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Increasing the Cost-Effectiveness of Government Healthcare Programs

By the end of June, the Supreme Court is expected to rule on the constitutionality of the Patient Affordability Act. Much of the debate centers around the individual mandate that would require virtually all US citizens to obtain health insurance or face a penalty. But there is a much lesser known element of the law that may have as great an impact on our nation’s healthcare system as the adoption of the individual mandate. The Center for Medicare & Medicaid Innovation, which was created by and is funded by the Patient Affordability Care Act, is the first nation-wide initiative to focus purely on improving the cost-efficiency of government healthcare programs.

The enormous costs of our government healthcare programs is frequently acknowledged by politicians and policy analysts. The latest CBO report expects between 6% and 10% of our total GDP to be spent on Medicare and Medicaid over the next ten years—where the actual figure will fall depends primarily on the GDP growth rate and whether the Bush tax cuts are allowed to expire. It remains that under almost any plausible fiscal scenario, healthcare outlays are the federal government’s largest source of spending growth over the next decade.

While the growing number of Americans eligible for Medicare and Medicaid contributes to rising costs, the most significant driver of rising Medicare and Medicaid costs is inflation across the healthcare sector in general. Although there are many drivers of healthcare inflation, most academics and policy analysts conclude that the diffusion of expensive new technologies—fueled by a fee-for-service compensation system—is the primary driver of healthcare inflation in the US. In most developed countries, hospital revenue and physician compensation is only tangentially related to amount of treatment received. In the US however, care centers receive revenue directly from the treatments they provide. As a result, they are often more enthusiastic about purchasing and applying new expensive medical technologies as this allows them to earn more if they administer more costly treatment.

Recognizing that overcoming healthcare inflation would be a key step in solving the nation’s fiscal challenges, the Center for Medicare and Medicaid Innovation has been provided with $1bn of federal funding to address this core issue. The Center has funded over 20 or so local and statewide interventions aimed at improving beneficiary health while reducing costs. Many of these initiatives seek to reform the current fee-for-service payment structure.

One such intervention, the Bundled Payments of Care Improvement (BPCI), involves having healthcare providers estimate what the total cost of care should be for a specific episode based on historical data. If the total cost of care falls below the target price, healthcare providers are reimbursed the difference. Any payment that compensates providers for more cost-effective care is then shared among all providers involved in the treatment process including physicians, hospitals, post acute care providers, and other practitioners. This method helps avoid unnecessary tests and treatments by providing healthcare providers with a financial incentive to keep costs for future patients inline with or below the costs of past patients. Moreover, by using national Medicare and Medicaid data as the benchmark for determining target costs, the Bundled Payments scheme immediately rewards providers that are the most cost-effective while giving greater incentive to less effective providers to reduce costs.

Although the plan has some potential pitfalls, many of these can be avoided by proper oversight. To prevent providers from setting unrealistically high cost targets for a procedure (and therefore benefiting more financially), all targets must be supported by historical data and approved by the CMS. Some analysts have criticized this type of program by saying it will create an incentive for physicians and hospitals to under-treat patients. However, the process used to determine price targets makes this very unlikely. Price targets are established only once a physician has determined the need for a specific procedure, and do not play a role in the initial diagnosis. In other words, a hospital participating in this program will not receive additional payment by administering fewer bypass surgeries to heart attack victims, but by administering each bypass surgery in a more cost-efficient manner. This will encourage providers to invest only in those new technologies that have been proven to improve health outcomes, while avoiding those which increase costs and provide uncertain benefits to patients. Moreover, since price targets to treatment are based on national averages, the Bundled Payments initiative will also help identify hospitals that habitually run over-budget in their treatment of Medicare and Medicaid patients. By giving caregivers a financial incentive to improve the cost-efficiency of care, best practices used by the most efficient caregivers are more likely to be adopted on a broader scale.

Another promising initiative, called Medicaid Incentives for the Prevention of Chronic Diseases (MIPCD) focuses on chronic illnesses, such as heart disease, pulmonary diseases, obesity, and type 2 diabetes. Recent figures suggest that treatment for these four conditions alone make up nearly half of all Medicaid expenditures on beneficiaries. Since the onset of these diseases is closely related to lifestyle choices, behavioral interventions that successfully change habits can be a very cost-effective way to reduce healthcare costs. While permanent behavioral change can be challenging to achieve, lifestyle interventions can be successful if they engage entire communities, emphasize self-care, contain well-designed incentives, and include routine follow-ups from wellness coaches. In the private sector, there are numerous examples of corporate wellness programs that both improved employees’ lifestyle choices as well as lowered healthcare costs for employers. Johnson & Johnson’s Health and Wellness Program is a particularly notable success story— for every $10 million invested in its highest-risk employees, the company has saved $30 million in healthcare costs.

MIPCD’s pilot program in Montana, which focuses on 800 Medicaid beneficiaries at high-risk for developing cardiovascular disease, has borrowed many of the characteristics of past successful wellness programs. The initiative provides beneficiaries with a small financial incentive to participate in the intervention. Committed participants will have the chance to earn more over the course of the intervention as they successfully address their risk factors including total body weight, cholesterol levels, and blood pressure. If the pilot program shows measurable improvement in beneficiaries’ health, it could be expanded in other parts of the country where there is a concentration of Medicaid beneficiaries who have a high risk for chronic illness.

While Bundled Payments and MIPCD were enacted too recently to have yielded concrete results yet, these small-scale innovations are based on promising ideas that address a core driver of healthcare inflation. Regardless of the Supreme Court’s ruling in June, it is imperative that the efforts made by the Center for Medicare & Medicaid Innovation continue uninterrupted. As the most popular government programs (with approval ratings from over 75% of the population), Medicare and Medicaid will remain a major part of our nation’s fiscal landscape for the foreseeable future.

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