Could Healthcare Reform Actually Raise the Cost of Care? (Part 1 of 2)


While courts continue to hammer out the details, it's probably safe to say that the Affordable Care Act (ACA) is here to stay. Most significantly, the Supreme Court has opined that the individual insurance mandate is a de facto tax — and not an unconstitutional imposition of mandatory insurance.

This isn't necessarily bad news. While the ACA may be flawed, something needed to be done to contain rising costs and improve access to care in our country. However, as I've watched implementation play out, I've been concerned that the policy will have unintended consequences that could lead to even greater cost inflation.

First, Some Background

Healthcare costs, which inflated dramatically through the 90s and early 00s, have actually decreased slightly over the past 5 years. The biggest reason for this is the Great Recession, which prompted cash-strapped consumers to delay care. According to economists, healthcare spending generally lags several years behind the rest of the economy. So while the recession officially ended in 2009, healthcare costs only started ticking upward in the first quarter of 2014.

So what can we expect? Analyses by PricewaterhouseCoopers (PwC) Health Research Institute projected healthcare cost increases of 6.5 percent for 2014 and 6.8 percent for 2015. These numbers are a far cry from the double-digit increases posted in the 90s and pre-recession 00s. However, they do suggest that healthcare spending is still growing faster than our GDP, which deepens the financial strain on our country and makes it increasingly difficult for federal and state governments to balance their budgets.

So will the ACA's cost-containment measures prevent the return of runaway healthcare costs? While the picture is pretty complicated, I can see some ways the law might unintentionally drive costs upward, even as it strives to contain them.

What the ACA Does

The RAND Corporation estimates that as of March 2014, 9.3 million people had gained insurance coverage. The sheer volume of new patients entering the market may offset the law's cost-containment measures — especially in the short-term. In addition, the experiences of states like Massachusetts and Oregon have shown that being covered tends to change consumers' behavior with regard to healthcare utilization.

The principle of "moral hazard" is the tendency for people to take less care with their purchases when someone else is paying — or at least when they think someone else is paying. For this reason, insured patients tend to consider costs in terms of their co-pay and deductibles. They're often unaware of the total cost of the service borne by the insurer. And it's this total cost that ultimately drives up prices and premiums.

Take Massachusetts as an example. Its 2006 healthcare program expanded coverage to nearly everyone in the state, which was a certainly a worthwhile goal. However, it also precipitated a spike in healthcare costs. Today, Massachusetts residents pay higher private insurance premiums than residents of any other state and spend 15 percent more per capita on healthcare.

That being said, it's worth pointing out that the ACA contains stronger cost-control measures than the Massachusetts law. Under the ACA, hospitals and health systems are making great strides toward managing health, reducing waste, coordinating care and shifting reimbursement toward a value-based model.

But will that be enough to offset the increased volume of care that needs to be delivered? In my mind, that's an open question.

Unintended Consequences

Policy can take on a life of its own once it's released into the wild, and the ACA is no different. Perhaps its most significant unintended consequence (from a cost point of view) has been the shift toward consolidation, which has the potential to greatly reduce competition.

Selling your hospital or physician practice to a larger entity has many benefits in the age of reform. Expensive mandates like EMR implementation and meaningful use are easier to accomplish with economies of scale. And buying up and employing local medical groups (and making those physicians your employees) can ease the demands of care coordination.

But what does consolidation do to costs? Well, my prediction is that it will tend to drive them up. For one, there will be less competition. If you've absorbed every hospital and physician group in your area, you're free to set the highest price the market will bear.

Second, outpatient services actually tend to cost more when they're delivered in a hospital-based setting, because the hospital rolls in heavy "facility fees." How much more? Well, about 80 percent more according to a 2012 government report. Some insurers are pushing back against this trend by refusing to reimburse outpatient services at inflated "hospital" rates, so it should be interesting to see how things play out.

Missed Opportunities

No healthcare law is a panacea, but our current reform legislation ignores quite a few additional drivers of healthcare costs:

  • Medical technology. New drugs, devices and tests (e.g., genome testing), which account for up to 50 percent of annual healthcare inflation, are not addressed by the ACA.
  • Unnecessary testing. Due to malpractice concerns, physicians often order unnecessary lab, imaging or other diagnostic tests to reduce medical liability. This waste accounts for at least 10 percent of annual healthcare inflation. Threats to existing tort reform laws (notably MICRA in California) have the potential to exacerbate the situation significantly.
  • Demand marketing by drug companies. Thanks to direct-to-consumer advertising, patients tend to request the latest treatments on the market — even when newer drugs are neither more effective nor safer than less costly generic drugs.
  • Medicare price-fixing. CMS sets the value of a service/procedure based on relative value units (RVUs), which means prices aren't moderated by supply and demand.

So What Can Be Done to Contain Rising Healthcare Costs?

In Part 2 of this series, we'll discuss some additional policy considerations that could fill the gaps in the ACA and lead us toward a more sustainable healthcare delivery system.