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White Coats and Straightjackets: Why Planned Cost-Saving Measures Will Reduce Your Healthcare Options

Tuesday, March 6, 2012

Before we proceed with the Independent Payment Advisory Board, we should carefully consider the pernicious impact that similar structures have had on patient care.

A patient recently asked me why doctors don’t spend more time communicating over email or by videoconferencing.

There’s a simple answer: Medicare hasn’t created a billing code for these services.

Medicare relies on a complicated and expanding schedule of codes for how it prices stuff. Outside of a few things that are bid in competitive markets (like pills and some low-tech equipment), Medicare establishes discrete “codes” for medical items and then establishes a price for each of these tens of thousands of different services.

That is how the program exerts control over spending.

Medicare tries to use its coding and payment system to push down its costs. If Medicare hasn’t made up a code or decided on how to price a product or service, in many cases that treatment simply won’t be offered under Medicare.

Since private health plans largely copy Medicare fee schedules, the decisions that Medicare makes establish the benchmark for the entire market. Any flaws in how Medicare sets prices ends up reverberating across the entire system.

The present system outgrew advances in the delivery of patient care long ago.

Before we select members to the Independent Payment Advisory Board (IPAB) and stand up this new entity, we should carefully consider the pernicious impact that these payment structures have on patient care.

IPAB was created under the Patient Protection and Affordable Care Act and was intended to be an independent board with expansive power to slow growth in Medicare spending. But because of the way it’s constructed, IPAB will be able to do little more than tweak the existing payment system, adjusting rates and manipulating codes in an effort to cut costs. This will merely institutionalize the current payment scheme, with all of its shortcomings and unintended costs.

The present system outgrew advances in the delivery of patient care long ago. As the breadth and complexity of medical care has expanded (as a result of scientific progress) and the impact of Medicare decisions has become more distributed throughout the market, the Medicare program has had a lot of bad consequences.

For one thing, there are too many products and services that science can deliver and that patients desire. Medicare can’t keep up with the expanded menu of what’s possible.

To simplify things, Medicare increasingly tries to lump new technologies and services into old billing codes. But this means that more innovative products are grouped into the same codes as older, less effective treatments.

When Medicare has to come up with cost savings to satisfy budget demands, it reduces payment rates to whole categories of products and services. If the rates are set too low, the products and services are no longer made available to patients.

These arbitrary payment schemes don’t optimize outcomes. They’re not meant to. They’re merely intended to organize payment systems and manage spending.

In an ideal world, innovation would be focused on improving outcomes at a lower cost, not trying to fit into an existing billing code.

If a service has profit margins higher than other sectors, or a product sees utilization grow faster than Medicare expects, agency staff will reduce a particular payment rate or tweak a code. When the program is compelled to come up with bigger cost savings, Medicare will simply implement across-the-board rate cuts to entire categories of healthcare like rehab facilities or hospice care.

There’s a long history of these changes only driving utilization increases and unbundling of services—negating the purpose of the price cut. The home health industry has gone through multiple cycles of these sorts of games, only to see total spending rise. The bottom line is that these schemes never reduce aggregate costs except in the case of driving products or services entirely out of the market.

A vast lobbying complex now exists for the sole purpose of trying to influence how Medicare assigns its codes and payment rates.

Entrepreneurs and providers increasingly design products and services to fit within the billing scheme rather than to optimize what’s best for patients.

Providers try to goose their income by devising procedures that can garner new (presumably higher) billing codes.

The whole system is gamed around a process for coding and payment that everyone acknowledges is flawed.

Now IPAB is going to further embed—and erode—these constructs.

IPAB was advanced politically as a way to enforce a cap on how much Medicare spending would grow each year. The belief was that the only way to manage the growth of Medicare’s spending was to control how individual products and services were priced. IPAB was ostensibly forbidden from affecting benefits.

If Medicare hasn’t made up a code or decided on how to price a product or service, in many cases that treatment simply won’t be offered under Medicare.

