Consumer Focused Health

Theo Francis’s article in the WSJ called “Medicare offers overhaul of hospital reimbursing” contains a number of statements that reflect what side of the carrot/stick equation Medicare’s “solutions” for provider quality will fall.

Medicare proposed sweeping changes to the way it reimburses hospitals, outlining a plan that would essentially redistribute cash by reducing payments across the board and then giving providers a chance to “earn back” money by meeting quality-of-care thresholds.

Its not surprising to see individual providers opting away from Medicare patients with reimbursement not tracking to inflation, and with a 10% punitive Medicare reimbursement cut hanging over their heads, and noise about further requirements for installation of EMRs making their economics look even worse.

Unfortunately for hospitals, demographics dictate that a large portion of their patient population and revenue is tied to Medicare, where these unilateral decisions can be made. (Medicine and Economics blog has a great post on government’s difference from corporations and charity being the ability to use force, Covert rationing blog has a great post on how Medicare/insurance contracting is non-negotiable, and therefore monopolistic and potentially illegal)

“We think this is another step down the pay-for-performance road,” said Tom Valuck, who led the project for the federal Center for Medicare and Medicaid Services, or CMS. “That’s the heart of pay for performance — if you’re not performing, you’re not paid as much.”

As laid out in the report, Medicare would cut payments to all facilities by a flat 2% to 5%. That money would then form an incentive pool for distribution to hospitals that show the most improvement or that meet or surpass certain thresholds on a variety of quality measures. The plan, dubbed “value-based pricing,” would require congressional action to implement.

As you can see from the statements made, there is no win-win in this equation. In this case, hospitals, many operating on margins under 5% will find their Medicare reimbursement cut by 4-5% by government fiat. The government may then give back some of that money, and if they do so, there are lots of new documentation and process requirements that will further dictate how you deliver care.

The agency said the program is designed to be cost-neutral to the government, and could even save money if Congress decides not to require redistribution of all the withheld cash. Lawmakers ordered up the report in 2005 as part of a deficit-reduction act.

And here is the kicker. Under the guise of quality, Medicare may simply cut reimbursement and not give it back. After all, the report was ordered up as a way to see if they could take money out of the Medicare kitty.

In the private world, innovators get large market share shifts and laggards get to try to hold onto their share, but pricing declines and quality increases because innovators get outsize rewards, and work harder to create better value for the market to earn them.

The Medicare approach is more akin to having a rat in a cage getting random shocks to speed its journey down the treadmill. Everyone is being prodded at the same rate, regardless of the effort’s ability to address market needs, and government provides random, unpredictable shocks that redirect the herd when it realizes the course it plotted isn’t working as planned.

In entrepreneur/ IT parlance Medicare is using the Waterfall model (give them specs, lock them in, and see what you get), rather than the entrepreneur’s agile model (beta test, iterate, iterate). The difference is that in a market system, entrepreneurs are essentially a portfolio of pilot tests, allowing society to pick things that are proven to work before creating major shifts of share to promising but unproven methods or technologies. The current approach is akin to running a herd of lemmings full speed toward a perceived crossing of a gorge, and hoping that there really is a bridge there upon arrival so they don’t all fall in.

Personally, I’m excited to see Medicare play such a heavy hand– it accelerates the animosity towards and ineffectiveness of the current comprehensive insurance-based system, priming it for alternate solutions (such as Health Shoppr‘s development of a retail marketplace for health services, coming in late 2008). As a physician, I see the current approaches to be unsustainable and within the next decade, I think we’ll see a significant retreat from comprehensive insurance toward catastrophic only (potentially lump-sum payment vs. defined benefit).