BusinessHealth Reform

The Global Budget in Your Future

3 Mins read

There were two announcements last week that I hope you paid attention to:

There were two announcements last week that I hope you paid attention to:

  • The American Medical Group Association, representing medical groups that provide care for roughly 1 in 3 Americans, said that 90% of its members would not participate in the new Accountable Care Organization (ACO) model the Obama administration wants to impose on Medicare providers.
  • Secretary of Health and Human Services Kathleen Sebelius, exercising new powers conferred upon her by health reform (ObamaCare), said insurers would have to justify any rate increases greater than 10%.

So what does one announcement have to do with the other? A lot. I’ll connect the dots below the fold.

Here’s the bottom line. The administration uses the rhetoric of choice and competition and some isolated souls within it may actually think competitive pressures can reduce health care costs. But if that doesn’t work out, it’s goodbye to volunteerism and hello to another way of constraining costs: global budgets.


If it don’t work out
Then you can tell me goodbye


The core of Obama administration health reform is managed competition, instituted through a health insurance exchange. In embracing this reform, the administration is following the lead of Mitt Romney in Massachusetts and before that Hillary Clinton’s failed attempt in 1993/94. But the idea really harks back to a book written by Stanford professor Alain Enthoven in the early 1980s. Enthoven argued that the entire health care system should be patterned after the Federal Employees Health Benefits system. (See a brief history and analysis.)

Here’s the difference. Enthoven believed (and still does believe) that competition in health insurance can actually work. Mitt Romney believed that as well. Maybe Hillary Clinton did too. But almost no one in the Obama administration believes that. When is the last time you heard any federal official praising the virtues of a competitive market for any good or service?

For Obama, the purpose of the health insurance exchange is not to bring needed competition to an imperfectly competitive market. The purpose is to exert control over the industry. If you believe in competition, then you want lots of competitors. But the administration is imposing rules and regulations that are driving insurers from the market, as we have previously reported here, here and here. In fact, some careful observers believe that by the time the exchanges become operational (in 2014) there will be only one or two insurers left in most markets.

This same attitude is reflected in the administration’s approach to ACOs. The original idea was that providers of care would be encouraged to compete on value, not just on the quantity of services they provide. Those that succeed in producing higher-quality care for lower costs would be rewarded with higher profits. Or at least that’s what everyone thought until the administration produced its 200-page book of rules that ACOs will be governed by.

Among the organizations balking at the administration’s top-down, regulatory approach are the Mayo Clinic, the Cleveland Clinic, Intermountain Healthcare in Utah, Geisinger Health System in Pennsylvania and others viewed as the vanguard for accountable care. These include organizations President Obama has singled out as exemplary examples of high quality care!

As in the health insurance industry, the Obama administration is taking actions that are forcing consolidation among the providers of care. (See our previous reports here and here.) Again, if competition were good, you would want lots of competitors. But if regulation is the goal, consolidation makes regulation easier. No government entity can effectively regulate the medical practice of 800,000 independent doctors. The regulatory approach almost requires doctors and hospitals to be merged into a few organizations.

So if competition is not the vehicle for controlling costs, what is? Global budgets. ObamaCare will force health plans to provide a nonnegotiable package of benefits, but will hold premiums at a level that will make it impossible to meet the full demand for that care. Instead, costs will be controlled by squeezing provider incomes and delaying access to care — just as it is in other countries.

When I attended a conference on ACOs at the Brookings Institution last fall, I was surprised by how many people took for granted that rationing through global budgets was necessary and inevitable. Everybody there seemed to know something I didn’t know. At least everybody else seemed to take the Obama administration’s rhetoric with a grain of salt.


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