Peter Orszag’s Bad Idea
I’m in favor of a Medicare Czar with complete authority to form contracts with providers. And no ability of Congress to override the decisions. But as I explained at the National Journal blog on Monday, I’m 100% against this idea if Office of Management and Budget Director Peter Orszag is the Czar.
I like Peter. He’s smart. He’s capable. He’s competent. But his idea on how to reform Medicare is completely wrong. As the CBO has affirmed, it will save no money. Zip. Zero. Nada. And it may harm patients.
But first things first.
The Claim. Researchers at Dartmouth have documented wide disparities in Medicare spending that appear to have no impact on health outcomes. Further, if doctors and hospitals across the country practiced medicine as efficiently as the lowest spending regions, it appears that as much as one-third of Medicare’s outlays could be saved. Orszag has generalized these findings for the health care system as a whole and concluded that national health care spending could be potentially reduced by $700 billion a year.
The Evidence. NCPA Senior Fellows Andrew J. Rettenmaier and Thomas R. Saving (also a former Medicare Trustee) have examined data from the Centers for Medicaid and Medicare Services in a Brief Analysis the National Center for Policy Analysis is releasing today [full study here]. Their initial results confirm the Dartmouth findings:
- Medicare spending per enrollee for residents in the five highest-spending states is about 40 percent higher than spending in the five lowest-spending states.
- Further, if every state were as “efficient” as the fifth lowest-spending state (that is, achieved the 10th percentile), Medicare spending could be reduced by about 25 percent.
However, when Rettenmaier and Saving looked at total health care spending they found that high Medicare spending often occurs in places where private sector spending is low, and vice versa. For example:
- Although Texas is fifth from the top in Medicare spending per capita, it is seventh from the bottom in per capita spending for the state’s population as a whole.
- California is 11th from the top in Medicare spending, but eighth from the bottom in spending overall.
- North Dakota is seventh from the bottom for Medicare, but 11th from the top in overall spending.
These results are consistent with the idea that cost shifting between the public and private payers is at play, although there may be other explanations as well.
There are also other factors that affect differences in spending, including income, age, race and various characteristics of state economies. After adjusting for these factors, the authors ask and answer this question:
Suppose that we could transform the practice of medicine all across the country and induce doctors everywhere to practice medicine the same way it is practiced in the fifth lowest-spending state (10th percentile). Based on the experience over a 15 year period, the potential savings across all populations is only about 5 percent!
Bottom line: After all adjustments are made, the potential savings are quite meager. They are probably smaller than what purchasers would have to spend to try to realize them.
Case Study: McAllen, Texas. An article in The New Yorker by Atul Gawande singled out this Texas border city as one of the worst examples in the country of unjustifiably high Medicare spending. Yet as Greg Scandlen has previously pointed out at this blog, McAllen is a poor city with many health problems and very little private insurance. So Medicare is the only reliable source of much needed funds. Like much of the rest of Texas, it appears that McAllen is overbilling Medicare in order to subsidize the lack of funds from other sources. Overall, McAllen is not a high spending area at all. The city is much more of an example of cost shifting rather than inefficient medicine.
Islands of Excellence. None of this suggests that there is no fundamental problem. With consumers paying out-of-pocket no more than 13 cents out of each dollar they spend, it would be impossible not to have an enormous amount of waste and inefficiency in health care. And, as is the case with education, there appears to be a sea of mediocrity punctuated by islands of excellence — distributed here and there almost randomly. Dartmouth research suggests that if everyone went to the Mayo Clinic for his health care, the nation would reduce its health spending by one-fourth and quality of care would go up. If everyone went to Intermountain Healthcare in Salt Lake City, the nation would reduce its spending by one-third and quality would improve in the process.
Problem is, not everyone can go to Mayo. Nor do we know how to replicate Mayo. Even Mayo doesn’t know how to replicate Mayo. And if we try to use the power of the purse to force other institutions to operate like Mayo, we could cause a lot of harm.
Supply-side versus Demand-side Changes. Everything that Peter Orszag is talking about and everything that is incorporated in legislation before Congress takes a demand-side approach. It seeks to use the purchasing power of the federal government to force doctors to change how they practice medicine. The National Taxpayers Union reports that:
- The House bill has the word “require” and its derivatives 494 times.
