The New Medicare Gold Rush
(A version of this Health Alert was published by Forbes.)
Over the next few years, Medicare will significantly change how it pays hospitals, physicians, and other providers. This is sparking a gold rush among investors. BDO, a leading management consulting firm, released a report last month describing significantly increased private equity investment in long-term care facilities, rehabilitation facilities and home health agencies. BDO reported 79 deals in 2015, in which private equity sponsors invested $5.92 billion, up from just $1.67 billion in 2014. The previous high-water mark was $3.58 billion in 2011.
A key driver of these deals is innovation in the way Medicare pays for certain procedures. Until now, doctors have been paid using a technique that would make a Soviet bureaucrat blush. William Hsiao, the economist who designed it, determined Medicare’s fees as follows:
He put together a large team that interviewed and surveyed thousands of physicians from almost two dozen specialties. They analyzed what was involved in everything from 45 minutes of psychotherapy for a patient with panic attacks to a hysterectomy for a woman with cervical cancer. They determined that the hysterectomy takes about twice as much time as the session of psychotherapy, 3.8 times as much mental effort, 4.47 times as much technical skill and physical effort, and 4.24 times as much risk. The total calculation: 4.99 times as much work. Eventually, Hsiao and his team arrived at a relative value for every single thing doctors do.
(Rick Mayes and Robert A. Berenson, Medicare Prospective Payment and the Shaping of U.S. Health Care, Baltimore: Johns Hopkins University Press, 2006, p. 86.)
Hospitals were originally paid in a similar “cost plus” way. Later, Medicare introduced Diagnostic Related Groups (DRGs) made up of identifiable episodes. An important example is MS-DRG 470, which comprises “major joint replacement or reattachment of lower extremity without major complications or comorbidities.”
DRGs were an improvement, because they approximated how a customer would pay for a procedure in a normal market. (For example, if you rent a hotel room, you do not pay separate charges for renting the furniture in the room, housekeeping, utilities, depreciation of the building, et cetera.)
Nevertheless, the government still decided what goods and services were in each DRG, and what the payment would be. Because the boundaries of each DRG were usually restricted to procedures performed inside hospitals, this introduced a perverse incentive: If a discharged patient is re-admitted for complications resulting from the initial procedure, the hospital makes more money!
This makes it very difficult for hospitals to compete on either cost or quality. The Affordable Care Act of 2010, which gave us Obamacare, set out to improve this by introducing a new agency, the Center for Medicare & Medicaid Innovation (CMMI). CMMI has courted controversy by making some of its innovations mandatory for the time being, although only for selected providers. Other providers are prevented from adopting the innovation immediately. This allows CMMI to observe the results as in a randomized clinical trial of a new drug, and then propose whether it should be more broadly adopted.
Hopefully, this will result in faster and better innovation than Medicare has experienced until now. While Medicare has sponsored countless voluntary pilot studies, they attract providers which already know they can succeed in the pilot study. This means the results are not scalable.
One new mandatory “experiment” is Comprehensive Care for Joint Replacement, launched in 67 Metropolitan Statistical Areas last April. The model combines the physician and hospital components of hip or knee replacement (including MS-DRG 470) into one payment. More importantly, it lengthens the scope of the payment to include 90 days of costs after discharge. Hospitals will suffer financially if a discharged patient is re-admitted because the joint replacement was not done right the first time.
This is what is driving private equity investment in post-acute care facilities and services. The site of discharge is a significant factor determining whether a patient discharged from hospital will bounce back. Sending a patient straight back home without follow up will often result in his early return to hospital.
Post-acute care providers now have opportunities to enter deals with hospitals and doctors that will result in shared savings within the 90-day period, if the post-acute care providers can reduce the likelihood of hospital re-admission.
There are a lot of moving parts to these deals, and the risks are not yet fully known. Nevertheless, the current crop of “experiments” is just the beginning. Medicare has gained confidence in its campaign for innovative payments, especially as a result of an April 2015 law that gave Medicare even more power to experiment with new payment models. This law passed with huge bipartisan majorities in Congress, imparting momentum to payment reform without the stigma of Obamacare.
More reforms will come quickly, continuing to present opportunities to investors.
The hip replacement payment experiment strikes me as a reasonable effort. What’s missing, though, is a mechanism for differentiating among patients by how risky they are for complications for the purpose of determining the basis for imposing financial penalties based on excessive readmissions within 90 days. For example, one patient might be an athletic, otherwise healthy, middle or upper middle class 55 or 60 year old man or woman while others might be overweight, diabetic, have heart disease, asthma, COPD or other co-morbidities and may also have low socio-economic status and lack a family support structure to help with recovery or be just plain old. I know of a 94 year old man who recently had his hip replaced. There should be a mechanism to take those factors into account in a way that works for both hospitals and doctors.
Of course, the free market types just want to be left alone to take care of patients, they want their fees to be paid promptly and without question, and they want the stupid, bureaucratic, inefficient government to stay out of their way. If patients have no way to tell how a particular doctor stacks up vs. his peers or how the hospital compares to its competitors based on risk-adjusted outcomes, well, tough. It’s not their problem.
The free market types want to make sure that collectivists don’t incentivize physicians to provide treatment to only non-risky patients.
The collectivists are more interested in their ideology than in treating the sick. Very few of them know anything about medicine or health care.
I don’t think you need to be a doctor to have constructive ideas about how to PAY FOR healthcare as opposed to how to practice medicine. Given the nature of healthcare, there is no way that insurance companies and government payers won’t be covering most of the bills. The payer debate is around how to cover those bills in a way that doesn’t bankrupt patients or the society.
