A Framework for Medicare Reform

Studies | Health

No. 315
Friday, September 12, 2008
by John C. Goodman


Short-Term Reform: Supply-Side Changes

Doctors participating in Medicare today must practice medicine under an outmoded, wasteful payment system. Typically, they receive no financial reward for talking to patients by telephone, communicating by e-mail, teaching patients how to manage their own care or helping them be better consumers in the market for drugs. Medicare pays by task, and these are not reimbursable activities. So doctors who help patients in these ways are taking away from billable uses of their time.17

In fact, physicians who help patients in these ways may end up with less payment from Medicare. To make matters worse, as Medicare suppresses reimbursement fees, doctors are increasingly unable to perform any task that is inadequately reimbursed. Other health care providers face the same perverse incentives. All too often, high-cost, low-quality care is reimbursed at a higher rate than the alternative, and Medicare’s payment rules get in the way of providers working together to improve health care.18

How can we produce high-quality care for a cost that is well below the price we are paying today? Fortunately, we do not have to speculate. There are hundreds of examples of efficient, high-quality care, and many of them have been studied and described in the academic literature. For example, studies by researchers at the Dartmouth Institute for Health Policy and Clinical Practice imply that if everyone in America went to the Mayo Clinic for health care, the nation could reduce its annual health care bill by one-fourth.19 If everyone went to Intermountain Healthcare in Salt Lake City, the nation could reduce its health care spending by one-third.20 Studies by Dartmouth21 and the National Center for Policy Analysis22 imply that if every region of the country practiced medicine the way the most “efficient” or low cost regions do, we could cut Medicare spending by one-third to one-fourth of its current level.

How do we get from here to there? Here are two practical examples of what would be involved.

Case Study: Geisinger Health System in Central Pennsylvania.23 Geisinger provides a useful example. It offers a 90-day warranty on heart surgery, similar to the type of warranties found in consumer product markets. If the patient returns with complications during that period, Geisinger promises to provide treatment without sending the patient or the insurer another bill.

Unfortunately, Geisinger incurs financial losses under this practice, even as it saves money for Medicare overall. This is because health care organizations like Geisinger are paid more when patients have complications that lead to more visits, more tests and more re-admissions. (Most hospitals make money on their mistakes!) What is needed is a willingness to pay for such guarantees. Medicare should be willing to pay more for the initial surgery if taxpayers save money overall.

Case Study: Virginia Mason Medical Center in Seattle.24 In another innovative example, Virginia Mason offers a new approach to the treatment of back pain, a source of considerable medical spending nationwide. Under the old system, a patient would often first receive an MRI scan or specialty consultation and other tests before referral to a physical therapist. Under the new system — which cuts the cost of treatment in half — patients are first seen by a physical therapist unless additional diagnostic measures are clearly indicated, and receive an MRI scan only if the therapy doesn’t work and symptoms persist.

The new system improves efficiency and saves money for payers but leaves the providers financially worse off. As in the case of Geisinger, Medicare should permit a new payment arrangement — one that is win-win for Medicare and Virginia Mason.

New Payment Opportunities. Medicare providers should be reimbursed more efficiently. We should be willing to reward doctors who raise quality and lower costs — who improve patient access to care, improve communication and teach patients how to be better managers of their own care. Providers do not need pay-for-performance; rather, performance for pay — with ideas and proposals coming from the supply side of the market (which is more knowledgeable about potential improvements than the demand side).

Any provider should be able to propose and obtain a different reimbursement arrangement, provided that (1) the total cost to government does not increase, (2) patient quality of care does not decrease and (3) the provider proposes a method of measuring and assuring that (1) and (2) have been satisfied.

Evaluating Proposals. In evaluating proposals, the Centers for Medicare and Medicaid Services (CMS) needs to depart from current procedures in four important ways. First, providers should not be “at risk” for the system-wide costs they propose to lower. For example, better diabetic care initiated by pharmacists in Asheville, N.C., apparently reduced physician visits and episodes of emergency room care.25 Yet the costs the pharmacists reduced are costs they do not control. Services provided by walk-in clinics in shopping malls may also lower physician and emergency room visits. But these costs are also not under the control of the clinic.

Second, approvals should be granted based on reasonable expectations that costs will be lowered and quality increased. For example, there are dozens of case studies documenting higher-than-average quality and lower-than-average cost. A provider who makes a prima facie case that he intends to replicate the standard operating procedures used in these case studies should be presumed to be successful.

Third, the CMS should view these arrangements as venture capital investments —understanding at the outset that many ventures will not be successful.

Finally, the goal of these arrangements is not to save as much money as possible for the CMS. The goal is to encourage a competitive market on the provider side — in which every doctor and every facility is encouraged to continuously search for ways to rebundle and reprice medical services in quality-enhancing, cost-reducing ways.

Once one hospital or doctor group implements an arrangement with better payment for better results, there will be competitive pressures on other providers to find new and innovative ways of raising quality and lowering costs. Plus, once Medicare takes these steps, private insurers can adopt similar payment systems more easily. Medicare and the private sector will be pushing in the same direction, for better care — not just more services.

Rescinding Contracts. After some reasonable period of time (agreed to in advance) the CMS must make a reasonable determination about the success of the agreement. If there is clear evidence of failure, the contract should be ended. If the new system shows clear evidence of success, the contract should be extended. If the evidence is mixed, the provider might be put on notice that the contractual arrangement is in jeopardy.

Streamlined Approvals. For the reform to be workable, the transactions must be easy to negotiate and consummate. Paperwork and time delays are the enemy of entrepreneurship. However, given a willing Medicare administration, the process of reform should not take long. There are already low-cost, high-quality pockets of excellence just waiting to be replicated.

Relaxation of the Stark Restrictions. Another essential ingredient is allowing doctors and facilities to work together as a team — making needed improvements and profiting from those improvements. To facilitate this change, we must repeal or relax regulations that prohibit profitable provider arrangements, including the so-called Stark laws.


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