On December 9, the leaders of three national groups — the American Hospital Association (AHA), America’s Health Insurance Plans (AHIP), and the Blue Cross Blue Shield Association (BCBSA) — jointly released a study by Milliman, Inc. designed to measure the aggregate amount that was being “cost-shifted” to private insurance plans due to underpayment by Medicare and Medicaid.* The study estimated that, nationally, private insurance plans pay $34.8 billion more in hospital costs due to cost-shifting from Medicare and $16.2 billion in hospital costs due to Medicaid cost-shifting, and they pay $14.1 billion more in physician costs due to Medicare cost-shifting and $23.7 billion more in physician costs due to cost-shifting from Medicaid. All told, the study said that $88.8 billion is being shifted to private health plans from Medicare and Medicaid. The study said that because of cost-shifting, hospital and physician costs for private insurance payments were 15% higher than they would be otherwise.
At the press conference when the study was released, reporters repeatedly asked if AHA, AHIP, and BCBSA felt this meant that Medicare and Medicaid spending should be increased by $88.8 billion. No one was willing to say those exact words; they merely re-emphasized the magnitude of the cost-shifting that was going on and urged that it be taken into account as national healthcare reform plans are formulated. In the press release the groups issued, Karen Ignani of AHIP called it a “hidden tax” on families and employers.
Unfortunately, no reporter asked the obvious question — Is it possible in some cases that Medicare and/or Medicaid are actually paying an appropriate price for hospital or physician, and that private insurance plans are merely subsidizing inefficiency? There is no doubt that there is inefficiency and overuse in healthcare; some have estimated that as much as 40% of the spending in healthcare is wasted on inefficiencies and unnecessary treatments. Even if that is only half-true, eliminating the inefficiencies would mean that Medicare and even Medicaid may be paying closer to the correct amounts, at least in aggregate.
The study did not attempt in any fashion to determine whether the amounts Medicare or Medicaid were paying were sufficient to actually deliver good-quality care. It merely looked at what hospitals and physicians reported as their average costs, and measured the difference between what commercial plans were paying relative to those costs vs. what Medicare and Medicaid were paying.
No one really knows for sure what it really costs to deliver specific types of care, or what it could cost if obvious inefficiencies were eliminated. It’s likely that in some cases, commercial insurers are overpaying, and in other cases, Medicare and Medicaid are underpaying. In some cases, such as with primary care, both commercial insurers and Medicare are underpaying. But there is certainly no basis for saying that Medicare and Medicaid are underpaying by a total of $89 billion simply because they’re paying that much less than commercial insurers are.
What is needed is a system that enables healthcare providers to define clear prices for their services and then to compete on those prices as well as on the quality of care they provide. Then it would make sense for all payers to pay the same amount for those services.
*If (a) it costs a healthcare provider $1,000,000 to provide a service to 100 people, i.e., $10,000 per person, and if (b) the 100 people are covered by two different insurers and one of the insurers only pays $8,000 per person for its 50 members, then (c) if the other insurer pays $12,000 per person in order to cover the provider’s total costs instead of $10,000, it is said that $200,000 has been cost-shifted from the first insurer to the second insurer.
It’s obvious that in any environment where there are multiple stakeholders, “win-win” solutions are more likely to be successful than “win-lose” approaches. In healthcare, there are three key categories of stakeholders — patients, payers (e.g., health insurance plans), and providers (hospitals, doctors, etc.). So an important question about any healthcare quality improvement effort is whether it’s a “win-win-win” for all three groups.
All efforts to improve healthcare quality are presumably “wins” for the consumer/patient, assuming that quality is measured appropriately in terms of patient outcomes. (Sometimes simply providing more healthcare services is represented as “higher quality,” but that is marketing, rather than true quality.)
