Balanced Incentives for Health

Mitchell T. Rabkin, M.D., and John S. Cook, D.Phil.
Boston, MA

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In the United States, the financing of health care is shaped largely by the policies of Medicare and copied by most other payers and insurers. These policies create a market that is unique, far different from the market that exists in virtually all other buy-sell transactions. This unique health care market creates a system of incentives that dominate the practice of medicine. Some argue that the continuing rise in health care costs is a result of advances in medicine, new technologies, increases in coverage, excess usage in fear of malpractice suits, demands by patients, inflation, etc. That misses the point. The primary reason for the unacceptable and continuing rise in costs is that the inflationary incentives of the health care market dominate its very weak incentives for containing costs.

Efforts to control costs to date have not dealt with the reality that for effective reform the dominating inflationary incentives of this market must be eliminated. For real reform, a new and different market must be developed with incentives that work to generate prudent commitment of resources, i.e., cost control, and also insure quality of care and patient satisfaction.

The keys to the pathology of today’s health care market are two: (1) fee-for-service as the dominant mode of payment, now widely recognized as inflationary, and (2) leverage for control of costs is in the hands of the payer and not the responsibility of the doctor. These are facts, realities long ignored. We propose to eliminate these two faults through a new market in health care, one with incentives that will make meaningful reform possible.

We start with pilot programs by Medicare that place control in the hands of the physician and patient. Coordinated financial incentives would favorably influence quality of care, patient satisfaction and the judicious use of resources, i.e., cost control. These incentives would impact on primary care physicians, their referred specialists, patients, hospitals, insurers and employers. Positive experience with the pilot programs could then lead to wider use, with revisions as insights may emerge from the initial efforts. Wide implementation by Medicare would influence other payers, government and private, and the health care market, its financing and delivery of care would improve.

In recent months, single payment for an episode of illness has been suggested as a means of cost control, covering all things related to that episode or illness. That provides a given budget for the episode or illness, but since many elderly patients have multiple illnesses, the notion has practical limitations. By contrast, fixed payment for all care of an individual over a year (true capitation) is more realistic, unless the patient can freely seek and receive care anywhere he or she wishes and still have the insurer pay for it. That unrestricted “freedom of choice” is what made for failure with many so-called “managed care” efforts in the recent past and distorted the common understanding of capitation. Only in a closed system, such as Kaiser-Permanente of Northern California, has true capitation worked and demonstrated that quality of care was comparable to or better than that in the neighboring fee-for-service environment, with lower cost and equal or better patient satisfaction.

Most doctors and hospitals are not organized as is Kaiser-Permanente, so the challenge is to innovate those principles of capitation in a new system that would work without disrupting the way most doctors and hospitals go about their work today.

To start with pilot programs by Medicare – which would not require new legislation – we must likely accommodate the following:

  • The current administrative capacities of the Centers for Medicare & Medicaid Services (CMS), including its enrollment, benefit adjudication, claims processing, and actuarial service capabilities
  • The current Part A and Part B Medicare health plan options, options that feature freedom of choice of providers with no referral requirements
  • The current network of participating Medicare providers

Medicare would issue contract proposals to primary care physicians (PCPs) requesting they voluntarily form groups of 5-15 physicians (a Team). Each Team would pool a sufficient number of Medicare beneficiaries with Part A and Part B coverage to ensure that a target budget covering their collective Part A and Part B expenditures will be actuarially stable.

Annually, CMS will compute a target budget for each panel of Medicare beneficiaries assigned to a particular Team. Age, sex, disabilities and other factors influencing the services required by the Team’s patient panel will be accounted for based on the actuarial classes and budgeting techniques currently used by CMS to create target budgets for Medicare HMOs and Advantage Plans. These target budgets are not bank accounts; they are accounting devices used to evaluate the expenditure levels of each Team. By the close of each year, having previously determined the target budget for the Team’s assigned beneficiaries, CMS will charge against this target budget all claims payments (“Chargeable Payments”) made by CMS on behalf of the Team’s assigned beneficiaries.

