A straightforward change would save money and improve health. So why isn’t Congress talking about it?
William Stanley Jevons, the nineteenth-century English economist, once wrote to a friend that he’d had no special ambition as a young man. He just did what he had to do. After his father went bankrupt in the iron business, in 1848, Jevons reluctantly left London for Sydney, to take a job analyzing the quality of the coinage at the Australian Mint. Somehow, this combination of work, family history, and deep boredom led Jevons to spend his days developing a theory about value, helping to start what is known as the marginal revolution. Before Jevons, economists thought that prices should be based on the cost of making goods. Jevons showed that prices should reflect the degree to which a consumer values a product. The marginal revolution taught a seeming paradox: if industrialists lowered their prices, they could make more money; more people would buy their goods, enabling economies of scale. It was a change in pricing strategy, almost as much as one in technology, that led to mass production and the modern world.
There is one sector of the U.S. economy, however, that is stuck in the pre-Jevons conception of value: health care. The health-care crisis in the United States is in many ways a pricing crisis. Nearly all medical care is paid on a fee-for-service basis, which means that medical providers make more money if they perform more procedures. This is perverse. We don’t want an excess of health-care services, especially unnecessary ones; we want health. But hardly anybody gets paid when we are healthy.
A superior payment model has existed in various corners of the country for a long time. Mark Twain, in recalling his youth in Missouri, described a Dr. Meredith, who “saved my life several times” and charged the families in town twenty-five dollars a year, whether they were sick or well. This is what is now called capitation, an ungainly name for a system in which a medical provider is paid a fixed amount per patient—these days, it is typically upward of ten thousand dollars a year—whether that person needs expensive surgery or just a checkup.
This encourages maintaining health. Geisinger Health System, which is based in Danville, Pennsylvania, has used a capitation model for more than a century. Geisinger has long known that many of its diabetic patients live in areas with an abundance of fast-food places but no supermarkets. Last year, it began providing free, healthy groceries to those patients through a hospital pharmacy. “The results are so spectacular,” David Feinberg, the C.E.O. of Geisinger, told me. The average weight and blood pressure among diabetics fell, and fewer required dialysis or eye surgery, a costly side effect of unchecked diabetes. The cost for the food was two thousand dollars a year per patient. The savings from doing fewer procedures will come to more than twenty-four thousand dollars a year per patient. Similar experiments elsewhere in the country show better outcomes at a lower cost for joint replacement, post-surgical care, and over-all population health.
So why isn’t capitation everywhere? One reason is history. The 1973 Health Maintenance Organization Act took a then obscure model of capitation and mandated it for all large companies that offered health insurance. The law was poorly written, and led to a proliferation of H.M.O.s that failed to cut costs and deprived people of care, putting many off the idea of capitation. The Affordable Care Act, better known as Obamacare, experimented more gingerly with new payment systems. It left fee-for-service largely in place but created the Center for Medicare and Medicaid Innovation, to explore alternative payment systems. The center’s experiments have shown that, in order to assure adequate care, providers must be rewarded based on objective indicators of health—to prevent doctors from profiting by withholding care—and that patient groups must be large enough and diverse enough that treating sick people does not jeopardize the financial health of providers.
Capitation, at its best, both improves health care and cuts costs. David Feinberg estimates that replacing fee-for-service with per-patient payment would cut the nation’s health-care costs in half; others believe that the savings would be closer to ten per cent, which, for an industry that makes up nearly a fifth of the economy, would still mean an enormous savings. Capitation even has bipartisan support. Paul Ryan has called for alternatives to fee-for-service, as have both conservative and liberal think tanks. The left and right continue to argue about who should pay, the government or the private sector, but it is still remarkable that they find anything to agree on.
It’s strange, then, that in the rush to “repeal and replace” the Affordable Care Act the pricing of health-care services has scarcely been mentioned. The health-care bill recently passed by the House of Representatives would transfer money to the rich (in the form of a tax cut) and slash Medicaid, which would lead to an existential crisis for many health-care providers, leaving them in no shape to overturn the way they charge for their services.
If Republicans in Congress read their Jevons, they might appreciate that a properly designed payment system could, with time and good faith, lower costs and government spending while improving the health of Americans. Jevons seemed to anticipate this moment. He wrote that politicians are often asked to lower taxes to “leave the money to fructify in the hands of the people.” But, he reasoned, a short-term postponement of tax cuts could favor a long-term improvement of fiscal health. “Could a minister be found strong and bold enough” to make such common-sense economic policy, he wrote, “he would have an almost unprecedented claim to gratitude and fame.” ♦