Probably one of the largest pending changes in health care is payment reform.
Right now, payment for medical services is essentially a fee for service model. Patients (or their insurers) are generally charged for the services utilized. If a patient goes to hospital for chest pain, and a physician evaluates the patient, either the patient or the patient’s insurer pays the physician for those services. If the physician orders an EKG and lab tests, either the patient or the patient’s insurer pays the hospital for the EKG and lab tests. If the patient is admitted to the hospital, the hospital gets paid a given fee for the admission. It goes on and on.
The feds want to reduce costs by changing the payment model for medical care to a “bundled” approach. I don’t think it’s going to work. Bundling won’t change the behaviors necessary to save money. This will be a two part post on why. This part will discuss incentives and how they drive utilization of health care. Next part will apply those concepts to bundled health care.
Why is our current system going bankrupt? It is all about incentives. There are three main concepts driving health care costs: profit, demand for services, and fear. Before we can see the effects of a policy change on health care costs, we need to understand how these concepts drive the actions of the major players in the health care market.
For Providers, the incentive is currently to provide more services.
- Demand for services is created by illness. When ill, patients often demand as many medical services as the providers are willing to provide. Patients may seek alternative providers if their demands are not met. There is little incentive to provide less care with increased demand.
- Profit is created by providing services. In a fee for service environment, the more services that are provided, the more that the providers are paid. If patients want the testing or services, more often than not, they get the testing or services. Unhappy patients tend not to come back. No patients = no income.
- The most pervasive fear for providers is fear of liability – either legal or professional. This fear is often mitigated by providing more services. Increased testing decreases the fear of liability because if there is a bad patient outcome, the provider can point to all the testing and argue that they should not be liable because “we did everything we could.” It is uncommon for a provider to suffer adverse consequences for performing too much testing. Fear of liability may lead to extremely expensive and questionably beneficial medical care.
Hospitals also fear regulatory sanctions. It is comical to watch hospital administrators scurry about when there is a JCAHO survey. Poor performance on a JCAHO survey threatens a hospital’s Medicare reimbursement.
For Insurers, there is an incentive to increase customers who pay into the system, but who do not take money out of the system.
- Demand for services is still created by illness, but as demand for services goes up, insurer profits go down (or, in the case of government insurance, debts increase).
- Insurers profit by having healthy and wealthy subscribers. Healthy subscribers pay into the system, but don’t take as much out of the system. Insurers can increase profits by raising insurance premiums, but must be careful when setting prices. If premiums are raised too high, healthy insurers may drop their coverage because they perceive too much of a disconnect between the premiums that they are paying and the services that they are utilizing. In that case, the profits from increased premiums may be diminished because the insurer has fewer subscribers and proportionately more “unhealthy” insureds who utilize more services that the insurer must pay for. Insurers increase their subscribers by contracting with employers to provide services to employees. If an employer chooses a specific insurance company, it would be a huge financial burden for an employee to try to go with another company not offered by the employer. There are even tax disincentives from purchasing your own insurance instead of using your employer’s insurance.
Insurer profits also increase when insurers deny care. Insurers have an incentive to deny claims to subscribers or to create roadblocks to providing care (also known as “pre-authorization”) in order to discourage people from taking money out of the system. A patient’s MRI doesn’t meet medical necessity — the insurer refuses to pay for it. Expensive cancer treatment is “experimental” — the insurer refuses to pay for it. Patients need an expensive medication? The physician has to call and pre-authorize the medication — which is uncompensated time spent away from caring for patients. However, too many inappropriate refusals may cause the insurance company to get a bad reputation with its insureds and may cause further attrition – or may cause a corporation to drop its affiliation with the insurer. Underwriters make a determination whether the risks of denying care are worth the potential financial benefit
Finally, insurers increase profits by paying less to providers. Providers need patients in order to make money. If insurers have control over a large proportion of a market’s patient population, then providers may be financially forced to contract with the insurer on the insurer’s terms so that the provider has access to the insurer’s patient base. Sometimes the providers have unconscionable contract terms to which providers will not agree. For example, Medicaid pays such little money that many providers will not accept patients who have Medicaid. The government gets around this conundrum by creating laws that force certain providers to provide care to Medicaid patients and by giving states funding to provide care to Medicaid patients.
Some private insurers also create unconscionable terms in their contracts in order to increase profits. In our area several companies have a reputation for low reimbursements and long reimbursement delays. Therefore, many providers simply refuse to contract with those companies. Think about it. Would you work for an employer who paid less than minimum wage and who didn’t give you your paycheck for 120 days? But insurers that cut corners then market lower cost products to employers who purchase their product to save money. Then the employees get “insurance,” but that “insurance” has less options and less physicians than other insurance plans.
