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The Best Argument Against the Public Option -- and the Counterargument

Jane Hamsher has a quick roundup of the prospects for a public option being amended to the Finance Committee's bill. As she says, the proposal to watch is Chuck Schumer's "level playing field" proposal.

But should it be? The relevant question for the public plan is whether it can use Medicare's payment rates. Put simply, Medicare uses its massive size to negotiate deep discounts for medical services. Private insurers pay quite a bit more. If the public plan could use Medicare's rates, it would save the government a lot of money -- the CBO estimates $110 billion over 10 years -- and consumers even more. Its low premiums and generous benefits would attract a lot of customers, giving the public plan and Medicare even more bargaining power.

If it can't use Medicare's rates, it's unlikely to save very much money or be a particularly dominant player in the marketplace. But many see that as a feature, not a bug.

The thoughtful, wonkish argument against the strong public plan is that Medicare underpays for services. If those payment rates spread throughout the system, the system would collapse. The saving grace right now is the private insurance industry, which pays more to make up for the fact that Medicare pays less. Want a graph? Of course you do.

medicarecost.gif

There are two ways of understanding that graph. The first is that it condemns Medicare's payment rates. The second is that it condemns the private insurance industry's payment rates. Put simply, does Medicare pay too little, or does private insurance pay too much?

Dr. Glenn Hackbarth was chief executive and one of the founders of Harvard Vanguard Medical Associates, a multi-specialty group practice in Boston. He also served as senior vice president of Harvard Community Health Plan and president of its Health Centers Division, as well as Washington counsel of the legendary Intermountain Health Care. He's been, in other words, associated with some of the most impressive and innovative health-care providers in the country. Currently, he serves as the chairman of MedPAC.

On March 17, Hackbarth testified before the House Ways and Means Committee on the adequacy of Medicare's payments. MedPAC, he explained, ran a study identifying a variety of low-cost hospitals "that consistently out-perform other hospitals on a series of quality measures, including mortality and re-admissions." Among this set of hospitals, Medicare's payments covered their costs. Here's their table:

Thumbnail image for efficienthospitals.jpg

You can look at the graph above and conclude that the health-care system can't function without the heavy spending of private insurers. Or you can look at the table above and conclude that the prices paid by private insurers are permitting a level of inefficiency and wasteful spending that Medicare's prices wouldn't allow. As analogy, an insurance industry executive and a schoolteacher spend differently. But they spend differently because they make different amounts of money, not because the schoolteacher spends "too little." So too with Medicare and the health-care system. If hospitals had to subsist on less revenue, they'd find ways to spend less money.

In health-care reform, you can believe one of two things: Either we're spending too much and the system is eventually going to have to make do with less, or we're not spending too much and the system can hold fast to its present practices. But you can't say we're spending too much but the system can't ever be asked to subsist on less. That's what cost control is, after all: policies that mean the system will spend less money than it would like to.

A final disclaimer: There are problems with Medicare's reimbursement rates. It pays too little for primary care. It's got too many incentives for specialty care. There's an issue with reimbursement for rural hospitals that I have to explore more fully before I comment on it. And there are other problems too, just as there are in private insurance. This post is about total levels of spending, not the infallibility of any particular scheme.

By Ezra Klein  |  September 25, 2009; 4:18 PM ET
Categories:  Health Reform  
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Next: The Republican Pretext

Comments

Ezra,

You've got a lot wrong here.

When the top 10% of hospitals are barely breaking even, that's a problem with reimbursement. There simply isn't any other way of interpreting that data. No industry works under that type of model. An adequately paying system would have the middle breaking even, the top 10-25% making sufficient money so that they could expand their business, and the bottom 25% losing money so they'll go out of business/be bought by the top performers.

"In health-care reform, you can believe one of two things: Either we're spending too much and the system is eventually going to have to make do with less, or we're not spending too much and the system can hold fast to its present practices. But you can't say we're spending too much but the system can't ever be asked to subsist on less. That's what cost control is, after all: policies that mean the system will spend less money than it would like to."

No, that's the wrong question. In cost control you've got choices-- target price inflation or utilization inflation. The data is unquestionably the latter. Your solution with the public option is the former. Medicare has shown zero-- zero-- ability to address utilization, the actual cost growth driver. That's the best argument for not pursuing a public option. At the end of the day, even with Medicare having a tremendous monopsony purchasing advantage, there is little difference in the cost growth compared to private insurers. Its because lowering prices has minimal impact, as its gets eaten every year in growing utilization. Wrong solution for the rightly identified problem.

