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Ulrich Baumgarten

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Obamacare's changes to doctor payments, explained

How are US doctors paid?

Health plans, by and large, pay doctors for every check-up, surgery and other medical services they perform.

In other words, health insurers tend to pay their doctor a fee for each service — regardless of how the patient feels about the services, or whether the patient gets any better.

Paying doctors this way, many economists argue, is problematic: it creates an incentive for doctors to provide as much health care as possible regardless of whether it makes patients healthier.

Obamacare takes some steps to change that. Many people know Obamacare for programs that increase access to health insurance, but there's a whole other half to the health-care law that aims to curb growing health-care costs by changing how the US pays doctors.

The basic idea is to move the system from paying doctors and hospitals for each service, test, and treatment they provide and instead reward doctors and hospitals for providing the best, most cost-effective care.

This is all done to, ideally, accomplish a three-fold goal: simultaneously reduce costs, improve quality, and enhance the patient experience.

The programs involved are largely pilot programs in Medicare, a health insurance plan the government runs for the elderly.

Because health-care cost controls have upset consumers before, the White House and Congress wanted to try various measures to see which ideas worked best without damaging health outcomes or public perception of the health-care system. This led to a piecemeal approach with a lot of different smaller takes that will presumably grow if they prove to succeed.

For more specific explanations for some of these programs and whether they seem to be working, click on their prospective cards: accountable care organizations, bundled payments, the Cadillac Tax, Independent Payment Advisory Board, patient-centered medical homes, the quality incentive program, and readmission penalties.

How are health-care prices set in the US?

Insurance companies, hospitals, and doctors typically negotiate the price for each and every medical service.

For the insurance company, the goal in these negotiations is to keep costs down by leveraging its customer base. Doctors and hospitals, meanwhile, typically try to negotiate for higher payments by arguing that their facilities are a "must-have" for a health plan's network.

Usually the hospitals win these battles, as patients don't usually like it when their doctor of choice is left out of a health plan. They tend to be able to set prices in the United States much higher than hospitals abroad.

Medicare is different. The government sets a specific price for each and every procedure that patients might get. It does not negotiate with doctors, and typically pays lower rates than private health plans. This seems to have helped hold Medicare's costs down in recent years.

But there are still challenges in terms of holding down costs. By paying a fee for each service instead of the quality of health outcomes, doctors are encouraged to provide as many services as possible without paying much attention to whether the services actually work. That means doctors are encouraged to rack up services and, therefore, costs to the overall health-care system.

What are accountable care organizations?

Accountable care organizations (ACOs) are Obamacare's biggest effort to fix the fee-for-service system. The idea is to get large groups of doctors to band together and accept a lump-sum payment for seeing patients.

The hope is that, working within this fixed-budget, physicians will be forced to spend their dollars in the most cost-effective way. They might be more likely, for example, to say no to unnecessary tests or decline an expensive joint replacement if a cheaper alternative is known to work just as well.

That's a dramatic move away from doctors taking a fee for each service, which health economists say incentivizes doctors to run up services and, therefore, costs.

Obamacare encourages — but doesn't require — health-care providers to participate in ACOs. Those ACOs are rewarded payment bonuses for savings and health outcome improvements. Some of them can also lose money if they don't hit certain spending and quality metrics.

Medicare's ACO programs started small with just 32 participants. But consulting firm Oliver Wyman now estimates there are 368 ACOs in Medicare and 154 ACOs outside the federal health-care program.


Map by Oliver Wyman

As a result, 5.3 million Medicare beneficiaries and 33 million non-Medicare patients receive health care from Medicare ACOs. Another 9-16 million patients obtain care from non-Medicare ACOs, according to Oliver Wyman.

The concept of modern ACOs has been around eight years now and, so far, the results are mixed. They seem to do well at improving the quality of care doctors deliver, but aren't all generating the cost-savings that the Obama administration had wanted.

