Is Kathleen Sebelius Listening to the NCPA?

Apparently so. But she’s only understood half the message.

For several years now, NCPA scholars have been calling for a radical change in how Medicare pays doctors and hospitals — in The Wall Street Journal, in NCPA publications and at this blog.

Here’s the idea: Instead of having Medicare fix millions of prices for predetermined packages of care, we should allow providers the opportunity to produce better care and cheaper care by repackaging and re-pricing their services. Everyone on the provider side should be encouraged to make Medicare a better offer. Medicare should accept these offers provided that (1) the total cost to government does not increase, (2) patient quality of care does not decrease and (3) the provider proposes a reasonable method of assuring that (1) and (2) have been satisfied.

Instead of maximizing against reimbursement formulas, doctors and hospitals would be encouraged to discover more efficient ways of providing care. They would be able to make more money for themselves as long as they save taxpayers money and patients don’t suffer.

Last week Secretary Sebelius seemed to indicate she has heard the call. Going forward, providers will be able to offer to perform heart surgery and other procedures for a lump sum (bundled) price covering all aspects of the procedure and (like Priceline) they can name their own price! Medicare will accept the offer if taxpayers are likely to come out ahead on the deal.

Unfortunately, Medicare will dictate what the bundles will look like. Providers will be able to re-price, but not repackage. You might think this represents progress for people who were previously pushing pay-for-performance and other command-and-control strategies designed inside the Washington Beltway. Yet, ironically, re-pricing without repackaging could actually make things worse.


I’ve tried and tried

To say what’s on my mind


First, let’s give the devil its due. How can such a reform produce savings? Let’s say there are six members of a team involved in treating a heart attack patient, but with efficient care five could have done the job. If the six are independently billing Medicare, no one has an incentive to sacrifice his own income so that care can be more efficient. But, if they can cooperate and bill Medicare a single fee (to be shared by the group) they can free one person per episode for other income-earning opportunities. They can then split the total income among themselves in a way that leaves everyone better off.

This is in the nature of all efficiencies by the way. Becoming more efficient always produces a surplus for producers as a whole. In health care, that surplus could in principle be used to lower Medicare’s cost and give doctors more take-home pay as a result.

More details on how the pricing system will work can be found here. The federal government has experimented with Medicare bundled payments since 2009 in a demonstration program at Hillcrest Medical Center in Tulsa and produced Medicare savings of 3%. That’s a far cry from the 30% waste that most of us think is in the system, however.

Why are the savings so puny? Answer: because this type of reform is focused on the least important thing that needs to be changed. Being able to repackage the bundles of care has far more potential for cost reduction than re-pricing a bundle dictated by Medicare.

To appreciate what the freedom to repackage might mean, consider Geisinger Health System in Central Pennsylvania. It offers a 90-day warranty on heart surgery, similar to the type of warranties found in consumer product markets. If the patient returns with complications during that period, Geisinger promises to provide treatment without sending the patient or the insurer another bill.

Instead of offering a bundle called “heart surgery,” therefore, Geisinger is offering a bundle called “heart surgery with a warranty.”

Under the current system, Geisinger loses money on its warranties, even as it saves money for Medicare overall. This is because health care organizations like Geisinger are paid more when patients have complications that lead to more visits, more tests and more readmissions. (Most hospitals make money on their mistakes!) What is needed is a willingness to pay for such guarantees. But unless Medicare is willing to allow Geisinger-type re-bundling along with re-pricing, other hospitals will have no incentive to follow in Geisinger’s footsteps.

Another example of the potential for re-bundling is the highly successful experiment in Asheville, North Carolina where pharmacists counsel diabetic patients and encourage them to take appropriate medications. In this case, the provider is offering a new package of services (traditional pharmacy plus some primary care services) — one which reduces trips to emergency rooms and to the offices of primary care physicians and lowers overall costs. Unless Medicare offers pharmacists in other cities the opportunity to make money by re-bundling in this way, however, the potential for savings will be missed.

We have frequently mentioned the case of Dr. Jeffrey Brenner, who is saving millions of dollars for Medicare and Medicaid in Camden, New Jersey by providing what is largely a bundle of social work services (not on Medicare’s price list) designed to keep high-cost patients healthier and out of hospitals. There will be very few physicians following in Brenner’s footsteps, however, as long as Medicare refuses to pay for innovative bundles such as these.

Let’s take a primary care example, previously posted at this site.  A clinic drew up a blueprint to shift a large portion of doctor duties to nurses, allowing the doctors to focus on more complicated problems, for which their training is needed. They then ran their model through a computer to see how it would have affected last year’s income. The result: there was virtually no improvement. The reason: every time a task was shifted to a nurse, Medicare’s payment rate went down, destroying any potential income gain.

