Next gen reform part 3: Put docs in charge

Physician-led practices responsible for the total cost of care gets the incentives right

The Biden administration has been clear about its health care priorities. Payment reform that drives delivery system reform is not at the top of its list.

“Health equity remains fundamental to our vision for transforming health care,” CMS administrator Chiquita Brooks-LaSure told last month’s annual meeting of the Health Care Payment Learning and Action Network (HCP-LAN), a coalition of provider, payer and patient advocacy organizations pursuing payment reform.

The Innovation Center at CMS, created in 2010 to experiment in ways to deliver higher quality care at lower cost, will continue to look for ways to support hospital systems and physician practices that address social ills like poor housing and food insecurity that undermine health, she promised. It will develop pilot projects that give underserved populations better access to physicians, especially those offering primary care. And it will focus more attention on the patient experience.

But when it comes to creating a reimbursement system that is ideally suited to achieving those laudable goals, she offered a decidedly go-slow approach. “We are supporting organizations new to accountable care by providing greater flexibility in the progression to performance-based risk,” she said. CMS will allow organizations “more time to redesign their care processes to be successful under risk arrangements.”

Risk. It’s a word that has very different meanings in different health care contexts. For patients, it is associated with the possibility a prescribed treatment may fail or cause unwanted harm. Failure and harms also worry doctors and hospitals, who are at risk legally and financially for their mistakes. For payers, risk entails the possibility the money set aside to pay for health care won’t cover the bills.

It is that last possibility to which Brooks-LaSure referred when she told payment reform advocates that providers will have more time before they are required to take on financial risk for patients under their care. She was simply bowing to reality. After a decade of experimentation, just 5.3% of health care payments in 2021 were made to provider organizations that took full financial responsibility for their patients’ total cost of care, according to the latest HCP-LAN survey of its members.

Just one in five health care dollars went to providers through “two-sided” risk arrangements, i.e., they could lose some portion of their reimbursement if they fail to hold costs below a pre-specified level. But most of those arrangements only put at risk a small portion of the total cost of care or were limited to treatments for a specific condition. Fully 80% of payments were still based on fee-for-service medicine.

In the first two parts of this series on Nex-Gen health care reform, I laid out two changes to our fragmented reimbursement system that would a create the framework for more rapid movement toward delivery system reform. Federalizing Medicaid, which now insures close to a quarter of the population, would standardize benefits, eliminate duplicative state bureaucracies, and provide low-wage workers with a seamless transition from poverty-driven enrollment in a government plan to the coverage available from employers or sold on the exchanges. All-payer pricing would eliminate a tremendous amount of administrative waste and, when combined with carefully regulated global budgets, would free up resources for provider organizations to focus on delivering better care at a budget-constrained cost.

However, the benefits from any payment change (including single-payer or Medicare for All) will never be realized unless we simultaneously change the way hospitals and physician practices get paid. Convincing providers to take on risk is key.

Risky business

Under fee-for-service medicine, providers abjure risk for the most part. As long as their hospital beds and appointment books are nearly full and the total take from their variable pricing scheme is adequate, they make a good living.

But fee-for-service reimbursement has major downsides, especially in the U.S. where special interests like drug and medical device companies and high-paid specialists and their societies exert undue influence over the practice of medicine. It incentivizes providers to overuse expensive procedures and under use less costly preventive screenings and treatments. It creates a barrier between patients and their relatively low-paid primary care physicians when office visits are limited to the 15 minutes. It provides no financing to address the social causes of ill-health or engage in community outreach to identify and help people most at risk of falling seriously ill.

Fifteen years ago, the late Dr. Arnold Relman, the long-time editor of the New England Journal of Medicine, laid out an alternative vision for reforming the health care delivery system. An advocate of single-payer reimbursement, he cautioned that payment reform alone “will not control costs sufficiently unless we also reform the way physicians are organized in practice and how they are paid.”

In A Second Opinion: Rescuing America’s Health care (Basic Books, 2007), Relman envisioned a future where large multi-specialty practices received a lump sum, risk-adjusted payment for every person under their care. These practices would include primary care physicians, specialists, physician assistants, nurse practitioners, social workers, care coordinators and community outreach workers – every professional needed to organize, manage and deliver an individualized and comprehensive approach for treating the sick, preventing illness and promoting good health.

In exchange, these practices would take on financial responsibility for all medical utilization, including hospitalization when necessary. “Physicians are better qualified than government, employers, insurance plans, or patients to assume this responsibility,” he wrote, “but they must be organized in a way that allows them to use their best judgment, uninfluenced by financial incentives or constraints that prevent them from meeting their professional commitment to patients.”