Two federal reviews (here and here) found that about a quarter of ACOs have reduced their health-care spending enough to receive payment bonuses. That means another three-quarters are falling short of federal goals.

Don Berwick, former CMS administrator and now candidate for Massachusetts governor, says ACOs are still in the middle of an experimentation process to see what works and what doesn't. It's possible most organizations will fail to produce savings in the short term, but the ones that succeed will eventually act as guides for everyone else to save money and improve health outcomes.

Health Futures President Jeff Goldsmith, however, argues the early savings from some ACOs might not flow throughout the rest of the health-care system. He points out that the organizations that produced savings were large health-care providers that had plenty of low-hanging fruit to pluck, such as high levels of previously unexamined Medicare spending. It's possible smaller, more scrutinized organizations won't have similar access to similarly easy cuts.

What are bundled payments?

Medicare traditionally pays doctors for each service they provide. So during a patient's visit, doctors have a financial incentive to run up as many services as possible.

Bundled payments attempt to do away with the fee-for-service system by bundling what Medicare pays for an episode of care into one payment. If a patient, for example, stays at a hospital overnight, Medicare's bundled payment program reimburses the hospital for the entire stay, not each service provided.

The idea is the hospital and its doctors will no longer be encouraged to run as many tests as possible during the patient's stay, since they'll get the same bundled payment no matter how many tests and treatments they run.

This has been a concept for a long time in health care. But Obamacare pushed the model along with the Bundled Payments for Care Improvement Initiative.

Whether that idea works in practice remains unclear. Many health-care experts caution that bundled payments, like the rest of Obamacare's cost-control programs, are still very much in the preliminary stage. Medicare is currently running four test models to see which one, if any, best reduces costs while improving patient outcomes.


The RAND Corporation's review of the research found bundled payments consistently reduced costs, although the effects of bundled payments on health outcomes appeared mixed. But RAND, noting the lack of comprehensive studies into the area, called for more research.

What is the quality incentive program?

If the problem with the US health-care system is that it doesn't reward doctors for making patients healthier, then perhaps the best solution is to establish measures of quality care and reward medical providers based on how well they score on those measures. That's the thinking that went into Obamacare's quality incentive program.

The program, known as Hospital Value-Based Purchasing, sets aside a certain percent of Medicare payments that would have gone to hospitals in the past and instead places the money in a new pool for the program. Doctors can recoup the payments and more by scoring well on the federal government's health-care quality measures.

In fiscal 2014, hospitals had their payments reduced by 1.25 percent (this number will change from year to year). But if hospitals post impressive scores on two-dozen quality measures, they can recover part or all of that funding — or even more than 1.25 percent, if they do really well.

More hospitals were net losers in the latest year of the quality incentive program. In total, 1,451 hospitals are being paid less for each Medicare patient they treat, while 1,231 are being paid more.


These are, like other Obamacare programs, very much preliminary outcomes. Health-care experts caution that it's possible, for example, that hospitals will look at how other medical providers are improving on the quality measures and then improve their own scores in the years to come.

There's also some debate about how to measure quality. Some worry that patients, who might lack medical savvy, could misjudge a doctor even when his or her advice is truly the best medical option. Others question whether some measures might underestimate how difficult it is for doctors to treat, for example, low-income patients who can't commit to some treatments due to high drug prices and transportation costs.

Meanwhile, RAND Corporation's analysis of the research into pay-for-performance programs found mixed results for both cost reductions and health outcomes. The studies with the strongest methodologies, according to RAND, found either poor or mixed results. But, particularly on the cost side, RAND said more research is needed.

What is a patient-centered medical home?

The current medical system is fractured. Sick patients typically go to doctors specializing in internal medicine, patients with heart problems go to a cardiologist, someone suffering from a mental disorder goes to a psychiatrist, and on and on.

As a result, a patient might get the same tests multiple times or contradictory treatments for different diseases.

If a patient's care can be put under one roof, the thinking goes, these redundant, contradictory tests and treatments could be reduced — and charges and costs for redundant care would fall as a result.

Patient-centered medical homes attempt to do just that by putting a comprehensive team of providers in charge of a patient's care. So whenever a problem arises — the flu, a heart problem, or bipolar disorder — the team is put in charge of finding the right way to treat the patient, and the lead physician coordinates that care through his or her team.

Obamacare encourages medical providers around the country to adopt this model, in an attempt to hold down costs and improve care by reducing redundancy in treatments, tests, and other medical services.

But a study published in the Journal of the American Medical Association found the model might not work as well as supporters hoped. Researchers from around the country looked at one of the earliest adopters of patient-centered medical homes in Pennsylvania, and they found the model did not reduce costs and only improved one out of 11 quality measures. The study ultimately called for changes to the model.

What is the readmission penalty?

Prior to Obamacare, there wasn't much of a downside to hospitals readmitting patients for the same diseases. In fact, there was a bit of a financial benefit: a readmitted patient meant more health care, and more health care gets hospitals more money.

As part of Obamacare, the federal government now punishes hospitals for excessive readmissions. Hospitals can lose as much as 2 percent of their Medicare payments if they have too many people coming back to the hospital.

In theory, this should both reduce costs and improve health outcomes: hospitals will be encouraged to provide better care to avoid readmissions, and less readmissions mean less charges to the federal government.

And there is some early evidence that the readmission penalties are working: the percent of patients readmitted to the hospital began to decline in 2011, shortly after the penalties went into effect.


Source: US Department of Health and Human Services

But hospitals still aren't doing as well as the Obama administration wants. A Kaiser Health News analysis found Medicare levied $227 million in fines through the program for fiscal 2013 for hospitals that had too many repeat visitors.


What is the Independent Payment Advisory Board?

If Obamacare's cost controls fall flat, the health-care law provides another avenue for further savings: a 15-person board of health-care experts, known as the Independent Payment Advisory Board (IPAB), that can enact further cost controls through Medicare.

The board is supposed to take action if it's expected future Medicare spending will exceed targets set by the federal government. But to bring projected costs in-line, IPAB will not be able to cut benefits provided by Medicare; its role will be largely limited to reducing how much Medicare reimburses doctors and hospitals for those benefits.

IPAB has fallen into considerable controversy because it can make major changes to Medicare without legislative approval: Congress can override IPAB's recommendations, but it needs a three-fifths supermajority to do so. That's led various groups, including the American Medical Association, to oppose IPAB and support the board's repeal.

But IPAB, for now, remains inactive, because health-care spending has been growing at a slower rate than previously projected. Health-care costs need to grow a percentage point faster than the rest of the economy for IPAB to kick in.

What is the Cadillac tax?

Obamacare's excise tax, commonly known as the Cadillac tax, is an attempt to discourage employers from providing incredibly generous health plans. When it goes into effect in 2018, it will put a 40 percent tax on the most expensive insurance plans.

It might seem unfavorable, but many health economists think the most generous health insurance plans should be less generous. To understand why, think of two scenarios:

1) A patient with an extravagant health plan, often dubbed a Cadillac plan, goes to the doctor's office. She's told by her doctor that she should take a bunch of tests, even though the tests seem unnecessary. The patient knows most the tests are unnecessary, but she figures that since her health insurance covers everything, it's better to be safe than sorry — it's not like it's costing her anything except a little time, anyway.

2) Another patient with a less generous health plan goes to the doctor's office. She's also told by her doctor that she should take a bunch of tests, even though the tests seem unnecessary. But this time the patient also knows her health insurance will charge her a bunch of extra fees for each test. Wanting to avoid a lot of costs, she decides to talk to her doctor about what tests are actually necessary, and she declines to take any of the tests that she and her doctor decide are unnecessary.

The Cadillac tax attempts to move more health plans from example No. 1 to example No. 2.

The idea, in short, is to move from health plans that cover just about everything to plans with more cost sharing. This, economists argue, forces consumers to put more skin in the game, so they give more consideration to health spending during a trip to the doctor or hospital.