Posted by: wisewon | September 25, 2009 4:35 PM | Report abuse

I think I remeber hearing that the coordinated care pact (or whatever its called) in Grand Junction, Colorado, (often held up as a model) charges Medicare rates for all patients. So it can be done. I would think the administrative cost savings from not having to deal with a forest of different rates would be considerable. Of course, if instead of the Grand Juntion model, you are using the McAllen, TX model (patients as profit centers) this would not work for you.

At the risk of a sexism accusation, I wonder if the sharp increase in the percentage of doctors who are female will eventually make it easier to start moving the cost curve down. I would posit that a higher percentage of female doctors would be willing to work in a salaried practice as a trade off for being able to have some type of family life along with their profession, rather than seeing their ability to generate as many $ as possible as a measure of their worth as a physician.

Posted by: exgovgirl | September 25, 2009 4:36 PM | Report abuse

According to Atul Gawande's article in the New Yorkerthere is efficient private and semi-private care and wasteful Medicare-funded care. It really has to do with the ethos of the medical community. Ineffective care can be ordered under Medicare or insurance care (in fact, more of it has to be ordered from Medicare by the profit-motivated doctor to make up for the lower reimbirsement rates). The efficiencies are in the administrative end as well as the reimbursement end, aren't they?

As you are fond of saying, there is no silver bullet in cost containment, and theri are costs to be wrung from insurers and from providers and from administration.

Posted by: Mimikatz | September 25, 2009 4:41 PM | Report abuse

Don't forget that hospitals also provide free service to those that are uninsured. It is the private insurance that ends up covering the cost. But once everyone is insured, that goes away, meaning hospitals can afford to charge less.

Posted by: ImMark | September 25, 2009 4:49 PM | Report abuse

Ezra, Most Doctors like the Public Plan.
http://www.huffingtonpost.com/2009/09/14/majority-of-doctors-back_n_286352.html

I think they factor in the high cost of doing business with private insurers who are 'incentivised' not to pay. The logic of the insurance system bends toward shareholder profit, not toward better care. So, while there's money gushing in, its being wasted all over the place and on top of that there's this premium for the shareholders and management to take away. It seems to be an enormous sum according to your chart and the performance of well-run non-profits. Also, for what seems to be a doctor's (private-practioner) perspective, see this testimony from the comment section of the HuffingtonPost article (they're comments so I can't vouch for their veracity, but the arguments make sense and follow a 3rd unmentioned belief; that we can spend less and still deliver quality healthcare):

Lerrin
Doctors' practices are small businesses that currently have to deal with a myriad of insurances, each with their particular nuances & conditions. They have to hire people dedicated to working with said insurances and assure payments.
While Medicaid and Medicare may be lower pay/lower pay- they DO pay eventually, and pay at an essentially known and consistent manner.
Not necessarily so with the insurance companies (who reject claims) and/or the un/underinsured (who then become financially responsible for the end results).
From a business perspective: Would be much easier to plan/budget if you knew how much you could expect and when to expect it - even if less than deserved.

oldngrumpy
Drs and their staff that I have talked to have said that they must dedicate approx. 25% of their staff and Dr time to dealing with insurance forms and arguing over rejected procedures, drugs, and tests. They claim that they could greatly reduce their billing if that requirement were fixed. It is imperative that some unified forms and procedures be instituted by mandate so that this waste is eliminated. Of course, single payer fixes this in one stroke.

HowdyDoody
I'm a health care provider who essentially will have to go out of business because health care companies (1) won't reimburse what they initially promise or without lots of haggling and additional paperwork; (2) have cut back my fees drastically; (3) have saddled people with huge deductibles, so they quit coming; and, (4) the time required to bill companies, argue with a myriad of bureaucratic policies and people, and resubmission of improperly denied claims, or the pussyfooting around the companies do in hopes that you'll give up trying to get paid.

I'm starting to spend more time trying to get paid than providing care. It's a nightmare.


Read more at: http://www.huffingtonpost.com/2009/09/14/majority-of-doctors-back_n_286352.html

Posted by: perhapsnot1 | September 25, 2009 4:50 PM | Report abuse

How about a similar piece on mandates? Why is there a virtual debate-free zone on mandates in the mainstream media?

govt enforced purchasing of private sector goods and the radical change that would make to our society needs more coverage. a public option is the tradeoff that makes mandates somewhat acceptable. without it there is literally a tax (payable to private companies) on just being alive.

mandates without a public option is not just bad policy it's also really bad politics.

