Slowing Medicare Spending Growth: Reaching for Common Ground
Published Online: August 24, 2012
Michael E. Chernew, PhD; Richard G. Frank, PhD; and Stephen T. Parente, PhD
2. Should Fixed Payments Go to Health Plans or Provider Systems?
When the government caps its liability for rapidly rising spending, the associated risks and responsibilities will be shifted. This means that insurers, providers, and/or beneficiaries will face new decisions and financial burdens. Vouchers and global payments vary in how they assign this risk and responsibility. Most voucher schemes assign new risk bearing to a mix of insurers and beneficiaries. Global payment places the new risks largely on providers. There are advantages and disadvantages to each strategy.
Insurers have developed competencies to manage data, support care management, and develop provider networks. Thus, they may be well suited to manage costs. One approach to managing costs is for insurers to use bundled- or global-payment strategies that force providers to share risk and responsibility. The ability of insurers to do so depends importantly on market conditions. However, the track record of insurers in this realm is poor. Therefore, failure to control costs means that beneficiaries will be liable for an increasing share of program spending over time.
In contrast, provider systems have more direct contact with patients, and thus are perhaps better positioned to alter patterns of care. If the Medicare program sets the payment rate to providers, it need not be so concerned with provider market power. However, while exceptions exist, a provider-oriented approach will require organizational changes and perhaps consolidation (which could have adverse consequences in the private insurance market because consolidated providers may increase market power and be able to raise prices to private payers). In many cases, providers will need to develop skills to manage risk and to coordinate care across different subgroups of providers. Providers need to perform better than they did in their last largely failed experiments in managing shared finances within 1970s and 1980s demonstration health maintenance organizations. Because of the constraints inherent in the bundled system, liability reform will likely be important.
Fortunately, the insurer and provider strategies are not mutually exclusive. In fact some innovative insurers in the commercial sector already accept a fixed premium and pay provider groups a global payment. Medicare could allow both approaches to coexist. Any organization willing to accept the fixed payment and be accountable for the patient outcomes should be able to participate in the program. It is important that the systems be designed on a level playing field, which would entail equalizing payments across systems. Equalization of payment will avoid favoring any particular organizational form and enable the most innovative organizations to succeed. For example, allowing providers in a global-payment system to have the same control over benefit design as health plans may be important.
Benefit design can be an important tool for aligning beneficiary and provider incentives, and a useful tool to support efforts to purge waste from the system. In premium-support systems, insurer control over benefit design is assumed (provided the coverage is not less generous than that mandated by Medicare). In a global-payment system, with payment going to provider entities, the locus of control is less clear. Yet, if provider systems are accountable for clinical and economic outcomes, some control over benefit design (within the same limits placed on plans) would be valuable. Benefit design can be used to encourage beneficiaries to seek care from the provider organization accountable for care and can be used to discourage use of low-value services. Moreover, patient cost sharing can mitigate conflicts between patients and providers who have incentives to practice conservatively. Ideally the organization accepting accountability would have at least some ability to control the details of benefit design within overall guidelines set by the Medicare program.
3. Should Plans or Providers Be Allowed to Charge Patients More Than the Fixed Payment?
Perhaps the most fundamental distinction between prototypical premium-support models and global-payment systems is whether providers (or plans) can charge patients above the amount of the voucher or global payment. In premium-support models it is assumed that insurers can charge an amount above the voucher. This feature allows beneficiaries to purchase more generous (or less managed) coverage if they desire, which might be very important if payment levels are tight. It also has the potential to create important new financial disadvantages for lower-income people. In typical global- or bundled-payment models, providers generally cannot charge an amount above the fixed payment. However, permitting providers to charge patients directly will allow beneficiaries who want access to more services to purchase them (or coverage for them). It may also result in limited availability of certain providers and services to lower-income people.
Permitting plans or providers to charge an amount above the fixed payment shifts responsibility for controlling spending, and risk if spending is not controlled, to beneficiaries. Yet it is unclear whether beneficiaries have the tools necessary to bear the responsibility and risk associated with controlling spending growth. If insurance (or provider) markets are not very competitive, beneficiaries could be charged well above the economically efficient amount. If plans or providers are allowed to charge amounts above government rates, antitrust enforcement will be important, perhaps coupled with some price regulation, such as limits to plan or provider surcharges.
As noted earlier, although extra billing can allow the system to be more responsive to beneficiaries’ preferences, it raises the possibility that disparities in access and quality related to income will develop, even if competition is perfect (though imperfect competition exacerbates concerns). To some extent, such income-related disparities exist now, and the Medicare Part D program already allows plans to charge amounts above the benchmark. Some of this disparity is attenuated by the availability of subsidies for low-income beneficiaries in Part D.
Today’s political climate and budgetary concerns suggest that subsidies for lower-income populations may be strictly limited. Therefore, allowing plans or providers to charge an amount above the government payment could exacerbate disparities. Different observers will view such disparities with varying degrees of alarm, but it seems likely that in a fiscally constrained system, individuals with greater demand for care will need a mechanism to have that demand satisfied.
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