How will healthcare reform change the economy?

The Patient Protection and Affordable Care Act, passed by Congress and signed into law by President Obama in March 2010, includes a series of reforms designed to increase access to healthcare insurance and lower costs, including the expansion of Medicaid, subsidies to assist middle-income families in buying insurance, and the creation of “exchanges” on which individuals can buy insurance. A number of states have challenged the constitutionality of the law on the grounds that the “individual mandate”—the requirement that individuals purchase insurance or face a fine—is beyond Congress’s authority. Federal courts have made conflicting rulings on the issue and it is expected to be decided by the Supreme Court.

David Cutler, the Otto Eckstein Professor of Applied Economics at Harvard, was senior healthcare advisor to Obama’s presidential campaign. He is a member of the Institute of Medicine, an arm of the National Academy of Sciences. Dr. Robert Galvin is the CEO of Equity Healthcare, which purchases healthcare for companies owned by private equity firms, and the former head of healthcare for GE. He is a professor adjunct of medicine and health policy at the Yale School of Medicine and also a member of the Institute of Medicine.

Q: What are the key issues that must be addressed around healthcare?

David Cutler: I would say there are two key issues. The first one, which is a particularly American issue, is to figure out how to finally get people covered. The second issue, which is far harder, is to bring rationality to the way medical care is delivered, so that it is both cheaper and higher quality. At a technical level, everyone understands that we can do that. But it’s been very difficult to make it happen.

Robert Galvin: I absolutely agree with David’s key issues. What I’d add is that Don Berwick, the physician who is now running Medicare and who before that ran the Institute for Healthcare Improvement, has concisely framed these issues in what he calls the triple aim: the overall health of populations; cost, which I think is inextricably linked to how we afford to cover everyone; and quality. We have so many opportunities to improve in all of these areas.

Q: What is the current system in the U.S. doing effectively?

Galvin: Where we continue to stand out is rapid access to innovative, high-tech medicine for serious conditions—for those who have health insurance. That part of the system works very, very well, if you have coverage and access to a delivery system that performs well. But our system is so marked by variation that you can have good insurance but be in a system that isn’t effective. Or you can also be underinsured or uninsured, and then the system doesn’t work effectively at all.

Cutler: If you brought Marcus Welby back from the 1950s, he would hardly recognize a single treatment that a doctor has at his or her disposal today. On that dimension, our system is very innovative and effective.

However, with the way healthcare gets delivered, Marcus Welby would understand the settings perfectly. Where doctors see the patient, what they do, how they interact with the other providers, those would all be entirely familiar, which isn’t something to be proud of.

Galvin: On that second point, I think that there are pockets of innovation in how the care is being delivered. It’s limited, but it is dynamic where it’s happening.

Q: How do you think healthcare is shaping decisions made by businesses today?

Galvin: It’s profound. Until recently, I had seen a lot more talk and wringing of hands than actual impact on business actions. In the last several years, however, it’s started to impact hiring and employment. It’s part of an overall cost base in the U.S. that leads employers to either look for part-time employees or look outside the country.

I changed jobs recently. I was with one of the largest companies in the country, General Electric, for 15 years, so I know a fair amount about the experience of jumbo employers. Since last summer, I’ve been running a company that works with smaller employers—they’re still roughly between 500 and 10,000 employees, but they’re certainly smaller than GE.

I’m in constant dialog with the chief executive officers and chief financial officers of these 35 companies. Healthcare is impacting key business decisions more than I’ve seen over the past 20 years. I don’t think anything has dramatically changed in healthcare, other than the uncertainty coming from the health reform bill. I think it’s simple compounding. The cost pressures companies have been worrying about since the 1970s have increased due to the year-over-year increases to the point where the problem has arrived.

Cutler: A recent study showed that industries that are more likely to provide health insurance are not growing as rapidly as industries that don’t provide healthcare, and that that’s unique to the U.S. It really looks like there’s something about the burden of providing healthcare in the U.S. that is different from countries where the costs are smaller.

Q: What’s the biggest risk related to healthcare? And how could developments in the industry negatively affect the rest of the economy?

Galvin: It’s a follow-on from the last question. If people are reluctant to hire and invest in this country because of healthcare costs, that has a direct spillover effect on the rest of the economy.

Healthcare is a significant drag. But obviously things are always complicated. So if this were a booming economy, and revenues and the entire GDP were growing at a rapid clip, I suspect it would be less of a drag than in the current, slow growth climate, when there’s such a focus on costs and uncertainty. It becomes a bigger issue because of those external forces.

Cutler: I think that’s right. I also think there are other risks. In my view, there’s real potential for a massive meltdown of the system. If the recession keeps going and states keep cutting Medicaid, that will both drive up the number of uninsured and put such incredible pressures on hospitals that they won’t be able to deal with it.