- It uses “report” 427 times, “limit” 167 times, “penalty” 156, “regulation” 91.
- By contrast, the words “marketplace” and “competition” are used 3 times each.
As I have argued here and here, what is needed is a supply-side approach — one that liberates doctors rather than seeking to order, manipulate and control them.
Lessons: There are many examples in our health care system of high-quality, low-cost care. They all originated on the supply side of the market. Not one of them was created by Blue Cross, Medicare, or any other payer.
Why can’t we learn from this experience? Let the providers tell Medicare how to reform the system rather than the other way around. As proposed on my recent testimony, every provider should be encouraged to repackage and reprice his services, provided that (1) the cost to the government does not go up and (2) quality of care does not go down.
I’m in favor of a Czar who is willing to liberate the supply side of the market. I’m not in favor of a Czar who wants to tell doctors how to practice medicine.
Excellent post. People inside the Beltway tend to naturally assume that the only good ideas are in Washington — not out in the hinterland.
Like the supply side approach. Why can’t Orszag and others understand this?
John,
Fascinating post. Am I to conclude that when a market has low income, under insured patients, that doctors ramp up on their Medicare volume (since payments are fixed)? Doesn’t that imply one of two points? 1. In under insured markets we perform an excess number of procedures in Medicare. 2. In privately insured markets, doctors prefer private patients and limit access to Medicare.
I agree with the need to challenge the Dartmouth hypothesis as too overarching and global in construct. I wonder about the state per capita conclusions you have draw as being misleading, too.
It is just complex stuff – we need to get to a system that purchases valued services with public transparency. Whether that is free market or not is up to the voters. We do not purchase valued services at this time because we do not have a value based system.
The problem, as you know, John, is that Orszag or someone in a similar bureaucratic position will be the one who either is, or appoints, that Medicare czar.
I am one of those physicians who would like to be liberated. Orzag must be commended, however, as one of the few who have spoken out forcefully for comparative effectiveness research (CER), an effort to weed out expensives and wasteful care that doesn’t work well. This is such a key element of reform and has been given only glancing attention in the congressional committees. They are struggling to fund health care reform when there are so many billions of dollars trapped within the system that can be harvested. I realize that it is a lot easier to support CER than it is to implement it. If CER were to get airborne, there will be winners and losers. It won’t be pretty. http://www.MDWhistleblower.blogspot.com
John,
You are being too kind. Peter is the poster child for the entire wrongheaded venture. Between him and Sibelius, were screwed unless we stop this whole thing. Frankly, the status quo, no matter how “broken” it is, beats Peter’s fairy tale!
Forcing inefficient hospitals to operate as efficiently as the Mayo Clinic, Cleveland Clinic or Intermountain Healthcare is akin to forcing K-Mart to operate as efficiently as Walmart. If it were that easy (or easy to learn), K-Mart would have adopted Walmart’s tactics years ago. Being unable to adapt, K-Mart was run out of business and largely replaced by Walmart and Target. That’s the way competition works: firms unable to compete are replaced.
Furthermore, medical spending in hospitals is a function of doctors who make up the hospital medical staff. A substantial portion of the “waste” related to inefficient hospitals, that would-be reformers talk about, is “income” to the doctors who treat Medicare patients in those hospitals. Asking hundreds of thousands of doctors to voluntarily forgo income to save the government money is a tall order indeed.
Supply Side?
The demand from patients is to have access to quality care with a patient-centered medical home.
But they want it for free.
If their is no supply of primary care physicians, then the demand will continue to rise from patients.
That’s why we need to change the business model for primary care to a patient-financed medical home. Then, we can attract med students back to primary care.
This is an excellent post. I would like to see a response from Elliott on their view of the observations that you make about the Dartmouth data juxtaposed with the commercial data.
Other reports over the years from actuaries such as Milliman support the notion of payment shifting from public to private payers to retain revenues when public funding is adversely impacted.
The unfortunate part of this vexing problem is that it is incredibly difficult to get the commercial payers (employers – not insurers) to agree on a consistent direction and approach. (Evidence Wal-Mart’s support of the House bill.)
