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As Washington Winds Down for Summer a Seminal Health Cost Debate Starts

By John Reichard, CQ HealthBeat Editor

August 2, 2012 -- It’s August and time for vacation, but better bone up on some summer reading. Two papers just published in the New England Journal of Medicine could prove seminal in framing an upcoming historic debate about how to reduce health care costs.

Several of the left-leaning luminaries who authored one of the two papers were at a forum Thursday sponsored by the Center for American Progress (CAP). They outlined an approach that uses the combined power of government and business to frontally attack the prices charged for health care services, among other features. Appearing later Thursday at an American Enterprise Institute forum were the authors of a competing vision. They urged Medicare and private employers to set a fixed dollar limit for what they’ll pay each year for a health plan—the so-called defined contribution approach.

The ideas outlined are likely to stir intense discussion, not only next year as lawmakers consider a new deficit reduction deal, but also over the next decade as the United States struggles with a potentially disastrous rise in debt fueled by growing health costs. In some respects the two plans floated Thursday differed fundamentally, but in other ways they overlapped significantly, analysts said.

In their paper, former Obama administration officials Ezekiel Emanuel and Peter R. Orszag, former Senate Majority Leader Democrat Tom Daschle, and 20 other policy leaders urged a set of solutions that would cut both the price and quantity of medical services for both public and private purchasers of health care. “Focusing in on prices is very important,” Emanuel stressed. “It’s obviously a serious concern if you’re looking to bring down overall inflation.”

“The United States pays a substantially higher price for many of the services that we do,” Emanuel said at the CAP forum. For example, Medicare pays $1,100 for MRI scans in the U.S. but in France they cost $300. “Even in Switzerland, which is much more expensive, they’re $900,” a 20 percent savings, he said. Coronary bypass procedures cost $60,000 in the U.S. compared to $17,000 to $18,000 in Germany and France, he added.

The proposal would try to lower prices by giving consumers information on the price and quality of procedures and by tailoring their health plans so they would pay more out of pocket if they went to providers offering lousier deals on medical services.

It also would quickly and dramatically spread the use of competitive bidding, which in Medicare has been used in some markets to sharply lower the costs of wheelchairs, hospital beds and other so-called durable medical equipment.

That program is supposed to go national by 2016. But “we suggest that Medicare immediately expand the current program nationwide,” the authors said. “Medicare should extend competitive bidding to medical devices, laboratory tests, radiologic diagnostic services, and all other commodities,” they wrote. “Medicare’s competitively bid prices would then be extended to all federal health programs.”

“To oversee the process, we recommend that Medicare establish a panel of business and academic experts,” they said in the paper. “Finally, we recommend that exchanges—marketplaces for insurance starting in 2014—conduct competitive bidding for these items on behalf of private payers and state employee programs.”

Global Budget
The authors also called for an independent council of providers, payers, businesses, consumers, and economists to set and enforce a global spending target for both public and private payers in a state.

Payment rates would be set to meet the target. “Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state,” the paper said.

“After a transition, this target should limit growth in health spending per capita to the average growth in wages.” Emanuel emphasized this as an enormous boon to workers who for years have lost pay increases to rising health costs.

The plan also makes a pitch for an aggressive move away from fee-for-service payment to reduce excessive care. “Instead of paying a fee for each service, payers could pay a fixed amount to physicians and hospitals for a bundle of services,” the paper said. They could adopt such payments for 37 cardiac and orthopedic procedures as soon as possible. Within five years Medicare should make bundled payments for at least two more chronic conditions, such as cancer and coronary artery disease. Within 10 years, Medicare and Medicaid should base at least 75 percent of payments on alternatives to fee-for-service payment.

The plan would require exchanges to offer at least one plan with tiered co-payments that would charge lower out-of-pocket costs if enrollees went to higher value providers. Exchanges would be required to be active purchasers excluding plans offering unattractive rates. Administrative costs would be saved by having providers and payers electronically exchange eligibility, claims and other administrative information.

