Posts Tagged ‘fee for service’

Improving the Harvest: Farming and Health Care

December 15, 2009

I love Atul Gawande’s writings on health care.  He has a rare talent for describing technical details of health care, insurance and finances in terms that most people can understand.   His recent article in the New Yorker discussed the current health reform bills’ approach to curbing costs, using the agricultural industry as a potential model.

One of his basic points is similar to one I have made before.  He describes two kinds of problems: “those which are amenable to a technical solution and those which are not.  Universal health care coverage belongs to the first category . . . Problems of the second kind [referring to rising health care costs], by contrast, are never solved, exactly; they are managed.” I would frame it somewhat differently.  The two basic kinds of problems are those which are amenable to a government solution, and those which are best addressed using decentralized market forces.

There are two serious shortcomings in our current health care system: lack of access to health care and insurance coverage for many low-income people, and the rising costs of health care.  While private market forces do have the potential to address cost issues –”efficiency” in the jargon of economists – they don’t do very well at handling issues of “equity”.  Specifically, private markets can’t do the following very well in the health care system:

  • Provide access to insurance or health care to low-income or very ill people
  • Ensure that reliable standardized information is available to consumers
  • Maintain the appropriate balance of power between providers and consumers

This means there is an important role for government:

  • Ensuring that coverage or care is available to low income and very sick people
  • Providing information is reliable and available
  • Maintaining healthy markets.

In the latter role, it is appropriate for government to establish the rules for the structure of the market in order to create:

  • Real choice
  • Healthy competition
  • Incentives for improving value (quality/cost)

Government can also play a role in providing financing for innovations (i.e., start-up funding for pilots).  After this point, however, it’s probably better for government to get out of the way and let the market do what it can do best – drive improved value for consumers.

So far, so good.  I basically agree with Gawande’s observation that different problems should be addressed by different means.  But is Gawande correct in using the developments of the agricultural industry as a model for what might occur in health care?  While there are a lot of parallels (e.g., fragmented and inefficient production, resistance to change), I am concerned that there are some important differences between agriculture and health care.  I won’t offer a critique of the outcomes of U.S. agriculture (lower prices, yes, but also the growth of corporate farming at the expense of family farms and small town economies, as well as serious concerns about food safety); I want to focus on two other issues about the relevance of the agriculture model to health care.

First, the economic incentives in agriculture seem much more direct and consistent with consumer welfare.  If the farmer can find more efficient ways to produce crops, it will result in higher net income.  Lower production costs also allow the farmer to reduce prices, gain market share and increase revenue.  Other farmers then have a strong financial incentive to adopt better production methods; otherwise they will lose market share, revenues and profits.  This healthy competition results in lower prices and improved value for consumers.

In the health care world, however, the financial incentives for improving efficiency are much weaker.  The knowledge about how to be more efficient is available, but the adoption of these methods is very limited.  Simply introducing the health care equivalent of USDA extension agents and financing a lot of pilot projects are unlikely to change this.  The incentives are weak for a variety of well-known reasons: health insurance, which shields most consumers from the real costs of health care; federal tax policy, which excludes employer-sponsored health benefits from personal income taxes; the ability for insurers to use risk management strategies to avoid high-risk enrollees; the ability for providers to use payer-mix strategies to avoid low-reimbursement patients; the well-entrenched use of fee-for-service payments that reward volume instead of outcomes, etc.  Unless we make structural changes to address these issues, the financial incentives will not be aligned in a way that will cause the health care industry to embrace more efficient production methods.

The second potential problem is the difference in relative market power of buyers and sellers.  In agriculture, the sellers (farmers) are much weaker than the buyers (consumers and middlemen), which forces the farmers to compete aggressively on price and quality.  In health care, however, the sellers (physicians, hospitals, drug manufacturers) are more powerful than buyers.  There are several reasons for this: providers have professional knowledge and expertise that consumers rely upon, and many areas have a high concentration or even monopolies of providers.  Even if the provider payment incentives were aligned with consumer interests, health care providers would probably still be able to charge relatively high prices.

