Uncapped programs fuel vast expansion of healthcare sector
Since their birth in 1965, Medicare and Medicaid have significantly influenced the size and shape of U.S. healthcare. The public insurance programs, initially blasted by critics as “socialized medicine,” have precipitated the vast expansion—and even the creation—of many profitable industry sectors including hospitals, physician groups, managed-care insurers, home health, drug manufacturers, devicemakers and others.
One big reason the two programs powerfully seeded healthcare expansion is that political forces—ideologically and economically motivated—blocked the government from establishing effective cost controls. That meant taxpayers essentially wrote providers, insurers, suppliers and beneficiaries a blank check. This quieted initial opposition to the establishment of Medicare and Medicaid by making the programs profitable for private-market players. But the lack of cost controls, such as the global budgets used in other advanced countries, has created long-term financial headaches.
The two programs initially paid providers based on usual and customary fees. That led to “the vast enrichment” of providers, particularly physician specialists, Paul Starr, a Princeton University healthcare historian, wrote. The programs later moved to prospective payment models, but providers made up for that by boosting the volume of services for which they billed.
Over time, Congress has expanded Medicare and Medicaid to cover more services and products, including home healthcare, kidney dialysis, skilled nursing, rehabilitation, hospice, preventive services, and most recently, prescription drugs. That has led to a sharp rise in the number of for-profit providers. “You have this huge Medicare thing that is like a big barrel with money that flows out,” said Uwe Reinhardt, a Princeton University health economist. “It has all of these spigots—a hospital spigot, a physician spigot, etc. Every so often, a new spigot gets put into the barrel.”
That’s what happened with home healthcare, which at one time was dominated by not-forprofit providers. In 1980, Congress lifted the prohibition on Medicare participation by for-profit home-care providers. What followed was an increase in Medicare spending on home health, which grew about 31% a year from 1988 to 1996, according to market research firm Launch Factory.
Similarly, the dialysis industry took off after Congress expanded Medicare to cover people with end-stage renal disease in 1972. By 2012, Medicare was covering dialysis for about 370,000 ESRD patients receiving treatment at more than 5,800 facilities, at a cost of $10.7 billion.
Skilled-nursing facilities saw steady growth through the 1980s and 1990s as SNF providers received Medicare payments under a cost-based system that put no limits on how much providers could charge for occupational and physical therapists. Critics said that payment model led to abuse, with Medicare spending on SNFs averaging 30% annual growth between 1986 and 1998, according to a 2004 study in Health Services Research. Congress moved SNFs to a prospective payment model in 1997, resulting in estimated savings to Medicare of $3.4 billion in 1999. That year, nearly 10% of SNF facilities filed for bankruptcy.
Reinhardt said a rhythm has developed in the way a Medicare or Medicaid policy change first leads to rapid growth in a sleepy industry sector previously dominated by small operators. Companies rush in under the new, more favorable rules. After federal costs shoot up, Congress or HHS wakes up and tightens the rules. That’s typically followed by an economic decline in that industry sector.
“Usually, after three of four years, as the cash flow through that spigot grows bigger and bigger, eventually Congress takes control of the spigot,” Reinhardt said.
Now there’s growing momentum to completely shift Medicare and Medicaid to a model in which the government pays private health plans a fixed monthly fee per beneficiary to manage patients’ care, establishes patient-outcome targets and lets the plans regulate provider behavior. Advocates hope that approach will end the cat-and-mouse game between the government and healthcare players. “You would get much better performance for taxpayers and much better performance for the programs,” said Tom Scully, CMS administrator under President George W. Bush, who is now a partner at privateequity firm Welsh, Carson, Anderson & Stowe.
But other experts warn that wholesale shift would merely change the identity of the cat and the mouse, not end the game. The danger is that private plans would “compete to enroll the healthy and avoid the sick,” leading to either higher costs or less access to care for chronically ill people, said Judy Feder, a professor of public policy at Georgetown University.
The bureaucratic tendency of any— even well-meaning— government program is something we have to move away from.
DR. GLENN STEELE JR.
Medicare and Medicaid are both fabulous programs, but I would compare them to an old Scottish golf club. They’re ancient and way out-of-date.
TOM SCULLY WELSH, CARSON, ANDERSON & STOWE