Editor’s Note: The post below by Harold Luft is an abridged version of a longer White Paper. The full White Paper and additional information about Dr. Luft’s work are also available.

The Current Options Under Discussion

There is substantial debate among Democrats about whether a public-plan option is a critical component of health reform; Republicans seem unified in opposing the idea. The “public plan” proposals are focused largely on expanding the population with coverage and on controlling federal costs. The proposal below focuses more on transforming the system to slow the growth in all health care costs. By doing so, it can facilitate the savings and political compromises necessary to allow coverage expansions.

The two options are the “strong” and the “weak” versions of a public plan, referring not to the strength of the proposals, but the power of the public plan. The “strong” version, as advocated by Jacob Hacker, among others, is a near-clone of Medicare adapted for those under age 65. It uses Medicare’s buying power in setting fees for providers, thereby keeping down the premium cost relative to private plans without such leverage. Not surprisingly, providers and private insurers vigorously oppose the idea, which they see as inevitably leading to a “Medicare for all” single-payer system. The proposal has other important features largely tied to parallel changes that need to be legislated for Medicare. Holding out for the “strong” plan risks having a political stalemate kill any chance of reform, but even if passed, it will not transform the health care system.

Medicare already has the ability to force down physician fees. This may shift costs to other payers or reduce provider incomes, but it has no impact on improving efficiency in the overall use of services. The current Medicare fee structure is a major cause of the unpopularity of primary care as a profession, yet Congress has been unable to change the way Medicare pays physicians to slow the overall growth in costs. When legislative changes must be budget-neutral, modifications to the status quo are opposed by groups fearing a loss of revenue. The recent reaction of specialists to proposed fee increases for primary care is a case in point. A “strong” plan might work in a parliamentary system, but it will inevitably be hamstrung in the U.S. political environment.

A “weak” public plan, as proposed by Len Nichols and John Bertko, would compete with private insurers by being transparent, nonprofit, and well-intentioned. It would follow all the rules required of private plans and not leverage Medicare’s buying power. Such a plan will need public funding to get started, probably bringing the public contracting, employment, and other rules that would hobble its ability to compete. An alternative to the “build your own” version is what many states have developed for their employees: a public plan that designs benefits and provider networks and carries risk, but leaves administration up to contractors.

This is not to excuse the behavior of private health insurance plans. They spend enormous amounts on marketing and underwriting. They have failed to be the innovators they claim to be. Market advocates believe that competitive forces lead to better outcomes; this is only true, however, if markets are structured appropriately. This is not the case for health care in the U.S.

Both the “strong” and “weak” plans envision an exchange allowing individuals to access a wide range of insurance options with transparent price and actuarial information, uniform rules about basic benefits, guaranteed-issue and -renewal clauses, premiums not based on health status, and risk adjustment across plans. None of these exists in the current market, and an exchange will be a significant improvement.

The weak links in the exchange idea are (1) the risk-adjustment mechanisms and (2) deciding on the basic benefit package. The proposal below addresses those two aspects. As has been learned in Massachusetts, however, to reduce the number of uninsured people, one needs to couple a requirement that everyone have some coverage with subsidies for those for whom coverage is too expensive. Expanding coverage within a system that doesn’t work well, however, isn’t enough — we need to transform the delivery system.

The Major Risk Pool

I propose an alternative avoiding the weaknesses of both the public solutions such as Medicare for all and current private insurance plans, while building on the strengths of each. It establishes a publicly chartered major risk pool that eliminates the need for the problematic behaviors of private health plans while enhancing choices for providers and patients.

The new entity would be publicly chartered, but nongovernmental. Independence from direct congressional oversight means that it avoids being hamstrung by special-interest groups. It has a publicly appointed board with long terms, similar to the Federal Reserve, with even higher expectations for transparency. Aside from some start-up funding, the pool is self-financing.

The major risk pool would not itself offer coverage directly to consumers; instead, it would offer reinsurance for hospitalization and chronic care — the most expensive components of health care — to health plans, which would sell comprehensive wraparound packages. In my book, Total Cure: the Antidote to the Health Care Crisis, I use the term “Universal Coverage Pool,” or UCP to describe most of these functions. The plan for health reform called SecureChoice in Total Cure has income-based subsidies and other features that may or may not be included in the current legislative discussion. Here I use the term “major risk pool,” or MRP, to describe a more narrowly construed publicly chartered plan.

The rationale for the MRP is twofold. (1) By pooling risk for the most expensive and financially threatening components of health care, it spreads risk broadly. Allowing health plans to buy coverage at demographically determined rates, it eliminates significant administrative and marketing expenses. (2) By paying in new ways for what covers, it will transform the delivery system.

Hospitalization and chronic illness costs account for more than 60% of all medical costs. Some hospitalizations are totally unpredictable, but most are related to chronic illnesses. People with chronic illnesses have above-average costs; plans incur substantial underwriting, marketing, and administrative costs attempting to avoid such people. Addressing plans’ legitimate concerns about adverse selection eliminates such costs that add nothing to health care delivery.

