David Cutler

The way to achieve payment reform is through evolution rather than revolution, says David Cutler, a senior healthcare adviser to Barack Obama's presidential campaign.

However, that process won't move forward without Medicare reform, because change in Medicare payment stimulates change by private payers.

Cutler recently sat down to discuss healthcare payment reform with HFMA President and CEO, Richard L. Clarke.

Richard L. Clarke: Recently, you wrote, "We can significantly reduce healthcare spending over the long term through a combination of increased research into which treatments work and which do not, improved payment systems that reward efficient and effective care, and the infrastructure we need to enable these elements to work together." Could you describe how these strategies interact?

David Cutler: It's like a building. For the building to both look pretty and work, it has to have a solid foundation, it has to have elevators that work and other kinds of operational systems, it has to look nice, it has to be functional, and so on.

We've already done a fair amount of work on the biggest part of the infrastructure. The biggest in the sense of most expensive is the IT stuff-wiring the medical system. It's virtually impossible to think about any industry working well if it doesn't even know what it's doing. So if we hadn't done that, infrastructure work would clearly be a need. We've put a lot of money out there; now we just have to define how to make it work.

Many of the payment system changes are in the legislation. In fact, the legislation that's on the table is probably better than most people give it credit for.

And then research. I think some of the research will be public, and I think we've decided that the death panel folks were overstating the case. Some of it will be private; that is, it'll come out of the information that we gather [as healthcare providers]. Some of that will be at the physician level, where physicians will get more feedback on whether what they're doing is helpful or not. I see that as a part of what is happening.

My sense is that anything like what the current bills are would give a very good foundation. But it's also absolutely clear that if we didn't pass a bill now, just having done what we've done regarding the IT wouldn't be enough.

Clarke: Do you think that payment reform will evolve in a direction that is positive, meaning that it provides the right incentives, gets the right care options and choices to the patient, and has some positive impact on cost? Do you think that evolution can continue even without healthcare reform?

Cutler: It will be very hard. The reason why is that the single biggest impediment toward doing a lot better is Medicare. About 40 percent of hospital payments and an enormously large share of physician payments are from Medicare. There's no way you will transform the healthcare system without changing Medicare. And that requires legislation. In fact, Medicare and the private sector go together in that changes in Medicare lead to changes in private reimbursement. Ideally, you then get to come back and modify what you're doing in the public programs. Without legislation on changing Medicare, we're virtually nowhere.

Clarke: As we shift the system, either through direct legislation or through evolution of Medicare and the private payment system, what would you hope that would look like in terms of moving from a volume-based payment system to something else?

Cutler: At a broad level, it means moving from a volume-based payment system to a value-based payment system. What we're talking about, though, is evolution rather than revolution. We know that things need to change. We know broadly what direction we need to go in and that there are a number of components of paying for value as opposed to paying for volume. What we have to do is really start down the path, figure out what works, what doesn't work, modify what works, get rid of what doesn't work, and keep going.

Let me give you an example. One component of paying for value is measuring the quality and cost of different providers and then saying, "If you get a high-quality, clinical-quality outcome at low cost, adjusted for patient mix, we ought to give you a reward." We should have some kind of a pay-for-performance system.

If you ask me, "Is there one absolutely perfect model out there now?" the answer is no. If you say, "Do we broadly know how to structure those components?" the answer is yes. What we should do is start, do something, see if it works, see how we need to modify it, come back, and change it again. We need to evolutionarily get ourselves on that path.

Clarke: Continuing along the same line, could you envision that that path leads us to a global capitation or maybe a disease-specific capitation type of payment methodology?

Cutler: I could envision it, but I don't think that's the only possible outcome. Some people think that's clearly the right outcome; some people think it's clearly the wrong outcome. I'd rather not have a religious view. I'd rather have an evidentiary view and say, "Some providers are ready for it right now. Let's let them do that." For example, Partners Healthcare System in principle could absorb risk.

On the other hand, three doctors in western Massachusetts won't be able to, at least not right away. That doesn't mean that we should tell them that's the only way you can survive. That doesn't mean we should leave them out of this totally. That means we need to find what works for different size providers. The key is that we need to keep moving toward what we want. What we want is higher quality and lower cost. And if we do things and they move us in that direction, let's keep doing them. If we do things and they don't move us in that direction, then we've got to think again. It may be at the end of the day, that's the only thing that really works. But I'd rather have discovered that empirically than to have intuited that because I think I'm such a brilliant person.

Clarke: Much of the public policy discussion around healthcare reform focuses on the high cost of providing care with a specific goal to "bend the cost curve." In your book Your Money or Your Life, you hold that spending money on health care is good because of the benefits received. How can those two perspectives be reconciled to achieve healthcare reform?

Cutler: Medicine is absolutely fascinating. Let's take one example: cardiovascular disease. Dwight Eisenhower had a heart attack in Denver when he was president in the 1950s. He was treated with state-of-the-art 1950s care. Do you know what state-of-the-art 1950s care was for a heart attack? Bed rest. He got morphine to dull the pain, and then he got bed rest. That was what the world's most famous cardiologist, who was brought in to consult on this case, recommended.

Bed rest is very cheap. Being president, he had a whole wing of a hospital, but basically bed rest is very cheap. Nowadays, you would get thrown out of the profession and sued if you provided that care. We now do many more things. He would have catheterization to figure out where the blockage was. He might have been given emergency stenting or medications, followed up potentially by bypass surgery down the road or other stenting.

So the proximate reason why we spend more is because we can do so much more. And on the one hand, that is great. But then, like the person at the buffet who never gets to feeling satiated, we overdo it. Stents are a great thing. So you wind up doing a lot of care that isn't contributing a benefit to health improvement, even though the same care in some patients can produce huge benefits.

