By Francis M. Miller

“However beautiful the strategy, you should occasionally look at the results.” – Winston Churchill

In April the Affordable Care Act celebrated its fifth anniversary. We have arrived at an observation point where we can see if the law has produced the desired results.

Francis M. Miller

My thinking has been informed by a May 7, 2015 article in the New England Journal of Medicine based on a report from The Commonwealth Fund by David Blumenthal, M. Abrams and R. Nuzum. It is titled, “The Affordable Care Act at 5 Years.” Blumenthal and colleagues began by summarizing the two major goals of the ACA: to extend access to the uninsured and to reform the delivery of health services.

In hyping the benefits of the law, it was said that Obamacare would also lead to a reduction in health care costs and a moderation of the hyperinflation that has plagued the health sector for over 50 years. After all, that hyperinflation has been increasing costs that are responsible for health insurance becoming out of reach of the working poor and elderly.

The “Affordable” in the ACA has been achieved using a carrot and stick approach. The carrot is a combination of subsidies and the expansion of Medicaid. The stick mandates enrollment and levies fines for non-compliance. According to Blumenthal, et al, the law has touched nearly 30 million people in one way or another. Declines in the uninsured attributable to implementation of the ACA are more modest and range between 7 million and 16.4 million out of the original estimates of between 50 million and 70 million uninsured. Regardless, the Commonwealth Fund gave the ACA a passing grade.

Beyond improving access, the ACA’s legislative intent was to reshape the American health care delivery system by shifting it from a volume-based, fee-for-service system to one based on paying for value. This is really the second major attempt to do this. During the Reagan Administration in the 1980s, legislation was enacted using budget reconciliation (OMBRA) to usher in an era of prospective payment fee schedules and diagnostic related groups (DRGs). That law also intensified emphasis on managed care in general and HMOs in particular.

Thirty years ago, the political establishment thought it had a beautiful strategy. We now know it did not produce the desired results. Health care during the period jumped from around 8 percent of GDP to 17 percent. Today HMOs are the most expensive form of insurance. If anything, OMBRA paved the way for the wholesale conversion of nonprofit hospitals to investor ownership, and a consolidation of the insurance companies into a seven company oligopoly.

I am chagrined at the current attempts to coin a currency by introducing a new vocabulary such as accountable care organizations (ACOs) and bundled, value-based pricing. Payers, led by the federal government are positioning themselves to offer incentives hoping providers will become more efficient. The unstated goal is to nullify providers’ continual attempts to game the reimbursement system by raising utilization as prices are ratcheted down. What leads us to believe this will work any better than what we tried before?

While health care pricing seems complex, it is really not rocket science when compared to other businesses. The average Home Depot store has over 25,000 different items. The number of products and services available at Park Meadows Mall in Lone Tree, Colorado exceeds 100,000. Every day Wal-Mart’s warehouses and trucks deliver millions of items to stores just in time to stock the shelves for sale. The business of business is to take risks and organize the marketplace. Raw materials to one party are finished goods to another. Implicit in the profit-making process is that the supplier takes a risk and the customer pays a premium for high quality services. If Dillard’s makes a mistake buying the wrong items, it will be forced to mark them down. Too many mistakes by a supplier will lead to market discipline forcing an exit from the market.

If we put health care under a microscope, the shifting of risk from insurer to provider is ever-present and it fluctuates over time. Insurance companies hate to admit it, but they have only been modestly successful in negotiating discounted fees. Providers have just increased the intensity and volume of services.

The fundamental problem is that most hospitals have a franchised monopoly in their service areas. They have the capacity to push back. Large payers and insurers are at wit’s end and are now being forced to try the not-so-novel approach of incentives. Will it work?

Based on history, I predict any gains will be fleeting and illusory.

The problem is that only hospitals seem capable of reorganizing the market in a top-down, command-and-control approach. But, over the past few years the hierarchical structure of the provider delivery systems has transformed them into networked organizations. Hospitals still represent the lion’s share of total costs. They have high revenue requirements because of their fixed costs, and it is this fixed cost structure that prevents savings in niche areas from reducing overall average costs.

Thus insurance premiums will not be reduced. To achieve the desired results, you would have to eliminate the least efficient providers and scale up the most efficient.

My sense is that the hospitals have no choice but to appear willing to create ACOs. But, they will wait and see if the incentives are strong enough to make all the effort worthwhile. If it turns out to be just another passing fad, they will give it short shrift. They have sabotaged previous efforts to measure quality or make prices more transparent.

What is really missing from this grand scheme, of course, is that the patients on the demand side are not being incentivized. Shouldn’t the patient become an informed consumer?

All competitive markets rely on consumers exercising their self-maximizing interests. The variation in costs and quality among providers creates a major opportunity for the consumer to shift his business to more efficient, higher quality providers, thereby saving money. Such savings do not have to trickle down from hospital to insurer, but can be pocketed immediately as the consumer meets his deductible.

In such a consumer-empowered market, providers will be forced to alter their scale and economies to deal with decreased revenues and volume. Inefficient, undisciplined providers will be punished, and not by being admonished with a slap on the hand. A shrinking bottom line in the new world of for-profit hospitals represents a real threat to survival. Poor performance leads to a denial of access to capital and the eventual liquidation of the organizations.

The fly in the ointment is that a ruthlessly, self-maximizing consumer is contrary to the financial interests of providers who are beasts that must eat continuously. They are caterpillars, not butterflies. But, I argue strongly that without incentives, consumers will never change their behavior. They will just milk their benefit plans. And, the quest for the Holy Grail of cost reductions will never be attained using the crude devices of either negotiated fee schedules or accountable care organizations. These are the blunt tools of the politician and social engineer. They only inflict blunt force trauma on the market. The situation demands far more finesse.

Obamacare does not deserve a passing grade for socializing risk by forcing young people to be duped into allowing their incomes to be taxed to pay for Medicare, Medicaid, the VA and Obamacare subsidies. Policymakers have violated the 10 commandments of insurance, which combine similar risks in a risk pool. Putting older people with serious health problems into the risk pool of young individuals and families has turned Obamacare into a covert means of taxation. Even Chief Justice John Roberts on the Supreme Court saw the ACA for what it really is.

What we stubbornly refuse to accept is that the uninsured have been barred from the market by rising costs that make affordable high quality health care out of reach. Inflation becomes the disciplining force. I give the Affordable Care Act an F for its lack of imagination or innovation. Its authors simply do not understand the economic hydraulics that allow competitive markets to deliver high quality, low-cost health services.

We all know the current path is unsustainable. We are merely marking time waiting for a “big event” or a “perfect storm” to alter the course of history. Maybe it will be a pandemic or some earth-shattering medical treatment breakthrough. The exact nature and timing of such events are impossible to predict. Business as usual will not get us where we want to go.

To echo Churchill, beautiful strategies do not necessarily produce results.

Francis M. Miller is the past president of the Colorado Business Coalition for Health and the vice chairman of the Colorado Health Data Commission. He founded the first consumer cooperative for health care called the Alliance and is the current president of Health Smart Co-op. He blogs on www.thethoughtczar.com.