November/ December 2011 The Cure

The politics of debt have gotten so insane that both parties are on the verge of gutting Medicare. The moment might be right to actually fix it.

By Phillip Longman

So far, ACO pilot programs have proved disappointing, producing little if any savings. And there are good reasons to believe that most ACOs will never deliver the quality and cost-effectiveness of truly integrated nonprofit health care systems like the Mayo Clinic or the VA. Under newly minted regulations, there is nothing to prevent ACOs from being just loose networks of colluding, profit-driven, fee-for-service providers who go through the motions of pursuing quality. Even stalwart defenders of ACOs now acknowledge their large potential for abuse. As Donald Berwick, administrator for the Centers of Medicare and Medicaid Services, recently told a forum at the Brookings Institution, “There will be parties out there who want to repackage what they do and call it an ACO.”

Berwick went on to warn, as have many others, that many ACOs are likely to be effective monopolies in their local markets, given the massive consolidation already going on in the health care industry. This means they will be tempted to abuse their market power by, for example, raising their rates for non-Medicare patients. This “would ultimately undermine any short-term savings achieved by Medicare,” notes Merrill Goozner of the Fiscal Times, “since increases in a region’s top line health care tab would eventually force Medicare to raise its own rates.”

Even if all these and other pitfalls of ACOs are avoided, there still remains an objection that no one can rebut: any benefit ACOs might bring will at best be only gradual. Unless a more immediate and certain reform is applied, most of the Medicare population will continued to be treated—for years if not decades to come—by the status quo of a pattern of deeply fragmented, wasteful, and dangerous fee-for-service care, the cost of which everyone now agrees is unsustainable. If we’re going to avoid financial Armageddon, we have to do better than that.

As it happens, ACOs are not the first to attempt to provide higher-quality outcomes while lowering the cost of treatment. For ten years during the 1980s and ’90s, Americans embraced and then rejected HMOs and managed care. While the experiment in widespread managed care ultimately failed to reshape American health care, much can be learned by examining what worked and what didn’t.

Today, many Americans view HMOs simply as organizations designed to make money by denying them care. And it’s a sad fact that many HMOs have wound up doing just that, or else using clever marketing techniques to make sure they cherry-pick only young and healthy customers who are unlikely to get sick. But it is important to remember that HMOs and other forms of managed care came into existence in large measure because of a big problem that is still with us and getting worse—namely, vast amounts of poorly coordinated, excessive, and dangerous treatment.

The original vision of those who championed HMOs was that this new model of care would vastly improve the quality of American medicine and only incidentally lower its cost. Paul Ellwood, a pediatrician who more than any other single advocate built the case for HMOs starting in the late 1960s, put it this way: “My own most compelling interest as a physician was in the integration of health care, quality accountability, and consumer choices based on quality first and, secondarily, price.”

What Ellwood and other reformers wanted more specifically was an “integrated delivery system” in which primary care physicians would coordinate care in large, multispecialty medical group practices that would in turn be part of a coordinated system of hospitals, labs, and pharmacies. Moreover, to address the problems of overtreatment and lack of prevention, care providers would be prepaid a set amount per patient. As Alain Enthoven, another champion of managed care, once wrote, this would give “doctors an incentive to keep people healthy.”

Such were the highly idealistic and data-driven concerns and issues behind the emergence of HMOs. What went wrong? Eventually, HMOs morphed into many different forms and hybrids. Some were nonprofits, others were publicly traded companies answerable to Wall Street. Some were “staff models” that put physicians on salary and effectively eliminated the problem of intentional overtreatment; others became little more than loose networks of doctors on contract. Some were run by idealists, others by shysters, crooks, and knaves who convinced themselves that the road to riches could be found by low-balling on prepaid contracts and then denying their patients necessary care.

Even the many HMOs that tried to do the right thing often ran into a fundamental flaw in their business model. Most remained small enough that the majority of their customers changed plans every few years, either because they moved to a different market or because their employers switched to a cheaper plan. For all but the largest HMOs, this circumstance demolished the business case for prevention and effective management of long-term conditions like diabetes. Before any returns from investing in a patient’s long-term health could be realized, the patient was likely to be enrolled in some other plan. According to Lawrence P. Casalino, a professor of public health at Weill Cornell Medical College who has extensively interviewed HMO executives, the common view in the industry is “Why should I spend our money to save money for our competitors?”

By the 1990s, most people who were enrolled in any particular HMO had little or no choice in the matter; they were there because their employers were trying to save money. It didn’t help that many fee-for-service doctors felt threatened by the growing dominance of HMOs and other managed care providers and complained to their patients about it. Neither was the industry’s image helped by the negative press and lawsuits that some HMOs attracted.

The result was a public backlash. But with the benefit of hindsight, we can see that it didn’t have to turn out this way. We only have to look at the big exceptions to the often poor performance of managed care organizations over the last several decades. These are institutions with high levels of patient satisfaction that are also lauded by health care quality researchers for their patient safety, adherence to evidence-based protocols of care, and general cost-effectiveness. They include integrated providers like Intermountain Health Care, the Cleveland Clinic, the Mayo Clinic, Geisinger Health System, Kaiser Permanente, and the VA, the last of which ranks highest of all on most cost and quality metrics and is in effect the largest, and purest, nonprofit, staff-model HMO in the land (though, of course, government run and open only to veterans). The VA’s cost per patient is about 21 percent below what it would cost under Medicare to serve the same population with the same level of benefits. Until the wars in Iraq and Afghanistan heated up, the VA was also holding increases in its cost per patient down to just 1.7 percent a year, compared to annual increases of nearly 30 percent for Medicare.