I don’t think one has to be a doctor or a rocket scientist to use common sense. That is what is lacking in many who attempt to interfere with the individual’s right to voluntarily contract with another.
Why do you describe risk adjustment for complications as “missing”? The final rule uses the hospital-level risk-standardized complication rate as developed by AHRQ and NQF.
What a lousy job of reporting. Recent study of 30 day readmission after total hip replacement of over 100,000 patients showed that the readmission rate was much higher in those patients discharged to rehab facilities than those sent home. In addition, readmissions are usually for medical complications and infections and not because “the operation was not done right the first time. The discussion in joint replacement circles is whether there should be a cut-off number for BMI of the patient. Who will operate on the obese, hypertensive, diabetic patient if the doc and hospital will be penalized by totally predictable medical complications?
See above. Risk adjustment for complications is included in the measure. You may not agree with the quality measure, and I doubt it will ever be perfect. I cannot imagine any quality measure will satisfy every orthopedic surgeon in the country. There will always be “discussion.” WRT re-admission, I was referring to a Dobson DaVanzo 2012 study of a whole bunch of DRGs, not just joint replacement. I do not believe it is publicly released.
Any GOLD RUSH will be unlikely given the exorbitant cost of our healthcare industry, now 18% of the national economy. No matter what, Congress will soon need to find a strategy for reducing it to 13% or less. Last year, the cost of our nation’s healthcare was @ $3.3 Trillion. It would have been $900 Billion less at 13% of the economy. Remember that the Federal government pays cash for 40% of our nation’s healthcare. Here’s the hitter! Since the Federal deficit last year is estimated at $500 Billion, 72% of the national deficit during 2015 was the result of our nation’s high cost of healthcare.
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Now, just take a breath and say to yourself, “nothing going on currently for health reform will significantly change this.” You need to do this several times and realize that the real causes of this sorry mess are fundamentally not known…by anyone! If you just can’t believe this, find a Primary Physician who has been in practice for 25 years at nearly the same location and go spend a day! It won’t be possible to believe how chaotic all of this is without a front line observation experience.
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Finally, just remember that we are the only developed nation in the world with a worsening maternal mortality ratio, by a lot. By any reasonable estimate, there were at least 300 deaths in 2013 that would not have occurred had these women lived in a nation among the 10 developed nations (out of 46) with the best maternal mortality ratio. Clearly, we have solved the economic mandate for Complex Healthcare to detriment of the social mandate for Basic Healthcare. The imbalance is devastating.
That is what guarantees a gold rush. Do you see any method of reducing health spending to 13 percent of GDP in the foreseeable future?
Yes … Unlike the other developed nations, we need a community by community focus on the broad implications of promoting HEALTH throughout a community, especially Primary Healthcare. For a start see
https://nationalhealthusa.net/communityhealthforum/
One should note that the sort of corporate behavior described here is a continuation of the same behavior that has been going on since Medicare was initiated. In the 1960’s and 1970’s, healthcare facitilites, medical schools, hospitals, imaging centers, etc, etc, exploded, as Medicare paid whatever bill was submitted, no questions asked. Physicians fees and hospital charges rose as much as 30% a year. The deep pockets of the federal government would pay any bill. Even individual physicians were cashing in. In the city where I once practiced, a general interest built his own 50 bed hospital and filled it with Medicare beneficiaries who had no need to be in the hospital, performed every test known to medical science, didn’t even bother to see the patients in the hospital, as they weren’t particularly ill and didn’t need acute care, and fired off the bills to Medicare. He quickly became wealthy. Later, Medicare was modified to require the attending physician to see the patient every day in the hospital to avoid such abuses. Teaching hospitals were inconvenienced as the residents took care of the patients. This later led to the notorious PATH audits in which the Clinton administration started charging prominent teaching hospitals with Medicare violations, and collected tens of millions of dollars in fines from prestigious teaching hospitals for such violations. The result of the feeding frenzy was that the estimated cost of Medicare, at a predicted $10 billion a year, rose to close to $100 billion a year by the 1990’s. Dr. Haaio created his RBRVS formulas during the Reagan administration, when the federal government was trying to rein in Medicare costs. The period from the passage of Mediare to the late 1980’s was the Golden Financial Age of Medicine due to the largesse of Medicare. Now the whole system is collapsing under unsustainable cost increases, that will only be exacerbated by the corporate behavior discussed here. And the quality of care will not improve, likely will deteriorate, as will access and affordability, and the financial viability of Medicare will take a turn for the worse despite the efforts to control costs. The perverse incentives inherent in the Medical/Federal industrial complex will further compromise medical care, it accessibility, and affordability.
Many moons ago, C. Northcote Parkinson said, “Work expands so as to fill the time available for its completion.” Just replace the word “time” with either the word “resources” or “space.” aka PARKINSON’S LAW
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For healthcare, you could also use “community standards of care.” We have known for a long time that certain surgical procedures occur more frequently in a community based on the number of surgeons that practice in the community who perform a certain procedure.
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The Design Principles for managing a common pool resource (as in a fixed portion of our nation’s economy) are known. We only lack the will to make it happen, community by community. Just start by following the lead of Nobel Prize winner, Elinor Ostrom.
John,
The inexorable momentum suggested by Parkinson’s Law seems to have brought this discussion to an end. It’s all something akin to the observation of Baron C.P. Snow in 1957 and his notion about the worsening communication barriers between the humanities and sciences. Makes one think that this is really the root cause of root causes for the paradigm paralysis controlling our nation’s healthcare reform. I appreciate the opportunity to say so!
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