However, not all quality improvements are “wins” for both payers and providers. In many cases, providers argue that they need more money to improve quality, with no assurance to payers that costs will be reduced elsewhere. Such initiatives may be win-wins for the patients and providers, but losers from the viewpoint of the payers. For example, the challenge that many initiatives to implement the patient-centered medical home are facing is that they are framed as asking payers to spend more money for primary care delivery in order to improve quality for patients. From the payer’s perspective, it’s win-win-lose, not win-win-win. (As noted in a previous post, it doesn’t need to be that way.)
At the other end of the spectrum, there are quality improvements that are clear wins for both patients and payers. For example, reducing hospital-acquired infections is good for the patient, and often avoids extra payments to cover complications. However, in many cases, because of the way current payment systems are structured, hospitals lose money by preventing infections — they don’t just lose revenue, but since their revenues go down more than their costs go down, their operating margins also get worse. (The new policies prohibiting Medicare payments for infections won’t solve this — more on that in a future post.) So these are also win-win-lose propositions, but this time from the provider’s perspective.
Are there win-win-win solutions? Yes, but only if the right kinds of changes in payment systems are made. For example, a hospital that reduces infections and other adverse events should be paid more for the successful cases than it is today, but nothing for the cases with adverse events. Under that kind of payment structure, it has both a financial incentive and a quality incentive to reduce the adverse events. Why does it have to be paid more for the successful cases? Because before, the failures were actually subsidizing the successes. With better quality, the hospital’s fixed costs will be spread over a smaller number of cases, increasing the average costs of care. That’s why the hospital can be worse off financially if it reduces infections — the payments it receives would go down more than its costs would decrease.
But won’t higher payment for the successful cases increase healthcare spending? No, not as long as the higher payment rate for the successful cases is offset by the reduction in spending for the unsuccessful cases (since they will no longer receive additional payment). The payer can still spend less than it did before (just not as much less as it would have if the infections were reduced under the current payment system), but the provider’s losses are reduced or eliminated. That enables a win-win-win solution for all three.
The importance of finding win-win-win solutions is why quality improvement needs to be coupled with reforms in healthcare payment systems.
Many people are convinced that the only way to significantly reduce healthcare costs is by some type of rationing — limiting the kinds of services that health insurance will pay for. But there are ways to significantly reduce healthcare spending without taking away anything that consumers want.
A perfect example is hospital readmissions. Research studies and quality-reporting initiatives around the country show that 15-25% of people who are discharged from the hospital will be readmitted to the hospital within 30 days or less. Many of these readmissions are for a complication or infection arising from the initial hospital stay. In many other cases, they are simply a repeat of the same situation that led to the first hospitalization — for example, a patient with a chronic disease such as asthma, chronic obstructive pulmonary disease (COPD), or congestive heart failure who doesn’t understand how to manage their condition properly.
The patients certainly wouldn’t mind having fewer hospitalizations. Billions of dolllars in spending on hospital stays could be saved if these hospitalizations could be avoided. In other words, reducing readmissions is a win-win for both cost and quality, without a hint of rationing. And study after study has shown that very simple, low-cost interventions, such as patient education about chronic disease management, can dramatically reduce hospitalizations.
So what’s standing in the way of success? Answer: the broken healthcare payment system. In many cases, health insurers won’t pay for the services that would keep patients out of the hospital, even though they will pay every time they go in to the hospital. (Many people believe that hospitals don’t get paid for readmissions, but in the vast majority of cases, they do get paid by both Medicare and commercial payers.) And because of that, both hospitals and doctors would see their revenues decrease if hospital readmissions rates were reduced.
Medicare and some commercial payers are now discussing whether to reduce or eliminate payments to hospitals for readmissions in order to create an “incentive” for them to reduce readmissions. But this assumes that the cause of the readmission is under the control of the hospital. In some cases it is, but in many cases it is not. That doesn’t mean the readmission isn’t preventable, but rather that the change in care has to happen outside the hospital — often in the primary care practice. And unfortunately, the payment system is broken there, too.
The solution? Marrying the Patient-Centered Medical Home and Readmission Reduction. More on that in a future post.
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