Phillip Longman is a senior editor at the Washington Monthly and a lecturer at Johns Hopkins University, where he teaches health care policy. He is also a senior fellow at the New America Foundation, where Atul Gawande is a board member.


  • Jack Lohman on October 25, 2011 9:32 AM:

    Can we fix Medicare? Yes, but first we must stop politicians from taking campaign bribes from the insurance industry. See http://moneyedpoliticians.net/2011/10/17/can-we-fix-medicare/

  • Dave Roberts on October 25, 2011 12:46 PM:

    Another extraordinary diagnosis and prescription by Phillip Longman. Kudos to the Washington Monthly for continuing to provide insight without dogma.

  • kindness on October 25, 2011 1:08 PM:

    I have Kaiser. I like them a lot.

    Can someone come in and do cleanup on the spam that is the first post please?

  • Melissa on October 26, 2011 6:21 PM:

    "Going forward, Medicare should instead contract exclusively with health care providers like the Mayo Clinic, Kaiser Permanente, the Cleveland Clinic, Intermountain Health Care, the Geisinger Health System, or even the Veterans Health Administration."

    I LOVE this idea. My parents have been part of Kaiser since before I left home, about 22 years ago. Since then, their coverage, under the same plan, has expanded dramatically. Kaiser didn't used to cover glasses, hearing aids, or fertility treatments, to name a few. They do now. Unlike the plans I've been on (I would choose Kaiser in a heartbeat but there isn't one where I live)

    As for quality of care, my parents have been extremely fortunate. My dad has lived through an surgery for an aneurism, two kinds of cancer, and many other problems. They referred him out to a specialist when they needed to, and gave him excellent care otherwise. Last year, they paid for him to be in the nicest rehab place (not drugs, physical rehab) I have ever seen.

    My mother has also had good treatment for her problems, most recently breast cancer - the support group has been wonderful for her. (Her prognosis is excellent.) The only thing they haven't covered for her is a high-end osteoporosis treatment - I can't think of the name of the drug, but you have to inject it daily - and she is paying out of pocket, $10,000 for one year, and she's lucky she can stretch to afford it. But after all they've covered that doesn't seem unreasonable.

    My parents considered moving to be close to my husband and me but they didn't because it would mean they would have to leave Kaiser.

  • Rachel Karash on October 29, 2011 1:58 PM:

    Medicare doesn't have to stop reimbursing for-profit hospitals in order to stop reimbursing them on a fee-for-service basis, as it has reimbursed for-profit inpatient hospital health care providers according to the Inpatient Prospective Payment System since 1983 and has reimbursed for-profit outpatient hospital-based health care providers according to the Outpatient Prospective Payment System since 1997. The latter was part of the Balanced Budget Act, which also established PPSs for skilled nursing facilities, home health care, inpatient rehabilitation services, and outpatient rehabilitation services. As for Part B services, Medicare hasn't reimbursed those based on the charge since the passage of OBRA 1989, which established the Resource-Based Relative Value Scale (RBRVS). The Balanced Budget Refinement Act of 1999 established a PPS for long-term care hospitals.

    Inpatient psychiatric facilities are reimbursed based on the IPF PPS.

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  • Maggie Mahar on February 24, 2012 7:37 PM:

    Great piece.

    The idea of setting a target date when Medicare drops fee-for service payment is excellent.

    And I would love to see Medicare patients treated by larger, more efficient, collaborate non-profits that enjoy economies of scale as well as the market clout that comes with size.

    But in rural areas and sparsely populated states, Medicare patients will have to be cared for by smaller groups. These groups might become "virtual networks" and enjoy some economies of scale, particularly with regard to IT,
    but we can't expect that seniors in Oklahoma will be able to travel to a Kaiser, an Intermountain or a Mayo Clinic. Inevitably, in Oklahoma an institution that models itself on these institutions will be much smaller, and as a result may require more funding from Medicare.

    I would add that I don't think we should write off accountable care organizations. Some of them will work, and work well. But I would like to see them operate as non-profits. This shouldn't be that hard. Today, the vast majority of hospitals are non-profits (though admittedly, some of these non-profits seem to put profits first. Medicare will have to insist that they re-think their priorities.

    Also, since half of all seniors are living on total income of less than roughly $20,000, we really cannot expect them to pay out of pocket to go out of network. Already, the $35 co-pays that Medicare charges for specialist care is more than many can afford.

    Unless we want to set up two sharply different tiers of care--one for people who can afford to go out of network, another for people who can't--we should make sure that "in network" care is good enough to be the norm (and the gold standard) 98% of the time, except in those cicumstances where it is clear that the patient cannot get the care he needs in network. Then Medicare should cover "out of network.

    Of course, if a wealthy person wants to pay for something out of pocket that isn't covered by
    Medicare, he should be able to do that. But the vast marjority of practioners and all hospitals that want to be reimbursed by Medicare should have to meet the standards of a network (practicing evidence-based medicine,etc. and accepting the payments that Medicare offers to these network . ) Over time, as you point out, Medicare patients, like the rest, of us, will adjust to the idea that being able to choose your network is fine. You really don't need to choose an individual doctor. The days of having one doctor "my doctor" are past. In the future patients will be treated by teams of doctors and nurses who, by working together, will be able to provide better care.

    But these are quibbles. You've outlined a generous vision of where we should be heading. I hope many people read this.