Is The Affordable Care Act Already Slowing Health Care Costs?

Health care costs are the biggest long-term driver of national debt, but that growth has decelerated a lot over the past couple of years and is likely to continue falling as health care providers adjust to the payment changes in the Affordable Care Act.

We’ve already seen the slowing trend in Medicare spending, where, as Chapin White and Paul Ginsburg point out, monthly Part B premium are slowing and Medicare outlays per enrollee “in 2010 and 2011 was roughly in line with growth in the economy.” In January 2012, “the Congressional Budget Office (CBO) made a $69 billion downward revision to its 10-year Medicare spending projection — a technical correction that reflects emerging data showing surprisingly slow growth in outlays. Similar slowing trends have led to positive earnings surprises for publicly traded insurers.”

A lot of this can probably be attributed to a slowing economy and falling utilization of care — but there are some promising signs that the trend could continue, if not accelerate, under the significant payment reductions and reforms in the ACA. The law includes reductions “for almost every category of provider other than physicians and makes additional targeted cuts to home health agencies and some other providers” and those changes may already be motivating hospitals and doctors to begin delivering care more efficiently. For instance, the Los Angeles Times reported earlier this week that in preparation for the healthcare overhaul, many hospitals in California “are replacing paperwork with electronic record systems and working more closely with physicians to improve care and reduce the number of unnecessary tests”:

Some hospitals are going a step further and partnering with physicians to form accountable care organizations, groups that agree to offer coordinated care for Medicare patients. Under the reform law, the organizations will share the savings from lowering costs and improving care. […]

Hollywood Presbyterian is working with nearby hospitals to identify the best and most cost-effective treatments. In addition, the hospital is trimming expenses and entering new partnerships with outpatient clinics to keep discharged patients from returning to the hospital unnecessarily.

Providence Health & Services, Southern California, which operates five hospitals, has offered voluntary buyouts and streamlined supply purchases. The hospital group also is trying to reduce the chances of medical complications and is standardizing treatment of some illnesses to improve efficiency.

Of course there is ample precedent for government payment policy paving the way for broad scale change — and savings. After lawmakers adopted prospective payment system in the 1980s — “replacing cost reimbursement with the inpatient prospective payment system (IPPS) — hospitals sought “efficiencies, and when they found those efficiencies, it allowed the federal government to share in the savings.” The hope today is that if ACOs and other payment reforms prove effective, “they will provide broader opportunities to increase the efficiency of delivery beyond shortening lengths of stay, such as managing chronic disease more effectively so as to keep beneficiaries out of the hospital in the first place.” The trend lines so far look promising and if reforms don’t reduce costs as anticipated, the Independent Payment Advisory Board (IPAB) will act as a backstop to keep costs in check.