The net impact is we wind up spending a lot more than necessary to get the outcomes that we want. And that's really the issue. The issue is not cutting back on all new things because new things inherently lead to cost increases and are bad. It's rather saying, "Let's have an incredibly advanced dynamic healthcare system, but let's make sure that what we do is actually done sensibly." And around all this great stuff is probably about 20 to 30 percent or more money that doesn't need to be spent.

When I think of bending the cost curve, what I think of doing is getting rid of that 20 or 30 percent that doesn't need to be spent, while leaving the enormously good stuff there.

Clarke: What magnitude of transition do you envision arising from healthcare reform for providers-particularly as it concerns hospital consolidation?

Cutler: One thing that will help is to reiterate that this is really going to be an evolution more than a revolution. One of the trends in the United States over the past 20 to 30 years has been a huge reduction in hospital capacity. Emergency rooms are down 10 percent in the past 20 years, and I think the number of hospital beds is down even more. The number of acute care hospitals is down a lot.

To some extent, it's easier to get rid of the first ones than the latter ones. But some of what's happened as a result of troubles in the hospital industry has been greater consolidation, so now you get more regional care as opposed to strictly institution by institution. In the good cases, that's worked out very well. In the good cases, you have combined institutions that can rationalize patient flows across them and that can take advantage of particular skill sets and improve quality overall. If there's a further reduction in demand for acute care because, for example, we manage to keep people healthy, that ought to be offset by institutions merging so they can take advantage of the surplus.

In practice, I think it's unlikely to be that dramatic, because at the same time all this is happening, we have an aging population that will need more care. So the actual number of deals that will close will probably be limited. The impacts might be a bit bigger, but in absolute terms, they'll probably be somewhat smaller.

Clarke: Further consolidation on the provider side is not viewed as a good thing from the perspective of employers and payers. So there's this dynamic of a power struggle between those providing services and those paying for those services-potentially pushing back against what might logically make sense. How do you reconcile those two?

Cutler: What traditional economic analysis and a lot of folks are worried about is that consolidation brings higher prices. It absolutely does do that. In the late 1990s, we saw medical costs going up after the managed care revolution. A fair part of that was that providers that had been beaten down got to raise their prices again. At least part of that was because there was a lot of consolidation. So in most big cities, the biggest hospital system has, say, a quarter of the market.

One question is whether that will continue. That is, if hospitals merge in more outlying areas, will the rates go up or not? And I don't really know. The other thing that happens is the potential for more efficiency. This comes back to our earlier discussion. You think about a hospital that, say, has a 4 percent margin now. Suppose you can find a way to cut the use of the hospital by 10 percent by getting the doctors to pay better attention to patients in chronic care settings, by preventing unnecessary readmissions, and so on. Hospitals can cut their costs over time by 10 percent. You can use some of that savings-maybe 2 percent, 4 percent-to increase the rates that are paid to hospitals.

So let's say you increase their rates by 2 percent. You've still saved 8 percent, and you've increased hospital margins by 50 percent. So there's a potential to say, "Through gainsharing, we can give you higher profits at the same time as we save money. The way we do that is, we get rid of inefficiencies, and that's what provides the funds for both of those." What I hope is that what we do will be consistent with making the system more efficient, pulling out unnecessary costs. Once you've done that, there's a lot of money to spread around.

Clarke: HFMA members are financial leaders in hospitals and health systems. In some of our research, we've found executive teams, including the financial leaders, are talking about the structural changes that are needed for the future, but they're caught between two worlds-the current payment system and the way in which the delivery system operates-and the kinds of broad structural changes that will be needed in the future, such as creating tight clinical integration among the clinicians. We're finding that many are waiting to see what happens in the reform process before making significant changes. What strategies would you recommend for hospitals to employ today that would allow them to succeed in a reform environment in the future?

Cutler: This is a very complicated question, of course. Some of it depends on the nature of reform. One way or the other, hospitals and health systems will change. If reform passes, they'll change in one way; if reform doesn't pass, they'll have to change in a different way.

I cannot imagine a scenario where for the next few years things stay the way they have been. By analogy, when the Clinton plan failed, there was a huge change. It just wasn't brought on by government, but there was an absolutely massive change associated with managed care. So I think there will be change.

The question is what direction will reform be in? I think there are a couple of possible directions. The one that's less likely if there's legislative reform-and more likely if there's not-is that patients are given much more financial autonomy. So you have people with very high deductibles, with lots more cost sharing, and then a hospital in the health system would have to adapt to that. That's a very different environment than the current one.

The direction that is more likely with legislative reform, and somewhat less likely without reform, is that hospitals and health systems get more of a payment associated with quality and with achieving quality and cost goals and less associated with just doing more.

I would much prefer that hospitals and health systems work within a quality system than one in which they're dealing with patients who are significantly less insured.

I would like hospitals and health systems to say, "We are going to have a huge emphasis on quality. What I need to be doing in my institution is figure out just what is my quality, where I am falling short of potential, and what steps I can take over the next few years to improve that quality and at the same time take advantage of efficiencies to reduce cost."


David Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the department of economics and Kennedy School of Government at Harvard University. Cutler served on the Council of Economic Advisers and the National Economic Council during the Clinton administration and was senior healthcare adviser to Barack Obama's presidential campaign. Cutler has held positions with the National Institutes of Health and the National Academy of Sciences, among other affiliations. Currently, he is a research associate at the National Bureau of Economic Research and a member of the Institute of Medicine. Cutler is the author of Your Money or Your Life: Strong Medicine for America's Health Care System, published by Oxford University Press. This book, and Cutler's ideas, were the subject of a feature article in the New York Times Magazine, "The Quality Cure," by Roger Lowenstein.

Publication Date: Friday, January 01, 2010

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