Posted by: PindarPushkin | September 25, 2009 4:54 PM | Report abuse

To contradict wisewon, Ezra actually has a lot right here. How many hospitals lose money is not the issue, because we cannot assume that these hospitals operate efficiently. That's what is compelling about the MedPAC data. MedPAC has shown that hospitals in competitive markets make money on Medicare. They're lean and efficient and able to do well with relatively low Medicare payment.

Private insurers don't pay high rates because they're altruistic and want to make up for hospitals' Medicare losses. They pay these rates because the providers have market strength and therefore the market demands it. In competitive markets, private insurers pay rates comparable to or lower than Medicare.

The issue is, of course, more complicated. For example, many more hospitals make money on Medicare inpatient payments than outpatient payments; markets may vary by service line; and in some circumstances, Medicare rates may actually be too low to meet legitimate costs. But the fact that most hospitals lose money on Medicare does not prove that Medicare payments are inadequate. In most cases, it proves instead, that providers are inefficient.

Posted by: poppies | September 25, 2009 4:56 PM | Report abuse

Simple Question - When physicians and hospital say that Medicare oays less than costs, how do they compute costs?

What do they figure for the income of a cardiologist? #200,000, $400,000, or $800,000? A Hospital Administrator? How do they account for fancy new machines that may or may not improve treatment? Who checks their figures?

Posted by: lensch | September 25, 2009 5:15 PM | Report abuse

I agree with Wisewon about the issue of payment to health care systems, as does Denis Cortese, the CEO of the Mayo Clinic.

We should revise our payment system to reward institutions that practice effective and efficient medical care. That needs to be based on data about outcomes and efficiency, not the impressions generated by PR and by traditional beliefs.

Fortunately, Obama and MedPAC are on the case, proposing rules that would do just that -- base payments on outcomes and efficiency, not volume of service. If the IMAC proposal is passed, those rules will actually stand a chance, rather than dying in congress under the efforts of lobbyists defending the inefficient and ineffective systems.

A quick glance at the Dartmouth Atlas data will tell you who would be the winners and who would be the losers under this system, and would also give an early warning to those who would be well advised to start making changes to avoid being driven out of business.

The problem then will be how to extend that system to private payers as well as government systems. There are two possible ways. One is through competition, which is the point of the public plan. The second is through strict regulation, which is the way they do it in private insurance based systems in France, Germany, the Netherlands, Switzerland, Japan, and elsewhere.

You can take your pick, but there is one way we know doesn't work. As the collapse of the managed care movement in the 90's showed, you can't do it just through efforts by private insurers on their own.

Posted by: PatS2 | September 25, 2009 5:17 PM | Report abuse

"Or you can look at the table above and conclude that the prices paid by private insurers are permitting a level of inefficiency and wasteful spending that Medicare's prices wouldn't allow."

In order for this to be true there would have to be a weak profit motive in healthcare. Are you claiming that healthcare providers have weak incentives to cut costs and increase profits?

Posted by: kingstu01 | September 25, 2009 5:20 PM | Report abuse

All to often we forget that Medicare is two separate plans: Part A (Hospitals) and optional Part B (Providers/MDs). You get two different bills from the Hosp and (usually) the provider group.

BUT, the providers determine the services provided in the hospital and in their offices. Hospitals don't prescribe/order anything. If the Doc tells the hospital "do a MRI", the hospital performs the service, and will not likely even know what that costs under either Medicare or private insurance.

The weeds are thick, and people's tolerance for getting in the weeds leads to lots of misunderstanding and misrepresentation. The so-called Medicare Advantage (which is not Medicare) makes this even more difficult: people don't distinguish one from the other, even though Medicare Advantage should be called Medicare Private Insurance (or just private insurance OPTION).

One last point: I receive my healthcare from a Univ. Med. Center Clinic/Hospital, and the staff MD's have no idea (they don't even want to discuss it) what the charge will be for a service. They aren't being malicious, they just never get involved in the ever-changing reimbursement systems (plural). Complicating my case is my former employer's back up insurance to Med. Part A/B/D. It is self-insured, but administered by Blue Cross in a different state from where I'm living.

The good part of this: I almost never have to pay more than the annual deductible. The bad part is that I have no clear idea what this all costs, and who is paying for what. We couldn't have engineered a system more complicated and less transparent if we set out from the beginning to mess with the minds of all those involved.

