.  They notice things like that,” said Sean Tunis, director of the Center for Medical Technology Policy and a former chief medical officer at Medicare.
  • “I don’t want to blame Obamacare, but it just kind of figures that people are taking a look at what the cost-benefit ratios are and all that sort of stuff,” said David Dykes, 69, of Lorton, a retired federal employee who was hoping to try Provenge.  “That may sound pretty good to the people who want to cut costs, but it doesn’t sound too good to me.  This is something that could extend my life.  I’d like to give that a shot.”
  • “It is extremely chilling if, after spending a huge sum of money, time and effort to get a drug through FDA approval, you’ll then have to go through it all again to see if CMS will pay for it,” said Allen S. Lichter, head of the American Society of Clinical Oncology.  “Firing a shot across the bow like this is not the way to have an intelligent and meaningful discussion about how we start to address the complex issue of drug costs.”
  • “To charge $90,000 for four months, which comes out to $270,00 for a year of life, I think that’s too expensive,” said Tito Fojo of the National Cancer Institute.  “A lot of people will say, ‘It’s my $100,000, and it’s my four months.’  Absolutely: A day is worth $1 million to some people.  Unfortunately, we can’t afford it as a society.”
  • “I’d like to think cost doesn’t need to come up when it’s a slam dunk,” said H. Gilbert Welch of the Dartmouth Institute for Health Policy and Clinical Practice.  “But when it’s a close call like this, it certainly has to be a factor.  That’s $100,000 Medicare can’t spend elsewhere.” 
  • “The men most impacted by prostate cancer are African American men.  If CMS doesn’t approve this, then this treatment becomes an exclusive kind of treatment for men who can afford it out of pocket,” said Thomas Farrington, president of the Prostate Health Education Network.
  • “At some point, if we keep paying these very high prices for treatments that provide very limited benefit, we’re going to reach the point where we can no longer afford health care,” said Alan Garber, a professor of medicine and economist at Stanford University.  “Some say we’re living through that right now.”

Sadly, many of the quotes above echo the comments of Centers for Medicare and Medicaid Services Administrator Donald Berwick, who has talked about “rationing with our eyes open” and said that “at some point, we might say…that we wish we could afford [a benefit or therapy] but we can’t.”  As medicine becomes more personalized to patients’ specific conditions and needs – one of the reasons Provenge is such a costly therapy – Americans may see more debates about these issues, and more attempts to restrict access to important therapies based on cost grounds.

What You Missed Over the August Recess

In case you were out for some or all of the August recess, I’ve compiled a “Dirty Dozen” list of seven important stories you may have missed since the Senate adjourned in August – followed by five stories that I didn’t have a chance to send around over the break:

What You Missed Over Recess

Health Care Law Raising Costs; White House Response “Misleading”:  Last week the Medicare actuaries released their updated projections for future health care costs through 2019 that reflect the changes made in the health care law.  The Health Affairs article (subscription required) found that health costs would RISE about 0.2 percentage points per year more than they would if the law had not passed, leading health care spending to consume nearly one-fifth of GDP by 2019.  When asked about the report at his news conference Friday, the President responded that “we knew that” costs would go up as a result of more individuals obtaining insurance – claims that an Associated Press fact check piece noted “were rarely heard” during the health care debate, when Democrats asserted their bill would reduce costs.  A separate AP fact check piece released this morning called the Administration’s claims that spending per insured person would decline under the law “fuzzy math;” one math professor called the metric “a little misleading,” and Medicare actuary Rick Foster called the White House’s statistics “not meaningful.”

Impact on Premiums:  The Kaiser Family Foundation’s annual survey of employer-provided insurance found that premiums rose by 5 percent for individuals and 3 percent for families last year.  However, because firms are requiring their employees to contribute a greater percentage of premium costs, net premiums paid by employees rose by nearly 13% for families and 15% for individuals.  Last week a Wall Street Journal report found that some carriers are raising their premiums by 5-7% to reflect the new mandates and costs imposed by the health care law.  The Journal’s findings comport with a similar study of employers conducted by Mercer and released last week, which similarly found that the law’s many mandates will raise premiums by more than the 1-2 percent Administration officials have been claiming.  However, the Journal article prompted Secretary Sebelius to send a letter to insurers attacking their “misinformation and unjustified rate increases.”  In this context, it’s worth pointing out that during his presidential campaign, then-Senator Obama promised his health care plan would reduce premiums for family coverage by $2,500 – a claim the Administration has not made about the law in recent months.

Effects on Work:  In its annual August update to the budget, CBO included a section (pages 66-67 of the PDF) outlining the health care law’s effects on the labor supply.  Most notable was the conclusion that “the legislation, on net, will reduce the amount of labor used in the economy by…roughly half a percent, primarily by reducing the amount of labor that workers choose to supply.”  At a time when economic growth remains weak, some may question the impact of policies in the health legislation that will discourage work – and according to CBO, will lead to about 750,000 individuals to stop working.

