Signs that Health Reform Is and Is Not Working in California

In the continued political conflict over health reform – now centered on whether states will set up their own insurance markets, to be known as exchanges – it is easy to lose focus on whether health reform is actually working. We have, however, some very interesting early indications on that score. Some are positive, others are negative. Neither, though, fit easily into the talking points of either side in the political debate.

There are some positive early indications that the Affordable Care Act, in part through reinforcing trends already occurring within the market, is likely to control healthcare costs somewhat, at least in the short term. One thing that masks this for the casual observer is that most people understandably think of affordability through the prism of premiums. These premiums have continued to rise, in some cases dramatically, for many consumers, and, come January 1, 2014, they will be much higher, in particular for younger more affluent people who have been purchasing insurance with relatively thin benefit packages.

Premiums, however, are what economists might call a “trailing indicator” of healthcare affordability. Over time, the price that we pay for healthcare is a direct function of the cost of that care itself, such as the salaries of doctors and nurses and the price of pharmaceuticals. To the extent that we are making the health system more efficient, particularly at higher cost facilities, premiums will come down.

There is good news on this score. Relatively higher cost systems – such as Sutter Health and the academic medical centers in the state – have been taking dramatic measures to bring down the cost of their care, cutting hundreds of millions of dollars from their operating expenses through streamlining administration and engaging in efforts to improve the quality of care, particularly for end-of-life patients. This trend is driven not only by specific provisions such as the penalties for hospital systems with high rates of readmissions but also through the need for them to be included in the networks that will compete in a more transparent fashion on the Exchange.

The negotiations currently occurring between insurers and providers for many of the policies that may be offered through the California Exchange, though, create some cause for concern. Many of the products that are being designed and developed are built on a chassis of low unit reimbursement fee-for-service. This would double down on the worst incentives that exist in the market, a set of incentives that the advocates for health reform claim to want to relegate to the benighted past. Low reimbursements to doctors and other providers tend to drive higher volume, which is the exact opposite of what we want to encourage.

To a certain extent this is unavoidable given the structure of the federal law. Everything from the relatively high consumer cost-sharing in Exchange products to the creation systems that are based on the extensive cataloging of patient encounter data makes it very challenging for the best of the California delivery system, such as our capitated, delegated medical groups, to participate in Exchange products. Consumer cost-sharing, if well-designed, can work in concert with the effective management of care. But that’s a very tall order, particularly when the product designs for the exchange are being put together on an insanely aggressive timeline.

The hunt for short-term affordability also means that many of the providers included in these narrow networks may be ill-equipped to manage complex chronic diseases that require complex specialty care. The vast majority of health system costs are the result of chronic disease. We have much more to do as a state to integrate the safety net better into the broader health system. Unless and until this occurs, we may be able to squeeze some short-term savings out of selecting lower-cost providers for these networks. These providers, though, will be wrestling with many different challenges, including the Medicaid expansion, caring for people who are still uninsured, and changes to their reimbursement models. Hence they will have real challenges providing the complex care management for the highest-need patients.

Overall, the trajectory that we were on before health reform was entirely unsustainable, and the passage of the Affordable Care Act was essential. As we implement the law, though, we have to turn off all of the political noise, both the criticism and the boosterism, to make real-time adjustments to the process going forward. Perhaps the most important adjustment that we need to make in California is to continue to look for opportunities to design health reform in such a way that we build on the highest-functioning elements of our health system rather than sliding backward into a world of low fee-for-service reimbursements that will encourage less efficient and effective care.

Micah Weinberg is a Senior Fellow at the Bay Area Council Economic Institute.

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