How A Public Option Could Hold Down Costs
Whether the United States eventually embraces Medicare for All or continues stumbling along with its current health care financing system, cost control will be paramount. To make health care affordable and sustainable in the long run, we’d first have to reduce spending growth to the rate of general inflation and then reverse the cost curve.
Proponents of Medicare for All believe that, once all health spending is under government control, costs could be lowered by reducing what’s paid to health care providers. But it’s not that simple because of the influence that the health care and pharmaceutical industries have on Congress. This influence has been demonstrated repeatedly, such as in the 2015 repeal of the Sustainable Growth Rate and in current debates about reducing drug prices to international levels or letting Medicare negotiate drug prices.
Rather than relying on an often-disproved notion that we can simply reduce health care prices by fiat, I believe we must put providers at financial risk to reduce overall health care spending. Furthermore, the most promising vehicle to effect this change is the public option plan that President Joe Biden proposed during the 2020 election campaign.
Prospective Payment Will Help Target Waste
From 2019 to 2028, the Centers for Medicare and Medicaid Services (CMS) forecast that total health spending per capita will grow about 5.2 percent per year, on average. That growth percentage is a bit higher than historical medical inflation, which has averaged 4.7 percent annually for the past century and has exceeded general inflation by 1.5 percent per year, on average. If we could reduce annual cost growth by 1.5 percent today, in 10 years health spending would be 12.0 percent lower than expected. By 2050, it would be a third less than the predicted level. While that might not be enough to make health care affordable, it’s at least an interim goal to shoot for.
Reduction of health care waste, which is believed to generate roughly a third of health spending, is a feasible method of lowering costs. Somewhere between 15 percent and 20 percent of health costs consist of low-value or unnecessary services and supplies that are under physicians’ control. Another 14 percent consists of billing and insurance-related costs that are built into fee-for-service. Given the right incentives, providers could cut the amount of waste under their control in half—reducing it to about 10 percent of health spending. Assuming they split the resulting cost reduction with payers, 5 percent could be sliced off health spending. If enough fee-for-service reimbursement were converted to budgeted (or prospective) payments, it might also be possible to decrease billing and insurance-related costs to 7 percent of spending. If both cost-cutting initiatives took 10 years to reach fruition, there would be enough savings to lower the annual growth of health costs by 1.2 percent.
Prospective payment has long been seen as an effective way to induce providers to lower costs. To date, however, progress toward this kind of payment methodology has been pitifully slow, and fee-for-service still dominates the health care industry.
Physician organizations have made the most progress on this front. Large groups and independent practice associations (IPAs) in California and elsewhere, along with physician-led accountable care organizations (ACOs), have learned how to take financial risk and manage care. Hospitals and health systems, however, have been resistant to prospective payment. Their business model tends to rely on increasing volume (putting heads in beds) while maximizing private payments. Most health systems have been slow to participate in value-based payment models, and as a result, the physicians that they employ—accounting for nearly half of US doctors—cannot be counted on to participate in a nationwide move to prepayment.
Possibilities Of A Public Option
Only a small portion of physician practice revenues are prepaid today. For the vast majority of physicians, who have been paid fee-for-service for their whole careers, the idea of practicing within a budget is scary and unfamiliar. Moreover, private practice is more precarious than ever. So, what would prod these doctors to make the leap to financial risk?
The most promising lever to effect this change is the public option that President Biden proposed during the 2020 election campaign. Biden has given no indication of when or whether he intends to propose legislation to create a public plan. But with growing pressure from the progressive wing of the Democratic Party to do something about health care, the introduction of a public option is not out of the question, especially if the Democrats increase their congressional majorities.
Under Biden’s campaign proposal, the public plan would be patterned after Medicare, although not merged with it. Millions of people could potentially enroll in this plan, including the uninsured, the individually insured, workers dissatisfied with their employer-sponsored plans, and low-income people not covered by Medicaid in states that chose not to expand Medicaid under the Affordable Care Act. The government plan would use its purchasing power to negotiate rates with providers.
The government should also use the public option to foster competition among physician organizations, including ACOs and other groups that are big enough to take financial risk for a substantial portion of the total cost of care. A group of distinguished health policy experts recently suggested something similar called the Better Care Plan, which would use prepayment to incentivize providers to continuously improve care. In contrast to competition among insurers, competition among prepaid providers would actually produce savings for employers, individuals, and the government—that is, for society—because at-risk providers, unlike health plans, would not be able to simply pass along higher costs to payers.
While health plans can incentivize providers to cut costs, their tools are limited in that regard. Physicians are the only ones who know how to reduce waste without harming patient care. And the rivalry among physician groups could act as a check on any group that tried to cut corners on quality to increase income.
Let’s assume that Congress passed a version of Biden’s scheme and incentivized physician groups and ACOs to assume risk for patient care in the public plan. The biggest incentive to participate would be distaste for the alternative: Fee-for-service rates in the government plan would probably not be much higher than Medicare payments. Only by taking risk would physicians gain the ability to earn more than that. Other carrots might include a favorable balance between bonuses and losses or upfront payments for infrastructure.
