There is no single overarching solution to reduce the growth in Medicare spending. Rather, thousands of small solutions need to be tried and implemented. Those that succeed will make a significant difference. This is how innovation works in the marketplace: Competing producers make many small improvements to the products and services they offer in order to anticipate and meet the demand of potential customers while relentlessly looking for ways to reduce the cost of production or delivery of services.
The same type of innovations could do the same for the Medicare program. Under current law, however, health care entrepreneurs have little incentive to innovate because they cannot gain from their success. Congress needs to give doctors, hospitals and other Medicare providers the entrepreneurial flexibility to experiment and identify unique solutions. Medicare should be receptive and flexible enough to allow these entrepreneurial providers to propose alternative compensation agreements for specific procedures if new protocols lower costs without lowering quality. Furthermore, to encourage providers to innovate, both providers and the government need to share in the savings.
True reform falls into four basic categories: freeing the patient, freeing the doctor, freeing the market and freeing the insurer. The impact of each of these reforms is discussed below.
Free the Patient. Instead of treating beneficiaries as passive recipients of government largess, it is time to empower seniors by allowing them to control more of the health care dollars that pay for their care. This requires making health care for seniors on Medicare more like other markets consumers are familiar with — markets where consumers make rational decisions based on comparisons of price and quality. In doing so, they benefit from prudent decisions and are penalized by bad ones.
Every day, millions of American consumers go shopping. They compare the prices and quality of goods and services ranging from groceries to cellular telephone service to fast food to housing. But prices for health care are difficult to obtain and often meaningless when they are disclosed. Doctors and hospitals do not disclose prices in advance of performing services because they do not compete for patients based on price. The reason: Patients rarely pay their own health care bills.
Health care is characterized by third-party payment. Patients pay, on average, only about 11 percent of their medical bills directly. Third party insurers pay the remaining 89 percent. When patients enter their doctor’s office, they only pay about 10 percent of the bill; when they enter the hospital, they only pay about 3 percent. Because of the presence of third party payment, patients care little about the cost of medical care. When patients only pay 10 percent of their medical bills, they only care about 10 percent as much about high prices as they would care when paying the entire tab directly. This creates a powerful disincentive to controlling cost.
If Medicare beneficiaries were given control over a portion of the funds spent on their health care, several million additional people would suddenly have money in hand to shop for services. Some successful examples of individuals managing some of the funds spent on their care include:
Cash and Counseling.14 From 1999 to 2003, the Robert Wood Johnson Foundation’s Cash and Counseling experiments in four states gave disabled Medicaid recipients a budget to hire the attendants of their choice to provide care in their homes. Before the experiment, disabled Medicaid recipients had no say in who came to their homes, what they were paid, when they came or what they did. During the experiment, recipients could hire and fire their caregivers, set their wages, and determine their hours and terms of employment.
Consumer-directed care reduced rates of unmet need, theft and injury. Though individuals purchased fewer hours of attendant care overall, they were more satisfied. In fact, patient satisfaction was almost 100 percent. In the second year of the experiment, Medicaid beneficiaries in Cash and Counseling spent fewer days in nursing homes and had fewer home health therapy visits. Cash and Counseling’s wage flexibility allowed the disabled to receive the care they were promised. As a result of this success, about half of the states are currently either experimenting with Cash and Counseling or a similar program, Independence Plus, under a waiver of Medicaid rules designed to expedite requests for consumer-directed support services.
Other Examples of Self-Directed Care. Many European countries are implementing similar self-directed care approaches. For example:
In Germany and Austria, a cash payment is made to people eligible for long-term care — with few strings attached and little oversight on how the money is spent. In England and the Netherlands, the disabled and the elderly manage budgets in a manner similar to Cash and Counseling in the United States.
The British National Health Service (NHS) is already contributing to self-directed care budgets for muscular dystrophy, severe epilepsy and chronic obstructive pulmonary disease. The NHS believes it is saving money in reduced hospital and nursing home costs. The NHS is also about to launch pilot programs that will include mental health, long-term chronic conditions, maternity care, substance abuse, children with complex health conditions, and end-of-life care.
In this country, Florida and Texas have self-directed care programs for patients with serious mental illness, and the Veterans Administration has a self-directed care program operating in 20 states for long-term care and mental illness.
Individuals with Chronic Conditions. The greatest potential for successful programs emphasizing self-directed care is in the treatment of chronic illness. By some estimates, more than half of U.S. health care spending is for patients with chronic conditions. Indeed, about 60 percent of all health care spending for people age 65 and above is for chronic care services, according to economist Christopher Conover.17 This money is wasted because care is often delivered in discrete, disjointed and disconnected ways. The most efficient form of therapy (drugs) is substantially underutilized. And many chronic patients are not receiving care at all.
Studies show that chronic patients can often manage their own care with results as good as or better than traditional care. Moreover, if patients are going to manage their own care, it makes sense to allow them to manage the money that pays for that care. People with chronic conditions typically consume multiple prescription drugs, which opens up a plethora of opportunities for better care. Individuals with chronic conditions are often sick enough to be highly motivated to seek better care, but still healthy enough to function as active consumers.
Mobility is often a problem for patients with chronic conditions. These individuals would greatly benefit if their regular physician could stop by the house to check on them, or if they could use the phone or e-mail to update their physician on how they are doing, or if they did not have to wait an hour to see their doctor in the office.
Medicare Part D is a good example of the kind of program that does far more to improve the care of patients than simply paying for drug purchases. Many of these Part D plans also recommend ways to save money with generic substitution, delivery by mail order and bulk purchasing, when appropriate. They send out reminders when it is time to refill a prescription and offer suggestions for management of chronic conditions at home.
