Over the past several years, the federal government has put billions of dollars into a variety of programs aimed at improving the way health care is delivered. The Affordable Care Act (ACA) authorized a broad agenda of reform projects, including accountable care organizations (ACOs), bundled payments, value-based purchasing, primary care initiatives, and other payment and service delivery models. The Medicare Access and CHIP Reauthorization Act (MACRA) of 2015 established new ways of paying physicians intended to promote high-quality patient care.

What will happen to these initiatives under a Congress where Republicans are still seeking to enact major new health reforms and a president who could aggressively use authority granted by the ACA to make sweeping changes in Medicare and other health programs? Does this spell the end of delivery system reform, or could this be a new start with a greater potential to promote efficient and effective health care?

The prospect of ACA repeal has raised concerns among advocates, who argue that the enactment of Medicare-led efforts to promote higher-value care represents a real turning point in the battle to reduce waste and inefficiency. They fear that any reversal of the ACA framework would be a setback to the cause of lower costs and higher quality.

Those fears are overblown. There is bipartisan agreement on the goal of promoting more efficient and effective health care. MACRA, which is aimed at improving the value of physician services through payment changes, was enacted on a bipartisan basis. The debate is over the best way to accomplish the goal, not the goal itself.

We agree that it would be unwise to jettison entirely the delivery system reform provisions of the ACA, but their demise would not be the end of efforts to improve US health care. Rather, we see those provisions as far less consequential than their advocates claim, yet they can serve as departure points for putting in place more effective changes that provide room for private initiative and consumer preferences alongside changes in Medicare’s payment systems.

Delivery System Reform In Context

There is widespread agreement that the provision of health services in the United States suffers from high levels of waste and inefficiency. A 2012 report from the Institute of Medicine (IOM) estimated that about 30 percent of health spending was wasted on unnecessary services, excessive administrative costs, fraud, and other problems. Although the IOM stated that the US health system has become too complex and costly to continue business as usual, we are far from resolving these problems.

Despite numerous initiatives undertaken by providers and health care organizations to improve care coordination, the degree of fragmentation is striking. Redundancy and excessive use of services is common, as is lack of communication and data sharing among providers. In too many instances, the result is poor quality and high-cost care.

The goal of improved efficiency in health care should be a central feature of any reform effort. The key is to set in motion changes that lead to continuous improvement in the productivity of the care delivery process, which could slow the pace of rising costs without diminishing the quality of care.

While the goal of better and more efficient care is widely shared among those advocating various approaches to health reform, there is far less agreement about the federal government’s role in that effort. The approach taken by the ACA and MACRA assumes that the federal government has the know-how and administrative capacity to set the terms for what would constitute higher-value care—and, in the process, redesign the way providers care for patients. Indeed, the federal government’s role in delivery system reform—and health care in general—is central to the disagreement about the ACA: Proponents of the ACA are relatively confident in the federal government’s ability to lead a delivery system reform effort, while opponents believe more room should be made for private initiative.

The ACA And MACRA Reforms: The Role Of Medicare

The delivery system reform provisions of the ACA and MACRA rely on altering Medicare’s payment methods to bring about changes intended to improve the efficiency and quality of care delivered to patients. Done well, harnessing Medicare’s financial leverage and regulatory influence could lead to system-wide improvements that benefit all patients, not just those enrolled in the Medicare program.

Ironically, Medicare’s incentives have long worked to reinforce costly and inefficient care arrangements based on unmanaged fee-for-service medicine. Separate payment systems for hospitals, physicians, and other providers were written to allow autonomy rather than to encourage coordination. The result was a fragmented and costly system characterized by redundancy, waste, and uneven quality of care.

The authors of the ACA implicitly acknowledged these shortcomings in drafting the delivery system reform provisions of the law. The most prominent delivery system reform in the ACA is the ACO program. Hospitals, physicians, and other health care providers form organizations that are intended to reduce Medicare spending while maintaining the quality of care. A successful ACO that meets the quality targets while holding down costs receives a bonus payment equal to half of the program’s savings. The other half of the savings is retained by the government.

ACOs are an attempt to achieve the efficiencies possible through managed care within Medicare’s traditional fee-for-service structure. Although shared savings when costs are reduced provide an incentive for providers to organize an ACO, they continue to be paid according to Medicare fee schedules. Because there is no enrollment process, patients may not realize that they are being treated by ACO providers rather than in a completely unmanaged care setting.

Provider-led ACOs are an alternative to insurance-based coordinated care plans that are already available through Medicare Advantage (MA). Health maintenance organization (HMO) and preferred provider organization plans offered in MA provide the full range of Medicare benefits, receive capitated payments (rather than fee-for-service payments), and are subject to multiple requirements for providing high-quality care. But MA plans are dominated by large national insurers, many of which are for-profit companies. There is a long-standing unease with these plans among some policy makers and many providers. ACOs provide an option for managing care outside of the traditional insurer-led HMO structure.