Posted by: JimPortlandOR | September 25, 2009 5:31 PM | Report abuse

Once again I don't at all see why "being able to use medicare rates" matters at all. They can set the rate to whatever they want. They could set it to mirror 50% of medicare rates if they wanted to- the result would be that no providers would accept it. The only thing that would matter is if providers are required to accept the public plan if they want to participate in medicare. THEN the total scale matters. Otherwise its just like any other insurance company tying to pay lower than market rates and it simply would not be accepted.

Posted by: spotatl | September 25, 2009 6:17 PM | Report abuse

A simple correction please - Medicare doesn't "negotiate" anything, it simply dictates rates, and as a provider you take them or leave them. There's no negotiation whatsoever.

Posted by: CarlosXL | September 25, 2009 7:16 PM | Report abuse

As I was reading this all I could think was "this is totally wrong, and I'm sure wisewon will be here shortly to correct him." He did not disappoint.

Posted by: ab13 | September 25, 2009 8:30 PM | Report abuse

"Medicare has shown zero-- zero-- ability to address utilization, the actual cost growth driver"

Not totally true, but effectively true for the most part. MedPAC has been interested in and tried to address utilization. They have failed because congress has failed to allow them to try, having been steered far off course by lobbyists and other rent seekers. As the saying goes, one person's over-utilization is another person's new beach house. We will only see Medicare and any new programs making any real effort if the process is removed from everyday politics and the horse trading, pork, and large scale political donors that beset congress.

However, it is also true that private insurance has shown zero -- zero -- ability to control utilization as well. To their credit, they also made a pass at it, in the 90's, but floundered on competition, overemphasis on pure cost rather than effectiveness, and on public rage. Since then they have been even less inclined to deal with utilization and effectiveness issues than Medicare, allowing payment for some procedures and tests that Medicare denies payment for based on poor results.

In fact, the only people who have been able to control utilization with any success have been every other advanced country in the world. For the most part, they have used straightforward government regulation, backed by reference to high quality research, to accomplish this.

That works. But there is a significant fraction of people in the US who are totally opposed to the idea of using research results and independent experts, both physicians and other scientists, to control over-utilization. They are driven insane by the concept and will resort to anything, including lying and name calling, to stop it.

I will predict that we will have control of costs by control of overutilization through regulation sometime in the future, since the only other choice is exclusion of most people from health care other than catastrophic care. But we will probably have to wait for the cost of health care to swamp the economy and destroy health care access not only for low income people but also for all of the middle class before we are willing to make that step. In other words, we need not just 50 million to 100 million people who cannot access health care, we will need 250 million people excluded before we can break out of gridlock on this issue.

Whether we pass health care reform without utilization control or don't pass health care reform at all, we are heading for an economic and health care disaster based on continued out of control costs. It is only when we face the music and start dealing with overutilization that we can have lasting reform. The answer is on the shelf. We just have to have the will to use it.

Posted by: PatS2 | September 25, 2009 9:37 PM | Report abuse

The good part of this: I almost never have to pay more than the annual deductible. The bad part is that I have no clear idea what this all costs, and who is paying for what. We couldn't have engineered a system more complicated and less transparent if we set out from the beginning to mess with the minds of all those involved.

Posted by: JimPortlandOR | September 25, 2009 5:31 PM | Report abuse

Jim,


check your explanation of benefit from medicare and/or your insurer. That will show what was billed and what was paid. Your insurer should pay first, medicare second (I take the assumption that since your employer is self-insured they have over 20 employees)

Posted by: visionbrkr | September 25, 2009 10:23 PM | Report abuse

Once again I don't at all see why "being able to use medicare rates" matters at all. They can set the rate to whatever they want. They could set it to mirror 50% of medicare rates if they wanted to- the result would be that no providers would accept it. The only thing that would matter is if providers are required to accept the public plan if they want to participate in medicare. THEN the total scale matters. Otherwise its just like any other insurance company tying to pay lower than market rates and it simply would not be accepted.

Posted by: spotatl | September 25, 2009 6:17 PM | Report abuse


If I remember correctly I believe HR 3200 opted all Medicare providers in and then required providers to opt out of their public option. Do you know how many years that would take with standard provider relations departments to get them out of the public option? Again i'm not 100% certain of that fact but i do remember being upset about how they set that up.

Posted by: visionbrkr | September 25, 2009 10:31 PM | Report abuse

If hospitals had to subsist on less revenue, they'd find ways to spend less money.

