HCI3 Update from the Field: Medical Cost Deflation

Submitted by francois.debrantes@hci3.org on Friday, May 10, 2013 - 01:11

Newtown, CT – May 10, 2013

It appears as if we should get ready for a period of medical cost deflation, and to continue to fuel it – Several papers, summed up in a recent blog, show that the slowdown in health care spending is caused by factors other than just the modest economic growth of the past decade. This is a point that we've argued for a while, against the then conventional wisdom, and it was based on a very simple economic principle: households cannot spend more than they earn for very long. And with household incomes declining over the past decade, it was predictable that the ability to pay for increased premiums would stop, and generate ripple effects to be felt for a while. The most recent ripple is the continued, sustained, and widening call for pricing transparency. Consumers, who have shaped every other industry, are reshaping health care. This week, CMS did what it should have done long ago: it released the price it pays hospitals for a Medicare beneficiary's hospitalization (albeit just the portion paid to the hospital, not the accompanying physician and other professional services), as well as the "charges" claimed by those same hospitals. This disclosure will generate more ripples. Researchers will analyze the discrepancy between charges and paid amounts. They'll wonder why the ratio between the two varies so much within a same hospital when the base cost for each stay paid by CMS is the same (the famed conversion factor). That, plus the recent paper by Cutler, Chernew, and colleagues might cause CMS to finally revamp the now outdated and deeply flawed DRG payment system. After all, if hospitals believe that the "cost" of certain procedures is more or less proportionally related to the DRG payment, then why should Medicare continue to have a single conversion factor? It really makes no sense anymore. And other researchers might start looking at the complete lack of relationship between the static Medicare payment for hospitals, the irrational charges, and the wide variation in quality. As Leah Binder argues, some of the safer hospitals in the nation actually have lower charges.

What this means to you – Ripples can become tremors and tremors can become quakes. And we're close to a series of quakes. While it's really impossible to determine what will happen after the quakes, we need to press on, making more ripples, helping them turn into tremors. How? First, keep pushing for pricing and quality transparency. It's the most powerful weapon to transform industries. Second, continue to use smart benefit designs to help consumer-patients seek out care from high-quality and affordable physicians and hospitals. We need to make sure that those who truly transform themselves into high-value providers get rewarded for their efforts. Third, stop rewarding bad behaviors. Review all your health plan contracts, ask to review their contracts with providers, and make sure that the silly payment mechanisms that have caused the misery of so many cease. And watch the tremors turn into quakes. It's going to be a bumpy ride, but the destination is worth it, because we need medical cost deflation to relieve the current unfair burden on American families.


Francois de Brantes
Executive Director
Health Care Incentives Improvement Institute, Inc.
w: www.hci3.org