For the most part, providers can still care for patients under private insurance plans, but patients must pay proportionately more for “out-of-network” physician services. In other words, if an insurer is only willing to pay a physician $20 for an office visit costing $150, the patient may being billed for the $130 balance. This is so-called “balance billing.” When patients pay a substantial amount of money in insurance premiums, they become upset by having to pay more than a small co-pay for provider services. Private insurers then blame “greedy” providers for charging too much and have successfully lobbied many state legislatures into making balance billing illegal and forcing some providers to accept whatever amount of money the insurance company chooses to pay. In other words, states such as California make it so that if an insurance company wants to compensate a physician 10 cents for providing medical care to a patient, the physician has to take the 10 cents and cannot bill the patients for the difference.
Medicare has also outlawed balance billing. Providers either agree to what Medicare pays for services or they don’t accept Medicare patients. Because of Medicare’s large patient base, it has considerable influence over medical providers. All patients over age 65 are eligible for Medicare. Because these patients typically are high utilizers of medical care, a hospital’s refusal to accept Medicare could threaten the hospital’s financial viability. Medicare knows this and it creates arcane rules that enable it to refuse payment or diminish payment to providers if the rules are not followed. For example, failing to note that a patient is a smoker may cause a provider’s payment to be diminished by up to 40% per patient. Hospitals have “chart police” who are hired solely to make sure that providers properly document everything that Medicare wants us to document.
- Insurers fear financial risk. If a patient has a history of a potentially costly medical problem, an insurer will not contract with that unhealthy patients. Try getting a private insurance policy if you have a history of diabetes or cancer. Fear therefore diminishes the availability of care to patients who need it most.
Insurers also fear legal liability. In many cases an insurer can be successfully sued for refusing to pay for medically necessary services. To mitigate this risk, a law called ERISA was created that minimizes insurer liability for refusing payment for services when those payments are for an employee-sponsored health plan. ERISA doesn’t apply to private insurance plans, so insurers have less fear of employed patients than they do of private patients.
For Patients, there are mixed incentives, depending on their insurance status and ability to pay for care.
Well-insured patients or patients on government insurance have an incentive to demand comprehensive medical care. If they are paying large insurance premiums, if they can afford to pay out of pocket, or if someone else is paying for the cost, why shouldn’t everyone have the latest and greatest testing, medications, and treatments?
In addition, patients with government insurance have no disincentive to seek medical care for trivial complaints or for secondary gain (such as narcotic prescriptions or work notes). With no financial risk involved in seeking medical care, the only disincentive for those with government insurance is time spent obtaining the medical care. The only time a monetary disincentive comes into play is when government insured patients seek care from a provider who does not take their insurance or when a government insured patient is prescribed a medication that is not on the government’s formulary.
Monetary issues aren’t a much of a concern for well-insured patients. If there is no out of pocket cost, very few patients even question how useful a test is or how much the test costs.
Patient fears drive increased utilization. Perhaps a relative just had a stroke or died from cancer. If an insurance company is picking up the tab, fear may cause the patient to demand that those same diseases be ruled out or that low-yield testing be performed, or that a family member be inappropriately admitted to the hospital.
Patients who pay out of pocket or who have high insurance deductibles have an incentive to obtain the minimum necessary care. Medical care is extremely costly and medical costs are behind a large proportion of bankruptcies in this country. Those who pay face value for their medical services avoid any services that aren’t essential – sometimes to the point of letting a treatable disease become worse or even become untreatable. To illustrate, consider a patient with good private insurance who has a $3000 deductible. Before the deductible is met, testing is kept to a minimum. Providers may have some difficulty obtaining co-pays or other payments. Toward the end of the year, when deductibles are met, there is a rush to have testing and procedures performed before the end of the year and the onset of a new deductible. Another example might be a patient who requests a questionably necessary service or test. If a patient or family member is given an Advance Beneficiary Notice to sign, acknowledging that they may personally be responsible for payment if the government does not pay, a large proportion of patients decide to forego the service or test.
Monetary concerns are a large disincentive to patients who pay out of pocket. Medication prescriptions may not be filled if they are too expensive. If pre-authorization for testing is needed, patients often forego the testing if pre-authorization cannot be obtained. Often patients become angry at physicians because they are not able to obtain pre-authorization so that the patient does not have to pay for the test.
Fears of monetary outlay serve as a disincentive to care for patients who pay out of pocket.
That’s it. I think that these are the main market forces at work in determining the cost of medical care. The examples certainly aren’t exhaustive. I’m interested in seeing comments on what other forces people think may contribute to medical costs.
The second part of this post will use the above concepts to show how the current proposed payment reforms will have little effect on controlling costs.