If the public plan grew large enough, a model built on competing, at-risk physician groups would launch a tsunami of change in the health care system. As the plan gained traction with consumers and employers by lowering their health costs, non-hospital-owned groups would begin to pull patients away from health systems not participating in the plan. At that point, many hospital-based organizations would see a need to change their business model, potentially allowing their groups to join the Marketplaces created by the public plan.
Leveraging Existing Physician Payment Models
Currently, CMS is experimenting with direct payments to physician groups and other provider organizations through its Direct Contracting program. Although the Center for Medicare and Medicaid Innovation has placed this program on a partial hold while it reevaluates its strategy, it represents one model for paying the groups in the public plan.
Under the Directing Contracting Professional program, contracted entities take full professional risk, including partial capitation for primary care services and 50 percent of shared savings/losses. The Direct Contracting Global program offers partial primary care capitation or total care capitation and 100 percent of shared savings/losses.
Another precedent to consider is the California delegated-risk model, which has achieved significant success over the past 40 years. Under this model, insurance companies contract with medical groups and IPAs to deliver all or a portion of health care for a prepaid amount. In California, most of these contracts delegate risk for all professional and ancillary services, although a few organizations take some form of global risk, including risk for hospital care.
The delegated-risk model never really caught on outside California, and it has been in decline in that state for the past 20 years. A 2009 report attributed this to several market developments. These included a market shift from health maintenance organizations to preferred provider organizations, both in California and nationally; the acquisitions of two major California insurers by out-of-state companies less interested in delegating risk; and the perception of some medical groups that they could make more money by shifting back to fee-for-service.
A third alternative would be to pattern the public plan’s payments to physician groups and ACOs after the advanced tracks of the Medicare Shared Savings Program (MSSP). The groups could be capitated for primary care and take limited risk for the total cost of care. For example, they might be able to keep up to 75 percent of their savings, depending on quality scores, and might risk losing up to 40 percent of any spending over their benchmark.
Since its start in 2012, the MSSP has saved Medicare just $2.5 billion after accounting for shared savings and shared loss payments—a small fraction of the program’s spending growth in the past decade. Moreover, only about 35 percent of the ACOs in the MSSP have received any shared savings. These figures, however, offer only a glimpse of the potential that the public-option care delivery model might achieve. Until the past couple of years, just a small portion of the MSSP ACOs took any downside risk, and many of them were formed by providers that just wanted to dip their toes in the water. If physicians could earn only a bit more than Medicare rates for a big block of their non-Medicare business unless they assumed risk, many more would take the plunge, and the potential savings would be much greater than those seen under the MSSP to date.
A Wide Range Of Participants
The groups, IPAs, and ACOs competing in this public-plan model would encompass a wide range of types. They’d have to include at least a certain percentage of primary care physicians, but multispecialty groups could also participate. Because some of the groups would be mostly primary care, and because certain kinds of specialists are in short supply, however, the competing groups would have to allow referrals from other groups to their specialists at in-house rates.
Groups would have to be big enough to take a significant amount of risk, but their size would be limited to a specified number of physicians, depending on the market. Otherwise, a giant group could drown out the competition. Any kind of ownership would be permitted, ranging from physician- and hospital-owned groups to practices owned by insurers, private equity firms, or pharmacy chains. Physician-owned groups, which have fewer resources than the other types, would initially receive subsidies from the government. All groups would also need substantial financial reserves and possibly reinsurance, although the government might backstop them in their formative phase.
The groups and ACOs would compete within markets or regions, using the same kind of cost and quality report cards that the California-delegated risk model uses. If consumers selected a doctor in a low-cost group, their premiums could be lower than those of consumers choosing higher-cost groups. As a famous experiment in Minnesota showed a generation ago, that would be a strong driver of patient choice, which in turn would compel groups to excel at value-based care.
Leveraging The Public Option
If this model were also adopted by the traditional (that is, non-managed-care) Medicare and Medicaid programs, private insurers would still have their Medicare Advantage and Medicaid managed care plans, as well as whatever commercial business hadn’t migrated to the public plan. But the private carriers would be at a competitive disadvantage because their commercial plans would likely be paying more to health care providers than the public plan would. In addition, they’d be contracting with fee-for-service providers who would have no incentive to minimize their resource use. The insurers could, of course, delegate risk to the same groups that contracted with the public plan, but they would likely be unable to procure the same rates as the government from hospitals and other providers.
This disparity in purchasing power, of course, explains why private insurers are fighting the public option so hard. But it’s also why a public plan makes so much sense if it uses an efficient, high-quality care delivery model. By getting most physicians to accept financial risk, and by having them compete for patients who have skin in the game, the public option could leverage widescale change in health care. In the long run, it could cut health spending to the level of inflation or even reverse cost growth.