How do the current Senate and House bills line up with the issues raised by Gawande and my analysis?  The underlying philosophy of the legislation is consistent with the two-sector approach described above: government helps low-income people to get access to health care and sets the rules for the health care market, while private sector providers and insurers compete to offer the best value to consumers.  The bills also begin to address the issue of financial incentives, by encouraging alternatives to fee-for-service, eliminating the use of risk skimming by insurers, and taxing high cost health plans.  Not surprisingly, the bills do not directly address the market power issue, although the proposed strengthening of the Medicare payment commission would be a small step toward curbing costs.

Will all of this work?  We don’t really know, but at least the bills are built on a framework that has some chance of success.  We do know, however, that the current system is cruel in human terms and unsustainable in economic terms, and we have to try something.  We will have more work to do to get this right.

A “Third School” of Cost Containment?

October 28, 2009

Is there a “Third School” of reformers that could help us resolve the long debate about how to contain health care spending?  Drew Altman’s recent column describes the history of the debate between the “Regulators” and the “Marketeers”, and he suggests that a new school of thought – the “System Reformers” – is in the ascendance.  According this Altman:

The Systems Reformers believe that the best way to bend the cost curve is not through external market incentives or regulatory controls, but from the inside out, by creating a smarter health care system with the information base, new delivery models and payment incentives that will improve quality and lower costs. . . .

The Systems Reformers’ paradigm is reflected in the “bending the curve” elements of the health reform legislation currently in Congress, which mostly come in the form of pilot projects and experiments. These include tests of ideas like Accountable Care Organizations, “pay for performance” and “bundled payments,” as well as efforts to create a smarter, evidence-based health delivery system through comparative effectiveness research.

He describes the Systems Reformers’ approach as a  “third leg of the stool of cost containment strategies”.

While Altman is right about the importance of the Systems Reformers’ ideas, I don’t consider this to be a new paradigm.  We’re really talking about two different things.  The debate between the Regulators and the Marketeers is a philosophical disagreement about the fundamental political economy of the health care sector.  The use of System Reforms, however, is simply an issue of how deep we go into the health care system in order to bring about reforms.  The former issue is about which fork in the road we should take; the latter is about how far we can go down that road.

The debate about the merits of regulation and markets is very important, and we do need to make a choice.  This issue is not unique to health care; it’s been raging in other sectors as well – for example, regulatory limits vs. cap and trade mechanisms to reduce air pollution.  In health care, the Regulators point to the failure of markets to contain costs, and they advocate regulation of supply and prices.  In the U.S. political debate, the ultimate model of the Regulators’ approach is a single payer plan.  Marketeers, on the other hand, point to the failure of past regulatory approaches (e.g., price controls, certificate of need) and the fact that health care markets haven’t been structured in a way to provide incentives for cost containment.  Intelligent and well-intentioned people can find good reasons to support either approach.

In the current national debate, we’ve largely made the choice to go down the Marketeer path.  Despite the protests of disappointed single payer advocates, all five major bills in Congress are based on a market-based approach.  If we did a word count of Congressional speeches on health reform during the past six months, it’s likely that “competition” and “choice” would be near the top.  And even wonky phrases like “cost conscious consumers”, “financial incentives”, and “transparency” have leaked into Congressional speeches, demonstrating that the Marketeers are in ascendance.