Since IPAB’s mandate is to achieve savings in the near term, it can’t pursue longer-term reforms aimed at changing incentives and behavior. Ideas such as payment reforms that try to align reimbursement with outcomes don’t generate significant savings in the short run. They’re premised on long-term changes in how efficiently doctors and patients use services. They won’t produce the kind of immediate savings that IPAB needs to achieve in the narrow budget windows that it must focus.

These kinds of reforms also don’t score as saving money by the Congressional Budget Office or the Medicare Actuary, who has to sign off on IPAB’s recommendations. The Actuary scored most of the Affordable Care Act’s provisions based on quality improvement as getting zero savings over the full decade.

All of these ideas for broader payment reform also rely on changes in payment to providers such as hospitals. But under the law, these constituencies remain off limits to IPAB until 2019. This was a way to buy off these groups politically.

Because IPAB had its purview narrowly targeted to specific slices of the healthcare industry, it’ll be forced to implement deep cuts to the limited terrain in which it’s permitted to operate in order to achieve the mandated savings.

The cuts could be so deep as to forestall access altogether to certain medical products and services. The Medicare Actuary estimates that Medicare payment rates will eventually be driven below Medicaid rates under IPAB’s budget assumptions.

There are plenty of situations where Medicare’s coding and payment changes resulted in reimbursement that was so low that options were no longer available to patients. At the same time, there are still plenty of products and services that are overused—and overpriced. When it comes to manipulating payment rates, Medicare’s selective picking and choosing doesn’t have a very good track record.

The bottom line is that these schemes never reduce aggregate costs except in the case of driving products or services entirely out of the market.

The rigidity of Medicare’s coding and payment process also forestalls innovation. Because it’s often hard to get new codes assigned to products and services, a lot of entrepreneurship is focused on developing things that are similar to current treatments—designed to fall under existing Medicare codes.

There’s also evidence in the medical literature that beneficial but cost-increasing medical advances have been systematically assigned to existing codes and diagnosis-related groups (DRGs) that don’t cover the costs of the new technology. The resulting underpayment can limit patient access to useful new technology.1, 2, 3, 4

In an ideal world, innovation would be focused on improving outcomes at a lower cost, not trying to fit into an existing billing code.

But the complexity of the healthcare system long ago exceeded the ability of the Medicare program to centrally manage prices using coding and payment adjustments. Yet these tools are likely to be a primary way that IPAB ekes out the savings that it’s mandated to achieve. To borrow a favorite phrase of President Obama’s, IPAB merely “doubles down” on Medicare’s flawed way of doing things.

This shortsighted approach will only serve to put more meaningful payment reforms further out of reach. IPAB is going to work at odds with attempts to make any fundamental change in how we align payment with medical outcomes, due to the intrinsic flaws in the way that IPAB operates.

Scott Gottlieb is a practicing physician and a resident scholar at the American Enterprise Institute.

FURTHER READING: Gottlieb also writes “Modern Medicine Is Undergoing Industrialization,” “Meet the Obamacare Mandate Committee,” and “Big Pharma's New Business Model.” Bryan Dowd contributes “Getting Ryan-Wyden Wrong.” Joseph Antos says “Medicare Reform Faces Reality.” Christopher J. Conover asks “Is Medicare a Ponzi Scheme?


1. Nancy M. Kane and Paul D. Manoukian. “The Effect of the Medicare Prospective Payment System on the Adoption of New Technology.” New England Journal of Medicine 1989; 321:1378-1383

2. Munoz E., Johnson H., Margolis I., Ratner L., Mulloy K., Wise L. “DRGs, orthopedic surgery, and age at an academic medical center.” Orthopedics 1988; 11:1645–51

3. G. Gregory Raab and David H. Parr. “From Medical Invention to Clinical Practice: The Reimbursement Challenge Facing New Device Procedures and Technology—Part 1: Issues in Medical Device Assessment.” Journal of the American College of Radiology 2006;9:694-702

4. John M. Hoffman, Sanjiv S. Gambhir, and Gary J. Kelloff. “Regulatory and Reimbursement Challenges for Molecular Imaging.” Radiology 2007;245, 645-660

Image by Rob Green / Bergman Group

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