The health-care law’s success story: Slowing down medical costs

David Cutler is a professor of economics at Harvard University and was senior health-care adviser to Barack Obama’s 2008 presidential campaign.

The anger over the botched rollout of the Affordable Care Act’s federal health insurance exchange — and over the conflicting explanations about whether people can keep their coverage — has been bipartisan and well-deserved. The administration needs to make personnel and management changes to get enrollment back on track. But the focus on insurance coverage obscures other parts of the ACA that are working well, even better than expected. It is increasingly clear that the cost curve is bending, and the ACA is a significant part of the reason.

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The law has two overarching goals: Cover almost everyone, and slow the growth of medical care costs. The goals are equally important. Too little coverage, and premiums in the exchanges will be unaffordable; too rapid a cost increase, and the federal government will not be able to afford the subsidies.

Even as coverage efforts are sputtering, success on the cost front is becoming more noticeable. Since 2010, the average rate of health-care cost increases has been less than half the average in the prior 40 years. The first wave of the cost slowdown emerged just after the recession and was attributed to the economic hangover. Three years later, the economy is growing, and costs show no sign of rising. Something deeper is at work.

The Affordable Care Act is a key to the underlying change. Starting in 2010, the ACA lowered the annual increases that Medicare pays to hospitals, home health agencies and private insurance plans. Together, these account for 5 percent of the post-2010 cost slowdown. Medicare payment changes always provoke fears — in this case, that private plans would flee the program and that the quality of care in hospitals would suffer. Neither of these fears has materialized, however. Enrollment in private plans is up since the ACA changes.

The law also emphasized that payments should be based on the value, not the volume, of medical care. In a value-based system, compensation is made for the patient as a whole, not for specific services provided. As a result, eliminating services that are not needed is financially rewarded. The reaction to this change has been rapid: Hospital readmissions, which used to bring in substantial dollars, are now penalized.

Unsurprisingly, the readmission rate in Medicare is down 10 percent since 2011. Similarly, hospital-acquired infections used to bring in additional dollars, but now they do not. One program to cut infections, encompassing only 333 hospitals, saved more than $9 billion. Both of these changes improve patient health even as they reduce spending.

The accountable-care movement — which aims to make providers more accountable for the cost and quality of care — has blossomed far beyond expectations. There are nearly 500 Accountable Care Organizations (ACOs) nationwide, half in Medicare. Ten percent of Medicare beneficiaries are in ACOs, and many others are in payment systems that put together all reimbursements for a procedure, such as a hip replacement or cardiac stent insertion. Leaders of medical systems routinely report that they expect, and are preparing for, a move to value-based payments.

Evaluations of recent ACO programs show quality improvements among all participating organizations and financial savings for many. This is not a surprise. The Institute of Medicine has been reporting for more than a decade that a third or more of medical spending could be eliminated while increasing patient health. The only surprise is how fast the system has moved in this direction.

The ACA does not account for all of the recent cost slowdown. New medical technologies are coming online more slowly than they used to; none of the 10 best-selling drugs on the market today were developed in the past decade. Similarly, patients with high deductibles are deferring elective procedures. Many insured families today owe more from a hospital visit than they have in the bank. Each of these factors is contributing to the reduction in health-care spending. But noting that factors beyond the ACA are important does not deny the importance of the law.

Cost savings induced by the ACA are particularly beneficial because they could increase quality while they lower spending. The reduction in technology development means lower costs but also fewer ways to treat sick people. People with high deductibles use fewer valuable services as well as fewer less-valuable ones. Only by eliminating unnecessary care can we ensure that everyone benefits from saving money in health care.

Governors and legislators in red states are almost universally opposed to the ACA. But these states are still seeing cost savings from the law — and they are participating in other ways.

Six states, including places as diverse as Arkansas, Massachusetts and Oregon, are using ACA-appropriated funds to help shift medical care to a higher-quality, lower-cost system . Nineteen other states are planning similar changes. And many of these states are solidly red.

States’ successes can feed back to federal policy. A recent Senate proposal, for example, calls for replacing the broken payment system that Medicare uses to compensate physicians with a system of payments based on value.

Before he was criticized for his statements about insurance continuity, President Obama was lambasted for his forecasts of cost savings. In 2007, Obama asserted that his health-care reform plan would save $2,500 per family relative to the trends at the time. The criticism was harsh; I know because I helped the then-senator make this forecast. Yet events have shown him to be right. Between early 2009 and now, the Office of the Actuaries at the Centers for Medicare & Medicaid Services has lowered its forecast of medical spending in 2016 by 1 percentage point of GDP. In dollar terms, this is $2,500 for a family of four.

Looking ahead, there is every reason to believe that costs will continue to grow slowly, maybe even more slowly. A study in Massachusetts showed that ACO savings increase over time as organizations move into more areas that can slow cost growth. An analysis of exchange premiums estimated that insurance costs in the exchanges are 16 percent below what was forecast two years ago; the lower costs were attributed to competition from new entrants in the market.

If cost growth continues at its low pace, the cumulative savings to the federal government would be more than $750 billion over the next decade. Such savings are likely to dwarf anything that comes out of Congress this year.

Many Americans are rightly upset with the Obama administration’s rocky rollout of the insurance exchange. Failing at such a major project is inexcusable. But if the early indications are any guide, we should be pleased with how the new health law is affecting what we pay for care. If the Web site is fixed and enrollment can catch up to expectations, the ACA could yet become a major policy success.

david_cutler@harvard.edu

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