How does the “System Reform” approach fit into this?  As Altman says, it looks at the health care system from the “inside out”, and the System Reformers deserve credit for helping us understand how the health insurance and medical care markets really work.  But the solutions that Altman points to are tools, not systemic solutions.  These tools, such as electronic health records, comparative effectiveness research, and alternative payment mechanisms, have been around for a long time.  The problem is that they haven’t been used widely within the health insurance and medical delivery system. For example, most physicians have not been quick to adopt electronic health records, since there is little reward for making improvements in efficiency and quality in the current system.  The solution to this lies outside, i.e., with the purchasers, consumers and/or regulators.  In order for the system reform tools to be used by health insurers and providers, there needs to be pressure from the outside.  One way to do this is a Regulatory approach, e.g., establishing a single payer plan and requiring all physicians to accept salaries or capitation rates set by the government.  Another way is with a Market approach, e.g., establishing health insurance exchanges and reforming the individual and small group market to encourage healthy competition and provide incentives for improved cost, quality and customer service.

The Congressional bills have used the work of the System Reformers to turn the Marketeer approach from a guiding principle into something meaningful and practical in the health care system.  For example, using the information that John Wennberg, Elliott Fisher and their colleagues have documented in their enormously important Dartmouth Atlas, the bills in Congress include pilots for Medicare payment reforms, such as bundling and pay-for-quality, which should reduce the geographic variation in costs and the inflationary effects of the current fee-for-service payment system.  Another example: System Reformers have pointed out that much of the medical care provided is not supported by evidence-based research; many physicians rely instead on simple protocols, community norms and what they were taught in medical school decades ago.  The lack of good clinical information has led to overuse as well as underuse of medical services, creating high costs and inconsistent quality of care.  Based on this finding, the bills in Congress include funding for comparative effectiveness research.  In a well-functioning market, good information is essential; CER will nudge the system toward more efficiency and higher value.

The work of the System Reformers is tremendously valuable, since it shows us what specifically needs to be done to improve our health insurance and medical care system.  This doesn’t, however, make it a “third school” of cost containment.  The current direction for health reform in Congress can be best understood as a Marketeer approach that is more likely to be effective in containing costs because it incorporates the System Reformers’ deep understanding of health markets.

Winners and Losers: Strategy in a Post-Reform World

September 3, 2009

Most health policy experts are focusing on the daily ups and downs in the political battles over health reform.  Within the health care industry, however, there is a buzz about who will be the winners and losers after health reform passes.  A.M. Best’s U.S. Health and HMO Insurance Index has been volatile since last November, reflecting high uncertainty about the effect of health reform.  Earlier this summer, there was some speculative analysis about the potential impact of reform on health care stocks.  Will health insurers come out as winners?  What about hospitals, doctors, drug manufacturers, and insurance agents?

It’s good to look ahead, but I think most people are asking the wrong question.  Each of these health industry sectors – in aggregate — will probably do just fine in the post-reform world, as Bob Laszewski points out in his recent blog.  The more important question is: who will be the winners and losers within each sector?

Change is coming.  After all of the political maneuvering this fall, some kind of health reform bill is likely to pass.  The basic shape of the post-reform world is coming into focus, and it is likely to include:

  • Insurance reform: guaranteed issue (no medical screening), along with rating rules and standardized benefits in the individual and small group markets.
  • Broader coverage: expansion of Medicaid, subsidies for low-income people and an individual mandate.
  • New market structures: an insurance exchange for individuals and employees of small groups.
  • Cost containment: increased attention to costs, transparency and accountability for insurers and providers.
  • Payment reform: a gradual shift from fee-for-service to bundled payments, as well as incentives for quality outcomes.
  • Emphasis on prevention, primary care, chronic disease management, and the use of comparative effectiveness research.

These changes in the regulatory and market environment will create changes in the dimensions of competition within the health care industry.  In the PRW (post-reform world), health insurers and providers will require different skills and strategies to be successful.

Health Insurers:  In the past, the key to financial success was risk management, i.e., making sure that the expected medical costs of enrollees were predictable and not too high.  Insurance CFOs focused on the “loss ratio” — medical claims payments as a percentage of premiums – as a key measure.  Insurers used medical underwriting, targeted pricing and benefit design to manage the risk profile of their enrollees.  Many insurers also tried to hold down medical costs and administrative expenses, but it’s much harder to do that.  (No one likes being yelled at by doctors.)  Most insurers have deep expertise and experience in risk management, so it’s not surprising that this would be the primary tool for achieving their financial goals.

