This wrong-headed approach has been encouraged by the way the federal Patient Protection and Affordable Care Act (PPACA) was written. Contrary to popular belief, there isn’t a section of the law titled “Accountable Care Organizations.” The provisions about ACOs are in a new section of the Social Security Act entitled “Medicare Shared Savings Program”. In other words, the law defines a payment method, and then defines ACOs as entities that can accept that payment method.

What we SHOULD be doing instead is identifying what kinds of changes care delivery systems can make to get better outcomes and lower costs, and then defining the payment changes needed to support those changes in care.

For example, a clear focus for ACOs should be reducing the rate at which people with chronic diseases are admitted to the hospital. We know that can be done. Study after study has shown that things like having nurses make home visits, encouraging patients to call their doctor early, and improving access to primary care practices on evenings and weekends can dramatically reduce ER visits and hospitalizations. But current fee for service payment systems don’t pay for the nurse care managers, they don’t pay doctors to talk to patients on the phone, and the payers don’t even tell PCPs how often their patients are being admitted to the hospital. So the obvious solution is to pay for those things, in return for PCPs accepting accountability for reducing admission rates.

Another example is hospital-acquired infections. Tens of thousands of people still get infections in hospitals, and some infection rates are going up, even though we know infections can be eliminated with appropriate protocols. But under current payment systems, hospitals lose money – a lot of money – when they prevent infections. Again, the solution is obvious – pay for care that has a warranty, the same way we pay for products and services in every other industry.

Those care delivery changes should be central to an Accountable Care Organization, and the priority should be creating payment changes that support those delivery changes. But most people in Washington aren’t talking about those changes. Instead, they’re mostly talking about “shared savings.” Unfortunately, shared savings does nothing to enable the PCP to afford to hire a nurse care manager; it provides no upfront money and only the uncertain prospect of future payments long after the PCP pays the nurse’s salary. Shared savings does little to change the fact that hospitals lose money by preventing infections or readmissions – losing less money is still losing money.

In fact, shared savings does nothing to fix any of the problems with the current fee-for-service system. In other words, shared savings isn’t really fundamental payment reform. It’s just another form of pay-for-performance (P4P), and a pretty weak form at that. And we know that pay for performance has shown very modest success in overcoming the powerful negative incentives built into the underlying payment system.

Shared savings can be useful if it’s paired with appropriate changes in the underlying fee-for-service structure. However, too many people are assuming that the “right” payment reform is merely shared savings on top of the current fee for service system, and nothing else.

Indeed, too many discussions about payment reform today are based on the erroneous belief that we have to give financial incentives to doctors and nurses to provide better care. The reality is that most doctors and nurses WANT to provide better care, they don’t need a financial incentive to do that. The problem is that the current payment system penalizes them for doing the right thing. So the key thing is to start paying for the right things and stop paying for the wrong things, i.e., remove the disincentives.

If we aren’t explicit about how we think care is going to improve and how payment changes will support that, what will consumers think when they hear that ACOs are fueled by “savings?” They’re likely going to assume the worst – that rationing is going to occur. And if we don’t ensure the payment system supports genuine improvements in care, some providers are going to use rationing as the way they create those savings.  If they do that, it will taint the ACO concept for everyone, the same way that bad versions of managed care in the 1990s led to the demise of good versions.

It’s also unrealistic to expect that providers are going to suddenly be able to manage the total cost of care when they haven’t been expected to manage any costs of care for decades. So if a small physician practice or an IPA comes forward and says “we’re willing to take accountability for some things – hospital admissions, ER visits, use of high-tech imaging,” we shouldn’t say “No, you can only be an accountable care organization if you’re able to take accountability for total costs right away.” In fact, we should do exactly the opposite: we should provide payment systems that enable them to tackle the costs that they can, and not penalize them for the costs they can’t control. Shared savings doesn’t do that, because it’s based on total costs: for example, even if a provider successfully reduces ER visits or preventable readmissions, if costs go up somewhere else – in a part of the system they have no control over – they may get no shared savings payment at all to cover the upfront costs they had to incur to achieve the successes they had.  That’s just another disincentive to change.

To make matters worse, even if a provider comes forward and says “I’m willing to take accountability for the total costs of care for a subset of my patients,” they won’t be able to do that, either. Why? Because under the shared savings model, Medicare will determine which patients the provider is accountable for through retrospective statistical attribution, i.e., the provider won’t know who its patients are until after the care has already been delivered.

