In addition to the opportunities for policymakers to actually reduce rather than merely shift health care costs noted in  Don’t Confuse Cost Shifting with Cost Savings  (such as bundled payments for certain episodes of care and value-based payments for prescription drugs), there is a larger trend that also promises to reduce health care costs. However, be forewarned – these cost reductions will also create some disruption along the way. For now, let’s call this trend the down streaming of care.

What is the Down-streaming of Care?

The down streaming of care can be defined as providing care in less resource-intensive settings. Examples of this include the increased use of ambulatory surgical centers and freestanding imaging facilities instead of hospitals, the increased use of home-based health care, and the use of telemedicine to replace office visits. In effect, the down streaming of care is already going on all around us. All we need to do is connect a few disparate pieces of information to better understand the larger trend under way and the implications of this trend.

•      In July, the Centers for Medicare and Medicaid Services (CMS) issued proposed Medicare payment guidelines for 2018. Notably, under the proposed guidelines Medicare would start paying for total knee replacements on an outpatient basis and would cover knee replacements performed at ambulatory surgical centers as well as hospitals CMS also noted that it was considering a similar change to hip replacement surgeries. This could be huge – according to the author’s estimates, there are 450,000 knee replacements and 200,000 hip replacements performed annually on Americans over age 65.

And, it is not just the federal government. Anthem BlueCross BlueShield recently announced that requests for certain imaging procedures (specific MRIs and CT scans) would be subject to additional review if the provider requests that the procedure occurs in a hospital (rather than a freestanding imaging center) and that providers will be required to indicate the medical necessity for use of the hospital.

•      The delivery of various types of health care in the home continues to grow. Moreover, there is a broad consensus that the demand for home-based care will grow substantially; this reflects the fact that patients and families prefer care at home and a recognition that the home represents a cost-efficient setting for care. (See, for example, Workshop on the Future of Home Health Care). Consistent with this anticipated growth, Northwestern University’s Feinberg School of Medicine recently announced a new program that will train doctors on how to provide home-based primary care.

•      The rapid growth of telemedicine has been extensively documented and the legal and regulatory environment has become increasingly receptive to the growth of telemedicine. For example, the Department of Veterans Affairs has announced a series of initiatives that will increase veterans’ access to telemedicine. And Texas recently enacted a law that is seen as a major step on the way to expanding the use of telemedicine by eliminating the requirement that that physician-patient relationship must first be established with an in-person visit.

Each of these individual trends contributes to the larger trend – the overall down streaming of care.

What are the Implications of Downstreaming Care?

The down streaming of care reduces costs because care is provided in a setting that is less resource intensive. For example, an ambulatory surgical center simply does not need all of the facilities, infrastructure and ancillary services of an acute care hospital. This less resource-intensive setting does not mean a poorer quality of care; rather, it is simply a business model based on lower overhead and a greater focus on offering a more specific, narrower set of services. In addition to lower costs, the down streaming of health care is meeting consumer demand in other ways, such as moving the delivery of services closer to (or actually in) the consumer’s home.

But the down streaming of health care does come at a cost. Even without the growth of down streaming, advances in treatment have been reducing the need for traditional resource-intensive care providers. Hospital admissions and lengths of stay have been falling for years; indeed, the number of hospital beds in the U.S. dropped by 37% between 1975 and 2013. The growth of down streaming will increase the pressure on more traditional resource-intensive providers and we can expect more hospital and nursing home closures in the years to come. And, favorable demographics (such as the aging of the baby boom or overall increases in the U.S. population) won’t be enough to reverse the trend.

Downstreaming and Creative Destruction

Economists recognize that the free market has a messy way of delivering progress – referring to this as “creative destruction.” It looks like the down streaming of care is poised to deliver creative new solutions for the American healthcare system – but with a fair amount of destruction along the way.