Tuesday, September 01, 2009

Real Health Care Reform

Almost everyone who comments on health care is critical of the fee-for-service system of paying providers. They agree that paying separately for each lab test, office visit, CAT scan, etc. gives hospitals, doctors, and other providers an incentive to use more of these services, even when the benefit to the patient is marginal or perhaps lacking altogether.

When Massachusetts undertook health care reform on its own, it dealt first with the issue of coverage, but made provision for addressing cost later. Cost reform has been under study by a special commission which issued a report a few weeks ago. The main recommendation of the report was that Massachusetts commit itself to replacing fee-for-service with some form of “global” payment.

“Global” payment is a euphemism for what used to be known as capitation. It refers to a system in which patients are assigned to a provider organization – like an HMO. The patient’s insurance company then pays that organization a negotiated fixed amount per month or year, in return for which the provider organization is responsible for providing all the health care services covered under the patient’s health insurance policy during that period.

As can be quickly seen, that exactly reverses the financial incentives for the provider. Under fee-for-service, the provider has an incentive to do more to make more money. Under capitation, the incentive is to do less, since the amount of income is fixed.

Among the many implications of the Massachusetts recommendation, three stand out.

The first is that it requires providers to get organized. The “global” payment has to be made to somebody with the ability to provide the health services covered by the policy and to do so within the amount of money being paid. If the payment is truly “global” and covers hospital as well as physician services, that somebody will almost always be a hospital. Few physician organizations are capitalized at the level needed to take on the financial responsibility of buying the hospitalization needed by a group of patients. The exception would be the ones (like Leahy Clinic in Massachusetts) that operate their own hospitals.

The second is that hospitals accepting global payment will be responsible not only for providing the physician services needed by the covered patient, but also for making sure those services are managed within the amount of funds available. In other words, they will have to manage those physicians – something they have never been anxious to do.

The third is that the provider organization would have to restrict the ability of patients assigned to it to use outside doctors or other providers. It would not want any open-ended obligation to pay for services it did not control. In other words, freedom of choice would be compromised.

Now that would be real health care reform.

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