OR THEY'D GO BANKRUPT.


http://www.fiercehealthfinance.com/story/hospitals-see-string-bankruptcies-recent-weeks/2008-09-24

http://www.njha.com/AboutNJHA/Pdf/BabyBrochure0309.pdf

11 hospitals since the beginning of 2007 alone have gone into bankruptcy in NJ alone.

Ezra,

maybe you should speak with a hospital administrator and ask them their view on the subject.

Posted by: visionbrkr | September 25, 2009 10:58 PM | Report abuse

Wisewon: "In cost control you've got choices-- target price inflation or utilization inflation. The data is unquestionably the latter. Your solution with the public option is the former. Medicare has shown zero-- zero-- ability to address utilization, the actual cost growth driver. That's the best argument for not pursuing a public option."

No -- Medicare also has shown zero-- zero-- ability to get a rocket to the moon. It doesn't prove anything about the public option, either way.

We have to differentiate between excessive utilization growth, and normal and welcome utilization growth. Because we don't want to stop utilization if it is justified -- and justified utilization is going to grow massively, due to demographic and technological changes among other things. Why would we want to stop a major growth industry of the 21st century?

The public option can save consumers on their bills by eliminating private insurers' profit (the insurers add no value for it) and reducing hospital and doctors' useless administrative costs if it is widely adopted. That could be a 15% total savings on uselessness eliminated. What the consumers choose to do with it is theirs alone to decide. If they want further healthcare utilization, so what? And if the savings is invested or spent on other goods and services, that compounds to a lot of economic growth in the future that will help swallow our long-term problem.

Wisewon: "No industry works under that type of model."

No other industries must include everybody as a customer, despite the distribution of income. The discussion must always start at getting everybody into the system. Healthcare according to the normal business model is wrong and misleading. Every other country appears to understand this, as well as most doctors in the United States.

Posted by: Lee_A_Arnold | September 26, 2009 12:58 AM | Report abuse

As Ezra said at the end of his post, there are a lot of details to be considered before reading too much into these data. But let's agree that Medicare payments are lagging behind medical inflation.

To me that's appropriate, because the country has decided we need to spend less on health care. And the main tool the government has to that effect is constraining Medicare payments. The tool is imperfect, and Medicare is working to try to devise better payment models.

Providers are responding by shifting costs to private insurers. It's well-documented that insurers don't negotiate effectively with providers. Still the CBO did score the negotiated rate PO as saving about $25 billion, but the Medicare+5 PO is much much better.

Posted by: bmull | September 26, 2009 1:02 AM | Report abuse

Visionbrkr, be sure to separate hospital bankruptcies for reasons of the economic crisis from bankruptcies due to lack of medical payments. There are a lot of things going into bankruptcy right now.

Posted by: Lee_A_Arnold | September 26, 2009 1:08 AM | Report abuse

Lee,

note that in NJ 5 were in 2007 and 5 were in 2008. It was going on before the economic crisis hit. And from where we're going I don't expect the crisis to end anytime soon, do you?

Also in thinking this over Ezra may be blaming insurers for allowing inefficencies in hospitals. that's a hoot. I've heard insurers blamed for a lot of things but hospital inefficencies? haha. I guess Ezra would rather us have just 338 hospitals in the US. You think we have an access problem now just wait until that happens. I'm waiting for the day when insurers get blamed for global warming. I'm sure its their fault too :-)

Posted by: visionbrkr | September 26, 2009 6:54 AM | Report abuse

Actually the financial credit crisis is dated from the middle of 2007. But I don't know whether that might have affected any hospital finances.

Posted by: Lee_A_Arnold | September 26, 2009 10:20 AM | Report abuse

PatS2,

Medicare has really done nothing on the utilization question. So while Medicare is mostly an all-you-can eat proposition, here's just a quick list of innovation from insurance companies that constrain utilization:

- utilization review
- in/out network coverage
- tiered formularies
- prior authorization
- step therapy
- high deductible plans
- pay-for-performance

This is far from saying that insurance companies have figured it out, they clearly haven't. But on the question of trying to control costs, particularly utilization, only the insurance companies have had some success. Medicare doesn't have literally anything in its history that has even been tried to constrain utilization. That's why I said "zero." The same isn't true for insurance companies.

I really like the idea of MedPAC for Medicare. Their reports are thoughtful, their representation is decent, altogether pretty good. But its an academic exercise, as no one is willing to give them any real power. Even the current proposal still leaves the power with Congress. As I've said in the past, there's simply no way our political process isn't going to overrun an independent bureaucracy for an issue as personal and pervasive as health care. That's why there's never been an actual attempt to constrain utilization in Medicare, and there won't be until our country is near financial ruin. There's not a politician around that's going to risk upsetting constituents by taking away health care today for cost-savings tomorrow.

