How Obama’s $3 Trillion Health-Care Overhaul Would Work

By John Tozzi January

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Michele Tantussi/Bloomberg

The Obama administration has announced plans to accelerate a shift in how the U.S. pays its $2.9 trillion annual health-care bill. Officials at Medicare, which covers one in six Americans, want to stop paying doctors and hospitals by the number of tests and treatments they do. Instead, the government wants to link payments to how well providers take care of patients, not just how much care they provide.

This transition is already under way. Millions of Americans are now covered in experimental programs created by the Affordable Care Act designed to reduce unnecessary care and incentivize doctors to focus on quality, not quantity. The administration wants
to vastly expand such programs to include half of all Medicare payments by the end of 2018. Here’s what you need to know:

America spends $2.9 trillion each year on health care, and that number keeps going up

Growth has slowed in recent years. Since 2010, per capita health spending has increased at about the same rate as the U.S. economy, a historically low rate for American health spending. Even if that holds steady, 17¢ of every dollar spent in the U.S. goes to health care, far higher than in other countries that have health outcomes as good or better than America’s.

The government’s starting to change how it pays doctors and hospitals

After the Affordable Care Act was passed in 2010, the federal government started experiments with doctors and hospitals willing to try new payment models. One of the attempts to do this was a program called Accountable Care Organizations (ACOs), which would let medical providers share in the savings if they reduced the overall health-care costs for their Medicare patients. Now more than 7.8 million of Medicare’s 55 million beneficiaries get their care through such arrangements, up from zero in 2011.
The Obama administration would like to speed this up. Medicare wants 30 percent of all payments to go through models like ACOs by the end of next year, and 50 percent by the end of 2018, up from about 20 percent now. Other incentives already in place, such as penalties for hospitals when patients get readmitted, nudge providers to improve care, even if they’re still getting paid in a traditional fee-for-service system. The government wants 90 percent of all Medicare payments to include such incentives by the end of 2018.

It still has a long way to go

It’s hard to say precisely how much of the total $2.9 trillion in health spending flows through fee-for-service payments, but a safe answer is: most of it. Even hospitals participating in Medicare’s new payment experiments often get paid the old way by commercial insurers, for example. Those contradictory incentives can make it hard for hospitals to fully make the changes they need to care for patients more efficiently. “Can you create a situation ultimately where you’re treating fewer people in the hospital and doing fewer higher-reimbursement treatments? That’s a real risk,” Moody’s health-care analyst Dan Steingart told me this month. “If your contracts only pay you on a pure fee-for-service basis, you’re basically shooting yourself in the foot.”
This is the first time Medicare officials have set clear targets for how much spending they want to flow through new payment systems. The Obama administration said the goals should incentivize more doctors and hospitals to join, and give them some certainty that the switch to new payment methods is real. The government also wants private-sector buyers of health care to make the shift. A council of executives from the insurance and medical industries, as well as big employers such as Boeing and Verizon, will try to expand alternative payments.

We don’t know how well it will work

Medicare is trying a few experiments, including ACOs and bundled payments (which try to put limits around how much hospitals can charge for common procedures like knee and hip replacements). While economists and medical providers largely agree that ending the fee-for-service program is essential to containing health-care costs, the evidence for the new models isn’t really in yet. Medicare officials said they have no results on bundled payments yet. The early years of the ACO program have shown some savings, but a majority of ACOs for which Medicare has data have not generated savings yet.