Covid Stimulus Spending Should Aim to Improve Health-Care Value

(Bloomberg Opinion) -- As policy makers debate the next round of Covid-related government assistance, a bipartisan group of former government officials is proposing to spend $50 billion to support the health-care sector, but with a catch. Hospitals and doctors get the money only if they accelerate the shift away from fee-for-service payment. The goal, which has proven elusive in most alternative payment models thus far, is to achieve a better match between cost and quality.

Some further funding for health-care providers is clearly warranted. The pandemic has put enormous pressure on hospitals and doctors, and not only from the virus itself. Many discretionary medical procedures have been put on hold by a combination of government mandate and consumer fear — and, as a result, health-care revenue and employment have declined sharply. From February to July, the health-care sector lost about 800,000 jobs. Primary-care doctors have seen patient volume cut in half, by some estimates, and the American Hospital Association reports that hospitals and health systems have seen inpatient volumes decline by a fifth and outpatient volumes by a third.

Hospitals and doctors with payments tied to volume — those paid under fee-for-service models — have particularly suffered from these declines. Those paid under value-based models, on the other hand, have not only weathered the storm better but also demonstrated the flexibility and innovation needed during an unexpected crisis. The former government officials who are pushing for value-based payments, including two former Senate majority leaders (Tom Daschle and Bill Frist) and two former Food and Drug Administration commissioners (Scott Gottlieb and Mark McClellan), argue:

The pandemic has brought into sharp relief the mismatch between what patients need and how health care providers are paid. Providers reimbursed using fee-for-service (FFS) have seen major reductions in revenues … [and] the loss in revenues for visits, procedures, and other “elective” services has complicated their ability to fully respond to the pandemic. In addition, FFS providers have had to rely on rule and payment changes to move forward with such innovations, such as Medicare’s emergency payment expansions for telehealth and additional sites of service.

Conversely, providers and health systems who participate in value-based payment … have been more financially stable, particularly those in advanced alternative payment models who receive upfront, ongoing payments not tied to FFS. Practices receiving these payments have used them to build a wide range of capabilities that are not well supported under FFS but are especially important during the pandemic.

The group therefore proposes that Congress provide $50 billion in assistance for the health sector, but condition this on further electronic data sharing; participation in state and local public health initiatives; and, most important, moving at least 20 percentage points more revenue (from 15% to 35%, say) toward value-based payment models by the end of 2023.

A shift away from paying for health care based on volume could improve health-care value in the U.S. To see how this works, consider the research showing how Medicare spending rises when beneficiaries move from lower-spending areas of the country to higher-spending ones, and falls when people move in the opposite direction. This wouldn’t make sense if the differences between regions were based on patient health rather than the way medicine is practiced.

A new study from the Health Care Cost Institute in Washington has found a similar dynamic for employer-sponsored insurance: When a beneficiary moves to an area with 10% higher health-care spending, that person’s spending rises 4%. The change is caused by differences in both price and utilization of services. Moving to an area with 10% higher health-care prices raises spending by 5%, and moving to an area with 10% higher health-care utilization (which may not be a place with higher prices) raises spending by 4%.

This suggests that variation in health-care spending is not tied to patient health — and that bodes well for bringing spending under control. The question is whether value-based payment models can capture that opportunity. To date, the results with these new models have been mostly disappointing — cost savings overall have been more modest than expected.

However, proponents of value-based models argue convincingly that any disappointments reflect the weak incentives that are built into most current variants: They typically provide carrots for good performance but no sticks for bad performance. What’s needed, then, is not to drop the approach but rather to double down on it. The former officials advocating the new spending embrace this approach: They propose tying the additional federal money to rigorous payment models that incorporate the stick component — even as some providers argue for such approaches to be suspended during the pandemic.

As I asked in a previous column, “If we’re going to spend trillions of dollars, how can we try to invest in the future economy rather than prop up the past?” This new health-care proposal is a good answer: Spend federal dollars to invest in the future, not to prop up the past.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Peter R. Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.

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