Posted by: wisewon | September 26, 2009 2:43 PM | Report abuse

wisewon,

you've got great points there but you've forgotten about disease management too. Also tiered formularies have now taken further steps to reduce cost. You can get on most larger employer plans mandatory generic plans, tiered rx plans that include percentages instead of just copays. Many large employers have employees pay 10% of generic cost, 30% of brand name preferred cost and 50% of brand name non preferred as an example. Also they can tailor fit it so it doesn't hurt those on forumalaries that can't substitute a generic. I have an employer client who just switched to mandatory generics to reduce cost. It was either that or lay another 10% of the workforce off. When we met with the employees at least 10 of the 150 employees told me they were on Lipitor but didn't know why they couldn't take a generic statin instead. They've never bothered to ask their doctor. Well they're asking now. In just three months since the plan has been in place it has saved not only the 10% of the workforce but also the employer and employees a lot off their prescription costs.


Lee,

i'm aware of when the crisis was dated from. Please don't try to argue that if we were not in the financial crisis that these hospitals would have survived. It only sped up the inevitable. It's been happening for years here in NJ and I'm sure elsewhere too. I'd love to see statistics on how many hospitals have been in bankruptcy year over year nationwide for the last 10 years. I'm sure that would be a very telling statistic.

Posted by: visionbrkr | September 26, 2009 4:09 PM | Report abuse

Ezra - So, the top 12% of hospitals make an average margin of 0.5% on Medicare?? This is hardly an argument that Medicare reimburses at an appropriate level.

And as for the argument that private insurers pay too much: I'd point you to the margins and returns on capital for the publicly traded hosptial companies. they are atrocious. Even with private insurance subsidizing Medicare and Medicaid, these companies barely provide a return for their shareholders. You'd need to provide a compelling reason why these companies are not trying to maximize returns for me to believe that they're all "wasteful or innefficient".

If the public plan paid Medicare rates, many, MANY hospitals would go bankrupt.

Posted by: mbp3 | September 27, 2009 10:37 AM | Report abuse

Wisewon --

First, Medicare has in fact dealt with utilization issues, frequently refusing payment for unproven or unsuccessful procedures and tests. In my own field, CT colonography and CT coronary arteriography are examples. Utilization review, which you cite as a private insurance feature, was actually forced on providers by Medicare, at least in the region of the country where I practice. There are many others.

Second, many of your examples of what private insurance has done founder on the test of reality.

In and out of network coverage has nothing to do with utilization. It has to do with the ability of insurance companies to negotiate favorable discounts with providers. You know that, of course.

Prior authorization is merely a form of harassment, not of utilization control. All the major insurers in my state started pre-authotization for CT and MR a few years back. I have yet to see or even hear of a turn down, and it has had no effect on over-utilization at all.

High deductible plans have nothing to do with utilization issues. They are rationing based on ability to pay, pure and simple. There is a large body of evidence that shows that high deductible plans don't lead to rational decisions about utilization, but lead to irrational decisions as to what to forego (colonoscopy is a favorite for that) and what to choose (MR for headache a good example here.) In fact, high deductibles frequently lead to truly poor choices, such as avoiding a doctor visit for early signs of chest infections, resulting in increased ICU admissions for pulmonary failure when the cause could have been treated with an outpatient course of oral antibiotics if the patient had chosen timely intervention.

Formularies are used by Medicare as well as private insurers. Of course, most outpatient drug coverage is done by private insurers, since Part D is privatized and since Parts A and B don't pay for outpatient drugs.

Pay for performance, however, is an interesting idea. Medicare has tried to implement that several times and been blocked by lobbying efforts, mostly by providers and hospitals, in congress. As I already said, we need IMAC.

The final proof of this pudding is that since the collapse of managed care in the late 90's, Medicare costs have increased at only about 65% of the rate of increase in private insurance. You are correct when you say that most of this has been payment cuts to hospitals and providers, many rational but some not.

We are in agreement that we need to see a greater emphasis on effective utilization controls. We are in disagreement about the chances that private insurers can accomplish this without the cover of these controls first being initiated by government programs. Interestingly, many insurance industry executives agree with me, saying that they need Medicare and other government programs to initiate change to protect them from public outcry and from pressures of competition.