Think about it – is it better to have only 10% of the providers in the country taking accountability for 100% of their costs while the other 90% are accountable for nothing, or is it better to get 80% of the providers taking accountability for 50% of costs (or whatever portion of costs they can control)? Simple math shows the latter is far better, but a pure shared savings is likely to result only in the former.

Fortunately, although the new Section 1899 of the Social Security Act is titled “Shared Savings,” a separate part of PPACA (Section 10307 of the bill) added language to Section 1899 giving the Secretary of HHS the “Option to Use Other Payment Models.” PPACA says that this can include partial capitation or “any payment model that the Secretary determines will improve the quality and efficiency of … services…” This provision deserves much more attention than it has received to date, because it provides the flexibility that the Medicare program needs to support the specific kinds of care changes that ACOs should be implementing.

His example is “an elderly woman who presents to the emergency room with syncope occurring at church.”

Hospitalist 1 “takes time to gather history from the patient, family, eyewitnesses, and the primary care physician, and requests a medication list and outside medical records, which reveal several recent and relevant cardiac and imaging studies. He performs a careful examination, discovers orthostatic hypotension, and his final diagnosis is syncope related to volume depletion from a recently added diuretic as well as a mild gastroenteritis. The patient is rehydrated and discharged home from the emergency room in the care of her family, and asked to hold her diuretic until seen by her family physician in 1 or 2 days.”

Total Cost: $935
Level 4 emergency room visit $745
Level 4 internal medicine consultation $190

Hospitalist 2 “tells the staff to get the patient a telemetry bed. He sees the patient 2 hours later when she gets to the floor. The family has gone home and the mildly demented patient does not recall much of the event or her past medical history. The busy hospitalist constructs a broad differential diagnosis and writes some quick orders to evaluate the patient for possible stroke, seizure, pulmonary embolism, and cardiac ischemia or arrhythmia. He also asks cardiology and neurology to give an opinion. The testing is normal, and the patient is discharged with a cardiac event monitor and an outpatient tilt-table test scheduled.”

Total Cost: $18,749
Level 4 emergency room visit $745
Level 3 history and physical $190
Laboratory evaluation: CBC, CMP, cardiac panel, urinalysis, D-dimer $843
EKG $150
Head CT $1426
Chest CT angiogram $2120
Brain MRI $3388
Echocardiogram $687
Carotid ultrasound $911
Level 4 neurology consult $190
Subsequent visits day 2, day 3 $150
EEG $520
Level 4 cardiology consult $190
Nuclear stress test $1359
Specialist subsequent visits $150
Telemetry bed, 3 days $3453
Discharge, low-level $90
Cardiac event monitor $421
Tilt-table test $1766

The basic concept is fairly simple: if a healthcare system or provider reduces total healthcare spending for its patients below the level that the payer (Medicare or a private health insurance plan) would have otherwise expected, the provider is rewarded with a portion of the savings, i.e., the payer still spends less than it would have otherwise, and the provider gets more revenue.

Unfortunately, there are some fundamental weaknesses in the shared savings approach that make it far less desirable as a payment reform than it might first appear:

1. It’s P4P, Not Payment Reform. Shared Savings is just another form of pay-for-performance (P4P). It doesn’t actually change the current payment system at all – key primary care services that aren’t paid for today (like nurse care managers for chronic disease patients, phone and email consultations with physicians, etc.) still wouldn’t be paid for, services where fees are too low to cover costs would still lose money, etc. (Although shared savings proponents would argue that it does pay providers for things that are under- or non-compensated today, the problem is that the payment, if it comes, arrives long after the service is delivered, and may or may not be adequate to cover the cost of the services delivered). It’s not even clear if the reward through shared savings would be sufficient to offset the profit that the provider is losing by reducing the number of services it provides, particularly if only one payer is sharing savings but the provider changes its approach with all of its patients. Creating a P4P incentive based on total spending is a good idea, but only if it is coupled with changes in the underlying payment system.

2. It Gives Providers Risk Without Resources.At first glance, shared savings looks like the perfect deal for the healthcare provider – if the provider is successful in reducing total costs, it gets a bonus; if it’s not successful, it suffers no penalty. The flaw in the logic is assuming that what the provider needs to do to achieve success is costless. For example, although there are programs that have been demonstrated to reduce preventable hospitalizations, those programs require an increase in upfront spending by the primary care practice or the health system that implements them. Even if the shared savings payment would ultimately cover the provider’s costs, it has no way of knowing whether this will be the case, and there is a non-zero risk that even if it reduces costs, it will not meet the threshold established by the payer to declare “savings,” or it will end up spending more money on a net basis even after any shared savings are paid. Moreover, when multiple providers are involved, shared savings creates a variant of the “prisoner’s dilemma” – if one provider makes the investment to improve care but others don’t, the savings may not be sufficient to cover that provider’s costs; conversely, if most providers make the investment, any individual provider can increase their profit by sharing in the savings without making any upfront investment themselves.

