In 1965, politicians made a promise to America’s elderly that they would not have to worry about or pay for health care during the final years of their life, and Medicare coverage for senior citizens was officially established in this country.
In my opinion, one of the biggest problems with our nation’s health care system is that the government has made big promises that it simply cannot afford or sustain. Now don’t get me wrong here; I am not saying that Medicare wasn’t a good or worthwhile idea. I’m saying that our government has a long history over-promising and under-delivering, and it has not been willing to address these two realities – 1) you can’t promise the world and 2) there is no such thing as a free lunch.
In 1990, the total Medicare expenditures were $111 billion dollars. In that same year, the U.S. Gross Domestic Product was $5,800 billion dollars, which means that Medicare consumed 2% of the GDP. This year, the Medicare expenditures are projected to be over $570 billion dollars, which is more than five times what it was just 20 years ago. In 2010, the GDP is projected to be $14,400 billion dollars. This means that in 1990, Medicare consumed 2% of GDP and only 20 years later it now consumes 4% of the GDP. It doesn’t take an economist with a PhD to notice a glaring problem with this trend.
Why is Medicare eating up the GDP like Godzilla on a rampage tearing through a Japanese city? There are several factors involved. First, we have an aging population that is continually increasing the number of people covered by Medicare. Second, the average life expectancy is higher now than it was in 1965 when the program was started, which means that people are living longer than ever before. Third, technology advances in medicine have dramatically increased costs. Finally, defensive medicine has taken its toll on Medicare budgets, driving up costs even further. Each of these factors has contributed to the problems with Medicare chewing up more and more of the GDP. To make matter worse, the government has done absolutely nothing to address these issues. There have been no discussions of increasing the age of eligibility, making Medicare a means-tested program, or even reducing benefits. On the contrary, the last major government change to Medicare was an increase in benefits by including a pharmacy benefit. That’s right, promise the world and don’t worry about how you are going to pay for it.
This approach has brought us to our current circumstances, and Medicare is projected to go broke in less than ten short years. Add to this the fact that in the recent health care reform legislation, the government is counting on $500 billion dollars in reductions in Medicare expenditures to pay for the expansion of coverage for non-Medicare individuals. That’s right--we are financing another expansion in coverage by borrowing from an existing program that is broke.
So how is this ever going to get resolved? Well, to understand that you need to understand the options. Health care expenditures are really a very simple formula. Costs = price x volume. To control costs you either need to reduce the price-per-service that you pay or reduce the number of services that are provided. Now think about Medicare. To reduce the number of services that are provided you either need to reduce the number of people on Medicare (i.e. increase the age of eligibility) or control utilization (i.e. rationing and death panels). Can you imagine a politician running on a platform of reducing Medicare costs by reducing utilization? Me either. So, if utilization is out of the question, then the only option left is to reduce the price-per-service. The problem with this option is that the Medicare community is already wise to that game. They understand that reducing the SGR means that doctors all over this country will revolt and stop seeing Medicare patients altogether. So, our government has cleverly figured out a way to reduce costs without the doctors figuring it out. Enter the Accountable Care Organization or the ACO idea.
CMS is now hard at work building a new payment model, and thus, new rules to the game. The new game will be called ACOs. To put it simply, ACOs are Medicare’s way of making a lump-sum payment to a group of providers and letting the providers fight over how to distribute the funds. This can be done one of two ways: through an episode of care model or through a full capitation model.
The episode of care model works like this: let’s say for example that Medicare knows it currently pays an average of $20,000 for cardiac bypass surgery. This amount includes the payments to the hospital, the cardiologist, the cardiac surgeon, the anesthesiologist, and so forth. Simply put, it’s the total outlay for that episode of care. Knowing this information, Medicare builds a new payment methodology and offers a lump sum payment of $18,000 for cardiac bypass surgery. They offer this payment to ACOs (which could be vertically integrated systems like an academic medical center or a virtual organization like a community hospital that organizes its area physician groups into an ACO). Medicare will pay the $18,000 to the ACO and leave it up to the ACO to divvy that money to its various parts.