That scenario involves extrapolating what we’ve already been seeing a few more steps. We see rich people can get access to the system. Poor people struggle mightily. And people in the middle feel they’re not simply one bad event away from losing coverage but one bad event away from not being able to access the system because they can’t afford the real providers. For that to become the new normal would be a catastrophic outcome, but it’s not inconceivable.

Q: Do concerns about healthcare change the way consumers behave?

Cutler: Concerns about healthcare have always impacted behavior to some extent, but it’s getting to be more important. There’s not a single decision about self-employment or small business formation that doesn’t involve healthcare. It shows up in job transition issues. It shows up in retirement issues. It scares the hell out of people.

And it extends even beyond healthcare. While many economists like free trade agreements, I don’t think we’re going to pass another one until we figure out how to make free trade not send shivers up people’s spines. That fear is not all around healthcare, but people associate free trade with an economy that’s changing, and changing in a way that doesn’t guarantee certain basic things like healthcare.

Galvin: David and I don’t have the same views down the line around healthcare, but I think we agree on how troubled the system is. And I think we strongly agree that the trajectory is getting worse faster.

But I’m always impressed with how long it takes for systemic concerns to trickle down to the consumer. When I talk with focus groups of consumers—these are employed people who have insurance—I don’t see them worrying about the healthcare system falling apart. They are worrying about paying more in premiums or having difficulty getting appointments with doctors. The one place where I see the most change is in the growing number of people covered by high deductible benefit design. When people pay more of the first dollar health cost, they are changing their patterns of seeking care, mostly by seeking less of it.

Q: Why are healthcare costs higher in the U.S. than elsewhere?

Cutler: There are probably three reasons. One is that we pay more for the same thing. Drugs cost more in the U.S. than elsewhere; doctors get paid more in the U.S. than elsewhere. Second is we do more stuff. My wife sprained her ankle at the gym a few months ago. We found two guidelines for sprained ankles on the web—the British version and the American version. The British version recommended rest, ice, compression, and elevation. The U.S. version said rest, ice, compression, and elevation, and an x-ray. The third reason, I think, is because the administrative costs are much higher in the U.S. and those get passed into prices. A typical hospital spends 10% of all the revenue it collects just getting revenue. Those three basically account for 50% higher spending in the U.S.

Galvin: I think all of that is true. I don’t think, however, that you can complete the conversation without talking about the expectation of patients that they will get the greatest amount of high technology diagnostics and treatment for almost any symptom they have. The so-called demand side tends to differ radically from other healthcare systems that I have visited. There is just a higher expectation and a sense that more is better, here. And that is connected to the fact that doctors do more.

Also, if you go to the nearly one million physicians in the country, they will tell you that the defensive medicine that they practice due to the malpractice and liability climate is a major factor. I understand that’s pretty controversial because the economic literature has not yet shown a tie to more treatment and higher costs, but it is just very hard for me to conceive that doctors believing so strongly that they need to protect themselves doesn’t lead to a degree of increased costs and utilization over what we see in other countries.

Cutler: What’s hugely important is to somehow, over time, evolve the system to where doctors think about what they do not as defending themselves but as practicing good care.

Galvin: A problem in getting a comprehensive solution to this problem, of course, is that this issue is controlled state by state, and there’s very little that you can do at the federal level on liability insurance and healthcare.

Q: Where does the healthcare reform effort stand? And how much uncertainty is there around the implementation of the Affordable Care Act?

Galvin: Let me start because David was such an important architect of the reform and I’d love to hear him follow up. The uncertainty is a palpable and real force in American business. I thought that people would focus on the uncertainty of exchanges forming in 2014, the premium tax on the “Cadillac plans,” and the ability of larger employers to get into the exchanges. And they were focusing on those issues until the issue of individual mandates came to predominate.

The fact that that is still sitting out there and is likely going to go to the Supreme Court has really stopped employers in their tracks. Because of that, they have been less willing to innovate in some of the places where they had really helped lead the healthcare system in the past. I’m talking about health promotion, disease management, transparency of provider measurements—important practices that have come from private-sector employers. Much of the momentum has been slowed by uncertainty.

Cutler: I suppose the best thing for the country would have been if we could have come to some agreement that said this is the path we want to take moving forward. That didn’t happen. And that creates a lot of uncertainty.

I think in some cases, the uncertainty is bad, in the same way that nobody bought electronic medical systems while we were still figuring out the standards for them. But it’s an unavoidable delay.

In some circumstances, the uncertainty helps concentrate people. Because there is genuine uncertainty about which way the system is going to go, people have to think strategically about it. I guess my hope is that some of the political uncertainty can be resolved through a Supreme Court ruling and the 2012 election. From there we can get into just the usual sorts of uncertainty—figuring out how to position yourself for a market that is changing.

Galvin: I like that distinction. I think that the more rapidly we can resolve the political uncertainty, the better. Particularly we need to resolve uncertainty around the mandates, because if you don’t have effective mandates, the viability of workable exchanges is really in trouble.

