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Highly Praised Health Systems Say Medicare Payment Practices Need Overhaul

Jul 17, 2009

When talking about his vision for the health care system, President Barack Obama praises places like the Mayo Clinic in Minnesota and Intermountain Healthcare in Utah for providing high-quality care at low cost.

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"We need to identify the best practices across the country, learn from the success, and replicate that success elsewhere," he said last month.

But officials at these institutions, called "integrated" health systems because of the close relationships between the hospitals and doctors, say the health overhaul bills in Congress would do little to reward them or encourage others to follow their lead. That's because the bills don’t aggressively revamp how Medicare pays for care, they say.

“We are flattered and grateful for the recognition" from Obama, said Greg Poulsen, senior vice president at Intermountain Healthcare, a nonprofit system of hospitals and doctors in Salt Lake City. But, he added, "unless we get the incentives right, nothing else in health reform really matters."

Poulsen and others at integrated health systems say Medicare, the federal health program for the elderly, needs to move away from its practice of paying doctors for individual services and move toward rewarding high-quality care and "value." That's the only way, they say, to reduce unnecessary care and hold down costs.

But others say the Medicare payment system isn't likely to be rejiggered any time soon, for practical and political reasons. Integrated health systems make up just a sliver of all the nation's hospitals. Most institutions aren't ready to be more financially tied to their doctors or fear a payment change would mean reduced Medicare payments.

About two-thirds of hospitals lose money on Medicare patients and many hospitals worry "they’ll lose even more money under payment reform," said Len Nichols, director of the Health Policy Program at the New America Foundation, a Washington think tank.

Medicare's payment system doesn't often grab the spotlight, but it's getting renewed attention amid questions about whether the health overhaul legislation would meet Obama’s goal of slowing the growth of health costs--or "bending the curve"--over the long term. Douglas Elmendorf, head of the Congressional Budget Office, testified last week that the legislation would increase spending.

Medicare Incentives

Medicare accounts for 22 percent of all U.S. health care spending and has a huge influence over how health care is paid for in the U.S. It's often emulated by private insurers.

Some officials aren't waiting for the federal government to overhaul its payment approach. A state commission in Massachusetts, the first state to require its residents to have health insurance, last week urged lawmakers to have Medicaid, the state-federal health program for the poor, and private insurers scrap the fee-for-service system and instead pay flat fees, or "global" payments, to hospitals and physicians.

In most communities, doctors work independently of their local hospitals and are paid by Medicare and most private insurers under fee-for-service arrangements. Hospitals, meanwhile, are typically paid based on patients' diagnoses, so they get paid for doing less for each patient. The incentives are sometimes at cross purposes, and aren't based on how well patients do.

At Mayo, doctors are paid salaries, and don't get paid more for providing more care. And they take a team approach to coordinating care, working to reduce unnecessary tests and office visits and using electronic health records to monitor the patients' outcomes. But while these steps are shown to save money, Mayo itself doesn't benefit financially by being more efficient.

To change that, members of Congress from Minnesota and Wisconsin last month introduced a bill that would create a Medicare “value index” designed to pay doctors based on the quality and cost of their care, rather than on how many services they provide. But the legislation hasn't been included in the health bills.

Mayo and other integrated health systems also want Medicare to move quickly to a system that pays hospitals and doctors and other providers a “global” or “bundled” payment for treating a patient’s illness or handling a patient’s condition over time. For example, the government would pay a single fee for a patient’s hip replacement to cover their hospital stay, surgery and rehabilitation at home or in a nursing home. The fee would pay higher rates to providers who delivered better care at lower cost.

“By having Medicare make a single payment to a team of providers, you change the culture and changing the culture is what allows the hospital and multiple doctors to act as a team as opposed to acting independently,” said Poulsen of Intermountain Healthcare.

Many hospitals are worried about proposals to “bundle” payments because of the possibility that managed care companies would end up controlling Medicare dollars previously paid directly to them. “Who gets the bundle is the key question,” said Linda Quick, president of the South Florida Hospital and Healthcare Association, which is based in Hollywood, Fla. and represents about 50 hospitals.

Pilot Programs

The House and Senate overhaul proposals call for pilot programs to test new Medicare payment systems, including a new type of provider arrangement called “accountable health organizations,” groups of hospitals and doctors that get paid based on how well they meet cost and quality targets. But the programs don’t go far enough fast enough, the officials from integrated health systems say.

“There is not sufficient attention being paid to the fundamental problem of reforming the Medicare,” said Oliver Henkel, chief government relations officer at the Cleveland Clinic. “We don’t yet see enough meat on the bones of Medicare payment reform.”

Rep. Ron Kind, D-Wis., a sponsor of the value-index bill, voted against the health reform bill Friday in the Ways and Means Committee, partly, he said, because it didn’t include strong enough incentives for care "that improves health care quality and reduces costs to patients."

Asked about that criticism, Nicholas Papas, spokesman for the Department of Health and Human Services, said the administration is pleased with the legislation and is "confident there will be opportunities to keep working with the committee leadership to refine the proposals that are emerging." In addition, the White House has separately proposed slowing Medicare costs by shifting broad power over Medicare spending to an independent commission.

The last major Medicare payment change for hospitals was in 1983, when Medicare switched from paying hospitals a fee for each service to a fee based on a patient's diagnosis, said Poulsen of Intermountain Healthcare. "That was a great first step, but we've yet to make a second," he said.

Medicare's spending varies greatly from region to region. It spends about $6,600 a year per enrollee in Minnesota compared to about $15,000 in southern Florida. That means any effort that would boost funds for lower-cost areas like Wisconsin and Minnesota would spark a bitter fight if it came at the expense of high cost areas like New York and California.

Quick of the Florida hospital group said that her members hospitals expect to get paid less after a health care overhaul, but that she doesn't expect "at the end of the day anyone will get paid more."

Both the American Medical Association and the American Hospital Association say they favor additional study of new payment strategies, rather than any major restructuring now.

That's the approach Congress seems to be pursuing. In addition, lawmakers are on track to approve across-the-board federal payment reductions of $155 billion for hospitals, reflecting a deal by major hospital groups, the White House and Senate Democrats. That agreement assumes that the hospitals will see increased revenues as reform legislation results in fewer uninsured Americans, whose care is now a financial burden.

Mayo and similar health systems object to the sweeping cuts. "Across-the-board cuts will be harmful to everyone and we think it is particularly bad to penalize the high-value organizations,” said Jeff Korsmo, executive director of the Mayo Clinic Health Policy Center. “We will have to violate our values in order to stay in business and reduce our access to government patients.”

As a result of low reimbursement rates, Mayo’s Arizona operations in 2007 stopped accepting new Medicare patients for primary care. About half of Mayo’s patients are on Medicare. Last year, Mayo said it lost about $840 million in treating Medicare patients, money it had to make up treating privately insured patients.

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