December 10, 2008
Reforming Our Healthcare System
Healthcare reform is shaping up as a major focus in the early months of the incoming administration of President-elect Barack Obama. With the nomination of Peter Orszag as director of the Office of Management and Budget, President-elect Obama has put a leading expert on health policy in a key economic post as the federal budget is increasingly strained by rising Medicare and Medicaid costs.
In the forthcoming January issue of hfm magazine, Orszag offers a commentary on improving the efficiency of the healthcare system. The commentary, available online as an hfm web exclusive, looks at the causes of rising healthcare costs and outlines a three-step approach to better care.
In his commentary, excerpted from a keynote address at the October 2008 Kaufman Hall Financial Leadership Conference, Orszag notes that most of the projected growth in the federal budget comes from increasing Medicare and Medicaid costs. Although we have the opportunity to bend the path of this growth now, Orszag believes our ability to maneuver will become more constrained as the weight of the budget grows.
The Cost of Inefficiency
In diagnosing the causes of increasing healthcare costs, Orszag focuses on one main factor: inefficiencies within our healthcare system. There are tremendous variations in the way health care is delivered across the country, within a particular region, and even among doctors in a single hospital. Too often, these variations are not driven by evidence or medical science, but by personal preferences or longstanding practices.
Orszag cites credible estimates that some $700 billion in annual healthcare spending--almost five percent of GDP--do not improve health outcomes. The good news is that the size of this figure represents significant opportunities to reduce costs.
To prove his point, Orszag looks at Medicare beneficiaries in the last six months of life at two leading medical centers. At one, the cost per beneficiary is $50,000. At the second, the cost is $26,000, but this center seems to get better quality outcomes than the first. There is little to suggest what patients are getting for the extra cost at the first facility, except tests and procedures that do not appear to improve outcomes. Orszag suggests that similar variations in treatment and cost can be found within most hospitals.
Three Steps to Better Care
It is clear to Orszag that we have a payment system, especially within Medicare, that leads to more care rather than better care. What do we do about it? He proposes a three-step agenda.
1. Expand the Health IT Backbone
Orszag supports dramatic expansion of the health IT backbone, but resists notions that an IT system alone will be a panacea for a fragmented delivery system with distorted incentives. He sees the value of the system in its ability to provide information that will enable providers to evaluate which treatments are improving outcomes and which are not.
Orszag also questions the effectiveness of the current policy approach that encourages health IT adoption by offering institutions small subsidies. In his opinion, a $5,000 or $10,000 tax credit or subsidy will only induce institutions that are close to adopting a system already. At the other end of the spectrum, large subsidies result in an equally large budgetary cost and "buy out the base" of many institutions that would have adopted health IT anyway. His solution is to offer small subsidies for a limited period of time, and then require adoption of a health IT system meeting certain criteria for reimbursement under Medicare and Medicaid.
2. Use the Information
The second step is to use the information that comes out of a health IT system. To use this information effectively, Orszag believes that we need a greatly expanded comparative effectiveness effort that significantly surpasses existing efforts. He notes that policy discussions are going on about an expanded comparative effectiveness effort, perhaps lodged in a new government entity.
3. Reform the Payment System
Orszag's final step involves payment reform. Unless we change the incentives for providers toward more efficient care, he states, we are not going to get what we want. To put the point another way, as long as we have incentives for more care rather than better care, we will just keep getting more care.
HFMA has been a leading contributor to the discussion on payment reform. Its recently published white paper, Healthcare Payment Reform: From Principles to Actions , outlines the principles that would align our payment system with our national health goals and what actions will be necessary to achieve reform.
Peter Orszag is one of several policymakers interested in healthcare reform who have been nominated to prominent positions within the Obama administration. HFMA is committed to keeping its members updated on healthcare reform in the new administration. Earlier this week, HFMA sponsored an audio webcast on "Delivering on the Promise: What the Obama Presidency Will Mean to Health Care." A recording of the webcast will be available the week of Dec. 15, 2008, on the HFMA audio webcast playback site.