3.  It Rewards Improvement Rather Than Performance. The communities and providers that have the most to gain from shared savings are the ones that are “wasting” the most resources today, through high rates of hospital admissions, use of unnecessary procedures, etc. In contrast, the communities with relatively low costs and high quality of care are already “saving” Medicare and other payers significant amounts of money but with no reward. The first group can improve relatively easily, since they have so much “low-hanging fruit” to pursue. The latter group, even if it can still improve further, may need to invest significantly more resources to do so, yet it will likely receive far less reward relative to the costs it incurs. In effect, shared savings exacerbates the current inequities in the payment system. The problem is even worse if the payer chooses to take a disproportionate share of the savings first, as Medicare has done in the Physician Group Performance Demonstration. Although this is intended to avoid rewarding providers for reductions in spending simply due to random variation, the practical effect is to increase the amount the provider has to spend or lose before receiving any reward through shared savings.

4.  It’s Inherently Arbitrary. How much of the savings should be shared? Merely picking a percentage between 0 and 100% provides no assurance to the provider that the costs they incur or the losses they would sustain will be offset by the amount shared. Although it would theoretically be possible to select a percentage that matches the amount of the savings to the cost of the specific investments that the providers plan to make, this would have to be done on a case-by-case basis, rather than on a uniform basis across the country.

5.  It’s Not a Sustainable Approach. Even in a place where there is the potential for significant savings, what happens after most of the savings is achieved?

• If shared savings is viewed as a one-time bonus payable in a year that savings is achieved, then the motivation it creates for providers to change disappears when there is little no additional bonus to be achieved in the future. Moreover, if there is no downside risk to the provider for increased costs, one-time shared savings creates the perverse incentive for the provider to again increase utilization of services in order to create a new pool of potential “savings” to go after in the future. (Similarly, it creates an incentive for low-spending regions to increase spending temporarily in order to lower it again and get a bonus payment they would not have otherwise received.)
• If the shared savings payment were not a one-time payment, but were to be paid repeatedly each year once achieved, there would need to be a mechanism for determining what kind of future growth is acceptable in a region that has achieved savings initially. For example, if a region reduces costs by 5% during the first savings calculation period, but then it experiences cost increases slightly higher than other regions in the second year, would its shared savings payment be reduced, and if so, by how much? What if the payer impose an even more stringent set of standards for spending in the future, which would reduce or eliminate repeated payments? From the provider’s perspective, it would need to understand in advance the requirements to achieve shared savings payments over an extended period of time in order to make investments that require a multi-year payback period.

These problems do not meant that shared savings is totally without merit, but it cannot effectively serve as the primary mechanism for healthcare payment reform.

Many people believe that healthcare costs can’t be reduced without rationing of services, but in fact, there are ways to significantly reduce healthcare spending without taking away anything that consumers want. A perfect example is hospital readmissions. Research shows that 15-25% of people who are discharged from the hospital will be readmitted to the hospital within 30 days or less, adding billions of dollars to healthcare spending. Many of these readmissions are preventable through simple, low-cost interventions, both inside the hospital and after discharge. But hospitals and doctors lose revenue if they reduce readmissions, and in many cases, Medicare and other 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 into the hospital.

Most hospitals and doctors have no idea how many of their patients are readmitted, so the first step in reducing readmissions is producing reports on readmission rates, similar to what Florida and Pennsylvania now do. The second step is to change Medicare and other payment systems so they support programs that will reduce readmissions and stop rewarding hospitals and physicians that have high readmission rates.

2. Create “Medical Homes” With a Focus on Improved Outcomes

A major reason for high rates of emergency room use, hospitalization, and readmission is the inadequacies in the current primary care system.  A number of efforts are underway to improve the quality of primary care delivery through programs to create “patient-centered medical homes.”  Most of the medical home programs that have been proposed or implemented to date make higher payments to primary care practices that meet certain standards, most commonly the medical home standards developed by the National Committee for Quality Assurance (NCQA). But there is no guarantee that merely meeting such standards will result in either better outcomes or lower costs, leading payers and providers to try and keep the payments for medical homes as low as possible.