Other delivery reform strategies adopted by the ACA and MACRA change the way traditional Medicare pays for services or penalizes providers for adverse patient outcomes. For example:

  • Bundled payment models make a single combined payment for services provided during an episode of care, which is intended to promote greater care coordination, lower cost, and better outcomes. Payment is still fee-for-service, but providers have an incentive to reduce the cost of services within the bundle.
  • The hospital readmission reduction program reduces Medicare payments to hospitals with a rate of readmissions within 30 days of discharge that exceeds the national average.
  • MACRA replaced the sustainable growth rate (SGR) formula for determining annual physician fee increases with an alternative that reflects ACA reform themes. Physicians can choose the Merit-Based Incentive Payment System (MIPS), which is fee-for-service with bonuses or penalties tied to performance measures. Alternatively, physicians who join an alternative payment model are paid based on performance and total spending.

Such strategies make providers financially liable for meeting government-prescribed measures of performance that are intended to promote value over volume but fall short of shedding the fee-for-service incentives that make achieving that goal a challenge. Because Medicare is the dominant payer in the US health system with broad regulatory authority, its policies directly affect the care delivered to all Americans. That raises the already high stakes resulting from government attempts to use its authority under Medicare to slow the pace of costs in that program.

Overstating The Case

Have the ACA provisions aimed at delivery system reform succeeded in slowing the growth of overall health spending? Proponents of the existing delivery system reform approach argue that it is working and should not be significantly altered. This view is shared by a large number of health system managers who have invested heavily in reforms based on federal policy. They believe progress has been made and do not want to see a return to what they perceive to be a culture of unmanaged and wasteful care delivery.

Reversing whatever progress has been made would be a serious mistake. But how successful have the ACA delivery reforms been in improving health system efficiency, and could we do better by opening the door to greater private-sector initiative?

The evidence that ACA reforms have slowed the pace of rising costs is mixed, at best. According to Centers for Medicare and Medicaid Services (CMS) actuaries, growth in national health spending topped out in 2002 at 9.6 percent per year. Spending slowed after that, falling to 6.5 percent in 2007. The Great Recession of 2007 to 2009 saw another sharp decline in health-spending growth, which dropped to 4.0 percent in 2009. After a further decline in 2013, health-spending growth rebounded and is expected to hover around 5.8 percent annually for much of the next decade.

The slowdown in health spending during the recession was not surprising. The severe downturn reduced consumer demand economywide, including in the health sector. A similar pattern in health spending was seen throughout the developed world, which was also hit hard by the economic decline. It is clear that the ACA had nothing to do with the slowdown in US health spending prior to its enactment in 2010 or the decline in spending growth outside of the United States.

A closer look at ACOs, the signature delivery system reform of the ACA, makes it clear that these provisions have been far less consequential than proponents suggest. The Obama administration reported that 9 million people had been assigned to Medicare ACOs as of January 2017, but more than 90 percent of them are enrolled in what are known as “Track 1” ACOs. These are organizations that participate with “one-sided risk,” which means they stand to earn a bonus payment if they meet certain targets but are not financially penalized if they are not successful.

With most ACOs operating in a no-lose environment, it is not surprising that they have had little impact on Medicare spending. In 2015, ACOs operating under the Medicare Shared Savings Program spent $429 million less than the benchmark set by CMS. However, $645 million was paid out as bonuses (shared savings), resulting in a net increase in Medicare spending of $216 million.

The ACO experience demonstrates the challenges of developing successful delivery system reform initiatives. What may seem to be a sound strategy from Washington’s perspective can run into problems if it is overly prescriptive, poorly designed, and implemented without sufficient regard for conditions in local health markets.

Some of the most successful health systems in the country came into existence decades ago. Kaiser Permanente, Geisinger Health Plan, Intermountain Healthcare, and many large multispecialty physician groups have taken the initiative to develop systems of care that are cost-effective, meet high standards for quality, and are responsive to their patients’ preferences. It is more accurate to say that these systems have succeeded despite strong incentives in Medicare policy for more fragmented and unmanaged care delivery, rather than because of any Medicare incentives. A strong federal regulatory role is thus no guarantee that health care will be more efficient and effective. In fact, poorly conceived regulations may impose barriers to the kinds of care delivery innovations that would help move us toward the shared goal of higher-value care.

Recalibrating Reforms For Better Results

Medicare plays a central role in shaping the delivery system. Medicare’s payment systems profoundly influence the way hospitals, physicians, and other suppliers of services and products in the health sector organize themselves to care for patients. Fee-for-service payment has driven fragmentation and lack of coordination among providers, leading to much of the waste, redundancy, and inefficiency that characterizes care delivery in most communities.