The federal government would pay bonus payments to states that ease scope-of-practice laws to allow non-physician providers to practice to the full extent of their training. “For instance, 34 states do not allow advanced-practice nurses to practice without physician supervision,” the paper said. “Making greater use of these providers would expand the workforce supply, which would increase competition and thereby lower prices.”

New limits would be placed on the ability of doctors to refer patients for imaging and other services to facilities in which they have a financial stake.

Medical Malpractice Overhaul
The medical malpractice system would be overhauled to provide a “safe harbor, in which physicians would be presumed to have no liability if they used qualified health information technology systems and adhered to evidence-based clinical practice guidelines that did not reflect defensive medicine.”

One point made at the forum is that doctors and hospitals can’t move away from a fee-for-service system unless both public and private payers adopt such reimbursement changes. As a result, the plan recommended that the eight-million-enrollee Federal Employees Health Benefit Program align with Medicare by requiring plans to transition to alternative payment methods.

Speakers at the forum urged against a “cut and shift” approach in which government cuts payments and shifts health costs to employers, individuals and states. That doesn’t really get at the underlying costs of health care and ease the burden of health costs on both government and business, they said. And they were careful to praise the health care law as providing a solid start in controlling health care costs—but only a start.

The authors sought to appeal to Republicans by making the medical malpractice overhaul a part of their plan along with “price transparency,” a GOP mantra in trying to create a system under which consumers are more on the hook for health costs and have a pocketbook incentive to shop carefully for the best health care deals. They also share common ground with Republicans in that both favor a move away from fee-for-service payment and greater use of information technology and bundled payment. But the proposal would not cap malpractice awards as Republicans would. And there’s also a gulf with Republicans when it comes to the issue of defined contributions.

Orszag discussed defined contributions in the context of Medicare and specifically the GOP plan to overhaul that program with a premium support system. In an interview after the forum he noted that premium supports are one form of defined contribution—they put health plan enrollees on the hook for premium amounts above the level the government is willing to pay. “The first clear thing is that it does shift risk onto individuals,” he said. “That’s the whole point. It. . .saves money for the federal government if the payment amount—the defined contribution or premium support payment—is indexed to a slower growth rate” than Medicare spending. “The whole goal though is that by shifting risk onto individuals you want them to become better shoppers, and thereby to reduce the total cost for themselves and the federal government combined. There is some limited evidence that more cost sharing does help to reduce cost,” he said. “The question is how big is it? And the answer is it’s not very big.”

“The reason is that even under these kinds of approaches you still provide insurance against catastrophic costs and the vast bulk of health care costs come from those catastrophic cases. So you don’t get as much traction from that cost sharing method. And then against that you’ve got less negotiating leverage with hospitals and doctors because you’re splintered across multiple providers and you also have higher” administrative costs.

In other words, Medicare beneficiaries are in multiple plans, which means lower negotiating pressure to obtain favorable rates, Orszag said. And administrative costs are higher because plans have to figure in a profit. Orszag said that according to the Congressional Budget Office, the Medicare premium support plan offered by Rep. Paul D. Ryan, R-Wis., actually sharply increases health care spending for Medicare patients when both their share of the costs and the government’s share are added together.

Among the other authors of the paper were Stuart Altman of Brandeis University; Scott Armstrong, an executive with Group Health Cooperative in Seattle; Donald Berwick, former administrator of the Centers for Medicare and Medicaid Services; Princeton economist Uwe Reinhardt; Michael Chernew of Harvard University, who serves as vice chairman of the Medicare Payment Advisory Commission; Harvard economist David Cutler; Stanford University professor Arnold Milstein, who also is medical director of the Pacific Business Group on Health; and Stephen Shortell, dean of the School of Public Health at the University of California, Berkeley. 

Paper (pdf)

John Reichard can be reached at [email protected].  

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