Other proposals for reinsurance pools have surfaced over the years; in 2004 Sen. John Kerry (D-MA) proposed a reinsurance plan. The MRP, however, differs markedly from reinsurance that simply reimburses insurers after they have incurred unusually high costs. Classic reinsurance generates no incentives for more efficient behavior by providers and blunts incentives for insurers to manage high-cost cases. The primary purpose of the MRP is to change payment incentives for providers; it can best do so by attracting the high-cost cases. Unlike conventional insurers, the MRP seeks risk.

By not providing insurance directly to consumers, the MRP sidesteps the need to define a basic benefit package — many states have already done that. The MRP will rarely make decisions about paying for specific items and services, an area in which Medicare is often caught in the crossfire. Both issues are highly political, with lobbying by providers and manufacturers of specific products.

The MRP simply provides funds for certain broad types of illnesses: (1) major acute and interventional care requiring a facility, and (2) care for chronic illnesses. The clinicians involved and the health plans providing the wraparound coverage decide what services and products efficiently achieve the best outcomes. As discussed below, the MRP will make available the underlying data needed by independent analysts to inform providers’ and patients’ choices.

Paying For Inpatient Care

For inpatient care (including major interventional procedures provided in ambulatory settings), the MRP will be a direct payer offering two options: One is traditional fee-for-service (FFS) and diagnosis-related group (DRG)-based payment at Medicare rates, comparable to the “strong public plan option.” This may satisfy those advocates of that strategy who believe that providers require such pressure.

The second option is a bundled amount for an episode of care including, not just facility and physician costs, but also appropriate pre-admission workup and postdischarge follow-up care. This payment will be made to a new entity — the Care Delivery Team, or CDT — willing to accept responsibility for delivering or paying for all necessary care during the episode. CDTs will be composed of those physicians and hospitals voluntarily choosing to participate and establish their own governance rules. Clinicians need not be employees of the CDT; they might be paid on an hourly, per service, or other basis and share gains (and losses).

Unlike the Accountable Care Organizations proposed by Elliott Fisher and others at Dartmouth, CDTs include only physicians whose work is largely within the participating facility. The CDT is responsible for coordinating inpatient care, but not for the decision to admit the patient. Those decisions are addressed through the approach the MRP uses for chronic illness management. CDTs, moreover, need not include all physicians practicing at the hospital — just willing participants. For patients not reinsured by the MRP, payments to physicians and hospitals are unaffected.

Providers preferring FFS will be paid Medicare rates by the MRP for its enrollees, and cannot balance-bill patients or plans. CDTs, however, can set their own prices for each type of episode of care, or expanded DRG. The MRP will pay them an amount, after adjusting for regional input cost differences, equal to the average prices set by those CDTs with better-than-average outcomes for those patients. CDTs may charge more than the MRP payment, but can anticipate pushback from health plans.

Transition issues must be considered. Medicare payments are typically below those of private payers. Legislation should include a transitional subsidy allowing the MRP to increase its FFS-based payments to providers at hospitals that have not yet formed CDTs. The MRP will not immediately have good measures of risk-adjusted patient outcomes. The MRP will engage panels of patients and professionals to transparently identify what outcomes matter to patients and how such outcomes can be measured. Until outcomes data are collected, each CDT’s outcomes are assumed to be average. Health plans will try to steer patients to CDTs with lower net prices. CDTs will lower costs by avoiding complications and reducing the inputs used in an episode through creative and empowering use of both clinical and nonclinical staff.

Under Health Insurance Portability and Accountability Act (HIPAA) rules, the MRP will make available its data to researchers and others developing risk models and other tools. (Fee and pricing data will not be released by the MRP.) CDTs will use the results of such analyses to identify new processes yielding higher quality at lower cost. Manufacturers, from pharmaceutical to device makers, will find increased demand for cost-reducing technologies that improve or maintain quality.

Covering Chronic Illnesses

Chronic illness management is often deeply intertwined with acute care. An office visit initiated for an ankle sprain may include a blood pressure check and ongoing monitoring of a patient’s diabetes. Thus, a different payment model is needed for outpatient services, including primary and specialty care.

Each month the MRP will transfer to health insurers buying its coverage an amount for the chronic illness management (CIM) of their enrolled patients. These risk-adjusted CIM payments will reflect the average costs incurred by those achieving better-than-average outcomes. Although the monthly payments per case are set, the number and mix of patients are adjusted monthly. Plans must share with the MRP their billing and other data to allow it to determine eligibility, cost updates, and quality. Some will claim to have sicker patients within a chronic condition. The MRP will add appropriate risk adjustments as the plans forward the necessary clinical risk factors demonstrating this. Over time, the data will increase in value for quality measurement and improvement.

Health plans may bundle the experience of all the patients for whom they purchase reinsurance, or subdivide that experience by patients associated with selected providers, such as specific multispecialty groups. Physicians providing higher quality care can thus be recognized and rewarded. This approach is roughly equivalent to the outpatient component of Accountable Care Organizations. It is more feasible, however, because it does not need all physicians to participate.