But this creates a Catch-22: if the payments are too low to allow the primary care practices to make the changes in care needed to improve patient outcomes, then all that will happen is that costs will go up, and the medical home projects will be labeled failures.

The solution is to have medical homes explicitly focus their efforts on improving outcomes and controlling costs, such as by reducing preventable hospital admissions and readmissions, emergency room visits, etc. For example, the largest number of hospital readmissions occurs among patients with chronic disease, and studies have shown that with better patient education, self-management support, and coordination of services -precisely the kinds of improvements medical homes are intended to make – hospital admission rates for these patients can be dramatically reduced, thereby creating a clear business case for the financial investment in medical home services. Medicare and other payers should provide increased funding for medical homes based on improving outcomes, rather than merely meeting process standards, which would help to reduce spending as well as improve the quality of life for patients.

3. Support Regional Health Improvement Collaboratives

Reducing hospital readmissions and creating outcome-driven medical homes would represent a major step in transforming today’s volume-driven healthcare system into a value-driven system. But to be successful, any such step requires coordinated changes in multiple areas – reforming payment systems and benefit designs to reward quality and value, redesigning care delivery systems to be more efficient and better coordinated, creating effective performance measurement and reporting systems, and educating and assisting consumers to take an active role in maintaining their health and choosing high-value healthcare services.

Moreover, these changes will need to be designed and implemented differently in different parts of the country, in light of the tremendous diversity in payer and provider structures across the country. No single national solution is likely to be successful.

Fortunately, a growing number of communities have formed Regional Health Improvement Collaboratives to build consensus among healthcare providers, health plans, employers, consumers, and others on the changes needed in their local healthcare systems and to help support and coordinate the implementation of those changes. Over 50 Regional Health Improvement Collaboratives across the country provide critical services supporting transformation, ranging from public reporting on healthcare quality and costs to training and technical assistance to providers to help them improve the quality and value of their services.

Federal support is needed to help Regional Health Improvement Collaboratives continue and expand these important roles. In addition to the technical assistance that is currently being provided through the Agency for Healthcare Research and Quality (AHRQ), the Federal government needs to (1) provide funding for Regional Health Improvement Collaboratives to help them maintain and expand their services, and (2) authorize Regional Health Improvement Collaboratives to analyze Medicare claims data and to publicly share standardized measures of the cost and quality performance of providers and practitioners based on those data.

4. Authorize Medicare Participation in Local Payment Reform Pilots

A major cause of many other cost and quality problems in health care today is that payment systems reward providers for delivering more services and penalize them for providing better-quality services and improving health. As a result, many Regional Health Improvement Collaboratives are working to design a range of reforms to health care payment and delivery systems and to encourage the payers in their regions to implement those reforms. However, since Medicare is often one of the largest payers in a region, it is very difficult for health care providers in a particular community to improve the way they deliver care if private payers improve their payment systems but Medicare does not.

Although the current payment reform demonstrations developed by the Centers for Medicare and Medicaid Services (CMS) are laudable and should continue, CMS also needs to have the authorization and resources to participate in regionally-defined payment and delivery system reform projects that can present a
clear business case for controlling costs as well as improving quality.

As a result, it’s up to the health plan to keep costs down by negotiating with providers about the price they will accept to be included in the network.  As in any negotiation, success depends heavily on the ability to walk away from a negotiation.  Small providers rarely feel that they can walk away no matter what a plan demands.  And that leads to pressures for small providers to consolidate or organize themselves to increase their negotiating power.

However, because most consumers like to have maximum choice of providers, health plans also seek to make their networks as broad as possible.  As a result, the plans’ ability to walk away from the negotiation is diminished, and consequently their ability to hold costs down through this method is also diminished.

This has led to a desire to make networks narrower, in order to create stronger negotiating pressure.  Indeed, there have been recommendations that Medicare should be authorized to estabish a network like a commercial plan and to extract even greater price concessions from providers for being included.

The phrase “we need to think outside the box” was invented for situations just like this.   As long as people perceive that the only way to organize healthcare is for payers to create networks of providers that consumers will use, it will be impossible to ever find a solution to the “broad access” vs. “cost control” tradeoff.

