For the last half-century, Congress has endorsed essentially the same approach to cutting health care costs, an approach that came to be called “managed care” by the mid-1980s. Based on the assumption that U.S. health care costs are double those of other wealthy nations because doctors order services patients don’t need, the solution is to “manage” doctors and provide financial incentives that nudge them to cut services.
The managed care approach has not only failed to cut costs, it has contributed to health care inflation by encouraging mergers and driving up administrative costs. The failure of the accountable care organization (ACO), a prominent iteration of managed care, illustrates the problem.
The ACO label was invented at a 2006 meeting of the Medicare Payment Advisory Commission (MedPAC). The concept was tested between 2005 and 2010 in the Physician Group Practice (PGP) Demonstration. In 2009, even as early results of the PGP project were showing that the accountable care concept wouldn’t work, Congress added provisions to the Affordable Care Act requiring the Centers for Medicare and Medicaid Services (CMS) to insert accountable care organizations into the traditional Medicare program.
ACOs are hospital-clinic chains that sign contracts with insurers (in Medicare’s case, with CMS) to share financial risk. That means an accountable care organization splits profits with CMS if profits are made and shares losses if losses occur. They work like this: CMS sets expenditure targets for accountable care organizations at the beginning of each year. At the end of the year, CMS sends ACOs that have spent less than their target a “shared savings payment.” In some programs, ACOs that exceed their target pay CMS a penalty.
In an article published online this month in the Journal of General Internal Medicine, we reviewed evaluations of all four of Medicare’s accountable care experiments that CMS has conducted since 2005. All four failed to affect Medicare spending; their impacts ranged from tiny savings of a few tenths of a percent to equally tiny losses. If we include in our calculations the costs that accountable care organizations incur in their futile efforts to reduce Medicare spending, such as contracting with insurance companies to manage risk and hiring more nurses, these organizations actually raise health care costs.
ACOs are supposed to work best for a population living with many chronic illnesses, such as Medicare enrollees. If these programs can’t cut Medicare costs, they clearly can’t cut costs for the whole country.
Why did accountable care organizations fail?
We see two main reasons for the failure of accountable care organizations: The diagnosis was wrong and the prescription was wrong.
The key assumption underlying the nation’s managed care experiment is that U.S. health care costs are high because Americans get too many medical services, and this overuse is caused by the fee-for-service method of paying doctors. Fee for service creates a financial incentive for doctors to order more tests and do more procedures, something doctors allegedly cave in to. That, anyway, was the diagnosis promoted in the early 1970s by proponents of health maintenance organizations, an early form of managed care, and it is the diagnosis offered today by ACO proponents.
In its June 2009 “Report to Congress,” for example, the Medicare Payment Advisory Commission claimed that the “ACO’s role is to create a set of incentives strong enough to overcome the incentives in the [fee-for-service] system to drive up volume….”
But the assumption that overuse is widespread, and that all overuse is caused by doctors caving in to fee-for-service incentives, is wrong. Over the last two decades, research has clearly demonstrated that overuse of medical care isn’t why health care costs are rising. Per capita health care costs in the U.S. are high compared with other nations because the prices at which medical services and drugs are sold is excessive.
In any sector of the economy, total spending is a function of price and quantity (or volume). Price times quantity yields total spending. American policymakers have focused on the quantity factor when they should have focused on the price factor. In a Health Affairs article aptly titled, “It’s The Prices, Stupid,” health policy expert Gerard F. Anderson and colleagues concluded that (the italics are ours) “the difference in spending [between the US and other countries] is caused mostly by higher prices for health care goods and services in the United States.”
Why are U.S. prices so high? Because incessant consolidation of its health care system gives those who sell medical services and drugs the power to raise prices. And the huge cost of administering the country’s stunningly complex health care system motivates sellers to raise prices: Excessive administrative costs account for 15% of the $4 trillion the U.S. spends annually on health care, or more than $2,000 per person.
The accountable care organization solution has failed not just because it addressed the wrong problem (overuse rather than excessive prices and inefficiency) but also because these organizations were never clearly defined. From the moment the ACO label was concocted by the Medicare Payment Advisory Commission at its November 9, 2006, meeting, accountable care organizations have always been “defined” in terms of the aspirations of its proponents.
The following “definition” by accountable care organization proponents Mark McClellan, a former CMS administrator and a former FDA commissioner, and colleagues is typical: “ACOs consist of providers who are jointly held accountable for achieving measured quality improvements and reductions in the rate of spending growth …. while caring for a defined population of patients.” Is it possible to be more vague than that? “Providers” are “held accountable” (by unidentified parties using unidentified means) for “measured improvements” (measured at an unknown cost to providers and the measurer) in the “cost and quality” of health care delivered to a (poorly) “defined population.”
In addition to being vague, the ACO proposition has failed because it rested on a false premise: doctors work primarily for money and can be induced to stop ordering unnecessary services if they could make money by doing so. But most physicians don’t work primarily for money. They are motivated to provide high-quality care, solve complex challenges, and see their patients prosper. Behavioral economists call these intrinsic motivations — and they are undermined by the monetary penalties and rewards deployed by accountable care organizations.
These twin defects in the ACO proposal — a wrong diagnosis along with a poorly defined and evidence-free prescription — have plagued the managed care experiment since health maintenance organizations were formalized in the 1970s. The widespread adoption of the cost-containment tactics pioneered by those organizations was the primary cause of an explosive growth in administrative costs and mergers, both of which drove up prices, that began in the late 1980s.
Health maintenance organizations, accountable care organizations, and other managed care “reforms” have not just failed — they have backfired, aggravating the problem they were supposed to solve.
It is long past time to abandon managed care. We should rely instead on lessons learned from other countries that have adopted single-payer systems, price controls, and universal coverage with uniform benefits. The results in cost control and longevity are impressive.
Kip Sullivan is a member of the advisory board of Health Care for All Minnesota. James G. Kahn is emeritus professor of health policy at the University of California San Francisco.
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