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Rx for Medicare

Howard Rohleder

RONALD REAGAN SAID “the nine most terrifying words in the English language are ‘I’m from the government and I’m here to help’.” Government programs are put in place to address real concerns. But they often come with unintended consequences.

When created in 1965, Medicare addressed the real need of senior citizens who couldn’t afford health care, just as Social Security was established in 1935 to help seniors in poverty. Both have become pillars of American retirement, but not without cost.

At the start, Medicare copied the insurance industry’s prevailing “fee for service” model for paying physicians, while hospitals were paid on a “cost-plus” basis. “Costs” were Medicare’s portion of hospital operating costs. The “plus” was meant to provide hospitals with some margin to reinvest in their plant and equipment.

We’re all economic animals and respond quickly to financial incentives. Physicians found that providing more services, and hospitals found that spending more money, resulted in more income. Rewarded for growth, our health care system suddenly supported many more doctors, facilities, personnel, technology and drugs.

The benefits to seniors were great: improved access to health care and steadily lengthening lifespans. But so was the unintended consequence: Medicare contributed to a health care cost explosion.

Health care expenditures rose from 5% of GDP in 1960 to 8.9% by 1980. As Medicare’s costs mushroomed, regulators began a long tug of war with providers to bend down the cost curve while still delivering promised medical care. Over the next four decades, there were waves of reform attempts:

  • Studies showed more care didn’t necessarily mean better care, so some controls on utilization were added.
  • Hospital charges varied widely from one area to another, or even within the same city, so standardized payments were imposed by region.
  • Medicare found it was paying to fix medical errors, so it moved to fixed rates for care and no longer paid to rectify mistakes.
  • Even with Medicare, high premium costs were hurting seniors, so Medicare Advantage plans were added to offer a private insurance alternative.

Each reform added another layer of complexity. Medicare regulations now rival the tax code in density—and may be harder to interpret. Despite all efforts, health care expenditures grew to nearly 20% of GDP by 2020. With costs this great, you can be sure more changes lie ahead.

Like a game of whack-a-mole, regulators are determined to hit higher costs with a mallet wherever they pop up. The next reform wave appears to be the widespread adoption of accountable care organizations (ACOs). These were introduced in the Affordable Care Act for what were termed “demonstration projects.”

By the time the Affordable Care Act was formulated, health maintenance organizations had fallen into such disfavor that they needed a rebranding. ACOs are thinly veiled cousins of health maintenance organizations. The goal: Put the onus on the health care organization to control the cost of care.

As with health maintenance organizations, ACOs are paid monthly, per head, for providing care to a patient population. Cost savings from ACOs are supposed to come from greater efficiency and quality of care. Poor care could impose an economic loss on the ACO—and also damage its reputation in the marketplace.

Because ACOs are demonstration projects, different models are available. Some are fully at risk, meaning the contractor could lose money on the monthly patient payments it receives. Other ACOs could gain what amounts to bonuses for good care but would be sheltered from actually losing money.

Not all providers jumped at the chance to be a Medicare guinea pig. After about 10 years of trials, just over half of U.S. hospitals and physicians are in an ACO. Urban hospitals, which offer a wide range of services and have many available specialty physicians, were more likely to join an ACO. Rural hospitals usually stayed out. Just 6% of hospitals in New Mexico have joined, for example, but 100% of those in Rhode Island have signed up.

No matter where you live, Medicare expects its entire insured population to be in an ACO by 2030. Of course, having a goal and achieving it are two different things. Among seniors, 63% have traditional Medicare today, often with a Medigap supplemental insurance policy. While supplemental policies can be expensive, traditional Medicare participants have a wide choice of physicians and few limits on their access to care.

Many in this group may object to being routed into an ACO plan that attempts to control the availability of care. Some members of Congress are already objecting that some private equity firms are turning health care into a profit center, and they want them kept out of ACO ownership.

Private equity firms have acquired various health care entities, including large physician staffing companies. Already, they’ve been cited as a driver behind one of the newest evils in the system: surprise medical bills. Hospital patients in no condition to ask questions are seen by out-of-network specialists. The specialists’ bills aren’t covered by insurance, even though the patient was treated at an in-network hospital. A concern: What will happen if profit-driven private equity firms own ACOs?

ACOs are the latest in a long line of attempts to bend the health care cost curve. As in the past, the government will attempt to apply the same top-down reform measures, and expect equal acceptance and success everywhere.

We don’t yet know what unintended consequences will accompany full ACO adoption, assuming that even happens. But no matter what, you can be sure some new moles will pop up—and need to be whacked.

Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured—along with five others—on the cover of Kiplinger’s Personal Finance for an article titled “Secrets of My Investment Success.” Check out his previous articles.

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