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Can the Gang of Six Change the Way We Pay For Health Care?

6 Mins read

A bipartisan group of senators is proposing to reduce the federal deficit by $3.7 trillion over the next ten years. This is seen as a way to overcome the debt ceiling impasse and deal with the nation’s long term financial crisis at the same time. What does this mean for health care?

A bipartisan group of senators is proposing to reduce the federal deficit by $3.7 trillion over the next ten years. This is seen as a way to overcome the debt ceiling impasse and deal with the nation’s long term financial crisis at the same time. What does this mean for health care?

The proposal would require Congress to find $300 billion in health care spending cuts in order to avert a planned cut in Medicare doctors’ fees. It may also require another $200 billion in cuts. And remember, this is on top of about $550 billion in Medicare cuts already legislated as part of last year’s health reform bill. If I were running a hospital, I would be feeling very nervous right now.

In general, the plan follows the outlines of the Bowles-Simpson (Obama debt commission) proposal. Yet when Erskine Bowles and Alan Simpson were in Dallas earlier this year, they said their health care proposal was nothing more than a line on a piece of paper. “We need you to tell us how to make that work,” Sen. Simpson told me.

Readers of this blog know that we regard all of the deficit reduction proposals as nothing more than lines on a piece of paper when it comes to health care. That includes the health reform law. The Obama administration’s talk about “value purchasing” is nothing more than empty rhetoric, backed by the threat of senseless price controls that the Medicare actuaries office says will put hospitals out of business and severely reduce access to care for the elderly and the disabled.

In general, there has been no serious proposal to reduce health care spending over the next ten years on Capitol Hill. Not on the right. Not on the left. Not Republican. Not Democrat.

So let us veer from the pack and ask what is shaping up to be the most serious question of the moment: How should the federal government pay hospitals?


The answer is going to disappoint you. There is no right way. Let’s make that stronger. No matter how it pays, it will be the wrong way. No matter what formula Medicare adopts, it will create perverse incentives for hospitals to game the system — by overproviding care, underproviding care and doing thousands of other things to maximize the revenue they get from the federal government.

Think about it this way. If crooks who provide no legitimate services at all can manage to extract 10% of all Medicare dollars, don’t you think legitimate providers can figure out ways to soak the system for at least 20% or 30% over and above what should have been paid?

Payment Formulas that Don’t Work. Consider some of the payment schemes that have been tried or considered:

  • If Medicare pays based on the hospital’s costs, as it once did, that creates a perverse incentive for the hospital to incur additional costs.
  • If Medicare pays so many dollars per day, that creates an incentive for the hospital to admit patients early and keep them late.
  • If Medicare pays a fixed price per procedure (the current diagnosis-related group system) regardless of how long the patient stays in the hospital, they will have an incentive to release patients prematurely — and when they are readmitted because of that fact, to try and bill Medicare a second time.
  • If Medicare pays hospitals 1% less if readmissions exceed a certain threshold (the latest plan), hospitals will balance the risk of early release against the risk of readmission in a way that maximizes the hospital’s bottom line — not in a way that maximizes the quality of patient care.

So how do we get out of this trap? My answer: Let the hospitals propose how they would like to be paid.

A Better Way to Pay. I first made this proposal to the Bush (43) administration about the time that Geisinger Health System announced that it would not charge payers (including Medicare) for readmissions after heart surgery. Essentially they were saying, “If we screw up, you don’t have to pay a second time.”

“Isn’t this an unquestionably good thing?” I asked a group of folks siting around the table in the Hubert Humphrey Building in Washington, D.C. Everyone agreed that it was.

“So why don’t you get on the phone and tell Geisinger that a warranty on heart surgery is valuable to Medicare and offer to pay them something for it?”

“Why would we want to do that?” one of the bureaucrats asked me, suspiciously.

“So then you can tell every other hospital in the country what you have done and invite them to also be paid in different ways if they can save Medicare money the way Geisinger is saving money or in other, better ways,” I responded, probably showing some irritation in my tone of voice.

“But Geisinger is already doing what we want them to do,” another chimed in. “We could never get away with paying a provider more than we have to pay.”

“Congress would be all over us,” a third person declared.

And so nothing happened. The only reason I remember the conversation so well, is that I found it so bizarre.

Anyway, I think there is a huge opportunity here, for any administration — Democrat or Republican — to radically change the medical marketplace. In “A Framework for Medicare Reform” and in a Wall Street Journal article, I listed a few of the hundreds of Geisinger-like providers who are saving Medicare money every year and being financially punished for doing so.

Implementing the Better Way to Pay. Here are the parameters:

  1. The new payment relationship has to save Medicare money.
  2. Quality of care to the patients cannot go down, and providers should be free to propose new and better ways of measuring quality.
  3. The provider must propose convincing procedure for how we are to decide that parameters 1 and 2 have been met at some future date.

What Can Derail the Better Way to Pay. There is no good idea that cannot be undermined if the bureaucrats are determined enough. But here are some ways to avoid getting derailed:

  1. The provider does not have to be at risk. In fact, the insistence on this idea in all cases is a huge mistake. In Asheville, NC, pharmacists counsel diabetics. What they get paid for doing so is apparently much less than the savings in reduced physician visits and emergency room visits. But the pharmacists are not individually at risk (their incomes do not go up or down depending on Part B payments) and they shouldn’t. Extending this idea, suppose Medicare agrees to pay the market price of services provided by nurses at walk-in clinics. (Not Medicare’s fee, but the market price everybody else is paying.) I think there is a very good chance Part B Medicare expenses would go down. But that’s a risk Medicare should be willing to take, not the walk-in clinics. Finally, most providers are too small to credibly bear the full risk that a new payment system will save Medicare money. Let’s suppose all the general practitioners in an area want to be paid more to insure that more children get their vaccinations and present a credible case that the return on this investment will be positive. If we are convinced their case is solid, it is appropriate that Medicare itself take the risk, not individual physicians.
  2. Contracts for new payment arrangements should be easy to negotiate and consummate. Mounds of paperwork and endless delays in getting approval are the natural enemies of entrepreneurship.
  3. We must be willing to tolerate mistakes. Everyone in business knows that not every decision is a good one. In fact, if every new contract Medicare negotiates under this proposal works out perfectly that is prima facie evidence that Medicare is being too cautious in inviting new payment arrangements.

Consequences of the Better Way to Pay. As noted, the current system gives everyone on the provider side an economic incentive to maximize against reimbursement formulas. Think of smart people against dumb formulas and you’ll have a better sense of where we are right now. If what I am proposing were up and running and considered by everyone to be a real alternative, then everyone on the provider side would have an economic incentive to search for ways to save taxpayers money and raise the quality of care at the same time.

Actually, what I’m really proposing is not complicated at all. Just start paying people for doing what we want them to do. The only worry I have is that government may be incapable of doing it. So we should be open to contracting the whole enterprise out to Microsoft or some private entity, not constrained by the normal bureaucratic impediments.


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