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Is Public Policy Changing The Practice of Medicine?

May 21st, 2014

The quick answer to the title question is yes, but not in the way the architects of the Affordable Care Act (ACA) intended. Indeed, the most significant unintended consequence of the ACA may be the way poorly designed regulations are inadvertently opening the door to improved medical practice.

But first things, first. At the time the ACA was enacted, the belief that health care delivery in the United States was about to be radically transformed was widespread. “We’re going to find out what works and then go do it,” said Barack Obama. Doctors will learn to practice medicine like engineers, predicted Atul Gawande. The profession will be dominated by Accountable Care Organizations (ACOs), said Karen Davis, and doctors will be rewarded for lowering costs and raising the quality of care. Only through ACOs can we achieve low-cost, high-quality care, said Elliott Fisher. Fee-for-service medicine is the problem, we were told, and the solution is bundled care. The idea that we should buy on value, not on volume, was a sentiment often heard.

Four years on, these predictions have been far from the mark — to put it charitably. We have spent tens of millions of dollars on demonstration programs and pilot projects investigating coordinated care, integrated care, managed care, pay-for-performance medicine, electronic medical records systems, etc. The result? Three separate Congressional Budget office reports have concluded that none of this is working, or at least not working very well. (See here, here and here.) The experience of the pilot ACO projects has been dismal. A total of 5.3 million Medicare beneficiaries are now in Medicare ACOs. Yet in their first year, only 29 percent of the physician-led ACOs and only 20 percent of the hospital-sponsored ACOs turned a “profit.” And among those that did so, the results were fairly mediocre.

The response of the advocates: double down and do more of the same. But before we throw good money after bad, perhaps we should stop and take stock.

In what I am about to say, I am relying heavily on input from Larry Wedekind, CEO of IntegraNet. This is a firm that operates independent physicians associations under contract with Medicare Advantage plans and commercial insurance plans. These groups go under different names but let’s settle for Integrated Delivery Networks, or IDNs. As far as I can tell, the IDNs managed by IntegraNet are at the cutting edge. The company also has managed about 30,000 patients under contract with the Texas Medicaid program. And it manages an ACO which appears to have saved the most money (per enrollee) of any ACO in the entire country

Here is the bottom line:

  • As I have pointed out before, (see here and here) many of the ideas that aren’t working in the pilot programs both here and in other countries actually are working in some of our best Medicare Advantage (MA) plans — especially in ones that are contracting with doctor associations. IntegraNet, for example, routinely lowers costs by about 25 percent. while raising quality at the same time.
  • The most significant innovations in medical practice are usually produced by entrepreneurs, and although they may be motivated by many factors, entrepreneurs tend to flourish where there is significant downside financial risk and significant upside potential for profit. That’s why some of the most interesting things going on right now are in IDNs managed by entrepreneurs, in contrast to the activities of hospitals, insurance companies and government agencies.
  • Ironically, the ill-advised medical loss ratio (MLR) regulations have inadvertently had a good effect — they have spurred insurance companies to shift the management of care to doctor organizations, and thus increased the sphere of opportunity for entrepreneurial medicine.
  • The original ACO regulations were so onerous that entrepreneurs (and some of our best medical centers) avoided them altogether. But now it appears that the Obama administration is moving in the direction of using Medicare Advantage-type (risk adjusted) formulas to pay ACOs. This will attract more entrepreneurs to the ACO market and, if the administration continues the trend, ACOs could actually become more attractive to enrollees than the MA plans.
  • Politically, we are about to come full circle. Although Barack Obama ran against the MA plans in the 2008 election, and although many Democrats regard Medicare Advantage as unhealthy “privatization,” this is the only place in all of Medicare where the president’s promise is being realized: practitioners really are finding out what works and they are doing it. Unwilling to endorse the MA approach, the administration created a new entity called an ACO. But the ACO model is likely to become viable only to the extent that ACO plans look more and more like MA plans. If all goes well, we are likely to end up with a reformed Medicare that looks very much like something the president campaigned against when he promised to reform the health care system. And if that happens, the President and Rep. Paul Ryan may discover that they see eye to eye on just about everything relating to Medicare!

