Lawmakers should look beyond the demand side.
With Republicans now talking about “repeal and replace” to the Patient Protection and Affordable Care Act (ACA), whatever legislation emerges must emphasize improvements on the “supply side”— that is, how doctors and hospitals can lower the cost of health care.
To do so, the new health law, like the ACA, should promote pilot programs to test how best to control costs while continuing to deliver quality care.
Many health economists, myself included, view supply-side initiatives as extremely important because of their potential to lower overall health care spending. Controlling costs on the supply side promises a bigger impact on reducing what doctors and hospitals are paid, which promotes better efficiency while preserving care quality.
An example is the Center for Medicare & Medicaid Innovation, which promotes the development and testing of health care payment and service delivery models. Under the ACA, promising models that reduce spending without impairing quality of care, or that improve quality of care without increasing spending, may be rolled out on a nationwide basis.
One early initiative, hailed as a success by the Obama administration, was a pilot to change Medicare’s payment system, known as Pioneer Accountable Care Organizations. The essence of this endeavor was to shift Medicare spending to quality, instead of quantity of care. Beyond the dollar amount of the cost savings, reportedly $400 million in 2012 and 2013, was how it was achieved: on the provider side, as groups of doctors agreed to accept lump payments under Medicare instead of individual payments for each service they provide.
Moving forward, more models of supply-side incentives that change how payments are made to doctors will be needed to reduce costs while still preserving the quality of care. Given that the U.S. continues to spend one-third of GDP on health care, this may be a priority that both parties can support.
In contrast, focusing on the demand-side—for example, as consumers with high-deductible plans shop around for a cheaper MRI—is less effective, because there is a limit to how much consumers can comparison-shop due to time constraints and the nature of acute health care needs. In addition, while preventative care can improve the quality of health by preventing disease, research has shown there is little impact in terms of reducing costs of overall care. One reason is that, actuarially speaking, reducing health risks leads to longevity in patients, which increases the cost of care over the long term.
Supply-side incentives that emphasize both cost and outcomes (for example, reducing avoidable hospital readmission) hold greater potential for cost savings. For example, bundled-payment arrangements by public and private payers (Medicare and large employer plans) can reduce health care costs by lowering the fees paid to doctors and health care facilities. With lower payments coming in, doctors and hospitals must concentrate on greater efficiency in usage of costly health care resources, such as by reducing readmissions and average length of stay. They can even flex their purchasing muscles with suppliers of such things as knee and hip implants.
It remains to be seen how the Republicans will proceed with their “repeal-and-replace” strategy. However, as The Wall Street Journal reported, many Republicans have acknowledged that “knocking down the law is more difficult than anticipated,” and have expressed a desire to stabilize the individual insurance market. This would be a departure from the campaign rhetoric and initial salvos from the Trump administration. Last month, in his first interview as president, Donald Trump called ACA “a disaster,” and pledged, “We are going to come up with a new plan ideally not an amended plan…that’s going to be better health care for more people at a lesser cost.”
House Speaker Paul Ryan also has been adamant about the need to repeal ACA, known as “Obamacare,” at the same time that a Republican replacement plan is approved. In a town hall discussion last month, Ryan reportedly said, “We want to do this at the same time, and in some cases in the same bill. So we want to advance repealing this law with its replacement at the same time.”
The yet-to-be-unveiled Republican plan, widely called “Trumpcare” even though its details are far from known, is expected to address areas of top concern to individuals, in particular pre-existing conditions. A widely lauded aspect of the ACA was eliminating insurers’ ability to deny coverage to individuals because of their health status. Reportedly, Congressional Republicans in general favor a replacement plan that would guarantee continuous coverage for individuals, without regard to health status.
As the debate around health care reform continues—whether repeal-and-replace or repair-and-amend—lawmakers should look beyond the demand side of how consumers access and pay for their care. The bigger stakes with the longer-term impact is on the supply side, bringing more physicians, hospitals, and other care providers on board with reducing the cost of care.
Amanda Starc is a professor at Kellogg School of Management at Northwestern University. She was a moderator at Kellogg’s Biotech Healthcare Conference.