Imagine you are the manager of such a practice. You know in advance how much your annual budget will be based on the number of patients you enroll and the severity of their pre-existing conditions. With that knowledge, you can adjust your personnel levels for each profession and support staff based on projected need. You can pay set salary to physicians based on skill, not on the number of patients they bring in. You can allocate money for community outreach workers to conduct home visits and arrange the social services for addressing patients’ needs.

Whither hospitals?

Under provider-led capitation, the hospital becomes a cost center, not a revenue source. Indeed, the decision on where to send patients (for hospitalization or highly complex cancer care, for instance) is placed in the hands of primary care physicians and their support staff, who are best suited for referring patients to high quality, unwasteful, and appropriately priced outside providers. They also are far more trusted by patients than insurance companies, who use blunt instruments like prior authorization and narrow networks to achieve their own version of those goals.

Hospitals can begin to see their own operations in the same light. Over the past several decades, the hospital industry in the U.S. has undergone a massive consolidation wave. The share of the nation’s 6,093 hospitals owned by larger systems reached 67% in 2020, up from 60% in 2011 and 53% in 2001. Just 417 systems now control 76% of all hospital beds, according to the American Hospital Association’s latest annual survey.

As they’ve grown, these large systems have forged financial ties with distant systems (horizontal integration). They’ve also bought out neighboring physician practices, set up outpatient clinics and built ambulatory surgical centers (vertical integration). The pricing power these mega-systems exert over private payers has drawn increased fire from antitrust advocates, who see breaking up these monopolies and fostering competition as key to bringing health care costs under control.

A better approach, in my view, would be to recognize that the consolidation horse left the health care barn a long time ago. All-payer pricing with global budgets comprising the total cost of care would be far more successful than antitrust in constraining revenue growth at hospitals. Managers of vertically integrated systems, if given financial responsibility for all patient care, would quickly see that the best way to maintain positive margins under global budgets that grew slightly slower than the rest of the economy would be to reduce severe sickness, reduce hospital use and promote better health.

In theory, a small but substantial fraction of the nation’s integrated delivery networks are already set up this way. They own and operate insurance subsidiaries, which take on risk and accept capped annual payments from employers, Medicare Advantage plans or Medicaid managed care organizations (the latter two being the privatized parts of those government programs). California-based Kaiser Permanente and Geisinger Health in central Pennsylvania are among the more celebrated delivery systems with insurance arms operating under capitation payment arrangements.

Both systems have been widely lauded for their high quality, high patient satisfaction and somewhat lower costs compared to competing or neighboring providers. But their prices are not dramatically different because internally they still price their insurance products to compete with other private insurers or, in the case of Medicare Advantage, what they receive from fee-for-service Medicare. Without global budgets, their prices rise at the same rate as prices at systems wholly wedded to fee-for-service medicine.

Beyond reform fatigue

Brooks-LaSure’s comments last month reflected the growing fatigue in health policy circles with the Innovation Center’s value-based care arrangements (accountable care organizations, medical homes, bundled payments and the like). For the most part, they have neither saved money nor improved outcomes. A review by a CMS official published in the New England Journal of Medicine shortly after Biden took office showed “the vast majority of the Center’s models have not saved money, with several on pace to lose billions of dollars.” The notable exception was Maryland’s all-payer pricing model tied to global budgets, which saved taxpayers more money than most of the other combined.

It's not that most of the other reform models are fatally flawed. But when they are only limited to Medicare payments, as most are, and Medicare, Medicaid and the private market remain wedded to fee-for-service medicine for the lion’s share of their reimbursement, systemic change in how care gets delivered remains forever on the horizon.

When the CMS Innovation Center published its Strategy Refresh a little over a year ago, the agency vowed to eliminate failed payment reforms, double down on the few that proved successful and come up with new experiments to promote greater health equity. It also set a goal of getting every Medicare beneficiary into some type of accountable care arrangement by 2030 with an increased number in care relationships where the providers are responsible for “the total cost of care.”

But nowhere in that document did the word mandatory get used except to express concern that existing accountable care models, almost all of which are voluntary on the part of providers, serve mostly white Medicare beneficiaries. “To avoid risk selection associated with voluntary models, (the agency will) examine whether mandatory models can increase quality and access for beneficiaries, as well as increase provider participation, without negatively impacting those who care for underserved populations.”

I eagerly await the results of that examination. I can’t think of a better way to infuse inner city and rural areas with the resources needed to serve the health needs of their local populations than all-payer pricing, which will raise the prices paid by Medicare and Medicaid, on which those communities depend. Tie that to global budgets given to provider organizations responsible for the total cost of care, and you’ve created a reimbursement system capable of achieving true health equity across the U.S.