The Great Train Robbery, version 2.0

A few years ago, at a meeting of business executives and the leaders of the Executive and Legislative branches of the Massachusetts state government, a representative of MA Blue Cross Blue Shield made a presentation advocating capitated, or global, payments for health care providers in the state.  This was presented as the most effective way of lowering the rate of growth of health care costs in the state.

The people from Partners Healthcare System were quiet during the presentation.  The CEO of Tufts Medical Center pointed out that effective cost control was impossible as long as the disparities in reimbursement rates among provider groups remained in place.  She pointed out, too, that overlaying global rates on a rate system based on market power would just perpetuate the existing problem.

I took a different tack.  I pointed out that instituting global payments would represent a huge shift of actuarial risk from insurance companies, which are structured and compensated for taking risk, to providers (doctors and hospitals), who are not.

I recall one of the top three state officials turning to me in surprise and saying, "Really?"

Well, we can see how much influence the CEO of Tufts Medical Center and I have had on the public policy debate.  As I have noted, the state has gone whole hog in assuring that the competitive price advantage enjoyed by Partners persists into the future.  The recent legislation also provides tremendous encouragement for the spread of capitated rate plans.  The former is a victory for Partners, the latter for BCBS.

Think of it.  The firm, in the face of little or no empirical proof, has persuaded an entire state to adopt a rate-making approach whose main value is to shift risk from it, the dominant insurance company.  Now, risk does not disappear.  Usually in society, we pay people to assume more risk.  Also, people from whom risk is shifted usually expect a lower return.  Here, the risk is shifted, but the insurance company gives up nothing.  Indeed, it is secure in pricing its product because it knows exactly how much money it will pay out in medical claims.  Meanwhile, the percent of premiums it collects to cover administrative costs remains remarkably constant, even as revenue grows.  The capital reserves that it has accumulated over the years to cover actuarial risk remain untouched, even thought the degree of risk assigned to it has fallen.

In contrast, doctors who take on risk contracts must secure that risk with their salaries.  If they are good at case management, i.e., meeting the arbitrary targets set by the insurer (and now the state), they might make a bit of a surplus to share among themselves.  (Recall, though, that how that surplus is shared remains a tough question. Who gets it?  The primary care doctors or the specialists?)  If they are not good at case management, or if something goes awry in the actuarial forecast that is the basis for the contract they have signed, their salaries go down.  There are no cash reserves to help them meet the deficiency, except their personal bank accounts.

Hospitals that take on risk simply face the prospect of higher or lower income, ultimately improving or diminishing their balance sheets and their ability to fund renewal and replacement of important capital assets used in providing care to patients.  As with the doctors, there are no cash reserves dedicated to risk management.  The hospital's endowment or working capital gets depleted as necessary to cover its losses.*

And the state official said, "Really?"

Really.  Even if you believe that capitated contracts are the best thing that could happen in health care, you should not and cannot believe that the transfer of risk inherent in such contracts should go unrecognized.  The state's failure to account for this gift to the insurance company represents an example of incomplete policy-making.

Oh wait, since the state intends to apply this kind of rate-making to Medicaid patients, it is also a beneficiary of the shift in risk.

Combined, the "gift" from providers to the insurer and the Commonwealth is this year's version of the Great Train Robbery.

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* Hmm, if I am the CPA firm doing the annual financial audit of such a hospital, shouldn't I require it to reduce current income to create a new reserve account for this risk? It may be a year or two or more before the actual surplus or deficit is known.