Now apply that example to a larger scale. Why couldn’t Medicare just add up all the costs for Medicare participants and give the whole budget to the ACO? Let’s say that Medicare realizes they currently spend $500 per Medicare member per month for health care. What is to keep them from giving an ACO $400 per member per month and transferring the risk and responsibility for revenue distribution down to the provider entity? Ladies and gentlemen, this is called capitation, and it is coming around again.
Now let’s fast forward to a future date. You are an independent community practice who is “invited” by your local hospital to become part of this wonderful new world of Accountable Care Organizations. You are plied with fancy talk of the future of health care reimbursement, the death the evil fee-for-service models, the elimination of claims processing, and expensive prior-authorization processes. You are told that the future lies in ACOs controlling their own destiny through episode of care practices, inter-specialty cooperation, and coordination of care. You are told that finally doctors can be doctors and the evil SGR will be a thing of the past. Don’t believe it! If it sounds too much like a snake oil sales pitch, that’s because it probably is.
The first reality will be that the starting point for these payment mechanisms will be a reduction in costs when compared to the current Medicare payment schedules. Remember, the current Medicare payment schedules aren’t great to begin with! The second reality is that the entity which controls the ACO (typically a hospital) will make sure that they drink from the money well first so they don’t go thirsty. The physicians who get involved with ACOs are going to have a rude awakening, only to find themselves doing the same or more work for alot less money.
So what is a practice to do? First and foremost, keep your eyes and ears open. Pay very close attention to all of this, and don’t get caught unaware. There is an old saying; “If you don’t like change you are going to hate being irrelevant.” Second, make sure you are “at the table” so to speak. If your hospital is moving down the path towards ACOs, make sure your group is represented as much as possible in the discussions. Get on the inside! Finally, make sure you are properly represented. If your eyes glaze over when people start talking about PmPm, utilization rates per 1,000 members per year, episode of care modeling and trend, make sure your group has someone who can represent them and who truly understands all of this. In many respects, your negotiations in the future may shift from sitting across the table from a payer and negotiating rates to sitting in a room with your hospital ACO and negotiating rates or compensation formulas as part of a capitation contract or episode of care agreement. For years, physicians have focused so much of their attention on the care they deliver to their patients and less attention on the business that they own and run every day.
Now is the time for physicians to finally get ahead of the curve and make sure that the next evolution in health care is not as damaging as the Medicare system was for physicians.
In my opinion, one of the biggest problems with our nation’s health care system is that the government has made big promises that it simply cannot afford or sustain. Now don’t get me wrong here; I am not saying that Medicare wasn’t a good or worthwhile idea. I’m saying that our government has a long history over-promising and under-delivering, and it has not been willing to address these two realities – 1) you can’t promise the world and 2) there is no such thing as a free lunch.
In 1990, the total Medicare expenditures were $111 billion dollars. In that same year, the U.S. Gross Domestic Product was $5,800 billion dollars, which means that Medicare consumed 2% of the GDP. This year, the Medicare expenditures are projected to be over $570 billion dollars, which is more than five times what it was just 20 years ago. In 2010, the GDP is projected to be $14,400 billion dollars. This means that in 1990, Medicare consumed 2% of GDP and only 20 years later it now consumes 4% of the GDP. It doesn’t take an economist with a PhD to notice a glaring problem with this trend.
Why is Medicare eating up the GDP like Godzilla on a rampage tearing through a Japanese city? There are several factors involved. First, we have an aging population that is continually increasing the number of people covered by Medicare. Second, the average life expectancy is higher now than it was in 1965 when the program was started, which means that people are living longer than ever before. Third, technology advances in medicine have dramatically increased costs. Finally, defensive medicine has taken its toll on Medicare budgets, driving up costs even further. Each of these factors has contributed to the problems with Medicare chewing up more and more of the GDP. To make matter worse, the government has done absolutely nothing to address these issues. There have been no discussions of increasing the age of eligibility, making Medicare a means-tested program, or even reducing benefits. On the contrary, the last major government change to Medicare was an increase in benefits by including a pharmacy benefit. That’s right, promise the world and don’t worry about how you are going to pay for it.
This approach has brought us to our current circumstances, and Medicare is projected to go broke in less than ten short years. Add to this the fact that in the recent health care reform legislation, the government is counting on $500 billion dollars in reductions in Medicare expenditures to pay for the expansion of coverage for non-Medicare individuals. That’s right--we are financing another expansion in coverage by borrowing from an existing program that is broke.
