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David Cutler, PhD, Otto Eckstein Professor of Applied Economics, Department of Economics, Harvard University. (Photo: Marshall Clarke)
A decade ago, a book titled Your Money or Your Life: Strong Medicine for America's Health Care System, and the ideas of its author, David Cutler, PhD, were the subject of a long feature in The New York Times Magazine. The article's headline—"The Quality Cure?"—included a punctuation mark that suggested Cutler's focus on healthcare quality was a questionable idea.
By the time Cutler's second book was published, in 2014, America's healthcare leaders were busy remaking their industry to reflect a concept that nearly everyone has come to embrace: Organizational survival depends on improving the value of health care, defined as quality divided by cost.
Indeed, Cutler borrowed from the Times' headline when he titled his new book, but there was no longer a reason to use a question mark. Its title: The Quality Cure: How Focusing on Health Care Quality Can Save Your Life and Lower Spending Too.
Between the publication of the two books, Cutler served as senior healthcare adviser to Barack Obama's presidential campaign. He also was appointed to the Massachusetts Health Policy Commission, which develops policy designed to reduce healthcare cost growth while improving the quality of patient care.
Cutler, the Otto Eckstein Professor of Applied Economics in the Department of Economics and Kennedy School of Government at Harvard University, isn't one to brag that his ideas were prescient, but he does allow that he is feeling good about where health care is headed.
At an Institute of Healthcare Improvement webinar earlier this year, he opened by highlighting three things that make him bullish on health care. For starters, the number of uninsured Americans is decreasing significantly. Secondly, healthcare cost increases have slowed dramatically.
Finally, the quality and efficiency of care delivery have improved measurably.
"That is, to a great extent, because of the hard work of hospitals, doctors, nurses—everyone involved in health care—coupled with policies that have encouraged greater quality such as electronic medical records and payment system reform," he says. "All of these make me feel like we're headed in the right direction. We're never going to declare victory, but at least it's a good sign."
Health care's fee-for-service (FFS) payment model is blamed for creating perverse incentives that reward providers for the volume of services they deliver rather than for the value of that care. FFS is an easy target for critics, but creating the right set of incentives to reward high-value healthcare delivery is not simple, Cutler says.
That is because healthcare providers—unlike, say, investment bankers—are not motivated solely by the financial consequences of their decisions.
"The goal is not just to make money," Cutler says. "Most doctors, indeed virtually all doctors, are enormously interested in doing the right thing for their patients."
Money does influence provider behavior, of course, but in more subtle ways than in some economic sectors. For example, physicians use a fee schedule that makes imaging more lucrative than office visits. "It's not that they say, 'Oh, goodie, let me scan everybody,'" Cutler says. "It's more, 'Gee, I can't afford to do very much good stuff in an office visit, but at least I'm not penalized for scanning, so that will help me feel like I'm doing good things for the patient.'"
Providing incentives that allow physicians to help patients in a way that makes sense economically is one of the most important challenges at hand—and one for which payers and policymakers still lack experience.
"I tell my students that one of the biggest things we've learned in the past decade in health economics is that providers are more responsive to incentives than we ever thought they were," he says.
That was demonstrated by policies such as the DRG system and the Balanced Budget Act, both of which reduced the length of inpatient stays. Among more recent examples, Cutler points to the Medicare Hospital Readmission Reduction Program and the Hospital Inpatient Value-Based Purchasing Program.
"When we look at the healthcare spending slowdown, it's not surprising that it is happening at the same time we put in incentives to do less, because that's what happens," Cutler says. "The response is just incredibly big."
The Medicare sustainable growth rate (SGR) is an example of getting incentives wrong, Cutler says. The SGR formula called for fee cuts to physicians if medical spending outpaced a benchmark, but Congress could not see any logic in adhering to that plan and thus continually delayed enforcement of the cuts. "Lowering fees as volume increases provides no incentives to reduce use," Cutler wrote in a Journal of the American Medical Association blog post. "Thus, volume kept rising."
Two kinds of incentives are being used to control healthcare spending—and Cutler believes in one more than the other.
The first strategy is the use of higher cost-sharing for people who get insurance coverage through their employers or the health insurance exchanges. Nearly 20 percent of covered workers have an annual deductible of at least $2,000, and both the prevalence of high-deductible plans and the size of the deductibles are increasing.
That so-called "skin in the game" gives patients incentives to use fewer healthcare services and results in substantial savings. But patients who cannot afford high cost-sharing may forgo needed care such as medications for chronic conditions, eventually leading to poor outcomes and the associated high medical costs. In an era of value-based care, Cutler wrote in the blog post, "It will be increasingly common for a primary care physician to be punished financially if her patients with diabetes are not meeting blood sugar and cholesterol goals, even while those patients report that they cannot afford the medication she prescribed."
