Healthcare

Perspective

T h e N EW ENGL A N D JOU R NA L o f M EDICI N E

august 12, 2010

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to modernize and improve a large part of the health care system, it may be one of the most ambi- tious and consequential pieces of legislation in U.S. history.

Although the bill has now been signed into law, the debate over its design and intended ef- fects has not abated. As concerns appropriately mount about the nation’s medium- and long-term fiscal situation, critics of the ACA have resurrected doubts about its cost-containment measures and overall fiscal impact. Many com- mentators have claimed that the bill focuses mostly on coverage and contains little in the way of cost control.

Yet we would argue that even from a purely “green eyeshade” viewpoint, the bill will signifi- cantly reduce costs. Projections suggest that with reform, total

health care expenditures as a per- centage of the gross domestic product will be 0.5% lower in 2030 than they would otherwise have been. In addition, although the Congressional Budget Office (CBO) expressed concern that health care costs will remain high even after reform, it also deter- mined that the ACA will reduce the federal budget deficit by more than $100 billion over the first decade and by more than $1 trillion between 2020 and 2030. And the Commonwealth Fund recently projected that ex- penditures for the whole health care system will be reduced by nearly $600 billion in the first decade.1

But these savings will be il- lusory if we do not reform health care delivery to bring down the long-term growth in costs, and

the ACA puts us on the path to doing just that. In fact, it insti- tutes myriad elements that ex- perts have long advocated as the foundation for effective cost con- trol. More important is how the legislation approaches this goal. The ACA does not establish a rigid bureaucratic structure to be changed only episodically through arduous legislative action. Rather, it establishes dynamic and f lex- ible structures that can develop and institute policies that respond in real time to changes in the system in order to improve qual- ity and restrain unnecessary cost growth.

So what are the cost-control elements of the ACA? First, some reforms aim to eliminate unnec- essary costs to the system; these include measures against fraud and abuse in the Medicare and Medicaid programs, which the Department of Health and Hu- man Services predicts will return approximately $17 in reduced spending for every dollar invest- ed2 ($7 billion over 10 years, ac-

Health Care Reform and Cost Control Peter R. Orszag, Ph.D., and Ezekiel J. Emanuel, M.D., Ph.D.

After nearly a century of failed attempts, com-prehensive health care reform was enacted on March 23, 2010, when President Barack Obama signed the Affordable Care Act (ACA). In attempting

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cording to the CBO).3 Adminis- trative simplification under the ACA will reduce unnecessary pa- perwork and create uniform elec- tronic standards and operating rules to be used by all private in- surers, Medicare, and Medicaid — saving the federal government an estimated $20 billion over 10 years2 and saving insurers, phy- sicians, hospitals, and other pro- viders tens of billions of dollars a year (according to the U.S. Healthcare Efficiency Index). And the ACA ensures a pathway for approval of generic biologic agents that is expected to save the gov- ernment more than $7 billion, and citizens and insurers addi- tional billions, over 10 years. An estimated $1.1 billion will be saved in Medicare by calculating payment for complex imaging studies under the assumption that the machines will operate not just 50%, but 75%, of the time. And about $135 billion will be saved in the first decade by elim- inating unjustified subsidies to Medicare Advantage plans.

These savings are oriented to- ward reducing the level of health care costs rather than the growth rate of such costs. If that were all the legislation did, it would technically pay for health care re- form but would miss an oppor- tunity to put downward pressure on the growth of health care costs — an essential step in re- ducing our long-term fiscal im- balances.

One prominent component of the ACA that will help to bend the long-term cost curve is an ex- cise tax on “Cadillac” insurance plans — plans that, in 2018, will charge more than $27,500 for families and $10,200 for indi- viduals, excluding vision and den- tal benefits. Beginning in 2018, the ACA will impose a 40% tax on the portion of health insur-

ance that is over these amounts. After 2020, the premium thresh- old for the tax will increase at the rate of overall inflation in the economy, the Consumer Price In- dex. Thus, the tax will create in- centives for employers and health insurers to devise more cost- effective health plans with lower premiums, and because the pre- mium threshold will increase with overall inflation rather than growth of health care costs, it will help to bend the cost curve. The majority of tax revenue will come not from the direct taxation of high-cost plans but from in- creased workers’ wages, as com- panies shift compensation out of benefits and toward take- home pay.

Yet “bending the curve” of health care inflation also requires a more direct change in the way health care is delivered. Health care costs are unevenly distribut- ed: 10% of patients account for 64% of costs. Many of these are patients with chronic conditions, such as congestive heart failure, diabetes, and hypertension. Sus- tained cost control will occur only with more coordinated care that prevents avoidable complications for patients with chronic illness. As Stanford’s Victor Fuchs has noted, coordinated care requires three “I”s: information, infra- structure, and incentives.

Information will come from the spread of electronic health records, a process that will be jump-started by the Recovery Act’s $26 billion investment in health information technology. Electron- ic health records will supply pro- viders with more accurate and real-time data on their patients, as well as provide checks on drug interactions and decision support to improve the quality of care. In addition, the Patient-Centered Out- comes Research Institute (PCORI)

that was created by the ACA will empower physicians and patients with new information regarding the effectiveness of various med- ical technologies and interven- tions. The integration of the PCORI’s research findings with decision supports, guidelines, and other aspects of electronic health records should greatly enhance the information that physicians and patients can use in choosing the right tests and treatments for a particular situation.