Posted by: PatS2 | September 27, 2009 10:48 AM | Report abuse

mbp3:"If the public plan paid Medicare rates, many, MANY hospitals would go bankrupt."

The answer to that is "unclear at this time."

The problem is not whether Medicare rates are below current cost on some patients. The problem is what costs are.

Hospital "costs" include many, many items that clearly make no contribution to care, including seven figure salaries for executives, large ad budgets, luxury decor in public areas and administrative areas, "medical arms race" spending on the latest and fanciest equipment without regard to utility, OR's designed for and often used by just a few surgeons, overbuilding of OR's and procedure rooms to cater to the desires of doctors to all do their work at certain times, and so on. In addition, there is evidence that there are ways in which hospitals can work to improve results on the 25% of patients that account for losses, by avoiding complications through improved quality programs and by improving the patients' underlying health by programs that operate outside the hospital.

Finally there is the issue of cost of billing. On the average, hospitals spend four times as much dealing with private payers as with Medicare. That cost is never broken out in the statistics about margins for Medicare patients.

A look at hospitals owned and run by systems like Kaiser and other prospective payment systems shows how much closer attention to costs can lead to much better margins while still leading to better quality care.

Posted by: PatS2 | September 27, 2009 1:36 PM | Report abuse

PatS2,

Thoughtful response.

In/out network coverage was a mistake in this context, but I'll stand by the rest.

Your understanding of HDHP plans is aoverly simplified, RAND's work shows that while patients do underutilize preventative care as a result of their financial exposure, but they do so less than their underutilization of low value/high cost care. More importantly, I wouldn't suggest HDHPs are a final product, and it isn't too far to see cost-effective care or preventative care excluded from cost-sharing on these plans addressing the issues raised by RAND.

Insurance companies developed formularies as a concept. Sure Medicare adopted them-- the question is where Medicare has LED on utilization controls.

Prior auth is a form of utilization control. It may be cruder than we'd like, and unpleasant for providers, but performed correctly, is a very good concept.

You do have a good point on virtual colonoscopies, although that feels a little different than utilization controls and more like technology validation. Medicare IS frequently at the leading edge of approving new technologies/therapies for reimbursement. But again, not really a utilization control, more like a "technology isn't ready for use" assessment.

Saying you like IMAC is sort of irrelevant. What you want IMAC to do, and what's politically feasible are two different things. Its similarly unrealistic to the Republican ideologues who say that the market can fix things. There simply isn't a solution involving something like an empowered IMAC on the horizon for at least another decade or two, and that assumes health reform passes this time around.

"We are in disagreement about the chances that private insurers can accomplish this without the cover of these controls first being initiated by government programs."

This is the bottom line. I don't think there is any evidence that our political system will support utilization controls until our financial picture is at the point where financial solvency is at a national crisis point. The private system you can see evolving before that point. With the appropriate regulations added on insurance companies, their offerings could adapt to address a growing unmet need-- affordable coverage. Far before the point we reach the 30 or 40 trillion in debt we'll need to reach before any politician will start talking honestly about health care costs. And that needs to happen before any real power is given to an IMAC to improve Medicare. That's my bottom line. Its a lot more politically realistic to see aggressive regulations of insurance companies to get them to compete on price than it is to see an empowered IMAC. Hoping Medicare stops being Medicare are starts acting like Medicaid isn't a policy prescription.

Posted by: wisewon | September 27, 2009 3:13 PM | Report abuse

PatS2 - I agree with many of your comments on medical arms races, OR, executive salaries, etc. But i would also note, that nothing in any HC reform bill would change these incentives for hospitals. So, without a complete structural change, I still believe that replacing private insurance rates with Medicaqre would drive many hospitals into bankruptcy.

"Real" reform would deal with incentive problems for consumers, hospitals, docs, etc. But we're not going to get that type of reform.

Kaiser is a good model, but not applicable everywhere and certainly not what all customers or docs want.

If you want to argue that there are simply too many hospitals in some areas, i'd be willing to listen.

Posted by: mbp3 | September 27, 2009 8:52 PM | Report abuse

PatS2,


I appreciate your responses on here more than almost any other but hospitals are already going bankrupt. If you force them to lower reimbursements you can force them to be more careful about how they spend their money and that would be a good thing but I still think in many urban areas they're not doing that as much and still struggling.

Also I'd be interested in your thought on surgi-centers and how they take business from hospitals and how that affects hospitals costs.