A completely different paradigm is needed, and fortunately, it’s already been tried and it works.  Let providers form networks, and let consumers choose between them based on cost and quality.  The Patient Choice system in Minnesota has done this — providers organize themselves into care systems (they don’t have to be formal integrated systems under a single corporate ownership).  The care systems define their prices for providing comprehensive care to consumers, and the consumers pay more if they use a higher-price system.   Consumers have complete freedom as to which care system they use – they’re not constrained to choose from a subset selected by the plan.  Consumers pay more if they use systems with lower value, but it’s not because the provider is in or out of a plan’s network, it’s because that provider is part of a system that has decided to charge more.  Importantly, care systems function more like true coordinated systems of care with a focus on managing cost and quality, whereas current “networks” are little more than lists of uncoordinated providers.   Providers organize themselves into systems to do a better job of managing costs and quality, rather than to increase their negotiating power with health plans.

It’s hard to imagine how Medicare would ever be able to establish a network in the way commercial health plans currently do.  But it’s not hard to imagine how Medicare could create a Patient Choice-style system.  It would simply ask Medicare providers to form networks/care systems and “bid” to provide Medicare services, i.e., define the price that they will charge for caring for beneficiaries.  Medicare wouldn’t select the winning bidder — the Medicare beneficiary would.  Lower-price networks/care systems with equivalent quality would get more Medicare beneficiaries as patients, which would encourage the providers in the other networks to become more efficient so they could lower their costs.  It’s worked in Minnesota with much smaller patient volume — imagine the impact if Medicare were to participate. 

It may sound radical, but it’s not all that different from the Medicare Advantage program, where beneficiaries choose a health plan based on its cost and quality, and the health plan then contracts with providers to deliver the care.  The Patient Choice model uses the existing fee-for-service structure for both billing and payment, which makes it easy for providers to participate.

That’s a little like saying that the only reason the country is in a recession is that every American doesn’t have a Blackberry to improve their productivity.

There’s no question that many aspects of care coordination and quality improvement are very difficult for healthcare providers to deliver without appropriate health IT support.  It’s inefficient and impractical to flip through paper patient charts to find out which patients are due for an immunization or a diabetic checkup, when a simple query of an electronic database could provide the answer quickly and easily.  It’s inefficient and problematic for hospitals and primary care practices to be faxing each other admission and discharge information in order to coordinate care transitions when the information could be electronically transmitted and stored in a common electronic health record.

But merely having an EHR doesn’t guarantee that providers will, in fact, deliver better care to diabetics or more effectively coordinate hospital care and discharges.  The physician practice and/or hospital must still redesign the actual processes of care to achieve those goals.  The EHR can make that possible, or at least much easier, but only if the EHR is designed in a way that actually supports the improved care processes. 

And therein lies the rub — it’s hard for today’s EHR systems to be designed to support improved care processes, when the improved care processes don’t exist.  Indeed, it’s likely that, if anything, today’s EHRs will best match the way providers work today, rather than the way we want them to work in the future.

For example, most studies have found that the key computer support for improved management of chronic disease patients, preventive care, etc. is a patient registry.  Yet most commercial EHR systems do not have, or do not come with, a registry component.  Similarly, it’s not surprising that the only research showing an impact of EHRs on quality is from healthcare systems which developed EHRs in-house, since it’s more likely that an EHR will match care delivery processes if it’s developed in cooperation with the practitioners who will use it, rather than independently by an IT company.

Does that mean we should not be pushing aggressively for development and implementation of EHRs?  No, but it means that we shouldn’t be pushing for EHRs in isolation – they should be developed and implemented as integral parts of quality improvement initiatives, ideally at a regional level, rather than provider by provider.

If health plans can’t medically underwrite, how will they compete? Victor Fuchs, in a recent article in Health Affairs, says “If insurers have to provide a standard benefit package with guaranteed issue and no pre-existing disease exclusions, receive risk-adjusted premiums, and have their outcomes monitored, they will have a strong incentive to change their business model from excluding sick patients to actually managing care for efficiency and value.  This is how competition can work to control costs.”

In another corner of the health reform arena, there’s deep concern about the decline in primary care and a major push for supporting creation of the patient-centered medical home.  One of the core principles of the medical home is to provide comprehensive management and coordination of a patient’s care.

So which is it?  Do we want health plans to manage our care, or do we want primary care practices to do it?  The experience of the 1990s indicates pretty strongly that people don’t like health plans managing their care.  (Based on the same experience, it’s not even clear that people like primary care practices doing it either, but the PCP gatekeeper role then was being driven by the health plan, not the practice itself.)