Liberal Groups Recalibrate their Health Care Pitch:  A Powerpoint presentation prepared for Families USA and other affiliated liberal groups, and obtained by Politico, found that “straightforward ‘policy’ defenses fail to be moving voters’ opinions about the law,” and that voters were skeptical that the law will either reduce the deficit or help the economy.  As a separate article noted, the slide show “stresses repeatedly [that] many are unaware that the reform has passed, an astonishing shortcoming in the White House’s all-out communications effort….The presentation also concedes that the fiscal and economic arguments that were the White House’s first and most aggressive pitch have essentially failed.”

Health Care Measure Remains Unpopular:  The Kaiser tracking poll released in late August showed a significant uptick in opposition to the health care law, with approval falling by seven points and disapproval rising by ten points.  Fewer than three in ten Americans (29%) believe the law will benefit them personally – a near-record low on that measure – and seven in ten (70%) Americans disapprove of the individual mandate, 52% strongly.  For all these reasons, a Politico article last week noted that the only ads being run by Democrats regarding the health care law come from those House Members who opposed the measure – defying earlier predictions by Democrats that “those who voted against health care will find it a liability” by this November’s elections.

The “Stigma” of Enrolling Poor Americans in Medicaid:  In a press release, Sen. Ben Nelson questioned budget estimates released by Nebraska’s Governor that assumed poor Nebraskans would drop their private coverage to enroll in Medicaid, because, in Sen. Nelson’s view, “private insurance generally is better than Medicaid, which also comes with a stigma for some.”  According to the Medicare actuary, more than half of the individuals obtaining coverage as a result of the law – 18 million out of 34 million newly insured – will be enrolled in Medicaid.  It’s also worth noting that individuals newly eligible for Medicaid under the law will be automatically enrolled in that government-run program, and will NOT be given subsidies to choose their own plan on the insurance Exchanges.

Reading the Bill a “Waste of Time”:  At a town hall meeting in Libby, Montana, Finance Committee Chairman Baucus told his constituents “I don’t think you want me to waste my time to read every single word in that health care bill….It takes a real…real…expert to know what the heck it is.  We hire experts.”

What I Missed Over Recess

Budget Chairman Dubious About Deficit Savings:  At a debate in South Carolina last week, House Budget Committee Chairman Spratt acknowledged that the health care law’s supposed savings “may still be in doubt.  ‘That may or may not happen, but those are the projections from CBO,’ he said.”

A “Complicated and Bewildering” System for Consumers to Navigate?  In a New York Times blog posting, noted liberal economist Uwe Reinhardt said insurance brokers shouldn’t worry about losing their jobs as a result of the health care law, because “it’s a pretty safe bet that the state-based exchanges…will be so complicated and bewildering that the services of brokers will still be needed.”  Remember however that CBO predicted administrative savings in the Exchanges would actually mitigate some of the law’s increases in premiums elsewhere – so if Reinhardt’s prediction is accurate, and the exchanges are administratively complex, consumers in the individual market could end up paying even more than the $2,100 increase in premiums CBO projected last November.

Primary Care Doesn’t Equal Better Care:  The Dartmouth Atlas released a report last week that examined whether seniors in areas where more Medicare beneficiaries have at least one primary care visit per year received better care (e.g. mammogram every two years, eye exam for diabetics, etc.)  The researchers ended up finding…nothing: There was virtually no correlation between increased primary care visits and better patient care.  It’s an interesting finding, and one that casts doubt on whether programs like medical homes and accountable care organizations will automatically lead to improved patient care and outcomes.

Medicaid and the Emergency Room:  A Health Affairs article (subscription required) examined the stresses on America’s emergency personnel: Emergency departments comprise only 4% of the American physician workforce, yet handle 11% of all ambulatory visits.  One primary reason for this disparity can be found among Medicaid patients – more than half of all Medicaid patients’ acute care visits took place in the emergency room, with only about 5% taking place with specialist physicians.  The lack of access to physician care (particularly medical specialists), and the reliance on the emergency room as a primary source of health care access, due to Medicaid’s low reimbursement rates was further emphasized by a paper released by the American Action Forum last week.  Former CBO Director Doug Holtz-Eakin found that, because the health care law dumps another 18 million individuals into Medicaid without reforming that troubled program, more new Medicaid patients will flock to emergency rooms – resulting in an estimated 68 million emergency room visits (nearly 13 million annually), and increased costs to hospitals of $35.8 billion.