But even then—say we solved the individual mandate issue and got rid of that uncertainty-- I don’t know a business that thinks healthcare costs are going to decrease, even if reform is effective.

Private employers believe that if hospitals lose a substantial part of their revenues as Medicare repayment rates are cut, they will shift costs to the insurers and the employers. I’ve debated back and forth with economists about whether cost shifting exists, but the private sector believes it does.

Added to that, as 30 million new people gain coverage, adding $100 billion a year to the cost of the system, employers are seeing added uncertainty and thinking the situation of uncontrolled costs is going to get worse, which would lead to a cycle of ever greater Medicare cuts and cost shifting. This is despite projections that reform will help employer costs. There is such a dichotomy between how the architects of the bill and even the CBO project cost growth and how employers are acting at the CFO and CEO level.

Q: With so much difference of opinion about healthcare policy, is there enough rational dialogue going on to get good results?

Cutler: Relative to the scale of public discussion, variation in expert opinion is much more compressed. Bob and I don’t agree on everything, but there’s an enormous amount we do agree upon. And with the exception of a few loonies on either side who get a ton of attention, there’s actually quite a lot of expert agreement.

Galvin: A lot of what was done in the bill is very well thought out, particularly the structural changes to the system. My biggest area of concern is the fact that there weren’t more people who actually are running the companies inside the delivery system involved in reform. There are some who could help take the very good principles that were promulgated and put them through the forge of what happens in the world of real healthcare operations to come out with a policy and plan that I think would have been more operational.

Cutler: I agree, and I kept trying to suggest that to people.

Galvin: It’s tough to do that, particularly when there is so much noise on both sides. The extremes cause problems, and I think this is the perfect example. It creates so much noise and so much tension that you can’t get people who are really willing to listen and find a middle to have a space to do that without being pilloried. And that is very, very troublesome.

Q: How much of that potential consensus could still happen with so much implementation still to come?

Galvin: It depends on what timeframe you want to look at. I think in the short run it’s hard not to be pessimistic. If you look over the long term, some of the structural entities that were put in place—the fact that we’re measuring outcomes through the new organization called the PCORI (Patient Centered Outcome Research Institute) which is a public-private enterprise; the fact that the Centers for Medicare & Medicaid Services have an Innovation center; the fact that we’re moving down the path of having Medicare beginning to pay providers based on performance; that we’re talking about transparency and getting consumers engaged; that there are financial incentives that employers are allowed to use to motivate people to adopt healthier lifestyles—these are all very positive and unprecedented changes in the health sector that over time are going to lead to a much better outcome than we would have had before. So in the long run, I’m optimistic.

Cutler: I think what we’re doing now is we’re trying to get a lot of the infrastructure right. It’s like the steel in a skyscraper. You don’t want to sit there and admire it, but if it’s not done right, the building is going to fall down and it will never look pretty.

Q: Is healthcare different than other parts of the economy? Should it be seen differently than consumer goods or infrastructure?

Galvin: I think we make a big mistake when we don’t think that there are market principles at work and that much of what works in other sectors can work in healthcare—whether that means incentives, consumerism, how information drives improvement etc. On the other hand, we make an equal-sized mistake when we think that health care isn’t also unique and that making a healthcare decision is akin to buying an uncomplicated consumer good. The amount and kind of information a sick individual can have when they’re speaking with a trained physician is just not comparable.

Healthcare is complex and we err when we want to make it simple. Our challenge is to apply the market principles where they ought to be applied and manage them when they oversimplify.

Cutler: I agree with that. I think the either/or doesn’t get it right. It’s also the case that the best industries are always changing, they’re always learning, they’re always doing things differently. We should expect healthcare to do the same thing.

Whatever effort we make to reform healthcare is not going to be a “one and done.” It’s going to be an evolution of a system. One of the things we’re going to have to get good at is monitoring which direction we’re going and figuring out how we’re going to respond in ways that don’t make it seem like World War III both in the markets and in public policy.

Q: Finally, what’s your briefest answer to the huge question of how we lower costs and improve quality?

Cutler: The short answer is, every other big business has figured out how to do it. There isn’t one magic thing. What you do is you focus on the fundamentals. What am I doing that’s right? What am I doing that’s not right? And how do I get rid of what’s not right? What is it that delivers value to people? And if you set up a system that works along the lines of delivering value, that’s what you’ll get.

Galvin: It is as possible to do in healthcare as it is in any other sector. It’s more complicated because you don’t have consumer line of sight into making decisions that keep things competitive and keep prices down. But the top healthcare systems in this country do things better and for less and at a very reasonable increment to GDP growth. The best of these organizations are not cherry-picking the healthy people, so if one can do it, all can do it. Basically if we look at those organizations and see how they do what they do, and then have the patience and the tolerance for the market to create all sorts of different solutions, we can lower costs and improve quality and overall health..

Interview conducted and edited by Ted O’Callahan.