Cutler prefers policies that give physicians incentives to provide high-value care. Alternative payment models such as bundled payments, patient-centered medical homes, and accountable care organizations (ACOs) are designed to reward providers financially for providing high-quality, low-cost care.
He points to an example from his home state—Blue Cross Blue Shield of Massachusetts' Alternative Quality Contract, currently in use by more than 85 percent of the physicians in the insurer's network—as proof that alternative payment models can deliver on their promise. An evaluation of the program showed that providers saved 10 percent on medical spending, while improving quality, by the fourth year of the contract.
That is why Cutler is especially enthusiastic about one particular incentive in the Medicare Access and Children's Health Insurance Program Reauthorization Act, which replaced the SGR earlier this year. Beginning in 2026, physicians who participate in alternative payment models will receive annual Medicare payment updates of 0.75 percent, compared with 0.25 percent for their colleagues who stick with FFS.
"It's an opportunity to encourage more providers to move into the ACO program," Cutler says.
Some of the most popular alternative payment models—including ACOs and bundled payments—depend on close collaboration among stakeholders that traditionally have operated in silos. These payment concepts incent healthcare providers to achieve quality and efficiency goals that can be met only by sharing information, goals, and accountability with fellow participants.
Given that dynamic, many observers expect the move to new payment models to trigger further consolidation among healthcare providers. Whether such a trend is beneficial or harmful remains to be seen.
"Some people worry that when providers get very consolidated, they just raise prices and get to live the quiet life of the monopolist," Cutler says. "Other people say that when providers are consolidated, it's easier to take advantage of the efficiencies of being one organization."
Past experience in health care shows that corporate integration is neither necessary nor sufficient to achieve clinical integration, Cutler notes.
"If you look at big hospital systems, they tend to do no better, on average, than independent hospitals in terms of measures of quality," he says.
As anyone who has tried it knows, clinical integration requires changing the way that care is practiced at all levels of an organization. A merger, in and of itself, does not accomplish that task and, in fact, may pose a distraction from collaborating on patient management. On the other hand, some organizations have used the clinically integrated network model or other vehicles to collaborate effectively without a merger.
That said, Cutler is not opposed to provider consolidation. His analysis of consolidation within the nation's 306 hospital-referral regions found that the benefits and harms associated with mergers vary based on many factors. "The answer is not always the same because it depends on the environment in which consolidation occurs, who is consolidating, how large each organization is in its different markets and whether the combined entity improves quality of care," he wrote (Cutler, D.M., and Morton, F.S., "Hospitals, Market Share and Consolidation," JAMA, Nov. 13, 2013).
Provider organizations that wish to consolidate need to demonstrate in detail how patients will benefit from the transaction, he says. He expects regulators to be more and more vigilant in their search for mergers that increase market power and raise prices rather than improve patient care and lower costs.
If he were a health system CEO, he would consider consolidation only if it improved the organization's value proposition.
"The world is changing so that if you're not delivering high value, you will get killed," he says.
Improving value in health care almost always requires cutting costs, and Cutler respects the fact that such a task is easier said than done. He recalls a meeting of hospital chief medical officers at which he posed the question: "Suppose you've been ordered to save money. How would you do it?" Meeting attendees said that, in fact, they had been ordered to save money.
"I said 'How many of you feel like you have a good handle on how to do that?' and no one raised their hand," he says. "I think the 'what to do' is a little clearer than the 'how to do it.'"
Earlier this year, the Center for Medicare & Medicaid Innovation announced the Transforming Clinical Practices Initiative, which will support 150,000 clinician practices through a collaborative learning process to implement comprehensive quality-improvement strategies during the next four years. That sounds good to Cutler, who recognizes that the government, payers, and employers are counting on healthcare providers to fix a broken system.
"I think we will look back at this as a sort of inflection point," he says. "Either we do well and the world will look like a much better place, or we will do poorly and it will get very, very bad."
He spells out what "very bad" looks like: Much more government involvement. New ways of rationing care. Many more uninsured people. Dramatic reductions in safety net programs. Substantial underinvestment in medical research and medical innovation. Enormous constraints on what physicians are able to do and on the freedom with which they practice.
When Cutler thinks about the next few years, he adapts a line from Jerry Garcia: "Somebody has to do something, and it's just incredibly pathetic that it has to be you—in this case, the healthcare industry."
"If you look at big hospital systems, they tend to do no better, on average, than independent hospitals in terms of measures of quality."
Lola Butcher writes about healthcare business and policy topics for several HFMA publications.
Interviewed for this article:
David Cutler, PhD, the Otto Eckstein Professor of Applied Economics in the Department of Economics, Harvard University.
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