Let’s look more closely at how all this is working.

Medicare Advantage Plans. As noted, many Medicare Advantage plans are successfully doing what the Obama administration is unsuccessfully experimenting with in pilot programs and demonstration projects. That is, many of these plans are using coordinated/integrated/managed care systems to achieve fewer admissions, fewer readmissions and fewer hospital days than conventional Medicare. (See a summary of the evidence by Jeff Lemieux in a comment at the Health Affairs Blog.)

They are often doing so by adopting strategies that are the opposite of the administration’s approach, however. For example, IntegraNet pays its doctors fee-for-service (plus performance bonuses). The Obama administration is convinced that fee-for-service payment is the problem, not the solution. Also, IntegraNet pays doctors who meet performance goals more than Medicare’s standard rates. Yet the administration’s Plan B for cost control in Medicare is squeezing provider payments, not increasing them.

Of particular interest to me is the opportunity to give economic incentives to patients. A number of insurers are rebating some or all of the seniors’ Part B premiums if they will cooperate and choose a medical home. As Larry Wedekind explains:

It is the beauty of competition in a marketplace with several competitors all bidding for additional business from seniors. The ones that we have seen in the Houston market have ranged from a full Part B premium give-back to seniors to a 20 percent portion of it…I’ve seen as low as $20 per month give-back to full premium give-back of $96 per month in the past. The Part B premium this year is $110.50, but no one is giving more than $50 per month back this coming year. The give-backs are often related to a Medicare Advantage Special Needs Plan such as a diabetic plan to help defray the higher costs of drugs.

IntegraNet and other independent physician organizations got a big boost when the Obama administration imposed a medical loss ratio (MLR) regulation on participating insurers. Under the regulation, health insurers must spend at least 85 percent of their revenues on “medical care,” leaving no more than 15 percent for administration, overhead and profit. If the health insurer contracts with an IDN, such as the one managed by IntegraNet, however, all the fees paid to the IDN count as “medical care” — no matter how much the IDN spends on administration.

As a result, IntegraNet can do something Humana, Aetna, and UnitedHealthcare cannot do: By becoming efficient and improving patient health, it can lower its medical costs, say, to 70 percent of premium income and reap much of the remainder as profit — to be shared with the doctors and even the insurers (!).

Accountable Care Organizations.The biggest difference between MA plans and ACOs is that the former were designed by Republicans and the latter by Democrats — and I am being only partially facetious. Both are over-regulated. But ACOs are regulated to a degree that is hard to fathom.

For starters, there is a 427 page book of rules, describing what an ACO has to do in order to be an ACO. The administrative burdens are so large that the average ACO spends $2.2 million on startup costs alone. From that point forward, the ACO functions like a (highly) regulated utility.

Medicare patients do not choose an ACO. They are assigned to one. The ACOs are forbidden to market to prospective customers, and seniors don’t even know they are in one until they are contacted by the ACO they are assigned to. Even then, the communication is tightly regulated. Any letter from the ACO to a new member must be approved by CMS and all introductory letters essentially look alike. In general, no ACO is able to have a better promotional piece than a competitor.

In an initial letter, seniors are asked if they would like to be in an ACO. If they say “no,” the ACO is still responsible for all medical costs, even though it has no influence over any treatment decisions. Unlike MA plans, ACOs cannot restrict enrollees to a network. In fact, if an enrollee goes to a primary care physician not in an ACO’s network, CMS is likely to switch the patient to another ACO. Within the first twelve months of IntegraNet’s ACO experience, 60 percent of its enrollees were switched to another ACO and an equal number were imported from some other ACO. (Although see lower potential switches reported here.)

During the first three years of an ACO’s life, the benchmark for measuring savings is projected costs based on the previous three years’ experience for each patient. Whereas MA plans are paid a premium based on a highly sophisticated risk adjustment formula (with more than 70 variables), ACO adjustment is based only on one crude measure: recent spending. If the cost for ACO enrollees comes in above the projection, the government bears the entire loss. If it comes in below, the government shares half the profit (“savings”) with the ACO.