Insurers have too much self interest and see the plan participant as their customer, rather than the employer who is paying the perponderance of the health care bill. As such they do not support change as they should. Who would if you can demand 8-10% premium (price) increases each year and get them. Reducing utilization is only to their benefit in a given year. Increasing it for the following year as long as it is priced into the insurance premium is a boon to the insurer.
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I’m in favor of swine flu lingering deaths for all elected and appointed officials. Medicare can pay for cremations.
I concur that this is, as usual, an excellent post. However, I disagree with requirement number (1) in your next to last paragraph, that “the cost to the government does not go up.” The major cause of the crippling distortion in the system is the fact that, within the historic metric, government has paid and is paying too little for Medicare and Medicaid. I can agree that it is likely that after some transition time during which a truer market equilibrium can be reached, and if the totally unnecessary administrative expenses relating to juggling multiple payer procedures and rules is largely eliminated, the resulting “cost to the government” might level off and even, in real terms, reduce back to the cost “now.” However, it is very likely that the short run result of “freeing” provider price setting (within some established rules, of course) is to increase what the Medicare and Medicaid plans cost now, whether that additional cost is covered through general or tax revenue, decreased benefits, or contributions from the insureds.
It is the price that must be paid for decades of Congress lying to the public that ratcheting down what those programs pay providers is “controlling health care costs,” while the hidden, disruptive, and disorienting tax of cost shifting performed its dastardly deeds. Providers should set their rates according to some agreed established template (RBRVS, DRG, variations) but with freedom to choose their conversion factors. Special global service package pricing can be done consistent with such templates. The key is that once set, those are the charges that must be charged to all patients and their third party payers, with absolutely no discounts or special arrangements with the third party payers allowed. (What happens between the provider and the patient on the net amounts owed by the patient after benefit cost sharing, limitations, and fee schedule limits of the third parties are taken into consideration, is only between them, just so long as it has no connection to a relationship between the patient and the third party. I.e., “no deals.”) This will allow a much truer market place to exist, something we have not had, and will provide a necessary measuring stick for the value of services and relative quality so that all the other elements of health reform can be properly evaluated. Until the pricing mess is fixed in this manner, we won’t be able to tell much of anything about any other changes to the system.
Michael and Chris,
Please share your perspective of the proportion of costs in the system being driven by the lifestyles of the population. What is the contribution of diabetes and co-morbidities to costs and how much diabetes is entirely preventable? What percentage of diet is responsible for cancer? What percentage of heart disease is preventable? The notions of more widely communicating more effective treatments is certainly noble and we should strive to make it better, but is that really the basis of so called “health reform?” I have seen statistics that 70% of our costs in the system are devoted to treating conditions that in many cases are intirely preventable by better living. The debate should be centered on driving behavior change within the population and apportioning resources accordingly.
John, unlike others, your note is the worst you ever wrote.
First, medicare prices have been progressively fixed below cost since 1971. Can a Czar do better than that? Second, think about how the Canadian Czarship works. They have already destroyed much of their infrastructure wih price fixing and global budgets beloved of Czars. Third, the new “price” to be dictated with ObamaCare is a capitation price for a clinic’s population care–not for patient care. This transfers the HMO gatekeeper role to doctors in “Accountable Care Organizations” (ACOs).So the solution is turn the venality of doctors allegedly doing and ordering “too much care” and doing no “well care” to the benefit corporate stockholders, isrance ‘buyers”, and govermet agencies.
All three of these cost control means are your supply side methods and all have failled in the past. So John, the problem is demand inflaion thanks to poltically driven subsidies for (low-copay style) insurance. It is policy maker malpractice to treat medical costs with suppl side controls (your Czar), when the problem is demand. Your HSA concept controls demand. Let’s stick to that–it works, as long as the actuarily stupid tax subsidies are in place. Bob
JOHN,
SO HOW CAN YOU LIKE PETER ORSZAG? !
HE HASN’T YOUR KNOWLEDGE, EXPERIENCE, EXPERTISE, CREDENTIALS, OR FOCUS IN THE MEDICAL AND HEALTH CARE FIELDS; YET YOU THINK HE HAS THE INTEGRITY TO BE AMERICA’S H.C. TSAR AND ADVOCATE OBAMA’S AGENDA FOR SOCIALIZED MEDICINE?.
…… EXPLANATION PLEASE. (rhetorical)