In the PRW, however, the usefulness of risk management tools will be greatly diminished.  Medical screening won’t be allowed, and insurers will be limited in their ability to use pricing and benefit design to attract only low-cost enrollees.  Even if they do, risk equalization mechanisms within the new health insurance exchange will reduce the financial benefits of cherry picking.  Insurers will need to put more effort into managing expenses, for both administration and medical services.  In other words, insurers will need to move from risk management to cost management.

The second major change for insurers will be in the small employer market segment.  In the past, insurers focused on the employer as the customer, not the employee.  They worked through brokers to get access to employers, to whom they offered coverage on a sole source basis.  Insurers – rightly concerned about adverse risk selection in a multiple choice arrangement within a small pool – insisted on being the only health plan offered within a small group.  The employees could only join the plan offered by the employer, so there was little need for consumer-oriented marketing.

In the PRW, the employees of most small businesses will purchase their coverage through a health insurance exchange.  The employer will have a minimal role, and the employee will have a choice of multiple health plan options.  Insurers will need to focus their sales and marketing efforts to consumers rather than brokers and employers.  In other words, insurers will need to shift from employer-based to consumer-based marketing.

Health Care Providers:  Hospitals and physicians face similar changes.  The analogy to insurers’ risk-management strategies is providers’ payer mix strategies.  An important factor in providers’ financial performance has been the mix of commercially insured, Medicare, Medicaid, and uninsured patients.  Since the payments for commercially insured patients have been much higher than for the others, many providers have systematically minimized or avoided patients in the other three categories.  Even not-for-profit safety net clinics have been forced to increase the proportion of commercially insured patients to stay afloat financially.  Many providers have also tried to hold down medical expenses, but it’s much harder to do that.  (No one likes being yelled at by staff physicians and nurses unions.)

In the PRW, the effectiveness of payer-mix management strategies will be reduced.  Most people will have insurance coverage, which will provide new revenue to providers who had been serving the uninsured.  There probably will still be payment differences between commercially insured vs. Medicare and Medicaid patients, but the importance of payer-mix management will be reduced.  In response, providers will need to focus more on managing their costs of delivering care.  In other words, providers will need to move from payer-mix management to cost management.

The second major change for providers will be in provider payment formulas.  In the past, the fee-for-service payment system rewarded a higher volume of services, regardless of the patient’s health outcomes.  The CFOs of provider organizations used key indicators such as the number of hospital admissions, the number of medical procedures, and billable physician time.  There was increased pressure for improved physician “productivity”, and billing systems were upgraded to maximize fee-for-service revenue.

In the PRW there is likely to be a movement away from fee-for-service payments — although it will probably happen gradually — and the incentives for increased service volume will be dampened.  Instead, providers will be paid for a “bundle” of services, and there will be a greater emphasis on quality processes and outcomes.  Hospitals will not be paid for a patient’s readmission for the same medical condition or for correcting medical errors (“never events”).  Physicians will be paid to take care of patients with chronic conditions via a specialized capitation or case rate.  Providers will need to coordinate their services and improve the management of chronic disease patients.  There will be stronger incentives to invest in electronic health records, use evidence-based clinical guidelines, and develop integrated delivery systems.  Providers will need to move from increasing service volume to improving patient care.

These are only a few of the changes that will be driven by health reform; the effects of reform are likely to be far-reaching.  The new legislative and market landscape will be very different from the one that insurers and providers have been accustomed to.  Smart health care organizations are already thinking ahead and developing strategies to be successful. The ones that don’t adapt will be moving against the tide.  Some insurers will gain, and others will shrink.  Some providers will thrive, and others will struggle.  Within a few short years, we’ll be able to sort out the real winners from the losers.