Even then, the ability of the ACO to profit is highly constrained. The ACO gets nothing if it reduces expected spending by 2 percent or less. And the government takes the entire profit to the extent that it exceeds 10 percent. The ACO gets to keep only half of savings that range between 2 percent and 10 percent.

This undoubtedly explains why the initial experience has been so bad. For participating ACOs, there is no downside risk — at least initially — and there is a strict limit on any gains. Thus, the incentives to experiment and innovate are extremely weak. IntegraNet posted an 11 percent gain in its first year, for example, and the government seized all of the last 1 percentage point. Had the company performed in a manner similar to its Medicare Advantage experience, it would have posted a 25 percent gain and the government would have seized all of the last 15 percentage points.

During the first three years of operation, doctors are paid fee-for-service and the money goes directly to the physicians. So the ACO doesn’t actually get anything from the government until year end — and even then it can expect to wait another year or more before it sees the money. Also, there is tight regulation of what kind of bonuses the ACOs can promise doctors.

In the fourth year of operation, the ACO will be given capitated payments and it will share 50/50 in the losses as well as the gains. The benchmark for establishing gains and losses will be re-set, however, based on the firm’s first-three-year experience. Say the ACO saved an average of 5 percent of expected costs for the first three years. Then the benchmark for the fourth year will be expected costs minus 5 percent. No wonder so few entrepreneurs have been attracted to this market.

The entire set up is about as anti-entrepreneurial as one can imagine. In fact, firms like IntegraNet initially were not even allowed into this market! Most, if not all, of the recipients of demonstration grants for the initial ACO pilot experiments (the “pioneers”) were hospitals or hospital-based physician organizations.

Medicaid Contracting. Although not our main focus here, it is worth noting that many of the same problems that beset the ACO program also plague the Medicaid program. About two thirds of Medicaid enrollees are in private, managed care programs. The private insurers are not allowed to market to prospective enrollees, however.

Think about that. As of last year, roughly one-fourth of all the people who are entitled to sign up for “free” Medicaid insurance had not done so. Yet, the private contractors were not allowed to target neighborhoods and radio and TV venues where prospective enrollees are likely to be and encourage them to join. (Recently hired “navigators” are allowed to do this, however.)

Going Forward. The experience with the ACOs has been so disappointing the Obama Administration has announced that it is making important changes, including a change in the risk adjustment formulas. ACO payment formulas in the future will look more like Medicare Advantage risk adjustment. Other changes could further allow ACOs to do some of the same things MA plans are now doing.

If this trend continues, ACOs could actually gain a competitive advantage over the Medicare Advantage plans. For one thing, MA plans only have a 7-week open enrollment period each year. For the remaining 10 months enrollees are essentially stuck in the plan they are in. Enrollment opportunities for ACOs, by contrast, are effectively continuous. Also, ACOs are not considered “insurance companies” and they therefore escape the costly regulation that Medicare Advantage plans must endure.

What Should Be Done? There is an enormous opportunity here to capitalize on what is already happening. It is often said that one of every three dollars in health care is wasted. That observation is vacuous, however, unless a mechanism exists to ferret out the waste and eliminate it. Here are a few steps toward getting that done:

  1. Deregulate. We need substantial deregulation across the board — in every program in which the government is contracting with the private sector for health insurance and medical care. About 90 percent of existing regulations are counter-productive and are barriers to low-cost, high-quality care.
  2. Allow product differentiation and competition.Health plans should be encouraged to innovate, experiment and find new and better ways of meeting patient needs. They also should have complete freedom to market their products to target audiences — certainly as much freedom as commercial insurers selling to the general public now have.
  3. Level the playing field. All forms of insurance and delivery should compete under the same de-regulated set of rules.
  4. Eliminate all restrictions on profit. If we want entrepreneurs to find solutions to our problems they need to be able to take big risks and reap big rewards. The value to society of successful innovation in this area is enormous. If entrepreneurs get rich in the process, more power to them. The benefit they will create for the rest of us will far exceed any profit they manage to earn for themselves.
  5. Allow less comprehensive care organizations. Dr. Jeffrey Brenner (“hot spots”) is saving Medicare and Medicaid millions of dollars keeping people well and keeping them out of hospitals, and he is getting next to nothing from the government in return. The Obama administration wants to force Brenner to become an ACO and manage hospital costs as well. That’s a mistake. Let people specialize in what they do best.
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1 Trackback for “Is Public Policy Changing The Practice of Medicine?”

