Thursday, March 17, 2011

The Inspector General observes

A recent report by the Massachusetts Inspector General raises a thoughtful concern about the implementation of global payments in the state.

In the effort to contain health care costs, much discourse has centered on moving from a predominantly fee-for-service system to one based mainly on global payments to providers organized as Accountable Care Organizations (“ACO”). There is little doubt that fee-for-service reimbursements create incentives for providers to increase utilization of health care services, with obvious inflationary consequences. But moving to an ACO global payment system, if not done properly, also has the potential to inflate health care costs dramatically.

There is nothing inherent in the current marketplace that would cause an ACO-based global payment system to contain health care costs. The evidence, in fact, suggests the opposite conclusion. For the past two years, the primary experiment with global payments in the private insurance market in Massachusetts has been the Alternative Quality Contract (“AQC”) popularized by Blue Cross Blue Shield of Massachusetts (“Blue Cross”). The payments to providers under this contract are made on a global capitated basis. The capitated amounts are determined by starting with the previous year’s experience of the population of lives covered by the specific AQC. That entire amount becomes the base year from which all future payments are derived. Therefore, the AQC embraces and adopts any excessive or wasteful payments in that base year, including all overutilization resulting from over a decade’s worth of fee-for-service provider contracts. Implicitly, the premium increases of that decade, which overall were well in excess of 100%, are made a permanent part of our health care system’s cost structure.

Once the base year is determined, any excessive provider costs from that year are trended into the future. And the rate of the trend is alarmingly high. While specific details of individual AQCs are kept confidential by Blue Cross and the contracting providers, the OIG estimates that increases in reimbursements to providers over the five-year term of an AQC could be in the 50% range.

The IG's remarks are especially apt in that the first global contracts contained very good deals for those providers who signed on, as rewards for being early adopters. The big problem he identifies, as I have mentioned before, is the lack of transparency surrounding this issue. Absent an open presentation of rates and practice patterns, we will never know how effective this payment regime really is. Meanwhile, the Governor and other policymakers have chosen to proceed, blindly trusting a path that has huge ramifications for patients.

I know of no other arena in public policy in which so many decisions are being made with so little substantive support and so little data-driven debate. Reporters, too, seem willing to accept relatively unsupported and undocumented assertions that global payments are working -- parroting statements made by stakeholders who have tremendous financial interests -- while demanding no independent verification.


Anonymous said...

Your point about transparency and skeptical publicity is well taken, Paul, in that anybody reading the statement below would say, 'well, duh; of course that's not going to work':
"the AQC embraces and adopts any excessive or wasteful payments in that base year, including all overutilization resulting from over a decade’s worth of fee-for-service provider contracts"

The uncomfortable fact is that a massive downward reset of prices will be necessary in health care, starting with the suppliers and moving all the way up the line. This means that GE will no longer be able to charge astronomical prices for its next generation CT scanner, the IT companies will no longer be able to feast on HITECH money, the purveyors of IV bags won't be able to make a nice profit, etc. etc. Although we concentrate on providers and insurance companies, the truth is that the mindset of feeding at the government trough (Medicare and, soon, more) is firmly embedded in the entire industry - and there are no normal market controls, such as we are now seeing in the residential construction business.
This must change - and starting at an artificially high set point as above is doomed to failure.

Inasmuch as Massachusetts is the canary for the country, thank you for bringing this to our attention.


Barry Carol said...

While more price transparency would be enormously helpful, global payments, preferably risk adjusted, make more sense than fee for service for primary care. For surgical procedures, bundled or episode payments are the way to go. Beyond that, I think insurers, especially Medicare, should focus more on not paying for services, tests, procedures or drugs that either don’t do any good or cost far more than they’re worth. Tiered networks could help to steer patients toward the most cost-effective providers, especially hospitals. The recent discussion about end of life planning focuses attention on how to curtail waste there while substantive tort reform could chip away at defensive medicine even within a fee for service reimbursement structure.

Longer term, the future might look more like Kaiser as ACO’s and insurers become part of the same organization with electronic records fully implemented and doctors paid a salary plus bonus. Competition for members should drive both insurers and providers to ensure that both health insurance and healthcare is affordable and of good quality.

Paul Levy said...

Barry, thank you. That is as wonderful summary of a future state as I can imagine! The trick in MA, and I assume elsewhere, is how to handle the transition. The system here is badly out of whack, and a poorly implemented transition will actually undercut progress to a thoughtful future state.

Anonymous said...

I told Barry years ago on another blog that he should head the committee to fix health care. His ideas make much more sense than most of the gurus!! :)


Jon said...

From Facebook:

The lesson is "proceed with caution." In the meantime, consider a bottom up solution rather than only top down. Return power & financial incentives to consumers to make the right choices on provider settings & reward them in future premiums for real attempts to get healthier, to lower utilization and to become an informed consumer of healthcare. Economic power today is consolidated at the top--with the receivers of healthcare dollars--not at the bottom, with the payers and the consumers. Global payments doesn't seem to change that. If you want a revolution you start at the bottom not at the top.

Josh said...

Just to add another data point to the discussion. The AG's report on the differing costs between providers-- did not find a correlation between the method by which providers were paid and how costly they were. I think the conventional wisdom before that was FFS always cost more in every setting. Even with early adopters being paid more, I think policymakers need to make sure to avoid pushing out low-cost, high quality FFS.

On another note, I was hoping you might post on the blog a great debate Pioneer Institute had with two smart guys: Dr. Douglas Holtz-Eakin and Dr. Jonathan Gruber on the Budgetary Impact of the Federal Health Reform.

Both a 2:00 minute debate highlight video and the whole debate are on the Pioneer blog.(
I am happy to provide the embed code if you are interested.