Yet most health plans have created an extensive care management infrastructure inside their own walls and they are already competing for business based on how extensive it is.  Drive down the highway in any major city or turn on the TV to see the proliferation of advertisements by health plans.  The message (unfortunately) isn’t how much less they cost, but how much they can help you manage your health care.

So not surprisingly, one of the challenges in implementing medical home initiatives is that the improved  services in the medical home appear to duplicate services the health plan already claims to be delivering.  Why should the health plan pay primary care practices more so they can hire nurse care managers, when the health plan is already paying for them on the health plan’s own staff, and advertising that that’s a way they control costs?  Why should the health plan pay more for a physician practice to install IT systems, when the health plan already claims to provide extensive data and decision support to help physicians better manage their patients?

The problem with having these services at the health plan, rather than the physician practice, is that they cannot be effectively integrated into care delivery for patients.  Health plan care managers try to help patients manage their care independent of the physician, when care management and physician treatment should be closely coordinated.  Physicians need one effective IT system they can use for all of their patients, not a half dozen systems, each of which only works for the patients from a particular health plan.

In order to truly fix the healthcare system, there will need to be a resolution to what, if any, care management services should be provided by health plans instead of by health care providers.  The likely answer, at least in the long run, is “as little as possible.”  There will always be some patients who can’t find or won’t use a medical home, and in those cases, the health plan (assuming the patients have a health plan) may be the only practical way to provide a semblance of care coordination.  But if the goals of the medical home advocates are realized, there will be fewer and fewer such patients over time.

Moreover, resolving this also helps resolve one of the key barriers to implementing the medical home — maintaining budget neutrality.  Health plans are reluctant to pay more for medical home services because it may increase spending with no guarantees of offsetting reductions in other costs.  Yet an obvious place to achieve offsetting reductions is reducing the spending on similar services inside the health plans.  Moreover, in light of the results of several recent studies showing low effectiveness of disease management programs, such a shift may result in better outcomes and lower costs.

However, payers, and the purchasers they represent, are reluctant to pay more for medical home services without assurances that patient outcomes will be better and that costs will be saved elsewhere.   And since there is no guarantee that meeting the NCQA standards will result in either better outcomes or lower costs, payers want to hedge their bets by making the payments as low as possible.  But this creates a Catch-22:  if the payments are too low to allow the primary care practices to make the changes in care needed to improve patient outcomes, then all that will happen is that costs will go up, the medical home projects will be labeled failures, and the healthcare system will return to its ineffective status quo ante. 

Is there a way out of this dilemma?  The answer could lie in the policy discussions being held around the country about ways to reduce preventable hospital readmissions.  As noted in a previous post, many hospital readmissions aren’t directly the fault of the hospital.  The largest number of readmissions occurs among patients with chronic disease, and their frequent admissions to the hospital reflect gaps in the primary care they’re receiving — which is precisely the problem the medical home projects are trying to fix.   Studies have shown that with appropriate education and self-management support, hospital admission rates for chronic disease patients can be dramatically reduced, but today, payers don’t pay adequately or at all for those patient support services.

So on the one hand, we have a primary care improvement initiative without a clear outcome, and on the other hand, we have an outcome improvement goal without a clear strategy for achieving it.   Could a marriage of the two can address the weaknesses of each?  Absolutely:  Payers should pay primary care practices adequately to provide evidence-based medical-home services to chronic disease patients at risk of hospitalization, and those practices should agree to an explicit focus on reducing the rates of hospital admissions and readmissions among those patients.  The savings achieved by payers from reduced hospitalizations would more than offset the costs of the improved services, justifying funding those services at levels sufficient to achieve the desired results.

A retired university professor found that an anti-nausea drug (Zofran) that he was paying $557 per month for at his local Rite Aid was available from an independent pharmacy for $46.58.    This is not a brand name vs. generic difference — it’s the cost difference for the same generic product.  In shopping around, he found that CVS was charging $420, Walgreen’s was charging $410, and Wal-Mart was charging $110, quite a variation, and all higher than the independent.  According to the article, the wholesale price was under $17.

He had an unusually strong incentive to shop around — even though his prescription plan pays 80% of the cost, he has to front the money and get reimbursed.  People with flat co-pays wouldn’t have either the incentive of the percentage co-insurance or the need to float the funds for the full price, and would likely go to the closest store.  

A spokeswoman for Rite-Aid confirmed that.  “Most of our customers are insured, and they have a wide choice of pharmacies for prescription services, and so convenience, value-added services, and days of operation, rather than price, are the primary drivers” of where customers choose to go, she said.

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.