The Health Reform That Scares Both Parties

Feb 16, 2010

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Twenty-seven years ago, President Ronald Reagan and a Congress split between Republican and Democratic control agreed to a radical new payment scheme for Medicare. The resulting legislation trimmed billions of dollars from the federal budget and caused medical inflation to plummet, yet still maintained quality of care.

Although this stunning achievement led to a permanent change in how both the public and private sector pay for health care, it has gone curiously unmentioned during more than a year of rancorous health reform debate. Nor is it likely to arise at the much-ballyhooed bipartisan summit. The topic simply raises too many squirm-inducing questions. In this instance, conservatives and liberals alike can agree that political discretion is the better part of valor.

For Democrats, the changes in Medicare hospital payments enshrined by the Social Security Amendments of 1983 constitute an unpleasant reminder that reforms targeting cost can be, and have been, successfully  decoupled from those aimed at improving access. Given the public enthusiasm for cost control over access expansion, acknowledging that reality might well deal a fatal blow to decades of liberal efforts to achieve the dream of universal coverage.

For Republicans, however, the reverberations of the Reagan-era Medicare revamp are even more unsettling. The most-revered figure in modern American conservatism agreed to an administered price system that the current guardians of conservative orthodoxy would undoubtedly denounce as socialist, Bolshevik or worse. Even more painfully, the scheme worked. Perhaps most painful of all, Reagan's reasoning showed a pragmatic view of government much closer to today's political center than it is to hard-right GOP ideologues.

The 1983 payment change was conceptually simple. Medicare pulled the plug on paying hospitals whatever they billed the government as their costs, plus an additional profit margin piled on. Instead, Medicare paid a fixed price linked to each patient's clinical condition, or diagnosis-related group (DRG). That price might vary somewhat due to adjustments such as regional wage levels, but it was essentially set in advance; hence the term "prospective payment system" (PPS) to describe the methodology.

As recounted by policy experts Rick Mayes and Robert A. Berenson in their book, Medicare Prospective Payment and the Shaping of U.S. Health Care, the effect of prospective payment was dramatic and immediate.  Growth in Medicare hospital payments plummeted from 16.2 percent a year from 1980 through 1983 to just 6.5 percent from 1987 through 1990. Hospitals, no longer paid to pad stays, hurriedly switched gears. Between 1982 and 1988, Medicare hospital days plunged 20 percent.

"Hospitals' financial health improved with increases in efficiency, and patient outcomes showed no discernible damage," noted a 2007 Health Affairs review of the Mayes and Berenson book, even as Congress discovered it could use changes in the annual update DRG factor to reduce the federal deficit.

Just as important were the far-reaching changes fomented elsewhere by the Medicare reforms. Reforms of Medicare hospital payment led inevitably to physician payment change. Even more heretically for free-marketeers, the government's actions spurred a lagging private sector. When hospitals tried to shift costs to private payers, insurers responded to customers' complaints by tightening oversight of medical utilization and changing  payment in the strategy. The result was that unregulated fee-for-service was replaced by what came to be called "managed care."

The Reagan administration understood that being for "small government" as a regulator did not mean abandoning efforts to make sure taxpayers got their money's worth from government-as-purchaser. Prospective payment was the strategy of a prudent purchaser committed to encouraging efficiency. Hospitals were put at financial risk: those who could efficiently deliver care for less than the average price made money;  inefficient hospitals lost money. Within that context, DRGs represented deregulation.

That confidence in appropriate use of government power helped the administration withstand a firestorm of criticism when DRGs actually went into effect. Although the term "death panels" was not used, the same idea quickly surfaced. The president of the American Medical Association, for example, declared that doctors were "not going to be allowed to practice medicine...based on their own judgment" and that "rationing of health care" had begun. Other critics spoke of patients discharged "quicker and sicker" to a "no-care zone."

The other factor that prevented the derailing of DRGs was the bleakness of the status quo. The much-overused word "crisis" genuinely applied. In 1967, Medicare served 19 million beneficiaries and paid $4.7 billion for their care. By 1985, Medicare expenditures had grown 30 times as fast as the population covered, reaching $72.3 billion for 31.1 million beneficiaries. The pain was real, persistent and getting worse.

At the same time, Social Security was literally on the verge of bankruptcy. Faced with that prospect, Congress  had to act. Prospective  payment, with little public notice, was snuck into "save Social Security" legislation, with the provider community threatened with far worse consequences if the deal for DRGs fell apart.

Today, policymakers seem less sensitive to the demands a crisis puts upon us as a nation and more attuned to the arguments advanced by special interests. Even in the extreme example of the 9/11 terrorist attacks,  Congress has been slow to take simple steps to adequately protect chemical plants because of concerns about government regulation. If the vivid memory of the crumpling World Trade Center towers is inadequate to override ideological concerns, why should more abstract issues, such as the growing numbers of the uninsured, fare any better?

Moreover, we are also quicker than ever to seize upon alarming anecdotes as if they were fact, and we are able to spread those anecdotes instantly via the Web. Even the rumor of short-term pain is unbearable; long-term gain is inconceivable if measured in months or even years.

Like DRGs, comparative effectiveness research is a way to use the power of government to promote private sector efficiency. It's the kind of idea that centrists from both parties could rally around at a bipartisan summit; after all, it was part of both the John McCain and Barack Obama presidential campaign platforms.

Unfortunately, in today's political environment the right wing of the GOP is very far from being Ronald Reagan Republicans.

Michael Millenson is a Highland Park, IL-based consultant, a visiting scholar at the Kellogg School of Management and the author of Demanding Medical Excellence: Doctors and Accountability in the Information Age .