  1. Goodman: How Should We Pay For Health Care? Government Or Markets? | Concierge Medicine Today
    October 24th, 2014 at 4:42 am

14 Responses to “Is Public Policy Changing The Practice of Medicine?”

  1. Nehme Alkarra Says:

    An article for all physicians to read, understand and know what is going on, Know your options, act on them before it is too late.

  2. Ron Cookston Says:

    Although many of the issues referenced in this are making the establishment of thriving Accountable Care Organizations difficult, the potential promise of creating a pathway for primary care physicians to regain their proper role in the continuity of care of their patients is significant. My organization is engage with the ACO referenced in this by helping reach the patients and focusing on social determinants of health that in the long run support the power of the clinical practice. The key is the patient / physician relationship combined with the natural community and family support systems that promote health care that emphasizes wellness instead of sick care that emphasizes repetitive and expensive treatments. The vision of better care for more people for less cost can be a reality.

  3. Don McCormick Says:

    I served as the co-leader of the Physicians ACO with Larry during the first year and have enjoyed a long term relationship with he and his staff in the MS business. His organization is very high performing and engaged at the grass roots with both the physicians and the patients. The ACO struggle is that its existence as a risk bearing entity has not yet been established under the law and in the regulations and the methodology for “attributing patients” is not rational and not practical. Only physicians actually belong the ACO and the there is no assignment of patients. CMS actually tells each ACO that all of the Medicare patients they see should be considers “in the ACO” because the ones that will be “attributed” are determined retroactively based on CPT codes 99201-99215 plus 99350 and G0402, 0438, and 0439 in which the physician that has billed the the most encounters under those codes will be deemed the primary care provider and if in an ACO will get the attribution. the problem is that those codes are used by physicians in most of the specialties and therefore when referrals are made to specialists the attribution to the primary care physician changes as frequently as 50-60 percent of the time. That means that the profit or loss within the ACO becomes a “Monte Carlo” function and not anything that can be predicted or controlled.

    I agree with you that a level playing field must be established, but it should be from the bottom up beginning with the patients and physicians and not a model of the MA Plans that have predetermined load percentages and medical costs that have been built on claims experience in which the work is both under-reported and over-reported. There is equity in the 15% margin of the HMOs and there is cost overrun in the other 85% of the premiums. The fact that our MA plans can take out 25% of the cost is straight forward evidence that we could bring our medical and hospital costs to the levels of outer industrialized nations. If it takes private efforts to do that then that is fine, but it will take political effort to cause the regulators to level this field and make what is reasonable and fair possible to do.

  4. Brian Williams. Says:

    Great post and great summary of Larry Wedekind and IntegraNet. They are doing great things within the ACO model. Imagine what greatness lurks if we could liberate the market and empower thousands of providers with millions of good ideas.

  5. Chuck Willey Says:

    I agree with most of what Mr. Goodman reports and advocates. I have had the marvelous opportunity to practice internal medicine in an at risk Medicare Advantage plan for 20 years. The first 10 were when there was competition among the local plans and they were locally led. When they merged up to be the 5 giant national health plans they increasingly crushed their business partners (Dr.s & Hospitals) and their customers (patients). I then started our own Medicare Advantage plan so we could center it on patients and their chief advocates the doctors and we are now the largest in our market, have the richest benefit for the patients and the highest “Star Rating” and the best of the best measure of true quality, “long term health”. We are able to spend all the time it takes to achieve and maintain long term health.

    Medicare Advantage run by the 5 evil empires (United, Anthem, Aetna, Cigna, Humana) in the healthcare axis of evil is just a parasitic middle player sucking the life out of anything they can infest.
    Medicare itself is the original problem in American Healthcare. Though it was sold by LBJ as not interfering it does little but disintermediate patients from quality healthcare with its mountains of bureaucracy and its well below cost of quality care payment system.

