Reducing healthcare costs requires emphasizing quality rather than quantity, says Peter Orszag, PhD, former director of the Office of Management and Budget and now vice chairman of the Institutional Clients Group at Citigroup, Inc. He believes bodies such as the Independent Payment Advisory Board can help change the financial incentives that challenge providers, ultimately driving down cost. "Providers are often financially penalized for moving toward lower-intensity practices, even if those practices produce the same or better quality," he says. Orszag recently shared his thoughts on healthcare payment reform with hfm.

Q.Many techniques to reduce healthcare spending have been discussed and debated. In your opinion, what are the most promising ways to reduce healthcare spending?  

A. Although many steps can help to reduce healthcare costs over time, the most important involve changing the information and incentives facing providers. Increased consumer-cost sharing would help, but this technique is inherently limited because high-cost cases are such a large share of total costs and it's implausible that we will ever impose very high cost-sharing on those cases. So in addition to an increased emphasis on consumer-directed health care, we need to focus on what drives provider behavior.

Currently, we have huge variation in how health care is practiced. For example, at UCLA's Cedars-Sinai Medical Center, 60 percent of patients saw 10 or more physicians in the last six months of life between 2001 and 2005; at the University of Wisconsin, only 25 percent did. At Cedars-Sinai, only 20 percent of patients enrolled in hospice care toward the end of life; at the University of Wisconsin, 40 percent did.

The variations tend to be larger for those conditions and procedures where we have the least information about the appropriate level of care. There's relatively little variation across the nation in hip fracture surgery (since there's little disagreement about what's necessary) but much more for hip replacement (where more ambiguity exists about what to do). And on even more discretionary topics, such as how frequently you see a physician after you've been discharged from the hospital, we often see even larger variations.

Experience in efforts such as the Premier healthcare alliance suggests that when we emphasize evidence-based care, practice variation narrows, costs decline, and quality improves.

To move toward a value-based system, we need two reinforcing changes. First, we need to build a positive feedback loop from health IT systems to expanded investments in comparative effectiveness research partially relying on depersonalized data thrown off by those health IT systems, and back to the clinical decision support software built into the health IT systems. A significant change that would help reinforce that loop is to alter the medical malpractice system, away from an emphasis on customary practice and toward a safe harbor for following evidence-based guidelines. That would help narrow practice variation and improve quality.

In addition to this information loop, we need to change the financial incentives facing providers. Right now, providers are often financially penalized for moving toward lower-intensity practices, even if those practices produce the same or better quality. That needs to change, and that's where bodies like the Independent Payment Advisory Board (IPAB) come into play.

Q.Do you think a body like the IPAB is the best way to handle the realities of pushing down the cost curve?  

A. I think the IPAB has been somewhat misunderstood by providers. It is not intended to be a mechanism for blunt provider payment reductions that could be implemented directly through legislation.

Instead, a key challenge is how we can move the payment system toward emphasizing quality rather than quantity. Many promising ideas exist-from accountable care organizations to bundled payments and value-based purchasing-but none of them have been tried on a national scale. We need to experiment aggressively with these ideas, and then have a mechanism for moving to scale on the ones that seem promising. The IPAB can play a crucial role in facilitating that. In particular, in an increasingly polarized political environment, defaults matter more than ever. The proposals that the IPAB puts forward to move toward a quality-focused payment system take effect by default; if the Congress ignores them, they take effect.

A recent example is the proposal by Steven Pearson, MD, of Massachusetts General Hospital and Peter B. Bach, MD, of Memorial Sloan-Kettering Cancer Center to reimburse new technologies in full for three years under Medicare, but then to reduce reimbursement rates to the (lower) level of the pre-existing technology if the new one has not demonstrated improved medical efficacy by then. The IPAB could put forward that type of proposal, and if done through the IPAB, it may have some chance of becoming a reality.

Q.What is the likelihood of the IPAB being repealed?  

A. That depends crucially on who wins the next presidential election. President Obama seems firmly committed to the IPAB.

On the substance, repealing the IPAB would raise the natural question: How are we going to facilitate the necessary shift toward a payment system based on quality given an increasingly polarized political system and the inertia and drift that is inherent in such a system?

Q.How will the IPAB achieve its savings targets between 2015 and 2018, given it can't cut spending for providers subject to productivity adjustments?  

A. Any movement toward improved quality and reduced costs has to aim at the long term. The importance of the IPAB-and also the excise tax on high-cost insurance plans, for that matter-is therefore not just for 2015 through 2018. It's for the next few decades.

Q.How would you improve upon the Affordable Care Act if given the opportunity?  

A. I think the biggest missed opportunity involves the tort system. The traditional idea for reforming medical malpractice is to impose caps on liability. A far better approach is to provide a safe harbor under those medical malpractice laws for following evidence-based guidelines. If a physician can show that he or she was following the recommended approach for a specific patient, that physician should not face any liability.

Rather than a defense based on what every other physician in the community tends to do, the defense would rest on following guidelines issued by a qualified body not only providing more certainty to physicians, but also helping to promote best practices across the nation.

As Professor James Blumstein of Vanderbilt University Law School has pointed out, a little-known provision in a 1972 law, the Professional Standards Review Organization legislation, provides immunity from malpractice liability to physicians who practice in conformity with the standard set forth by institutions now known as Quality Improvement Organizations. But even though the provision remains in force, those organizations have never implemented their authority to set such standards of care. Professor Blumstein believes they have the capacity to do so if they choose.

An alternative approach would involve other bodies such as the American Medical Association and the Institute of Medicine issuing evidence-based standards that would provide malpractice immunity to the physicians following them. Unfortunately, rather than incorporating this type of significant malpractice reform, the healthcare reform act included a modest set of state-based pilot projects.

about Peter R. Orszag, PhD 

Peter R. Orszag, PhD, is vice chairman (Institutional Clients Group) at Citigroup, Inc. and a member of the Senior Strategic Advisory Group there. Before joining Citigroup in January 2011, he served as a Distinguished Visiting Fellow at the Council on Foreign Relations and a contributing columnist at The New York Times. Orszag previously served as the director of the Office of Management and Budget from January 2009 until July 2010. In that cabinet-level role, he oversaw the Obama administration's budget policy, coordinated the implementation of major policy initiatives throughout the federal government, and reviewed federal regulatory action, among other responsibilities.

From January 2007 to December 2008, Orszag was the director of the Congressional Budget Office (CBO), supervising the agency's work in providing objective, nonpartisan, and timely analyses of economic budgetary issues. Under his leadership, the agency significantly expanded its focus on areas such as health care and climate change.

Prior to serving at the CBO, Orszag was the Joseph A. Pechman Senior Fellow and Deputy Director of Economic Studies at the Brookings Institution. While at Brookings, he also served as director of The Hamilton Project, director of the Retirement Security Project, and co-director of the Tax Policy Center. During the Clinton administration, he was a special assistant to the president for economic policy and before that a staff economist and then senior advisor and senior economist at the President's Council of Economic Advisers. He also founded and subsequently sold an economics consulting firm.

Orszag graduated summa cum laude in economics from Princeton University and received a PhD in economics from the London School of Economics, which he attended as a Marshall Scholar. He has coauthored or coedited several books, including Protecting the Homeland (2006), Aging Gracefully: Ideas to Improve Retirement Security in America (2006), Saving Social Security: A Balanced Approach (2004), and American Economic Policy in the 1990s (2002).

Publication Date: Tuesday, March 01, 2011

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead