Obamacare, Medicare, and Falling Healthcare Costs

The Council of Economic Advisors (CEA) gathered together some data on costs and trends in healthcare and produced a short paper extolling the progress made in slowing the growth in healthcare expenses. The purpose of the document was to make sure everyone was aware of the progress being made, and to insure that credit was apportioned to Obamacare.

This chart was provided to illustrate how per capita costs have increased since 2000. It includes "real" costs, which, presumably, means costs over and above inflation. The data is broken down into three time intervals: before the recession, during the recession, and after the recession.

The pre-recession numbers are intended to convey the long term trend prior the recession and the fall that followed during the recession. There is considerable disagreement between various people who have studied the issue as to how much of the drop in healthcare spending growth rate can be attributed to the slow economy and people short on cash to spend on their health. The interval 2010-2013 is included to illustrate how expenditures continued to grow at an even slower rate in the period when Obamacare was being implemented and anticipated. The message should be clear: Obamacare is having a beneficial effect.

To insure the reader is convinced that structural changes are at work rather than mere economic hardship, this plot was provided:

Roughly 19%, about one in five, of Medicare patients that are admitted into a hospital must be readmitted for health reasons within 30 days of release. This rather scary statistic is attributed to lax release procedures on the part of doctors and hospitals. Sick people, especially old sick people, do better when they are properly prepared to take care of themselves after going home. Better outcomes are observed when there is follow up by the caregivers to verify that the patient is taking prescribed medications and doing whatever else he/she has been advised to do. This type of follow-up adds to the cost of dealing with patients and the high rate of readmissions is interpreted as a lack of incentive on the part of caregivers to spend extra money in a manner that would, ultimately, hurt their profit margin. Readmission has been a fiscal positive for them.

Obamacare contained financial inducements to reduce this readmission rate. That the rate has, in fact, fallen during Obamacare implementation signifies that structural changes are taking place in healthcare delivery, not just economic effects.

The slowing in the growth of healthcare spending has caused to Congressional Budget Office (CBO) to lower its projected costs for Medicare and Medicaid in each of the last three years.

If one considers the outlook for the year 2020—which is not that far off—the current lower projections indicate a savings of about 0.8% of GDP which translates into about $135 billion. That is $135 billion less government expenditure for just the year 2020.

The cost of healthcare exerts a tremendous amount of leverage on debt projections; that is why it is so important that the current trends persist. To endure, these savings must be based on fundamental changes in how healthcare is delivered, not on transient economic effects.

Jonathan Rauch provides insight into how Medicare patients have been treated by healthcare providers and how greater savings can be attained. He has produced an article in The Atlantic: The Hospital is No Place for the Elderly.

As people have extended their lifetimes, more experience a lengthy period in which multiple physical functions degrade.

"Thanks to modern treatment, people commonly live into their 70s and 80s and even 90s, many of them with multiple chronic ailments. A single person might be diagnosed with, say, heart failure, arthritis, edema, obesity, diabetes, hearing or vision loss, dementia, and more. These people aren’t on death’s doorstep, but neither will they recover. Physically (and sometimes cognitively), they are frail."

"Seniors with five or more chronic conditions account for less than a fourth of Medicare’s beneficiaries but more than two-thirds of its spending—and they are the fastest-growing segment of the Medicare population."

The aged and unhealthy need frequent access to healthcare professionals, but not necessarily the intense and expensive care involved in emergency room visits.

"Right now, when something goes wrong, the standard response is to call 911 or go to the emergency room. That leads to a revolving door of hospitalizations, each of them alarmingly expensive. More than a quarter of Medicare’s budget is spent on people in their last year of life, and much of that spending is attributable to hospitalization."

Hospitals are dangerous for all people, but particularly for the elderly.

"Hospitals are fine for people who need acute treatments like heart surgery. But they are very often a terrible place for the frail elderly. ‘Hospitals are hugely dangerous and inappropriately used,’ says George Taler, a professor of geriatric medicine at Georgetown University and the director of long-term care at MedStar Washington Hospital Center. ‘They are a great place to be if you have no choice but to risk your life to get better’."

If asked, very few seniors would say they expect to spend the last days of their lives in pain, with bodily functions maintained by machines, and surrounded by strangers; but that is how many end up.

"For many, the worst place of all is the intensive-care unit, that alien planet where, according to a recent study in the Journal of the American Medical Association, 29　percent of Medicare beneficiaries wind up in their last month of life. ‘The focus appears to be on providing curative care in the acute hospital,’ an accompanying editorial said, ‘regardless of the likelihood of benefit or preferences of patients’."

If hospitals are overly expensive and inefficient at dealing with the elderly, what is the alternative?

Atul Gawande wrote an article for The New Yorker discussing the way end-of-life patients should be treated: Letting Go. He referred to two studies that are particularly relevant to medical care for the aged sick. They involved the effect of hospice care on medical outcomes.

Hospice care is concerned with trying to maintain quality of life at the current moment. That means worrying about pain and discomfort and trying to keep the patient alert and active as long as possible. Its goal is to bring the patient peace while nature takes its course. Under hospice care the patient has much more opportunity to interact with a team of personnel who closely monitor his/her condition.

Gawande refers to a study performed by Aetna. Normally hospice care is only provided to patients after they forego all other treatments and when life expectancy falls below six months. Aetna decided they would let a group of patients have hospice care and their normal treatments concurrently. The results would be compared with a control group only following their regular treatment. Both groups had a life expectancy of less than a year. The results were stunning. Patients benefited greatly from having the hospice service available. Within this group, emergency room visits declined by 50% and the use of hospitals and ICUs dropped by two-thirds. Overall costs dropped by almost a quarter. The ultimate conclusion was that this more personal care received from the hospice workers improved the patient’s health and well being.

Gawande describes another study.

"Like many people, I had believed that hospice care hastens death, because patients forgo hospital treatments and are allowed high-dose narcotics to combat pain. But studies suggest otherwise. In one, researchers followed 4,493 Medicare patients with either terminal cancer or congestive heart failure. They found no difference in survival time between hospice and non-hospice patients with breast cancer, prostate cancer, and colon cancer. Curiously, hospice care seemed to extend survival for some patients; those with pancreatic cancer gained an average of three weeks, those with lung cancer gained six weeks, and those with congestive heart failure gained three months. The lesson seems almost Zen: you live longer only when you stop trying to live longer."


The lesson to be derived from these studies is that there is a more efficient and effective way to deal with very sick people. It involves considerable more personal interaction and different skill sets than normally provided in the doctor’s-office-visit-to-hospital-stay loop. And this approach need not apply only to the elderly.

Having a hospice-like team manage the healthcare of an extremely sick person is advantageous for the individual patient, and it is less expensive for society as a whole, but it has not been a profit winner for hospitals. They lose money via this approach because there are fewer hospital days and fewer emergency room visits. Something has to change before this approach can scale up from small pilot programs.

The point of Rauch’s article is to demonstrate that change has, in fact, come to the healthcare industry.

"Under the new health-care law, Medicare has begun using its financial clout to penalize hospitals that frequently readmit patients. Suddenly, hospitals are not so eager to see Grandma return for the third, fourth, or fifth time. Obamacare has also earmarked money specifically to test new care models, including home-based primary care."

Rauch describes an organization called Hospice of the Valley that operates in Phoenix, Arizona.

"In the early 2000s, Hospice of the Valley began experimenting with an in-home program designed to bridge the frailty gap—that is, the gap between hospital and hospice. That experiment led to the development of a team-based approach in which nurses, nurse-practitioners, social workers, and sometimes physicians visit clients’ homes, provide and coordinate care, and observe people outside the context of the medical system. ‘That face time is what makes the program work,’ David Butler, Hospice of the Valley’s executive medical director, told me. Butler says that for the 900 people it serves, the program decreases hospitalizations by more than 40　percent, and ER visits by 25 to 30　percent."

This effort was run mostly on funds from charitable contributions and research grants. That is no longer the case.

"Insurance companies and other providers have begun asking Hospice of the Valley to contract with them to pick up their caseloads of high-cost, chronically ill patients. At the beginning of this year, the program was earning enough in reimbursements to cover one out of seven patients; today the rate is more like one in three. That is still not enough, but when a few more big contracts come through, Butler says, perhaps in a year or 18　months, enough of the patient base will be covered to tip the program into the black."

Sutter Health, a large network of hospitals and doctors in Northern California, has been experimenting with a program it refers to as Advanced Illness Management (AIM) that is similar in philosophy and execution to that of Hospice of the Valley.

"….each patient is assigned to a team of nurses, social workers, physical and occupational therapists, and others. The group works under the direction of a primary-care physician, and meets weekly to discuss patient and family problems—anything from a stroke or depression to an unexplained turn for the worse or an unsafe home."

"Thanks to a $13　million Medicare innovation grant, for example, Sutter is rolling out Advanced Illness Management to its entire health network, to test whether the program can be scaled up."

Rauch indicates that Sutter management is determined to make AIM its standard approach to dealing with the very ill.

"At Sutter, AIM has acquired institutional and financial momentum of its own; executives there say they expect to expand their annual patient load from about 2,000 today to between 5,000 and 7,000, which would make it the Sutter network’s standard method of care for the frail."

Perhaps, the biggest change of all that has been brought about by Obamacare is the realization within the healthcare community that the old business model is no longer viable. Whereas the previous focus was on generating revenue, now attention must be paid to cost and quality of care. Rauch provides this comment:

"Jeff Burnich, a vice president at Sutter, told me that the business case for AIM is only getting stronger. ‘Most health providers, if not all of us, lose money on Medicare, so how we make up for that is, we cost-shift to the commercial payers,’ he said. But the space for cost-shifting is shrinking. ‘The way you bend the cost curve now is by focusing on where there’s waste and inefficiency, and that’s the end of life in the Medicare population.’ He expects to see a wave of hospitals fail in coming years if they don’t provide better value. ‘The music has stopped,’ he said, ‘and there are five people standing, and one chair’."

There is a long way to go yet in cutting healthcare costs. The $135 billion the CBO projects in savings in 2020 is the tip of an iceberg. There is much more yet to be gained.