At the very least, there's evidence that the Cadillac tax could cost employers a lot of money if they don't act. A survey from the American Health Policy Institute found Obamacare will cost large employers (10,000 or more employees) an additional $4,800 to $5,900 per employee over 10 years. And the largest cost, based on anecdotes from the survey, seems to be the Cadillac tax.


Employers could, in theory, just accept these higher costs and pay them. But some economists say it's more likely employers will take steps to avoid the extra costs. Bradley Herring, a health economist at the John Hopkins Bloomberg School of Public Health, argues, based on his research, that employers will reduce the health benefits they provide and require more cost sharing to avoid crossing the threshold into the Cadillac tax.

If that plays out, many employers could begin reducing their health benefits in the next couple decades. In a study on the impact of the Cadillac tax, Herring found the tax will affect few health plans when it first starts in 2018. But if health-care costs grow quickly, the tax could affect most employer-provided health plans by 2029.

AHPI president Tevi Troy, who helped conduct the employer survey, agrees it's possible that the health-care law will drive more employers into cost-sharing schemes and therefore drive down health-care costs. But he argues that if that's the case, Obamacare will affect many, if not most, Americans' health insurance plans. That, he says, violates a promise from President Barack Obama that most Americans won't see their health plans change as a result of the health-care law.

How will Obamacare's changes to doctor payments affect patients?

The goal of Obamacare's payment reforms is to improve health outcomes or at least keep outcomes flat while reducing costs. But there is some concern that attempts to cut costs could harm low-income, minority populations and their doctors.

The problem is that many of the doctors and hospitals that serve low-income, minority populations are already among the most resource-strained, so cutting their pay further could exacerbate the problem rather than encourage medical providers to improve outcomes.

Lower-income and minority Americans tend to have worse health care outcomes than the overall population. They can also pose unique challenges to doctors trying to improve their outcomes. Low-income people, for instance, might not be able to afford the medication or transportation required to complete treatments prescribed by their doctors.

One prominent panel suggested, as a solution, the payment reforms could take into account some of the higher costs associated with seeing lower-income patients, so that hospitals seeing the neediest groups wouldn't be disproportionately penalized.

The White House, however, is worried any changes that account for socioeconomic factors could amount to setting lower standards for low-income, minority patients. While the Obama administration is closely watching the issue, senior officials say they're waiting on additional stakeholders to weigh in before moving forward with specific changes.

Separately, the RAND Corporation reviewed some cost-control programs and found little-to-no evidence they cause undesirable outcomes.

Will Obamacare’s changes to doctor payments save money?

We don't know for sure. Many of Obamacare's programs are in the middle of implementation, so their full effects aren't clear yet.

There are, however, some preliminary results, and they're fairly mixed.

Accountable care organizations: Two reviews from the Centers for Medicare and Medicaid Services found roughly 25 percent of affordable care organizations generated significant savings.

Bundled payments: RAND Corporation's review of the research found bundled payments consistently reduced costs.

Quality incentive program: RAND's analysis of studies on pay-for-performance programs, which are similar to Obamacare's quality incentive program, found mixed effects on costs.

Patient-centered medical homes: A study published in the Journal of the American Medical Association found one of the earliest examples of patient-centered medical homes failed to reduce costs.

Health-care experts caution, however, that none of these results should be taken as final. John McDonough, a professor at the Harvard School of Public Health, says it's far too early to judge what works and what doesn't. It's possible, for example, that in many of these programs the hospitals and doctors actually cutting costs will eventually be emulated by other medical providers, and that could translate to cost savings across the entire health-care system.

What does it mean to "bend the health-care cost curve"?

Bending the health-care cost curve is a phrase that comes up a lot in health care. It's shorthand for figuring out ways to slow the long-term growth of medical costs. In graph form, it means turning the red line into the blue or yellow line.


Bending the cost curve would save both households and governments a ton of money over the long term. That's great news if it can be done without compromising the quality of care.