The ACA intended to set in motion a new regulatory approach that would reverse some of the damaging aspects of previous federal payment policies. However, there is reason to be skeptical that a federal agency can engineer a higher-value health system relying solely on regulatory carrots and sticks.

A better approach would combine new provider payment policies with stronger economic incentives for beneficiaries and consumers to seek out lower-cost and higher-value care. This approach would recalibrate, not reject, the delivery reform effort started in the ACA and continued in MACRA.

Several broad changes are needed to help guide realistic delivery system reform. They include:

Improved Consumer Information On Medicare Coverage Options And Supplemental Insurance Reform

A revamped approach to delivery system reform should begin with making it easier for Medicare beneficiaries to make good choices. Today, Medicare beneficiaries can enroll in the traditional Medicare program or opt to get their Medicare benefits through a fully capitated MA plan. In addition, beneficiaries can select prescription drug coverage and can enroll in a supplemental insurance plan.

Although CMS offers several decision-support tools on Medicare.gov, it is extremely difficult for a beneficiary to compare the full cost of alternative combinations of coverage options. Information is available on the premium and cost-sharing requirements of traditional Medicare, but that information is not tied directly to the cost and coverage of commercial Medigap policies, which must be added to fee-for-service Medicare to match the coverage of a MA plan; separate searches are required to compare the cost of traditional Medicare with that of MA plans. With the current system, it is not possible to see clearly the cost differential between enrolling in a MA plan with prescription drug coverage included on the one hand and unmanaged fee-for-service plus supplementary insurance and a separate drug benefit on the other.

The difficulty of finding accurate cost information and the gaps in that information lead some seniors to settle for what seems like the easiest option, often fee-for-service Medicare plus supplemental coverage, even when an alternative would provide better coverage at lower cost. Improved consumer information can improve those decisions and has the potential of reducing system costs as well.

A related reform would correct a distortion associated with supplemental insurance. About 85 percent of people enrolled in fee-for-service Medicare have some form of the supplemental coverage mentioned above, which pays much of the fee-for-service cost-sharing requirements. The most popular Medigap plans pay all or most of the cost of deductibles, copayments, and coinsurance. Many employer-sponsored wrap-around plans also cover most of Medicare’s cost sharing.

Such plans drive up the cost of unmanaged fee-for-service by removing the financial “speed bumps” that cost sharing represents. According to the Medicare Payment Advisory Commission, Medicare spends 27 percent more per person on enrollees who have Medigap coverage and 14 percent more per person on enrollees who have supplemental coverage from a former employer than it does on enrollees without supplemental coverage.

Changes could be made to the rules governing supplemental coverage to promote more prudent use of health care and reduce program cost. For instance, limits might be placed on Medigap and employer wrap-around coverage to ensure that enrollees face a larger deductible before insurance coverage kicks in. Other options include limiting the amount of cost sharing above the deductible that can be paid by a supplemental plan or imposing a surcharge on enrollees who have supplemental policies with first-dollar coverage.

This sort of reform of supplemental insurance is important because it will remove a market advantage that favors the combination of supplemental insurance with unmanaged fee-for-service. The higher utilization associated with that combination of insurance is paid for in large part by general taxpayer support of Medicare and not in the premiums charged by the insurers offering the supplemental plans.

Medicare Provider Networks As A Successor Program To ACOs

The ACO program suffers from two important limitations that could be corrected by shifting to a new program of integrated, provider-directed networks of care.

First, beneficiaries are assigned to an ACO rather than being given the opportunity to enroll in a managed care system within traditional Medicare. Beneficiaries are unaware that they are in an ACO arrangement, and there is no incentive or requirement for them to cooperate with the management practices of the ACO. In addition, the ACO is responsible for the cost and quality of all care provided to the beneficiary, including care provided outside of the ACO. Under this loose arrangement, it can be difficult for the ACO to implement effective managed care practices.

Second, ACOs are supposed to use data provided to them by CMS to identify ways to cut costs and improve quality. But this data comes with a long delay and in a format that makes it hard to translate into tangible practice improvements.

A better approach would create the opportunity for well-run provider networks to compete for beneficiary enrollment with both Medicare Advantage and unmanaged fee-for-service. Medicare provider networks should be one of the options available to Medicare beneficiaries when they make their enrollment decisions. The new networks would be available as an option to beneficiaries who would prefer to get their care from a provider-driven system as opposed to an HMO, but with less cost and inefficiency than unmanaged fee-for-service.

Like ACOs, Medicare provider networks would be paid using the traditional fee-for-service payment systems, but they would have an economic incentive to cut costs because they would only prosper by attracting beneficiary enrollment. Unlike the situation with ACOs, beneficiaries would choose to enroll in Medicare provider networks rather than being assigned to them.

