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

What do these exceptions to the rule have in common? First, they are all large enough to achieve significant economies of scale. The VA’s scale, for example, has also been an important precondition for the deployment of its highly effective system of electronic medical records, the cost of which it has been able to spread across a large base of hospitals and clinics. So too with Kaiser Permanente and the other examples of “best-practice” health care delivery systems mentioned above. The size of these institutions also means that the data generated by their digitalized information technology about what works and what doesn’t has far greater scientific value because the records are drawn from a very broad population. And their scale allows them to integrate and coordinate care among a broad range of specialists who all work for the same institution and use the same patient records so that the care patients receive is far less fragmented (and dangerous) than found generally in fee-for-service medicine.

Furthermore, large size gives these institutions substantial market power to negotiate favorable deals with drug companies and other medical suppliers. The VA enjoys a 48 percent discount in the price it pays for frequently prescribed drugs compared to those obtained by even the next-biggest health care plans. The size of the VA also allows it to push past the cartels, known as group purchasing organizations, that control the prices paid by smaller health care providers for hospital supplies, from hypodermics to bed linens. (See Mariah Blake, “Dirty Medicine Washington Monthly, July/August 2010.)

Finally, and just as importantly, the size of these institutions allows them to hold on to a significant portion of their customers year after year. This, along with their nonprofit status, preserves a business case for prevention and investment in long-term health. Unlike for-profit HMOs, they are not under pressure to maximize short-term profits by withholding appropriate care; instead, all their incentives are aligned toward providing enough care, and no more than is necessary, to keep their patients healthy over the long term.

We should set a date when the Medicare system will stop covering fee-for-service medicine. Medicare beneficiaries would instead have the choice of deciding among competing managed care organizations that meet specific quality requirements. These organizations wouldn’t be standard for-profit HMOs. And they would not receive the inflated, no-questions-asked reimbursement rates that have prevailed under the Medicare Advantage program. Nor would they be anything as amorphous and underdefined as an accountable care organization.

Instead, providers qualified for reimbursement under Medicare would have to be nonprofit organizations to start with. They’d also have to use salaried doctors, deploy integrated health information like the VA and other best-in-class health care providers do, adhere to evidence-based protocols of care, and operate under a fixed budget. Specifically, for every Medicare patient who decided to join their plan, the government would pay a specific annual reimbursement based on that patient’s age. These Medicare-certified providers would not be allowed to turn away patients on Medicare or kick such patients out of their plans. In order to stay in the program, they would have to meet strict safety and quality requirements on such measures as hospital-acquired infection rates. And they would have to be at least of a certain size to participate.

The latter requirement would allow them to achieve the economies and other benefits of scale described above. With enough large institutions participating, the government could assure that no single one monopolized a local market and that seniors always had a choice of plans.

The best of our integrated health care providers would instantly qualify. With that advantage, top-flight regional providers like Mayo, Intermountain, and the Cleveland Clinic would have an incentive to expand geographically. The VA, which is already national in scope, could be allowed to expand by serving the many older veterans who are currently excluded from the system because they lack service-related disabilities or are not poor enough to meet the VA’s means test. By allowing these older vets to use their Medicare entitlement for VA care, and perhaps their elderly spouses as well, everyone would win.

Meanwhile, many existing health care providers that didn’t qualify would face a choice: they could merge with institutions that already deliver the highquality health care necessary to become a Medicare-certified provider and adapt to their cultures and protocols care, or they could reform themselves. Under the threat of losing their ability to collect from Medicare, they would find it much easier to stare down greedy, profit-driven specialists and others resistant to change and gain the power they needed as an institution to do the right thing.

Raising any capital needed to reform an existing institution, or to create a new one eligible to treat Medicare patients, should not be a serious obstacle. Banks and investment firms would gladly extend credit and capital to any institution that could show a reasonable plan for meeting the requirements, because such institutions would have a predictable future revenue stream that could be used as collateral. Our financial system routinely does this for other nonprofit entities that have predictable revenue streams, from cities and counties to universities, as well as certain hospitals with assured earnings.

Indeed, institutions that became certified to serve the Medicare population under this proposal could reasonably hope to attract many younger Americans, especially those who will become mandated by the ACA to purchase health coverage starting in 2014. Benefiting from an inherently efficient model of care, these institutions will be the thrifty option for fulfilling the individual mandate, while also happening to be the smart option as well. They may also be attractive to middle-age Americans contemplating retirement, who may want to transition early into the system that will wind up treating them into old age. Indeed, the government may even want to encourage this kind of behavior, given that the longer an HMO is on the hook for a patient’s care, the more financial incentive it has to keep the patient healthy. These and other effects could ripple through the system, hinting at a bigger truth: if you reform the delivery of Medicare, you just might reform the entire health care system.

Would there be resistance to such a proposal? Of course. But compared to what?

Let’s start from the point of view of individual citizens. Yes, many current Medicare beneficiaries would be upset by any change to the status quo. But these folks could and probably should be allowed to stay in traditional Medicare; the changes outlined here will take some years to put in place in any event. The people who will be affected first are those eligible for Medicare in, say, ten years.

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.