Why Obamacare's Health Care Cost Controls Won't Work

Our sad, failed history of technocratic cost controls.


There's little question that what's ultimately driving the nation's long-term debt is entitlement spending—in particular spending on Medicare. Yet as the fiscal cliff negotiations have dragged on, many prominent Democrats and liberal analysts have made it clear that they oppose any and all reductions to Medicare's benefit structure. House Minority Leader Nancy Pelosi warned against cutting Medicare benefits just this week. Earlier this month, a group of Senate liberals led by Sen. Jay Rockefeller (D-W. Va.) and Sen. Tom Harkin (D-Iowa) sent a letter urging the White House to reject any changes to Medicare or other entitlements that "cut benefits, shift costs to states, [or] alter the structure of these critical programs."

Liberal wonks have coupled this argument with a reason to hold off on cutting or changing the program: Rather than pare back Medicare, they say, we ought to wait and see if a slew of promising health care cost-control measures passed in recent years work out, obviating the need for additional reforms. "Now's the time to watch and evaluate," wrote Center on Budget and Policy Priorities fellow and former Obama administration economist Jared Bernstein. "The real savings in health care will come from cost control measures enacted in the Affordable Care Act but nowhere near fully implemented," Bernstein continued, "and it's just too soon to know if they're working." Some of the work of health care cost-cutting "is already underway thanks to the Affordable Care Act," wrote The New Republic's Jonathan Cohn earlier this month. "Among the most common criticisms of the law is that it did very little to address the cost of health care. That's nonsense. It's arguably the most ambitious effort to reduce the cost of medical care in history."

The most ambitious cost-control effort ever? That's a low bar to begin with. And at least one of Obamacare's own authors has described the law differently. What's even more important, though, is that we already have a fair amount of evidence about the efficacy of the Obama era's cost-control measures. And so far, it's not very promising.

Was Obamacare intended as a cost-control bill? Some Democrats have portrayed it that way. But in a presentation to lobbying groups given just a few months after the law passed, David Bowen, who served as a Democratic health staff director of the Senate Health, Education, Labor and Pensions Committee while the law was being written, suggested otherwise.

"This is a coverage bill, not a cost reduction bill," he told a group of K Street staffers in what was billed as a behind the scenes look at the law's development, according to a report by The Washington Examiner's Timothy Carney. "There is stuff here that will begin to address the issue of cost, but this is not a cost reduction bill with a bit of coverage on it—it is really trying to get coverage first."

What about the handful of cost-control efforts the law did include? There's little reason to believe that its cost control will have a significant impact on Medicare spending.

Cohn links to a Washington Post report on two of the law's hospital payment reforms: One creates financial incentives for hospitals to avoid preventable readmissions. The other, labeled Value Based Purchasing, pays more to hospitals that perform better on certain quality metrics.

Both programs are riffs on the same basic idea: Change the way we pay for health care, and get better care and lower costs.

This is the primary insight at the core of Obamacare's cost reforms. The problem is that there's precious little evidence it works.

As an October backgrounder on performance pay programs published by the journal Health Affairs dryly notes, "Despite limited evidence of effectiveness, pay-for-performance remains popular among policy makers and public and private insurers as a tool for improving quality of care and containing health care costs."

The two schemes noted in the Post report are useful examples. The Post describes them as "part of an effort to fundamentally transform the health-care system" so that it "pays for value." But so far, evidence of either value or fundamental transformation is in short supply.

Early attempts to overhaul medical payment incentives focused on quality more than costs. But where costs were measured, there was little success. Nor have most studies shown quality improvement.

In one study of hospitals given incentive pay, a researcher at the University of Pennsylvania found a short-term increase in quality, but the effect disappeared after five years. Another researcher from the Harvard School of Public Health looked at 30-day mortality rates in the same hospital quality incentive demonstration project and found no difference between hospitals in the pilot program and those who weren't participating at all. A similar pay-for-performance pilot program launched in Medicaid also found no quality improvement. A Dartmouth study found performance pay results in some quality improvement, but only "modest" savings. A few hospitals saw savings, but those were offset by costs at other institutions.

The prospects for Value-Based Purchasing look similarly unhelpful. A study by researchers at the University of Pennsylvania and the University of California found that the program is likely to have a "small impact on hospital payments"—probably not enough to incentivize better care or reduce costs.

Worse still, some of the intended cost-savings plans could actually end up costing us more. Another program created under the president's health care law—the Medicare Shared Saving Program—is intended to provide bonuses to more cost-efficient care groups. Yet this program, too, seems unlikely to produce meaningful savings. A study by health care modelers at Archimedes projected that the program's savings would be 1 percent or less, and could in fact become cost increases after a full accounting of all the work involved.

Obamacare is not the only major legislation passed under President Obama to attempt to control health care costs. The 2009 stimulus bill also included some $30 billion in incentives for hospitals to adopt new information technology systems. The goal, according a memo drafted by health advisers to President Obama's first campaign, was to use health care information more prudently in order to "produce savings in health spending." Yet an investigation published by The New York Times in September found that the new health I.T. systems were actually helping hospitals bill Medicare to the tune of up to $1 billion a year more. The stimulus spent billions of taxpayer money on new technology that was supposed to cut costs—but it ended up making the government's biggest health program more expensive.

The truth is that all we really know about health care cost control is that we don't know very much at all. When the Congressional Budget Office released a report examining the results of 34 Medicare pilot programs intended to improve the cost and quality of health care, it found little success. "On average, the 34 programs had little or no effect on hospital admissions," the report said. "In nearly every program, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program, when the fees paid to the participating organizations were considered." It also looked at four programs intended to reduce spending through payment incentives to provider organizations. One focused on heart bypass savings showed a 10 percent savings. But the other three "appear to have resulted in little or no savings for Medicare."

Summarizing Medicare's history of attempted care and cost-control innovations, CBO Director Douglas Elmendorf gave little reason for hope. "The demonstration projects that Medicare has done in this and other areas are often disappointing," he said in 2011 congressional testimony, according to The Fiscal Times. "It turns out to be pretty hard to take ideas that seem to work in certain contexts and proliferate that throughout the health care system. The results are discouraging."

Indeed they are. Which is why we shouldn't count a significant payoff from the latest round of technocratic tweaks either. Adjusting the program's payment system is not enough. The way to reduce spending on Medicare is to cut spending on Medicare, by overhauling the system's benefits and eligibility structure—and the time to start the process is now.