Saving Public Health Programs – Pt 1.

Saving Public Healthcare

In previous posts, I have argued that the staggering costs of publically financed healthcare can only worsen the already dire deficit problem and, in order to balance the federal budget and make strides toward eliminating our sovereign debt, we are going to have to gain control over the costs of these programs. Medicare alone represents about 20% of the federal budget and, with 10,000 of my fellow baby boomers becoming eligible every day, the share consumed by Medicare can only increase. Likewise, under the terms of the Affordable Care Act, Medicaid coverage will become more generous in many states. This is likely to strain state budgets beyond their capacities and make it difficult or impossible for state governments to provide many of the services that many of us rely upon for safety, commerce, and recreation.

So how do we solve the problem of runaway healthcare costs? How can we finally do what we have tried and failed to do for years? First, I think we have to accept the fact that there is no single magic bullet; no one intervention that will rein in the cost of care. It will take many different solutions and all of them will be necessary.  Second, we have to be prepared to invest the time necessary. Some of the most effective interventions will be the ones that take the longest to come to fruition. Human behavior is responsible for a huge portion of the cost of healthcare and interventions intended to eliminate obesity, smoking, drunk driving, and other such problems are likely to require an investment of time and effort. For example, Johnson and Johnson estimates that they currently realize $1.80 to something over $3.00 for every dollar invested in their employee wellness program but that program has had 30 years to develop.

Of the multiple ways to decrease healthcare spending, a few have already shown promise.  I would like to start with so called “bundled payments”. The concept here is pretty simple. Under current payment schemes if I need an elective surgical procedure, say a hip replacement, I and my insurer will receive bills from the surgeon, from the anesthesiologist, from the hospital, and from the rehabilitation provider. Under a bundled payment scheme, the insurer, in this case Medicare or Medicaid, would pay one price for the preoperative period, the operation itself, and for a post-operative period of, perhaps a month. Even if the bundled payment is equivalent to the sum of the separate payments, Medicare will enjoy reduced administrative cost. They write one check and the providers divide the money among themselves. Of course, most bundled payment schemes are designed such that the overall payment is lower than the sum of the separate payments.

Bundled payment programs must be well designed lest they fall victim to their potential flaws. First, the plan must be designed to reduce cost without sacrificing quality. This might mean a bonus payment to the providers if they meet certain quality metrics. In theory, the incentive to reduce cost should already be built into the payment plan because the overall payment is lower than the one that each individual provider would have received. Second, the plan must be designed so that the providers who have the most to gain share with those who have less to gain. In practice, this means hospitals will need to be prepared to share with doctors. Continuing with my example of an elective hip replacement, the hospital could probably reduce its costs by stocking only one or two kinds of artificial hips rather than a dozen but the cost of the surgeon’s time doesn’t change at all. Therefore, if the surgeons are willing to help the hospital by deciding to use only two different artificial hips, then the hospital needs to be willing to help the surgeons when it comes time to divide the pie. Third, the payments need to be generous enough to encourage providers to participate and yet provide an incentive for providers to reduce waste and improve care. Under ideal circumstances, the providers should stand to have a net gain by increasing efficiency while Medicare and Medicaid spend less than they might have in the past. Finally, we have to recognize when bundled payments make sense and when they do not. My personal feeling is that these programs will prove to work best for elective procedures because these mostly follow a predictable path and are, therefore, amenable to process improvement methods like Lean. Emergency procedures and acute conditions have an unpredictable course and offer fewer opportunities for savings based upon operational improvements.

Experience with bundled payments has been limited but the success of programs like Medicare’s ACE project and Geisinger Health System’s “ProvenCare” suggests that bundling of payments offer the potential for cost reduction. In my view, federal payers and other public health systems will be well served to implement well-designed bundling programs. Under such arrangements, providers offering the right combination of savings and quality improvements should thrive.