    Early on, Medicare Advantage built a wall to insulate us from a good deal of that destructive regulation. Unfortunately MA is now being laden with red tape. As we see once again in the VA scandal, the more regulation, the more bureaucracy the more the work focuses on the survival of the bureaucrats and the less on the customer. In this case that is you or your mother and this is not a curious distraction it is injurious and life threatening. (hence the appropriateness of the evil empire metaphor)

    ACOs were well intended by the American Medical Group Association when envisioned early on. They were unfortunately naive to think Leviathan would not over control it to death. They forgot about Provider Sponsored Organizations, PSOs, (likely still in the Federal Register), that failed immediately in the early 90s due to over regulation. Don’t miss that the big-government-crony-giant national-health-plans are adept at mucking up legislative attempts to create a little competition for them.

    Asymptotically diminishing returns are a suicide for the ACO as it engineers itself into no profit. In MA we compete with the broad market averages which slowly improve giving all time to make a few extra dollars to invest in systems to make further improvement yet.

    The crucial element is to return accountability and responsibility to the patient and their trusted advisor the physician. The physicians need to be invested in patient health. The patients need a short term feedback loop monetary incentive to help them achieve and maintain new habits of healthy lifestyle. They need to suffer more of the financial burden if their illness is self inflicted. Credible estimates are that 50% of American healthcare costs are adverse behavior. The hospitals need to have incentive to promote long term health as well, not just to find positive wallet biopsies upon which to focus their complete cashectomies.

    Yes, deregulate. It is THE problem. And deregulate the provider side as well. There is nothing to be gained for instance by forcing super clean surgeries like joint replacement to be done in the same theater wherein PUS is handled. Let the orthopods put up an outpatient center if they will. Abandon the ACO for a “do it yourself” (no HMO contract first) direct to Medicare Advantage Contract with CMS. Many medical groups could, with a little help from a business process outsourcing vendor, anchor their own contract and do very well thank you. MA needs a deregulatory clean up as well. For instance we need to be able to discriminate against self inflicted illness instead of make an entitlement of it. Interesting isn’t it, that if you put someone on Social Security Disability for a treatable illness you are now paying them to stay sick. Let us charge a little more when the person behaves poorly making themselves sick and the results will be amazing. Fear not if we charge too much we will lose the customer.

    Indeed get the dad burned government out of it all together. They are the problem. In the information age the consumer, well armed with comparative information and the lightening fast ability to report a bad outcome or a high price to the market is all the creatively-destructive-free-market-discipline post modern healthcare will need.

  6. Warren Longmire Says:

    I have been working with Mr. Wedekind’s IPA for several years. We share visions, goals, and motivations to give Quality care promptly and educate the patients. I serve on committees to help other Physicians gain better outcomes with less cost. Most patients express gratitude for caring service and hand outs with specific ways to stay well.


    I agree with this interesting article 100 per cent. There is too much over regulation that makes physicians want to retire. I think Larry from Integranet has the right idea and his model is working well Other medicare advantage plans are making me want to quit their programs. ACO model should be more closely related to MA plans or deregulate MA more. It chokes the entenprenurial system.

  8. Mark W Says:

    The biggest losers so far in ACO’s appear to be providers. Their hands tied and bound by limited upside revenue because the member health status is somewhat static or decreasing, regardless of real life events or changes in conditions.
    The changes proposed should resemble Medicare Risk Adjustment because MRA has a long track record of producing better outcomes at a lower cost. Shared saving and revenue are a by-product of doing the right thing medically for the member. The goal should and always will be to early identify, treat, and manage conditions. This will generally result in lower lifetime claims through better outcomes.

    Everyone one is better off: the patient, the provider, and the taxpayer!

