Reforming Payments to Healthcare Providers: The Key to Slowing Healthcare Cost Growth While Improving Quality?

Mark B. McClellan

The seemingly intractable debate about how to slow the growth of healthcare costs in the United States and elsewhere has traditionally boiled down to efforts to limit practices and quantities directly. In public healthcare programs, the focus in the United States is often on tighter price regulation. For example, the Balanced Budget Act of 1997 achieved most of its savings by reducing the growth of regulated prices in Medicare for physicians, hospitals, and most other healthcare providers. The Affordable Care Act of 2010 also achieved most of its “scored” budgetary savings (which were used as a partial offset for the costs of coverage expansions) through reducing Medicare price growth (Elmendorf, 2010). An often-discussed alternative is to regulate the quanitity of care by using available evidence on benefits, and potentially also costs, to restrict use of costly treatments through coverage restrictions or denials.

These blunt instruments of price limits and quantity regulation can affect specific types of costs in the short term. But over time, attempts to regulate prices have not been a solution to rising healthcare costs, either because the tight price regulations have been repealed or delayed due to provider opposition and concerns about access, or because changes in the mix of services provided overwhelmed any effect of lower prices for individual services. Other countries have more aggressively limited quantities based on technology evaluations of the value of care (for an overview of the British approach, see National Institute for Health Research webpage: But global restrictions on access to treatments have not been acceptable to the American public, especially if they are based on cost, and they appear to be a source of increasing concern in other countries as well (for example, Timmins, 2010). Maybe more importantly, the blunt instruments of price and quantity regulation discourage flexibility needed for a type of health care innovation with great potential: the trend toward “personalized” medicine – that is, health care that does much more to take individual clinical and genetic characteristics, as well as preferences, explicitly into account to achieve better outcomes while avoiding low-value treatments.

Read the full article at the Journal for Economic Perspectives »