Patient Choice Improves Health Care Outcomes—Even in Britain:  A National Bureau of Economic Research paper released last month (subscription required for off-Hill users) examined the impact of changes made several years ago to Britain’s National Health Service (NHS) that allowed patients to choose their own hospital.  The results: “We find that the introduction of competition led to an increase in quality without a commensurate increase in expenditure” – because better hospitals attracted more patients, and “the increased competitive pressure led to improvements in quality.”  The study calculated the changes creating patient choice and competition in the NHS saved an estimated 3,354 life-years and £227 million (about $350 million at current exchange rates).  The study may come as a surprise to CMS Administrator Donald Berwick, who previously warned NHS officials: “Please don’t put your faith in market forces.”

Dartmouth’s Elliott Fisher Argues with…Dartmouth’s Elliott Fisher

Elliott Fisher and his Dartmouth Atlas research team this afternoon released a response to this morning’s front-page New York Times article that raised several important questions about the validity of their research into health care costs.  In responding to the Times’ characterization that their research does not consider spending measures that prolong life, Fisher points to a post on the Times’ blog in March, which reads in part:

End-of-life measures could penalize hospitals providing potentially costly but life-saving procedures. This is true of any cost measure, and is why we have always emphasized measuring quality, such as patient satisfaction, avoidable-readmission rates or health outcomes…The lower-cost hospital systems that are often held up as a national model, in part because of the Dartmouth data, appear to get results that are as good as — if not better than — higher-cost systems. (Emphasis added)

Compare that quote from March with Fisher’s own quote in this morning’s Times piece: “We never asserted and never claimed that we judged the quality of care at a hospital—only the cost.”  So in other words, Fisher and the Dartmouth team never believed that their research would judge quality – except when they did.  Got that?

In a similar vein, the researchers attack the supposed “misrepresentations” in the Times piece, but Fisher himself admitted in the same story that “he was sometimes less careful in discussing his team’s research than he should be.”  So the Dartmouth response attempts to minimize the scope of Fisher’s misrepresentations, while simultaneously accusing the New York Times of multiple “factual errors.”  Some might characterize an academic who admitted overstating his factual claims in a newspaper article turning around and attacking that same article for “misrepresenting” his work as indicative of no little amount of chutzpah.

But the bigger health policy question is this:  How credible is research – which Donald Berwick called “the most important research of its kind in the last quarter century” – undertaken by a professor who admitted he oversold his claims?  Is the Dartmouth Atlas really the “Holy Grail” of health policy – promising better care at lower costs – that Peter Orszag and others hold it out to be?  Or is it, as Fisher admitted in this morning’s article, really just an examination of costs and spending – a tool that government bureaucrats can use to deny patients access to life-saving but expensive treatments?

“Shaky” Data Underlie Democrat Claims on Costs

The New York Times is out this morning with a feature analysis that dispels some of the myths surrounding the Dartmouth Atlas survey.  Some of the criticisms have been previously reported – for instance, a December Times piece examined a study highlighting a California study from last year indicating that spending in the last year of life presents a potentially misleading picture of hospitals’ efficiency, because (by definition) it does NOT examine care interventions that successfully saved lives.

Two startling quotes from Dartmouth’s Elliott Fisher stand out in this morning’s article.  First, Fisher admitted that he and his Dartmouth colleagues have made unsupported claims that more spending equals worse care, even though there is “little evidence” to support this claim.  Fisher admitted “that he was sometimes less careful in discussing his team’s research than he should be” by drawing conclusions without data to back them up.

Second, Fisher made this stunning statement about his research for the Dartmouth Atlas: “We never asserted and never claimed that we judged the quality of care at a hospital — only the cost.”  So if you were wondering where Donald Berwick – the Administration’s nominee to run the Medicare and Medicaid programs – obtained the notion that we should cap health care spending and “ration with our eyes open,” you may have just found your answer.

Health Care Spending and End-of-Life Care

This New York Times article from December 23 highlights one of the pitfalls of the arguments made by Peter Orszag and others that hundreds of billions of spending in health care (and in Medicare) are “waste” that can easily be eliminated.  The piece highlights a major flaw in the Dartmouth Atlas surveys about spending on end-of-life care that allege some hospitals have much higher costs than others: “If you consider only the patients who die, there is really no way to know whether it makes sense to spend more on one case than another.”  The article quotes a data analysis from UCLA and several other California hospitals that found that, after considering the effects of elderly patients with heart failure who did and did not die, found much less variation in spending than the Dartmouth Atlas’ analysis examining only patients who died.

Note also that the prospect of additional focus on “wasteful” end-of-life spending – through various payment changes made as a result of bureaucratic studies and proposals – concerns officials at UCLA, “who say that unless the distinction can be clearly drawn between excellence and excess in medical care, efforts to cut wasteful spending could be little more than blunt rationing.  ‘There’s a real risk of doing harm here – real harm,’” said UCLA’s Chief Medical Officer.