  • The PCP will provide basic and initial care and provide or arrange for specialist, hospital and other care, referring the patient to providers specifically selected by that Team.
  • A beneficiary who accesses care through the PCP (and Team), whether for primary care, specialty referrals, nurse-practitioner care or care by other providers agreed upon by the Team physicians will be relieved of a meaningful portion of the co-payments for the services of physicians, etc., otherwise applicable under Part B of Medicare. This offers the patient the first of several incentives to access care only through the PCP and to follow the PCP’s referrals for specialist and hospital care.
  • Even so, the beneficiary is not “locked in.” The beneficiary can reject the PCP’s referral and self-refer to the specialist or hospital of his/her choice while maintaining Part A and Part B coverage with its deductibles and co-payments.

Each Team has its target total budget for the group of Medicare beneficiaries registered with the Team. By the close of each year, the balances in that target budget will be determined and a proportion of any positive balance will be paid to the Team. The Team with positive balance in its total target budget and with highly favorable quality and patient satisfaction results (determined through effective information management and surveys) might receive, say, 40 percent or more of the positive balance. The remainder of the balance could be both shared with the payer and also used to reduce the patients’ health insurance premiums for the following year. Thus, fee-for-service payment is eliminated, and responsibility for control of costs is in the hands of the physician and not the payer. The financial incentives now act in support of the prudent commitment of resources, quality of care and patient satisfaction.

Balanced Incentives for Health (BIH) anticipates more patient time with the primary care physician, offering better care, better communication, and more gratifying experiences for both patient and physician. How will more time with a physician result in lower costs? It can lead to fewer visits to physicians’ offices or emergency units, earlier diagnosis, improvement of patients’ lifestyle, prevention of illness, and better overall health, all making for lower costs. BIH encourages the physician to spend time with the patient in useful efforts not paid for under fee-for-service, such as taking the time to listen to the patient, planning with the patient for health in the years ahead or, for a patient with chronic illness, focusing on education, monitoring and home care. The primary physician Team can include nurse practitioners, physician assistants and other members without concern that a fee-for-service system might not pay for their efforts. And the Team’s financial incentives, based on value measures that include quality, cost and patient satisfaction, encourage greater value and more cost-effective care.

Were BIH proven to be effective at controlling costs for Medicare and improving the situation for both patients and caregivers, it would likely become adopted more widely and lead to meaningful competition among private plans, with more cost-effective and patient-centered systems of organization, cafe delivery, and payment. That could promote an across-the-board change in the way virtually all insurers do business.

We think Massachusetts faces the same problem. While its efforts at health care reform have been widely heralded, these have addressed only one component of the three that must be dealt with successfully. The Massachusetts program has dealt with access, leaving only a few in the Commonwealth uncovered by health insurance, but the program has not impacted favorably on the issues of cost and quality, the two other components of the trio necessary for success.

Implementation of BIH should create a new health care market, enabling the Primary Care Physician to resume the professional responsibility of managing the care of patients in return for a workable system of prepaid capitation, with incentives for value delivered — prudent use of resources, high quality of care and patient satisfaction. For the participating specialist, market advantage is gained through similar performance. For the patient, BIH offers better-coordinated acute and chronic care, and long-term promotion of health combined with both freedom of choice and the opportunity to cut out-of-pocket costs. For the hospital, the incentives on its physicians enhance quality of care and efficiency, lessen costs, increase patient satisfaction, and increase competitiveness. For the insurer, government or private, the benefit is relief from both the burdens of clinical monitoring and management, and the administrative jungle of fee-for-service accounting and payment in return for a system of cost control that operates on incentives supporting value in health care. Neither the existing pattern of fee-for-service nor the recent past experience with so-called and inherently flawed “managed care” offers comparable direction for effective reform.

A new and systemic approach is needed to create a health care market supporting the critical goals of quality of care, prudent use of resources, and the possibility of access for all. Balanced Incentives for Health is offered for that purpose and warrants trial. Its opportunity for timely implementation without legislative infighting in Washington is an added advantage. We should explore its effectiveness and capacity to bring about greater value in the health care of all Americans and do so without breaking the nation’s bank.

Contact the Authors:
Mitchell T. Rabkin, M.D.
CEO Emeritus
Beth Israel Hospital
John S. Cook, D.Phil.
Beth Israel Deaconess Medical Center
330 Brookline Avenue, E/ES-204
Boston, MA 02215
Phone: (617) 667-9400
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