Infrastructure reform is evi- dent in the law’s provisions sup- porting enhanced horizontal co- ordination among providers and more constant monitoring of pa- tients. For physicians, health care reform encourages greater inte- gration in many ways — for in- stance, through the redesign of delivery systems such as medical homes and accountable health care organizations. In addition, the law includes a new hospital readmission policy to address the fact that nearly 20% of Medicare patients are readmitted within 30 days after a hospital discharge4 and that lack of coordination in “handoffs” such as hospital dis- charges has been identified as a particular problem in the health care system overall. More than half of these readmitted patients have not seen their physician be- tween discharge and readmis- sion, and a recent study suggests that better coordination of care can reduce readmission rates for major chronic illness.5 The policy provides $500 million over 5 years to manage care for 30 days after hospital discharge and also im- poses payment penalties on hos- pitals with high risk-adjusted readmission rates for certain conditions.

These changes in information and infrastructure will not spon- taneously affect how doctors de-

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liver care; incentives within the system also need to be recalibrat- ed, since the dominant fee-for-ser- vice payment system creates dis- incentives to making the changes necessary for coordinated care. In addition to the hospital readmis- sion policy, the ACA will create incentives for hospitals to adopt proven practices that substantial- ly reduce their rates of hospital- acquired infections and other avoidable conditions; hospitals that still have rates in the top 25% will face reductions in Medi- care payments. Similarly, the ACA’s pilot programs involving bundled payments will provide physicians and hospitals with incentives to coordinate care for patients with chronic illnesses: keeping these patients healthy and preventing hospitalizations will be financial- ly advantageous. (These efforts will also enhance physicians’ au- tonomy by allowing them to de- vise the best practices for keep- ing patients healthy.)

Perhaps most fundamentally, the ACA recognizes that reform, particularly changing the deliv- ery system, is not a one-time event. It is an ongoing, evolutionary pro- cess requiring continuous adjust- ment. The ACA therefore estab- lishes a number of institutions that can respond in a flexible and dynamic way to changes in the health care system. The PCORI will assess new medical tests, drugs, and other treatments as they are developed, thereby pro- viding continuously updated in- formation for physicians and pa- tients. Similarly, over the next decade, the Innovation Center in the Centers for Medicare and Medicaid Services will be devel- oping, testing, and evaluating new policies and programs that enhance the quality of care for Medicare beneficiaries, reduce the cost of their care, or both. And

the secretary of health and hu- man services (HHS) is empowered to expand successful pilot pro- grams without the need for ad- ditional legislation.

The most important institu- tional change in the ACA, how- ever, is likely to be the establish- ment of the Independent Payment Advisory Board (IPAB), an inde- pendent panel of medical experts tasked with devising changes to Medicare’s payment system. Be- ginning in January 2014, each year that Medicare’s per capita costs exceed a certain threshold, the IPAB will develop and pro- pose policies for reducing this inf lation. The secretary of HHS must institute the policies unless Congress enacts alternative poli- cies leading to equivalent savings. The threshold is a bit complex; initially, it is a combination of general and medical inflation, but in 2018 and thereafter, the cap is set at general inf lation plus 1%.

The combination of these three bodies — the IPAB, the Innova- tion Center, and the PCORI — holds the potential for providing up-to-date information and de- veloping policies that can improve the quality of care and the value provided by the health care sys- tem on an ongoing basis. Ensur- ing that these new bodies live up to their potential and earn repu- tations for rigor and integrity will be one of the most important challenges as the implementation of the ACA continues.

The ACA not only will extend health care coverage to millions of Americans but also will enact many policies specifically aimed at reducing the amount we are spending on health care and, by changing the delivery system, re- ducing the rate of growth in health care costs over time. In- deed, one of the essential aspects of the legislation is that unlike

previous efforts, it does not rely on just one policy for effective cost control. Instead, it puts into place virtually every cost-control reform proposed by physicians, economists, and health policy ex- perts and includes the means for these reforms to be assessed quickly and scaled up if they’re successful. By enacting a broad portfolio of changes, the ACA provides the best assurance that effective change will occur. More- over, by taking a multifaceted ap- proach that includes hard savings plus the mechanisms for creating a dynamic health care system, it enables physicians, hospitals, and other providers to consistently improve outcomes, boost quality, and reduce costs as health care evolves.

Disclosure forms provided by the au- thors are available with the full text of this article at NEJM.org.

Dr. Orszag is the former director of, and Dr. Emanuel is a special advisor on health policy to, the White House Office of Management and Budget, Washington, DC; Dr. Emanuel is also chair of the Department of Bioethics at the National Institutes of Health, Bethesda, MD.

This article (10.1056/NEJMp1006571) was published on June 16, 2010, at NEJM.org.

Cutler DM, Davis K, Stremikis K. The im-1. pact of health reform on health system spend- ing, May 2010. (Accessed June 14, 2010, at http://www.commonwealthfund.org/ Content/Publications/Issue-Briefs/2010/ May/Impact-of-Health-Reform-on-Health- System-Spending.aspx.)

Department of Health and Human Ser-2. vices, Office of Inspector General. Fiscal year 2008 annual performance report. (Accessed June 14, 2010, at http://oig.hhs.gov/ publications/docs/budget/FY2008_APR.pdf.)

Congressional Budget Office. Letter to 3. Speaker Nancy Pelosi, March 20, 2010. (Ac- cessed May 25, 2010, at http://www.cbo.gov/ ftpdocs/113xx/doc11379/AmendReconProp .pdf.)

Jencks SF, Williams MV, Coleman EA. Re-4. hospitalizations among patients in the Medi- care fee-for-service program. N Engl J Med 2009;360:1418-28.

Hernandez AF, Greiner MA, Fonarow GC, 5. et al. Relationship between early physician follow-up and 30-day readmission among Medicare beneficiaries hospitalized for heart failure. JAMA 2010;303:1716-22. Copyright © 2010 Massachusetts Medical Society.

Health Care Reform and Cost Control

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