  9. K M Gilliam Says:

    While unpopular a belief it might be, my thoughts are based on my experience in the industry. I feel the most effective reform, and we do need reform, would to have everyone on a voucher system. Yes everybody gets insurance. I think the MAPD plans have it right! NO more Medicaid or Medicare. Everyone will choose what plan they get each year. The vouchers are federally funded and Every Citizen gets them. There should be oversight from the government but through the judicial system, for Companies that cheat the system and the patient. Government and efficiency are contradictions of terms our government was not meant to or set up to manage buisness or insurance or healthcare. Lets leave that to the people that know how to do it!

  10. Jaime Duarte Says:

    I am a primary care physician who is affiliated to Mr. Wedekind’s IPA (Integranet) for the last 8 years.
    My practice of 3 family physicians cares for about 8500 patients in a medically undeserved area in Houston’s East End District.
    I felt compelled to comment on this blog to note that I agree wholeheartedly with Mr. Goodman’s blog. Since my affiliation to the IPA we have been heavily incentivised to provide quality low cost service. Under their guidance we have been able on ocassion to save up to 65% of the cost of care through decreased hospital admissions, judicious patient follow up and education. Integranet’s case management helps us manage our patient population and they train us on how insurances work making us look at them as partners, not enemies. Our patients like their health plans and health plans love us. It’s a win-win situation.
    When the ACO program came out we were very excited and went all in with hopes of repeating the experience we had with the Medicare advantage plans. It has been a rough ride and my partners are very discouraged with the way the government behaves on regards to the ACO. Our hope is that they will understand that physicians can provide high quality low cost care if they deregulate a bit and let people like Mr. Wedekind guide us and fix the healthcare dillema we are going through.
    Thank you for bringing this to light Mr Goodman!

  11. Devon Herrick Says:

    Of course public policy is changing the practice of medicine. That’s what public policy does — affect a change in the area being regulated. Some of these changes are by design; while some are unintended consequences.

    Consider this: the tax exclusion for employer-sponsored health plans ushered in a gradual change in the practice of medicine back in the 1950s. The passage of Medicare/Medicaid furthere changed the practice of medicine in the 1960s. What were these changes? These public policies were intended to make it easier for Americans to afford medical care. An unintended consequence of these policies was that insured patients were less price-sensitive. Over time that prompted doctors and hospitals to change how medicine was practiced. Under fee for service, most services performed were reimbursed. No longer did doctors have to worry about whether an insured patient could pay for expensive surgery. Doctors just had to follow the insurers’ rules. Over years it became almost unethical for a doctor to even consider cost when treating a patient. This was true not only when a third-party of was paying the bill, but also when patients themselves were paying.

    Proponents of the Affordable Care Act hope it will change the way doctors practice medicine — this time by encouraging doctors and hospitals to only provide “necessary” care that’s been proven to work. What do you want to bet that this too will result in unintended consequences?

  12. Jared Rhoads Says:

    Excellent analysis, thank you.

  13. Peter Ferrara Says:

    The fundamental problem is that Progressives are trying to impose central economic planning in health markets, and everywhere else, based on their certainty they are smarter and more moral than anyone else, and they already know everything and there is nothing for them to learn from markets, even though the experience of the entire 20th century proved them wrong. For Progressives, the above certitudes in their minds serve as a sort of 21st century divine right of kings, creating their entitlement to rule over everyone else as a 21st century aristocracy. If you don’t agree to that, they insist that is because you are morally inadequate, or mentally deficient, and so are not entitled to common decency in return. I believe that if these progressives are not politically routed, these attitudes will lead to long term decline for America, and the rest of the West.

  14. Healthbear Says:

    A couple comments:

    The cost saving potential of the majority of these demos is indeed disappointing, though the entire point of demonstrations is to try and identify which innovations may and may not work and then make adjustments based upon what you learn. Also, the CBO only looks at effects on cost, not on quality, which is the other major justification for these pilots. Presumably may of the regulations that you criticize are guided by a desire to maintain a certain quality standard, misguided as you may think they are.

    I don’t understand your apparent support for FFS and skepticism of alternative reimbursement structures. The pilots on bundled payment do appear to have achieved significant savings of 10% and I don’t see any argument for why FFS has anything to do with IntegraNet’s success.

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