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ObamaCare’s Failing Cost Control

The law’s ‘accountable care’ experiment is a bust so far.

The Symbol of ObamaCare

The Symbol of ObamaCare

by Editorial Board   •   Wall Street Journal

A major claim of ObamaCare’s political salesmen is that it will reduce U.S. health spending. The heart of this claim is the Accountable Care Organization, or ACO, but already evidence is accumulating that it isn’t working.

That’s the news in the recent Health and Human Services release of the results from the first two years of ACO experience under the Affordable Care Act. The much-delayed data received zero media notice despite a speech from HHS Secretary Sylvia Mathews Burwell citing “evidence that we have bent the cost curve.” The data show the opposite.

ACOs were supposed to be a new paradigm for health care, with hospitals, primary care physicians and specialists working in teams to be more efficient and coordinate patient treatment across providers. In 2011 HHS introduced this business model as a new federal regulation, so providers that reduce spending according to a formula are paid a bonus that is a portion of the savings. If participants boost spending over this benchmark, they pay a penalty.

The Medicare “Pioneer” ACO project originally featured 32 experienced health systems hand-selected by HHS because they had already made progress toward the ACO model. Thirteen—or one-third of the program—have since dropped out as they spent more than the old status quo.

In year one, spending increased at 14 sites and only 13 of the 32 qualified for a bonus. In year two, spending increased at six of the remaining 23 and 11 received a bonus. Spending did fall somewhat overall, driven by a few high-performance successes. After netting out the bonuses and penalties, the Pioneer ACOs saved taxpayers a grand total of $17.89 million in 2012 and $43.36 million in 2013. All in, per capita spending was a mere 0.45% lower compared to ordinary fee for service Medicare.

Yet the upfront start-up investments for the pioneers (in administration, compliance and information technology) ran to $64 million, so at best the program is a wash. More to the point, the Medicare budget for 2013 was about $583 billion and these are supposed to be the most experienced providers. If most of them can’t succeed, what about the community hospitals that need the most improvement?

HHS runs a second ACO pilot for everybody else, with rewards but no penalties, called the Shared Savings program. Among those 114 ACOs, only 29 hit HHS’s financial targets in 2012. They saved $128 million and were paid $126 million in bonuses. In 2013, only 64 of 243 participants hit the targets.

Liberals are celebrating these disappointments as a victory for experimentation and “learning” about health-care delivery, but they haven’t learned anything. ACOs are failing because HHS’s regulations are a classic case of counterproductive and arbitrary central planning: The government is paying hospital groups to generate slightly lower bills. As the quitters may have discovered, it is more remunerative to stay with the old system, with higher hospital bills but no bonuses.

In particular, HHS also refused to involve seniors or give them any reason to choose ACOs over other providers. An inscrutable Medicare algorithm called a “prospective-retrospective attribution model” assigns patients to an ACO, even if they later leave the group or seek additional care from outside providers.

So patients often never know they are being treated by a given ACO and spending is then attributed (or not) that the ACO was or was not responsible for. Such turnover, or “leakage,” runs as high as 40% annually. Since the ACOs cannot accurately know which patients belong to their organization, they cannot understand how they are performing in real time or the standards to which they will eventually be held.

Notably, the integrated health systems that ACOs are supposed to recreate—Mayo Clinic, Geisinger, Kaiser Permanente and the rest—refused to become pioneers when the ACO regulations first appeared. HHS is now revising those regulations for next year. In comments to the agency this year, Mayo wrote that both ACO programs “are still too complex in their structure and requirements. They are excessively detailed and restrictive in ways that have significantly limited the number of interested groups.”

A better alternative would give patients the incentive and usable information about prices and value a la Paul Ryan’s defined-contribution Medicare reform. Doctors and hospitals will quickly adapt to compete for their business. That might mean ACOs or something else.

Mandating a new industry business model through the Federal Register was never likely to amount to much, however well meaning. But the rolling collapse of this ObamaCare ambition is more troubling for what it says about the future of U.S. health care.

If the ACO goes the way of every other previous HHS adventure in false omniscience, government planners will invariably turn to rationing care. Their main tool will be the Independent Payment Advisory Board, a 15-member committee of experts whose decisions are insulated from political oversight. Under ObamaCare, medicine will always be accountable to government, not patients.