Un­capped pro­grams fuel vast ex­pan­sion of health­care sec­tor

Modern Healthcare - - 50 MEDICARE AND MEDICAID THE NEXT HALF-CENTURY - By Steven Ross John­son

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.



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.



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