Despite the same tired politics,

Steven Pearlstein
Columnist May 21, 2011

Newt Gingrich spent much of the past week explaining why he was against turning Medicare into a voucher program before he was for it.

That was after Mitt Romney rolled out his long-awaited explanation for why he was in favor of requiring individuals to buy a basic health insurance plan before he turned against that idea.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

And Tom Coburn last week dropped out of the bipartisan “Gang of Six” budget talks in the Senate because of his insistence on deeper cuts in Medicare spending, the same cuts that he and other Republicans said they were against during last year’s election campaign.

Health care, it seems, is the political issue that won’t go away, all the more so because Republicans still can’t seem to figure out what they really stand for. While the politicians continue with their posturing and hair-splitting, however, the rest of the world is actually making some progress by improving quality and slowing the growth in health-care spending.

One of the rituals in the health-care industry is annual arm wrestling between private health insurers and hospitals over how much hospital rates will go up the next year. Over the years, the hospitals have gotten the upper hand in these negotiations, particularly as they have organized themselves into regional and national chains that are “must haves” in terms of insurers’ provider networks. So it’s not uncommon that the hospitals have won rate increases well in excess of inflation, which of course are passed on to thee and me in the form of higher premiums.

Rates, however, aren’t the only driver of spending. Just as important as the cost of MRI or a night in a hospital is how many MRI and hospital nights are utilized. And decades of research have revealed that a surprising amount of that use is unnecessary because it results from avoidable medical errors or failure by doctors and nurses to follow best medical practices.

This insight — that better quality leads to lower cost — has become the focus of the effort to slow the growth in health-care spending.

Medicare kicked things off by requiring that all hospitals begin to collect data on various quality measures. The hospitals screamed and complained the metrics were unfair, but they eventually complied. Now the results are published on the Medicare Web site and are widely used by insurers and private groups to rate the quality and cost-effectiveness of individual hospitals.

For taxpayers, the payoff to all this was written into the new health reform law. Starting in October, Medicare will launch a program it calls “value-based purchasing” in which hospitals can see that their reimbursement rates will rise or fall by one percentage point based on how they do on their quality measures, both in absolute terms and relative to their score the year before. In 2017, the stakes will double, with a two-percentage-point variation allowed in each direction. And because of the way the incentives are structured, there will be a competitive dynamic that drives the benchmarks higher every year — a “race to the top” in hospital quality.

Private insurers are also getting in on the act. Over the past few years, most of the big insurance companies have begun to collaborate with willing hospitals to link annual rate increases to quality improvement. This year WellPoint took all of this one step further by announcing that its contracts will not allow for any increase for any hospital that fails to reach an agreed-upon set of quality benchmarks, with bonuses for hospitals that exceed them. Given that annual rate increases have averaged 8 percent, we’re talking real money here.

Dr. Sam Nussbaum, WellPoint’s medical director, reports that the insurer has received relatively little pushback on its pay-for-performance approach, which is included in about a third of WellPoint’s hospital contracts. And therein lies the big news. While medical providers have developed elaborate rationalizations for why health spending rises so much, they know they cannot offer any excuses for inferior quality — the public wouldn’t stand for it. And unlike cost-cutting, Nussbaum says, improving the quality of care is something that resonates with doctors and hospital staff.

“Hospitals are now going to be forced to make changes they’ve avoided for years,” says Helen Darling, president of the National Business Group on Health, which represents larger employers. “If they don’t become more effective and efficient, they won’t be paid.” They also won’t survive.

Paying for quality is a big first step on the road to genuine reform of the health-care system, but in terms of bending the cost curve, it takes you only so far. The bigger and more important step is to change the financial incentives for doctors, hospitals and other providers so that they have a financial interest in holding down costs by eliminating care that isn’t necessary or offers little benefit relative to its cost.

Forty years ago, health reformers thought they figured out how to do that when they pioneered the first health maintenance organizations, which were networks of hospitals and salaried doctors that received a fixed amount of money every year for taking care of the medical needs of each of its patient members, irrespective of how many tests they did or procedures they performed. Rather than some insurance company like WellPoint or Aetna taking the financial risk of paying for an unknown amount of health care for a premium set at the beginning of the year, the hospitals and doctors would, in effect, become their own insurance company. That would give them the legal and financial incentive to work together to provide all the care that is necessary, but not more.

In theory, it is possible to construct an “open” HMO in which patients are free to mix and match doctors and hospitals as they choose, and rely on an insurance company to manage care and hold down costs. In fact, we did it briefly in the 1990s when many employers moved to HMOs, and insurance premiums increased hardly at all for a few years. But when doctors and patients recoiled at being told by insurance clerks what services could and could not be provided, the managed-care revolution fizzled.

Now we’re about to try again, with Managed Care 3.0. This time it’s going by the name of Accountable Care Organization, but in many respects it looks more like the original closed-panel HMOs built around networks of hospitals and salaried doctors that took on the insurance function and the insurance risks. During the health reform debate last year, President Obama held up ACOs such as the Mayo Clinic in Minnesota, the Cleveland Clinic in Ohio, Intermountain Health in Utah and Geisinger Health System in Pennsylvania as having cracked the code by using coordinated care to increase quality and lower costs. And at the White House’s insistence, a key feature of the health reform law was to find a way to bring ACO-like care into Medicare, which until now has been largely organized around a fee-for-service model, with the government having all of the insurance risk and patients managing their own care.

Last month, Medicare issued the first draft of its ACO regulations, more than 450 pages of lively reading. Donald Berwick, the head of the agency, says he is confident they will allow Medicare to offer an option for seniors that combines the freedom of choice of a fee-for-service system with the cost and quality benefits of coordinated care.

But the reaction from the industry has been one of disappointment. Hospitals that for the past year have been laying the groundwork to become ACOs — hiring doctors on to their staffs and making alliances with labs, nursing homes and home care providers — complain that the proposal requires too much risk for too little reward. And even the successful ACOs so often lauded by Obama now say there is so much about the proposal that is inconsistent with the way they operate that they would not participate in the program as proposed.

Berwick assured me that the regulations are only in the proposal stage and he’s very open to suggestions on how to make them better. But he surely realizes that he’s walking in a political minefield. If he moves too much in the direction of managed care, he will invite another round of political bromides about death panels and rationing and restrictions on what docs Grandma can go to. If he moves too much in the direction of traditional fee-for-service, he won’t generate the savings and quality improvements that the system needs to survive.

They can debate all they want up on Capitol Hill about whether the growth in Medicare funding will be cut by $400 billion or $500 billion over the next 10 years, but let me assure you they won’t get anywhere near those numbers unless initiatives like value-based purchasing and Accountable Care Organizations succeed. While Newt and Mitt and the other Republicans are still stuck in the same stale debate of the past 20 years, the rest of the world has moved on.

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