So how is this ever going to get resolved? Well, to understand that you need to understand the options. Health care expenditures are really a very simple formula. Costs = price x volume. To control costs you either need to reduce the price-per-service that you pay or reduce the number of services that are provided. Now think about Medicare. To reduce the number of services that are provided you either need to reduce the number of people on Medicare (i.e. increase the age of eligibility) or control utilization (i.e. rationing and death panels). Can you imagine a politician running on a platform of reducing Medicare costs by reducing utilization? Me either. So, if utilization is out of the question, then the only option left is to reduce the price-per-service. The problem with this option is that the Medicare community is already wise to that game. They understand that reducing the SGR means that doctors all over this country will revolt and stop seeing Medicare patients altogether. So, our government has cleverly figured out a way to reduce costs without the doctors figuring it out. Enter the Accountable Care Organization or the ACO idea.
CMS is now hard at work building a new payment model, and thus, new rules to the game. The new game will be called ACOs. To put it simply, ACOs are Medicare’s way of making a lump-sum payment to a group of providers and letting the providers fight over how to distribute the funds. This can be done one of two ways: through an episode of care model or through a full capitation model.
The episode of care model works like this: let’s say for example that Medicare knows it currently pays an average of $20,000 for cardiac bypass surgery. This amount includes the payments to the hospital, the cardiologist, the cardiac surgeon, the anesthesiologist, and so forth. Simply put, it’s the total outlay for that episode of care. Knowing this information, Medicare builds a new payment methodology and offers a lump sum payment of $18,000 for cardiac bypass surgery. They offer this payment to ACOs (which could be vertically integrated systems like an academic medical center or a virtual organization like a community hospital that organizes its area physician groups into an ACO). Medicare will pay the $18,000 to the ACO and leave it up to the ACO to divvy that money to its various parts.
Now apply that example to a larger scale. Why couldn’t Medicare just add up all the costs for Medicare participants and give the whole budget to the ACO? Let’s say that Medicare realizes they currently spend $500 per Medicare member per month for health care. What is to keep them from giving an ACO $400 per member per month and transferring the risk and responsibility for revenue distribution down to the provider entity? Ladies and gentlemen, this is called capitation, and it is coming around again.
Now let’s fast forward to a future date. You are an independent community practice who is “invited” by your local hospital to become part of this wonderful new world of Accountable Care Organizations. You are plied with fancy talk of the future of health care reimbursement, the death the evil fee-for-service models, the elimination of claims processing, and expensive prior-authorization processes. You are told that the future lies in ACOs controlling their own destiny through episode of care practices, inter-specialty cooperation, and coordination of care. You are told that finally doctors can be doctors and the evil SGR will be a thing of the past. Don’t believe it! If it sounds too much like a snake oil sales pitch, that’s because it probably is.
The first reality will be that the starting point for these payment mechanisms will be a reduction in costs when compared to the current Medicare payment schedules. Remember, the current Medicare payment schedules aren’t great to begin with! The second reality is that the entity which controls the ACO (typically a hospital) will make sure that they drink from the money well first so they don’t go thirsty. The physicians who get involved with ACOs are going to have a rude awakening, only to find themselves doing the same or more work for alot less money.
So what is a practice to do? First and foremost, keep your eyes and ears open. Pay very close attention to all of this, and don’t get caught unaware. There is an old saying; “If you don’t like change you are going to hate being irrelevant.” Second, make sure you are “at the table” so to speak. If your hospital is moving down the path towards ACOs, make sure your group is represented as much as possible in the discussions. Get on the inside! Finally, make sure you are properly represented. If your eyes glaze over when people start talking about PmPm, utilization rates per 1,000 members per year, episode of care modeling and trend, make sure your group has someone who can represent them and who truly understands all of this. In many respects, your negotiations in the future may shift from sitting across the table from a payer and negotiating rates to sitting in a room with your hospital ACO and negotiating rates or compensation formulas as part of a capitation contract or episode of care agreement. For years, physicians have focused so much of their attention on the care they deliver to their patients and less attention on the business that they own and run every day.
Now is the time for physicians to finally get ahead of the curve and make sure that the next evolution in health care is not as damaging as the Medicare system was for physicians.
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