Posted by: visionbrkr | September 28, 2009 11:38 AM | Report abuse

mbp3 –

I definitely believe there are too many hospitals, too many beds, and too much duplicative technology available in many, if not most, markets. That is the biggest reason why US hospitals find Medicare payment rates to be too low, and why they have strong-armed private payers into much higher rates in so many places.

That is also one of the important root causes of out of control health spending.

Effective cost control will mean that some hospitals may close or shrink; we just have to figure out ways to protect true critical access in rural areas and inner cities.

Posted by: PatS2 | September 28, 2009 12:46 PM | Report abuse

Wisewon --

IMAC is part of the Obama plan and is present in the Senate Finance bill and in the House HR 3200. Whether there is enough political steam to pass it, particularly over Republican resolve that blocking reform is better than allowing the Dems a shot at it, is not clear. It is much easier to give in to health care industry forces that are dead against this type of reform, since it actually threatens their way of doing business. MedPAC already has recommendations for increasing the role of primary care, for development of responsible care organizations, and for increasing payments to primary care by 15% while making cuts to specialists that would cover that rise. If IMAC becomes law, that will become law as well. The plans sponsored by Mayo and others to change payment to emphasize quality and outcomes rather than volume, though a little nebulous now, are right behind those on the agenda.

The proponents of HDHP plans are the ones who are being simplistic, both in ignoring real world results and in ignoring basic economic principles. Experience shows that HDHP plans do not result in appropriate health care decisions. Anyone at all familiar with real world economics, or the theories of Adam Smith and his followers, would recognize that that is bound to be true, since patients simply do not have the information needed to make the decisions, providers are not dependable in giving information to allow for appropriate decisions to refuse or choose care, and medical decisions based on avoiding incurring out of pocket expenses are wrong with great frequency. In particular, HDHP plans discriminate very powerfully against the average American, who enjoys a household income between $30,000 and $70,000 (half of them below $50,000) a year, pre-tax, and who is not prepared to pay out large amounts of money (relative to their income) for health care unless it is absolutely obvious that his or his family’s lives and well being are at stake. Again, in the end HDHP might save some money, but it would save it by rationing health care in the purest sense.

Far from being different from utilization control, the decision not to pay for CT colonography is utilization control in its best sense. The way we need to save money in the US is not by denying health care that people need, but by denying the hundreds of billions a year in health care people don’t need. That is one tiny example. Rules changing payment for all sorts of unnecessary or inappropriately chosen services, including creating appropriate standards for management of low back pain, standards for coronary disease, standards pushing hypertension management to comply with ALLHAT, and so on would be a good way to start. Rules strongly encouraging the implementation of proven quality standards that could save hundreds of billions with very little cost would be another.

Posted by: PatS2 | September 28, 2009 12:49 PM | Report abuse

Wisewon and mbp3 --

I do not consider private insurance to be the demon here, and would support use of private insurance for most or all of insurance coverage if there were strong rules, including cost control rules, controlling insurance. I would consider Wyden-Bennett to be a good approach as long as it incorporated enough rules to drive cost control in a way that saved money, improved quality, and protected real universal access, not just access to catastrophic care.

I know that private insurance has made many attempts to control costs. The sad fact is that no matter how much we argue about various ideas they just have not worked. Private insurance suffers a cost inflation rate of over 8%, well over the Medicare rate, but the Medicare cost inflation rate is still unsustainable itself.

Systems like the German system, Dutch system, and Swiss system, which are 100% based on private insurance but which use strict rules to preserve quality, access, and reduce cost, are excellent models for health reform.

We will have these things here in the end, unless we choose to exclude over 80% of Americans from care they need, since the economics will drive reform. I agree that our political system may well be extremely resistant to accepting the need for cost control. In my pessimistic moments I agree that we may well not attain the political will to make needed changes UNTIL 80% of people are being excluded from good access to health care. However, there is one way to be certain that nightmare becomes fact, and that is to refuse support for efforts to implement needed changes before the crisis arrives.

Posted by: PatS2 | September 28, 2009 1:01 PM | Report abuse

I keep seeing that 'Medicare doesn't do anything to control costs, especially utilization (pay per test) costs.' This isn't really true.

On the hospital side, MCare pays based on a DRG rate. Each admit is diagnosed and discharged with a DRG, and that DRG is paid at a set rate. It does not matter if a sepsis patient is in the hospital for 30 days, or 3, we are reimbursed the same amount.

It also does not matter if we do 17 scans, or 0, it is all included in the DRG rate.

This is meant to drive down length of stay and utilization.

Posted by: HospAdmin | September 28, 2009 2:23 PM | Report abuse

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