How Government-Run Health Care Happens

Published January 30, 2015

National Review Online

Acting on the assumption that the Department of Health and Human Services has the power to remake the American health-care industry, Secretary Sylvia Burwell this week announced goals for moving the Medicare program away from its fee-for-service roots. By 2016, she wants 30 percent of Medicare’s fee-for-service payments to be made through “alternative payment models.” Further, she plans to tie 85 percent of all traditional fee-for-service payments to measures of “quality” or “value.”

The announcement was greeted by many as an important milestone. Peter Orszag hailed it as the crucial next step in the long struggle to slow the pace of rising health-care costs, arguing, correctly, that Medicare is so big that it can influence how the entire system is organized and does business.

But the announcement is likely to be less important as a policy roadmap than it might first appear. The terms “alternative payment models,” “value,” and “quality” are so elastic that HHS could place any number of relatively minor payment adjustments under those umbrellas and claim victory.

What’s more important about the announcement is what it says about the cast of mind of those who are implementing the Affordable Care Act (ACA). From Secretary Burwell’s article in the New England Journal of Medicine explaining the initiative, it is evident that she and her colleagues see HHS as having the power and the responsibility to embark on a complete makeover of American health care. The first sentence of the piece says it all:

Now that the Affordable Care Act (ACA) has expanded health care coverage and made it affordable to many more Americans, we have the opportunity to shape the way care is delivered and improve the quality of care systemwide, while helping to reduce the growth of health care costs.

The “we” in that sentence is Burwell and the people who work for her at HHS. Burwell explains how the department will use “incentives” to push doctors and hospitals to form the organizational structures the government believes are best for delivering care: HHS will develop “quality” and “value” metrics to reward or penalize medical-service providers, in addition to using taxpayer funds to train physicians and others to provide services consistent with what the federal government believes to be best practices.

Burwell is reflecting an attitude that permeates health policymaking among those who supported the ACA. Their view, contrary to all evidence, is that the federal government has the capacity to lead an effective makeover of the nation’s complex and vast network of hospitals, physician practices, outpatient facilities, and related services. It seems not to have occurred to Burwell or her likeminded colleagues that perhaps the federal government is not in a position to do this well and that in fact asserting more federal control over the manner in which health services are delivered to patients might be a prescription for worse, not better, health care.

The federal government’s half-century record of running the Medicare program is a reason for caution not boldness in this regard. Medicare is the largest purchaser of services in most markets,and so has substantial influence over the organization of care delivery. Unfortunately, that influence has pushed health care in this country toward more fragmentation, disorganization, cost-shifting, and inefficiency in how services are delivered to patients.

Medicare’s dominant fee-for-service program fuels cost pressures. In fee-for-service, the providers of services get paid more when more procedures and tests are ordered for patients, and the Medicare program pays claims submitted by licensed and qualified medical providers, no questions asked. The only check against unlimited use of services is the cost-sharing requirement for patients, which is substantial in Medicare. But most Medicare beneficiaries pay almost nothing at the point of service because they have Medigap insurance or retiree health coverage that pays for whatever is not covered by Medicare. The result has been a relentless rise in the volume and intensity of services used by Medicare patients.

Congress and Medicare’s bureaucracy have responded to the cost crisis, which has been ongoing since the 1970s, with a steady stream of massive and complex payment regulations. Their purpose is to cut costs by lowering what the government pays for each service rendered to a patient, but they are blunt instruments, with many unintended consequences. For example, in the case of physicians, a new payment system instituted in 1989 was supposed to reward primary care over specialization but for more than two decades has had the opposite effect.

These payment systems also stifle innovation. Incumbent providers hire lawyers and lobbyists to protect their interests as they navigate the regulations. New entrants with new ways of doing business, on the other hand, have a difficult time getting the bureaucracy to approve their approaches. The result is inertia and risk aversion, which slows the pace of progress.

What Burwell and her co-workers are promising is that HHS is going to break out of this decades-old model with new payment systems that are calibrated to reward value and not the providers with the best lawyers and most political clout. But what evidence is there to believe this will work? To begin with, nobody really trusts that HHS has the right data to measure quality fairly. And without consensus on how to measure quality in health services, none of what HHS says it plans to do will be possible.

But there’s an even more fundamental problem with Burwell’s thinking on this subject. Medicare-payment regulations are budgetary devices more than anything else. Whenever Congress or the administration wants to cut spending, they look to squeeze some additional dollars from the massive provider-payment systems in Medicare. That dynamic will not change with new, supposedly better payment rules. When budget pressures build, rates of payment to providers will be cut indiscriminately again, regardless of the consequences for the quality of the health system.

The Obama administration balks when its opponents charge it with supporting “government-run health care.” But Secretary Burwell’s announcement is clear. HHS is eagerly moving ahead with plans to “shape the way care is delivered” and therefore to control costs across the industry and not just in government-administered health programs.

In the health system envisioned by the administration, HHS will call all of the important shots and direct how hospitals and doctors are to care for patients. If that’s not government-run health care, what is?

— James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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