The Best Way to Reform Health Care—and Cut the Deficit

How Obama can cut health-care costs, save thousands of lives every year, and keep deficit hawks happy.

Melina Mara/The Washington Post, via Getty

With the tax portion of the fiscal-cliff deal done—for better or worse—Washington's attention will now turn to deficit reduction. And there's one way that Obama can keep deficit hawks happy without sacrificing entitlements.

It’s the least painful way to lower health-care costs, because it actually increases quality. It’s bipartisan, because it adopts deregulatory reforms that should appeal to Republicans. And best of all, it can be done through executive action, and thus spares us the agony of trying to pass another health-care statute.

So what is it? It’s defragmenting health care.

To explain: the fragmented nature of the U.S. healthcare system is remarkable. Even physicians who practice within the same hospital are typically independent from each other and from the hospital and its nurses. At some hospitals, case managers gamely try to coordinate the physicians working on a given case but have no direct control and little leverage, because the physicians bill separately. Outside of hospitals, the situation is even worse. The average Medicare patient sees 7 to 8 doctors a year, 13 if the patient has a chronic condition, and no one is paid to coordinate them.

Institute of Medicine reports have concluded that this fragmentation within hospitals and across physicians increases both medical errors and avoidable deaths. Under our fragmented system, medical errors in hospitals result annually in 44,000-98,000 deaths—and $17-29 billion in related costs. Only 55 percent of us get recommended preventive care, and only 56 percent of chronic illnesses are treated in accordance with practice guidelines. One striking empirical study found that having more physicians involved in treating a Medicare patient following a heart attack increased patient costs by $3,331 while reducing their odds of surviving by 2.5 percent.

Why don’t physicians coordinate more on their own? One problem is that there is no money in it. Not only does no one pay for coordination, but physicians are typically paid for the amount of care they provide, so that a lack of coordination actually increases their revenue by increasing the need for medical care. The administrative costs of our fragmented system are also staggering, accounting for 31 percent of U.S. health-care expenditures. The average administrative costs per patient, hospital, and doctor are each three times those of their Canadian counterparts. But the even bigger cost is that fragmentation often produces treatments that are ineffective or harmful.

True, medical providers sometimes engage in heroic efforts to address this problem. Duke University Hospital once adopted an integrated program to treat congestive heart failure that reduced health problems and cut costs by 40 percent. The result? Duke lost money because the new program meant Duke had fewer health problems it could bill to treat. If we financially penalize good medicine, we cannot expect it to flourish.

Why isn’t health care instead like other industries, where large integrated corporations coordinate multiple personnel and costly machinery to achieve a valuable result and have the incentives and control to do so as efficiently as possible? The reason is simple: current law gets in the way. It creates legal obstacles to prevent corporations from charging for medical services, directing physicians, or taking a share of the fees paid to physicians. It also generally requires separate payments for hospitalization, physician services, drugs, and outpatient services that must go directly to each provider. These laws are designed to protect a form of individual physician autonomy that makes little sense in the modern world where many medical treatments require intricate teamwork and expensive equipment.

(An aside: Sometimes laws allow a specific form of integration, like HMOs. But such laws do not allow corporations to pick whatever level of integration is most efficient to achieve a valuable result. Moreover, the forms of integration that are allowed have problems. HMOs, for example, are not paid for the value of the care they provide but rather receive a fixed payment per enrollee that gives them an incentive to provide too little care. To compensate, HMOs are subject to laws that restrict their ability to control their physicians. The result may be better than fee-for-service medicine, but the combination of flawed incentives with imperfect control is far from optimal.)

Obamacare contains provisions that could lift these legal obstacles to efficient health-care integration. Some provisions allow for the creation of Accountable Care Organizations, which can coordinate care and, if they meet quality performance standards, receive a share of savings that they can distribute among providers. So far, the regulations implementing these provisions still provide for separate Medicare payments to each provider that reward them for increased care, which may well override any individual cost-saving share that provider gets from reducing that care. But these provisions would also allow future regulations that could change the separate payment model itself in a way that fully allows efficient integration.

Obamacare also creates a new Center for Medicare and Medicaid Innovation to test models of integrated payment and care delivery and expand them on nationwide basis if they prove successful, as well as a new Independent Medicare Advisory Board that not only can, but must make proposals that improve health or efficiency through greater integration or coordination.

The Obama administration should use these powers to adopt regulations that both preempt legal obstacles to health-care integration and allow payments to corporations that would orchestrate all the providers necessary to provide valuable health outcomes. The result would be improved health care that would likely save tens of thousands of lives, avoid hundreds of thousands of injuries, and save hundreds of billions of dollars in medical costs.