Medicare provider networks would be given a savings target, based on historical spending patterns, to promote more efficient health care delivery. Provider networks that achieve savings while maintaining appropriate quality of care would retain a portion of it, with the remaining savings going to beneficiaries through discounted Medicare premiums and to the government. Savings in excess of the target would be fully retained by the Medicare provider network, enabling the network to finance delivery system improvements. Medicare provider networks would be responsible for most of the costs incurred above the targeted spending levels provided by CMS.

To be effective, Medicare provider networks would need their own capacity to collect and analyze clinical and cost data to better manage their patient populations rather than relying on the slower and less informative government process that exists now. CMS regulation of these networks should be directed mainly at monitoring key clinical indicators to assess whether patient health outcomes improved based on the care paid for by the Medicare program. Medicare provider networks would be required to demonstrate the capacity to provide this data on a timely basis and to have in place management protocols that could be used to alter how care is delivered to improve quality and correct any identified deficiencies. Networks that do not demonstrate sufficient management capacity would be excluded from the program.

Medicare provider networks would have new administrative flexibility. For example, a Medicare provider network could decide to accept centrally all fee-for-service payments made to its affiliated providers (with their approval). Networks that accepted payments on behalf of their affiliated providers would then be free to use payment models that differ from the traditional fee-for-service payment structure. This approach would provide significant new opportunities for the private sector to develop and experiment with their own version of alternative payment models.

Because Medicare provider networks would have strong incentives for cost discipline, they could be treated differently from unmanaged fee-for-service in the rules for supplemental insurance policies. Beneficiaries opting to enroll in a provider network could be allowed to enroll in supplemental policies that reduce their cost-sharing requirements to levels below those allowed in the unmanaged fee-for-service program.

Reference Pricing With Beneficiary Incentives

Reference pricing is a technique to spur competition among health care providers and to promote better consumer decision making. Private insurers using this method set a price that they will pay for a specific health care service. This “reference price” is based on prices charged in a market area by well-qualified providers and is typically set toward the lower end of the price range. Enrollees in the insurance plan are allowed to get the service from any participating provider. If the provider’s price is below the reference price, the patient pays nothing extra. If the provider’s bid is above the reference price, the patient pays the difference.

In Medicare, reference pricing would account for the payment rates and legal and regulatory requirements that have already been set by the government. Medicare’s reference price for a specific service could be set using a bidding process to determine a price that is lower than Medicare’s standard rate. Beneficiaries could be encouraged to use high-value, low-cost providers by sharing some of the savings with them instead of requiring them to pay more for the service.

Medicare is currently testing “bundled” payments for the kinds of procedures that might be good candidates for reference-based pricing. Under bundled payments, the government is putting a provider (usually a hospital) in charge of managing the payments to all of the providers involved in procedures such as joint replacement. The hope is to drive down costs for the federal government and improve quality. The Department of Health and Human Services (HHS) initiated a demonstration project involving mandatory joint replacement bundles and one involving mandatory cardiac bundles, but recently delayed further work on both of those projects.

Reference pricing differs from this approach because it incorporates beneficiary incentives into the process and because providers are placed into more direct and transparent competition with each other.

Support Research On Continuous Productivity Improvement

The Medicare program has a long history of sponsoring research to improve the efficiency of the health care system. The ACA created the Center for Medicare and Medicaid Innovation (CMMI), which was granted unprecedented authority to test new payment models and other mechanisms to achieve that goal. If the tests are successful, the HHS secretary can implement the new payment models nationwide without seeking additional legislation.

There are legitimate concerns that this authority is too broad and could be used to expand the government’s control over the nation’s vast network of facilities and physician practices. The agency also has automatic budget authority, which isolates it from the normal pressures of political accountability.

Whether or not there are changes in the CMMI, CMS will continue to sponsor research on payment and delivery systems. That research should be refocused on supporting the agenda outlined above, specifically promoting approaches that allow market incentives to drive costs down for consumers and the government.

Summing Up

The cost of health care in the United States has grown rapidly for many years, typically well above growth in the overall economy. Those high costs have not guaranteed high-quality care or good patient outcomes, and our delivery system remains inefficient. What is needed is a process of continuous improvement in the efficiency and quality of the care delivered to patients. That is the core belief motivating the delivery system reform effort, which should be continued even as important features of the ACA come under review.

The key question is how best to pursue more cost-effective care delivery in the United States. At the moment, the federal government is trying to use its leverage to bring about greater efficiency, employing its regulatory powers under the Medicare program. That approach, while understandable, should be amended to make room for more private initiative and consumer incentives. Those are the driving forces for productivity improvement in other sectors of the national economy, and they should be harnessed to produce better outcomes in health care as well.