Massachusetts Commission cuts the Gordian Knot on healthcare costs

I wanted to post notice of a key development on the healthcare cost containment front reported in the WSJ on Friday, but didn't get around to it (settling for a tweet) -- and now I see that Ezra Klein has beaten me to it. Here's the WSJ:

A Massachusetts panel proposed that the state scrap traditional payments to doctors and hospitals for each office visit or procedure, and instead adopt a system where they receive a monthly or annual fee per patient.

The proposal is an effort to control the state's health-care costs, which are among the highest in the nation.

Under the new system, doctors and hospitals would be organized into groups responsible for all of a patient's health-care needs. The groups would receive a "global payment" per patient, which could be adjusted with performance incentives based on the quality of care provided.

The proposed system -- a radical departure from the way patients and insurers now pay -- would require legislative action and waivers from Medicaid and Medicare rules.

The panel, created by state law, voted unanimously to adopt the recommendations. The commission included key state legislators, the state's leading doctor and hospital associations and insurers.

As Klein says:

That's a huge reform. Much bigger than anything we're considering nationally. It's a direct attempt to change the behavior of politically powerful providers to preserve the coverage that the reforms gave to individuals. It will be difficult. The doctors' lobby is already giving angry quotes to the press.

Atul Gawande, in his landmark article focusing the healthcare debate on the problem of health care providers' incentives (mainly payment per treatment), stressed the complexities of realigning those incentives:

Instead, McAllen and other cities like it have to be weaned away from their untenably fragmented, quantity-driven systems of health care, step by step. And that will mean rewarding doctors and hospitals if they band together to form Grand Junction-like accountable-care organizations, in which doctors collaborate to increase prevention and the quality of care, while discouraging overtreatment, undertreatment, and sheer profiteering. Under one approach, insurers—whether public or private—would allow clinicians who formed such organizations and met quality goals to keep half the savings they generate. Government could also shift regulatory burdens, and even malpractice liability, from the doctors to the organization. Other, sterner, approaches would penalize those who don’t form these organizations.

This will by necessity be an experiment. We will need to do in-depth research on what makes the best systems successful—the peer-review committees? recruiting more primary-care doctors and nurses? putting doctors on salary?—and disseminate what we learn. Congress has provided vital funding for research that compares the effectiveness of different treatments, and this should help reduce uncertainty about which treatments are best. But we also need to fund research that compares the effectiveness of different systems of care—to reduce our uncertainty about which systems work best for communities. These are empirical, not ideological, questions. And we would do well to form a national institute for health-care delivery, bringing together clinicians, hospitals, insurers, employers, and citizens to assess, regularly, the quality and the cost of our care, review the strategies that produce good results, and make clear recommendations for local systems.

Dramatic improvements and savings will take at least a decade.

Massachusetts' Special Commission on the Healthcare Payment System (full report here) is proposing to cut the Gordian knot - to end payment per treatment in one fell swoop. In fact, though, there is nothing simple about the proposal, other than recommending unequivocally that the core transition to "global payment" be mandated. The Commission proposes a phase-in period of five years., and makes it clear that developing the global payment system will be a complex undertaking -- "global payment rates will include adjustments for clinical risk, socio-economic status, geography (if appropriate), core access and quality incentive measures, and other factors." The Commission recommends all the reforms outlined by Gawande and then some - development of "accountable care organizations," development of uniform standards of outcome assessment, implementing pay for performance incentives, building consumer incentives for preventive care.

The lobbying machinery is cranking up to crush the panel's initiative. Can Massachusetts legislators, under cover of a unanimous blue-ribbon commission, withstand the pressure? Can Massachusetts, which led the way in extending near-universal coverage, now lead the way in containing costs? Or will this fundamental reform fade away. to be replaced by nibblings around the edges of health care cost control?

BTW, will Peter Orzag weigh in on this potential game-changer?

Matt Miller clarifies healthcare reform

Matt Miller, a former Clinton budget official, provides rare clarity on the broad outlines of emerging U.S. healthcare reform and concludes:

Of course, just because Obama is on a path to give America the Romney health plan with McCain-style financing does not mean the Republicans will embrace it, if it seems politically more attractive to scream “socialist”. But the rest of us do not have to listen to them. Mr Obama can fairly claim to have championed a bipartisan health policy, even with few Republican votes.

Within that broader irony Miller captures a narrower one: Massachusetts healthcare reform, repudiated by the slogan-spewing former governor who signed it into law, is working:

The central mechanism through which Mr Obama seeks to extend coverage and restrain costs is via new “exchanges”, insurance clearing-houses, modelled on the plan Mr Romney enacted in Massachusetts. The idea is to let individuals access group coverage from private insurers, with subsidies for low earners.

The approach is so sensible that Ted Kennedy urged Massachusetts Democrats to support then-Governor Romney in passing it in 2006. The results have been impressive. The ranks of the uninsured have been slashed; just 2.7 per cent of residents now lack coverage, the lowest of any state – against 15 per cent nationally. Costs, which overran as the programme was brought in more quickly than planned, are now on budget.

The exchange, according to Miller - not the public plan, which he's assuming Democrats will sacrifice -- is the core of reform:

A federal version of this exchange (or federal sponsorship of state versions) would for the first time give non-elderly, non-poor Americans whose employers don’t offer coverage, or offer it at premiums they can’t afford, access to group insurance rates. It’s difficult to overstate the breakthrough this would represent. The inability of millions of Americans to access group coverage outside the employment setting is one of the most damning features of US healthcare. It means individuals with pre-existing health conditions are often uninsurable, which in turn explains why medical bills are, shamefully, a leading cause of bankruptcy. It locks budding entrepreneurs into jobs they loathe because their families need the coverage. Structuring these exchanges so health plans have incentives to compete on value is exactly the role government should play.

Miller also offers a broad perspective on cost, and an argument that ending or capping the employer tax exemption for healthcare is the logical way to pay for it:

Start with cost. It’s easy for foes to feign shock at Obamacare’s $1,000bn 10-year price tag, but a trillion dollars ain’t what it used to be. That is just over 0.5 per cent of gross domestic product over the same period, and barely 3 per cent of the roughly $35,000bn total healthcare spending during that time. If Mr Obama’s approach is otherwise sensible, the idea that America can’t afford it is preposterous...

When it comes to financing expanded coverage there’s no way to get there without revisiting the current scheme, under which employees escape taxes on employer-provided health benefits. This subsidy is so massive, at $250bn a year, and regressive – reserving its biggest bounty for those with the most generous plans – that a phalanx of health economists from both political parties recently begged Congress to trim it.

Miller's breezy assumptions that unions will cave on the employer tax exemption, and Obama and the Dems on the public plan, will be challenged by many who are deeply committed on both issues. He also does not address the crucial issue of how the emerging bill will tackle runaway healthcare inflation, which, as Peter Orzag never tires of reminding us, is the central front in the war on future deficits. But his 30,000-foot view does bring into focus the likely outlines of reform, the core issue of expanding coverage, and the absurdity of the current terms of U.S. political debate.