Although effective management of chronic illnesses reduces the need for expensive hospital episodes, it may require more resources in outpatient settings. Consistent with Fisher and colleagues’ approach, MRP payments for high-quality chronic illness management care may be higher if admission rates are lower.

Primary care physicians are undercompensated for their time and coordination of care. Health plans will be able to develop new payment arrangements that better reward primary care providers. Developing such fee schedules under the “strong public plan” will be stymied by those who might lose; independent health plans will have much more flexibility.

The Role Of Private Plans

The MRP operates as an option “in the background.” No insurer need buy into the pool; those who prefer “cherry picking” incur underwriting and selective marketing costs avoided by their competitors that join the MRP. No inpatient provider is forced into CDTs accepting its newly structured payments. No outpatient provider need contract with health plans. Reinsurance will make coverage much more affordable for the sick. The real payoff, however, is through increasing numbers of patients choosing more-efficient providers.

Plans developing ways to steer patients to lower cost CDTs will reduce their net premiums to attract enrollees. CDTs, however, will be in a much better bargaining situation vis-á-vis plans than hospitals with independent physicians. If the private market does not seize these new opportunities, state-based public plans can lead the way.

Some health plans have tried to develop tiers of preferred providers. Those efforts appear focused largely on providers with lower fees, rather than lower overall cost relative to quality. Plans have fee information, but not data on overall resource use and quality. The MRP will have much better data and make those data available, but keep confidential physician identities in the raw data. Plans seeking the most efficient physicians will need to offer them more attractive payments. This may include payments for cost-reducing services not currently reimbursed, such as extended consultations, telephone consults, and care provided by nonclinicians.

The MRP’s standard reinsurance is for both chronic illness care and hospitalization. This reinsurance will be sold to health plans on a demographic basis, and because the MRP “coverage” for chronic illness involves only a monthly transfer, it requires a wraparound plan to make coverage seamless from the patient’s perspective. For “insured products,” the insurer will be subject to state insurance regulations and other requirements.

Although the immediate need for the MRP is to lower the costs of coverage for individuals and small groups, large employment-based groups can also be an important market for the MRP. The MRP will also allow any insurer or self-funded (ERISA) plan to piggyback on its bundled payment arrangements with CDTs as an administrative service. Employers and health plans thereby get access to CDTs, measuring their quality and agreeing to bundled payments. CDTs will be free to charge more than the MRP payment, but the bundling saves billing and processing costs. From the CDT’s perspective, uniform incentives for all similar cases will facilitate internal process changes.

Synergies Between The MRP And Medicare

Although the MRP will be independent of the Centers for Medicare and Medicaid Services (CMS), the two should cooperate. The MRP should be allowed to use the Medicare fee schedules and DRG payments along with the Medicare prohibition of balance-billing for providers wishing to be paid FFS. Although similar to the “strong” public plan proposal, it is based on provider choice; after a while, most providers will probably choose to be in CDTs.

The MRP is intended to be more nimble and innovative than Medicare. Medicare beneficiaries can benefit directly from the MRP by opting out of Medicare FFS. Medicare Advantage plans currently take full risk for their enrollees, but the accuracy of the risk adjustment is controversial, and many believe that the plans are being overpaid. Medicare and the MRP will collaborate on risk-adjustment methodologies and rates to be paid the MRP for people who choose new Medicare Advantage Reinsured (MAR) plans. Unlike current MA plans that retain (but seek to avoid) risk, the MAR plans offload risk to the MAR. They will seek payment arrangements with providers — for example, offering primary care providers much higher fees and payment for services and care coordination not covered by Medicare. Specialists may be attracted to CDTs to capture savings achieved through inpatient process redesign and reductions in unnecessary services. Many of the new MAR plans will be regional and use arrangements that are not feasible nationally.

A Better Alternative To The Public Option

The appropriate rationale for a public option is to bring a long-term public perspective to covering and delivering care. Relative to the proposals currently on the table, the MRP emphasizes delivery system reform — a critical goal for long-term sustainability. It is, however, compatible with various subsidy and mandate programs to expand coverage; increasing efficiency in delivery will make such subsidies affordable.

Through its direct relationship with providers, the MRP will do a better job improving health care quality and achieving efficiency than either the strong or weak options. By operating in the background, the MRP does not threaten the survival of insurers. They will play a different role than in the past, restructuring payments and facilitating coordination and efficiency . In theory, the MRP could be a wholly private, but none of the players will trust such an entity with all the sensitive information the MRP needs to operate.

A publicly chartered MRP can receive some initial public start-up funding, be not-for-profit in the long run, and operate transparently with a publicly appointed board. It can use Medicare leverage with those providers wishing to stay with classic FFS. The bundled payments it makes directly to new care delivery teams give them incentives to improve efficiency and quality. The chronic illness management payments channeled through insurers reduce their risk while allowing them to develop creative new payment arrangements with ambulatory care providers. Both types of innovations would likely be stymied by politics if attempted though a public plan.

A publicly chartered plan can work well with private plans. A carefully crafted policy incorporating both can be more effective than either approach alone.