As to how to bend the health-care cost curve, that's the $2.8 trillion question. There are lots of ideas about what types of policies could slow health cost growth in the long term. Some health economist think that we might actually have bent the health-care cost curve, citing four years of slower-than-normal growth — although this point is fiercely debated. There's general agreement across political lines that it would be a good idea to bend the cost curve but how to get there is a whole lot murkier territory.

This card was written by Sarah Kliff.

How else could the US bring down health-care costs?

When it comes to how US health care is priced, Obamacare really only tackles one side of the equation: it encourages doctors, hospitals, and medical providers to run less unnecessary tests and treatments, but it does very little to change how those tests and treatments are priced in the first place.

But there are a lot of ideas for how the US could reduce health-care costs beyond Obamacare. Here are a few examples:

1) A single-payer system: A couple countries, including Canada, use a single-payer system in which the government handles all medical payments. That means medical providers have to negotiate directly with the government, which represents Canadian citizens and patients, to set the price for each medical test or treatment. With such a large consumer base, Canada's federal and provincial governments have a lot of leverage to keep health-care prices down. And it seems to work: Canadian health-care costs are much lower than the US's.

2) Government rate-setting: Other countries, like Germany, negotiate and set payment rates by bringing public and private insurers together under one organization. This is similar to single-payer in that it leverages an entire country's population in negotiations, but it also allows private companies to provide health insurance. But just like single-payer, the government-guided negotiations seem to keep health prices down.


3) A public option: The government could offer what's called a public option: a government-run health insurance plan. Anyone insured by the public option would still need to pay premiums and deductibles, just like a private health plan. But the plan might hold down costs better than some private plans, since the federal government doesn't need to worry about profits. Budget forecasters projected the public option would reduce the federal deficit by $158 billion over 10 years, or about 0.3 percent of 2014-2023 federal spending.

4) Consumer-driven health plans: Those who want less government interference in health care point to consumer-driven health plans as one way to accomplish lower costs. These plans, in short, force consumers to share the cost of health-care services with the insurance company, instead of having an insurer cover everything. The idea is to encourage patients to weigh the cost of a medical test or treatment before deciding if it's really necessary. So far, health insurance company Cigna claims consumer-driven plans work: in a survey, the company found consumers on such plans are more likely to own and reduce their health spending.

5) Insurance sales across state lines: One market-oriented approach is to allow insurance companies to sell across state lines. This would, ideally, foster more cost competition between health insurers because they would be forced to consider more competitors from across the nation. Health policy blogger Avik Roy argued interstate competition could save money by, for example, letting insurers sell from states with less costly regulations. But there's some evidence that insurers wouldn't sell between state lines even if they were given the opportunity.

6) Tort reform: Many conservatives strongly advocate for tort reform that would place new limits on medical malpractice lawsuits. Some proposals would, for example, place caps on how much wronged patients can win from such lawsuits. Budget forecasters estimated tort reform would reduce federal health-care spending by $64 billion over 10 years, or about 0.1 percent of 2014-2023 federal spending. Texas's experience with such reform, however, failed to bring down overall health-care costs.

You didn't answer my question!

This is very much a work in progress. It will continue to be updated as events unfold, new research gets published, and fresh questions emerge.

So if you have additional questions or comments or quibbles or complaints, send a note to Sarah Kliff:

Where else can I learn about how US doctors are paid?

The Kaiser Family Foundation and Kaiser Health News both do a great job keeping up with these issues and putting them into data. As two examples, check out Kaiser Health News's stories on readmission penalties and the quality incentive program.

Steven Brill at TIME wrote one of the most comprehensive pieces on America's expensive medical bills. And although it's worth reading in full, Vox's Sarah Kliff summarized the in-depth report with her own take.

Dan Diamond also wrote a very helpful article tracking some of Obamacare's pilot programs — and how they're not living up to cost-controlling promises so far.

And if you want to learn more about the US health-care system, check out our card stacks on health-care spending and Obamacare.


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