Those with comorbidities (patients with more than one health issue) or who see multiple specialists might find it a blessing if all their providers had the same updated information in an electronic record.
Fortunately, there is a better way. Under a market-based approach, providers find it in their self-interest to solve other people’s problems. The more problems they solve and the more thoroughly they solve them, the more take-home pay they realize. Without in any way discouraging altruism, a market-based approach harnesses the pursuit of financial self-interest in the course of lower-cost, higher-quality, more accessible care.
Free the Provider. Doctors participating in Medicare today must practice medicine within an outmoded, wasteful payment system. Typically, they receive no financial reward for talking to patients by telephone, communicating by e-mail, teaching patients how to manage their own care, or helping them be better consumers in the market for drugs. These activities are not reimbursable, however, because Medicare pays only for specific tasks that must be performed in a doctor’s office or other provider setting, such as a hospital or laboratory. Thus, doctors who help patients in these ways are taking away from other billable uses of their time and, in fact, may end up with less payment from Medicare. Other health care providers face the same perverse incentives. All too often, high-cost, low-quality care is reimbursed at a higher rate than the alternative, and Medicare’s payment rules get in the way of providers working together to improve health care.
In a real marketplace, the suppliers are the innovators. An entrepreneur develops a new idea, then launches it into the marketplace hoping someone will buy it. This is how most of the technological innovations of the past 40 years came on the market. No consumers were beating on the doors of tech companies demanding fax machines, e-mail, CD players or iPods. In fact, consumers did not even know such things could exist until entrepreneurs unveiled them.
Physicians and other providers would like to offer their patients a variety of innovative services, but the current system of bureaucratic payments prohibits it. For example, Camden, New Jersey, physician Jeffrey Brenner is saving millions of dollars for Medicare and Medicaid by essentially performing social work services to reduce spending on his most costly patients. 20 But “social work” is not on the list of 7,500 tasks Medicare will reimburse doctors for, so he gets nothing in return for all his efforts.
Geisinger Health System is another example. The company offers a warranty of sorts on cardiac surgery to payers willing to reimburse Geisinger a higher initial amount. Geisinger absorbs all costs for unforeseen complications, follow-up treatments or readmissions. However, Medicare lacks the flexibility to pay Geisinger a higher reimbursement — even if the company saves Medicare money in the long run.
In another case, Virginia Mason Medical Center found a less expensive way to treat lower back pain by substituting less-invasive physical therapy for more costly (but no more effective) digital imaging and surgery. But it lost money on each procedure because its less-invasive protocols lowered revenue. Virginia Mason went to insurers and offered to continue the program in return for higher reimbursements for the procedures performed. However, Medicare does not have the flexibility to offer higher reimbursement, even though it would save taxpayers money.
Medicare has strict rules about how tasks can be combined. For example, “special needs” patients typically have five or more comorbidities. Medicare spends about $60,000 per year on each of these patients, and they consume a large share of Medicare’s budget. Ideally, when one of these patients sees a doctor, the doctor would deal with all five problems sequentially. That effort would economize on the patient’s time and ensure that the treatment regime for each malady is integrated and consistent with all the others.
Under Medicare’s payment system, however, a specialist can only bill Medicare the full fee for treating one of the five conditions during a single visit. If she treats the other four, she can only bill half-price for those services. And the situation is even worse for primary care physicians — they cannot bill anything for treating the additional four conditions.24
The solution? Any Medicare provider should be able to propose and obtain a different reimbursement arrangement, provided that: (1) the total cost to government does not increase, (2) patient quality of care does not decrease, and (3) the doctor proposes a method of measuring and assuring that conditions (1) and (2) have been satisfied.
Free the Market. Once we have freed the patient (buyer) and freed the doctor (seller), we can finally look at what a free market might look like. In a free market medical fees should be determined the way prices are determined everywhere else in the economy — in the marketplace. However, two problems arise when trying to achieve this.
First, the third-party payer and Medicare systems have suppressed normal market forces in medical care for many years. How can market prices exist where no real market exists? Medicare has a list of some 7,500 separate tasks it pays physicians to perform. For each task a price exists that varies according to location and other factors. Of the 780,000 practicing physicians in this country, not all are in Medicare and no doctor is going to perform every task on Medicare’s list. Yet Medicare is potentially setting about six billion prices across the country at any one time. Each price Medicare pays is tied to a patient with a condition. And with the 7,500 things doctors could possibly do to treat a given condition, Medicare must be just as diligent in not paying for inappropriate care as it is in paying for necessary procedures. So, in fact, Medicare isn’t just setting prices. It is regulating whole transactions.
Is there any chance that Medicare can set prices and approve transactions in a way that does not cause serious problems? Not likely. And what happens when Medicare gets it wrong? One result is that doctors face perverse incentives to provide care that is costlier and less appropriate than the care they should be providing. Another result is that the skill sets of our nation’s doctors become misallocated, as medical students and practicing doctors respond to the fact that Medicare overpays for some procedures and underpays for others.
Second, many economists believe that Medicare, as the single largest buyer of health care services in America, uses its purchasing power to push provider fees below market levels. Economic theory predicts that this monopsony power not only allows Medicare to pay rates below what a free market would set, it also results in a lower volume of services. In this case, that means less medical care. Without government acting as a monopsony buyer, patients might pay more for the services they currently get, but they would also get more care, or their access to higher-quality care would improve.
There are at least 10 important policy changes that can circumvent these two problems and free the marketplace in the process.
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