With all the talk of repealing Barack Obama’s Affordable Care Act (ACA), people have been taking a closer look at what the law has done for our healthcare system. It turns out the ACA is about a lot more than the problematic healthcare marketplaces. There’s the extension of parental insurance coverage to age 26 and the requirement of insurance companies to cover pre-existing conditions. The ACA also cleared a path for the FDA to approve the first generic versions of complex drugs called biologics, a huge issue for the pharmaceutical industry. For health insurance, the ACA established a new office called the Center for Medicare and Medicaid Innovation (CMMI), a division of CMS intended to encourage innovation within the healthcare system.
One of the major initiatives of CMMI has been to promote the adoption of alternative payment models (APMs), which offer new ways to reimburse providers for their services. These payment models harness capitalist forces to improve quality of care and reduce the amount of money spent unnecessarily on healthcare. APMs are intended to align incentives for providers so that it is in their interest to minimize wasteful healthcare spending and improve the quality of care they provide. Instead of prescribing how to take care of patients better, APMs use financial incentives to encourage providers to find the approach that works best for them. By tying payments to outcomes, providers are motivated to improve performance.
Despite being business-friendly solutions to the problem of excessive healthcare spending, many Republicans have opposed these innovations. Tom Price, the new Secretary of Health and Human Services, is among them.
In September 2016, Price said that CMMI was “experimenting with Americans’ health.” He was referring to a mandated bundled payment system for joint replacement surgeries. Under the new system, providers are paid a lump sum for all care a patient receives during surgery and the immediate recovery period. This is intended to give providers an incentive to reduce complications and improve efficiency.
Price objected to rolling out the bundled payment strategy because he thought providers do not have adequate experience with such models. We actually have experience with bundled payment models going back at least to 1982, when diagnosis-related groups were implemented nationwide to pay for many inpatient admissions. We know they can work to reduce costs and improve efficiency.
Now, we have evidence to support the specific bundled payment system for joint replacements that Price opposed. An article published in JAMA last month found that bundling payments for these surgeries resulted in a $5,000 decrease in cost per patient, and patients had as good or better outcomes than with traditional reimbursement.
Beyond joint replacements, evidence is rolling in that APMs are effective and good for patients. Maryland has taken the idea of bundling one step further, paying hospitals a fixed amount per Medicare patient per year, rather than per inpatient admission. Maryland has saved $429 million with this system. At the same time, hospitals in the state cut preventable complications by 48 percent. This is another example of how APMs can cut costs and improve outcomes while not imposing rigid regulations on companies.
Oregon has introduced a payment model that pays providers a fixed amount per patient per year for all their care—inpatient and outpatient. This system has succeeded in cutting the spending growth rate by 2 percent per year in that state. Providers have also improved performance on key quality measures.
Given Price’s previous objection to bundled payments, many people fear that he will cut CMMI, discourage implementation of APMs, and block additional funding for these efforts.
These payment models depend on the core capitalist principle of aligning incentives with desired outcomes. This should appeal to Tom Price. Furthermore, we know bundled payments work when implemented properly. To improve our healthcare system, the new team at Health and Human Services should build on the work that has been done at CMMI and allow states to expand the use of alternative payment models.