We cannot solve this problem by inviting the clinic to underbid Medicare’s current price list. We solve it by allowing the clinic to offer a doctor/nurse package with acceptable quality for a price well below the price Medicare would pay for the all-doctor package.

In the area of primary care there are numerous other examples of opportunities to repackage or re-bundle in cost reducing ways. As I pointed out in The Wall Street Journal the other day:

  • Walk-in clinics offer a bundle of nurse-provided primary care, less expensive than the same care delivered at traditional primary care physician’s offices or hospital emergency rooms.
  • TelaDoc and other companies offer a bundle of telephone and e-mail consultations, less expensive than the same care in traditional settings.
  • Some concierge doctors offer a bundle of services (same day appointments, telephone and email consultations, electronic medical records, etc.) that the Commonwealth Fund describes as ideal when the doctors providing them live in some other country.

Will the new re-pricing scheme allow providers of these services to name their own price and submit bids to Medicare? I’m afraid they will not. And if they don’t, one has to wonder what the real purpose of the whole exercise is.

That brings us to why we ought to be suspicious. Let’s think about how the Sebelius reform might actually make things worse. The whole scheme would be a huge step backwards if:

  • It completely ignores and excludes the innovative bundling I’ve been describing and other examples like them.
  • It continues to enforce the Stark rules which effectively prohibit physicians and hospitals from cooperating and sharing in the profits from bundled services unless the physician is an employee of the hospital.
  • It suspends the Stark prohibitions only for physicians who are practicing in Accountable Care Organizations, subject to a 427-page book of rules.

If these suppositions are all true, then we would be left with a scheme to induce the consolidation of medical care into large organizations of salaried doctors, subject to all kinds of bureaucratic controls. What appears to be an act of liberating the supply side of medical care could in reality be a clever ruse to enslave them by coaxing them into accepting the building blocks of ObamaCare.

Comments (20)

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  1. Vicki says:

    I like the Beyonce song.

  2. Ken says:

    Great post. Probably makes way too much sense for federal bureaucrats, however.

  3. Patrick Skinner says:

    I doubt Sebelius will understand it. She’s stubornly trying to move to single payor, yet won’t accept that it is RATIONING.

  4. Mike Kelly says:

    “This type of reform is focused on the least important thing that needs to be changed. Being able to repackage the bundles of care has far more potential for cost reduction than re-pricing a bundle dictated by Medicare.”

    Brilliant insight.

  5. Joe S. says:

    Great post.

  6. Keith says:

    I used to think that the single greatest threat to physician autonomy was the payment system (i.e., “He who pays the bills makes the rules”). Now I’m beginning to think that antitrust law is in fact the true threat.

    Most of the health policy community readily acknowledges that the Stark rules and other antitrust laws make little sense, at least with respect to the reforms necessary to improve the delivery of health care services. But instead of fixing the law and universally freeing physicians and others to innovate, the banana republic grants narrow exemptions which are generally conditioned on the exemptee delivering health care services in accordance with the bureaucracy’s vision of how health care services should be delivered.

  7. KG says:

    Compromise can be great, but accepting part of a plan while ignoring other essential parts doesn’t make a lot of sense.

  8. Greg Scandlen says:

    I believe all of these schemes are based on a visceral hatred of physicians. That has been the driving impulse of every bureaucratic initiative of the last 40 years — the Docs are out of control and gobbling up resources.

    In this case, the payments will be delivered to the hospital which will then allocate payment between the various “care providers.”

    Problem is, patients (citizens/taxpayers/voters) like their doctors just fine, but despise the bureaucrats (whether public or private.) Nothing will ever improve until we allow patients and doctors to work together to come up with the best solutions to the problems.

    At the risk of sounding like a broken record (does that simile still work in the iPod era?), it means putting the money in the hands of the patient and letting them (us) buy the services we value.

  9. Al says:

    John, you have 3 wise dictums. Dictum one regards the direct cost increases faced by Medicare. That dictum should recognize the indirect costs as well. One indirect cost is when healthier patients are removed from traditional Medicare and sicker patients are put back in.

    Based upon that dictum Medicare Advantage should not exist because it increases the direct costs to Medicare and has no provision to prevent the indirect costs already seen in similar programs.

    Medicare Advantage and this other idea of bundling that you discuss today have one ruinous failure in common. Both rely excessively upon third party payment where the consumer is left out becoming almost a cosmetic afterthought.

    What happened to Adam Smith’s willing buyer and willing seller? Why is the idea of a third party payer seemingly so entrenched in the economist’s book of solutions? To myself, the non economist, it seems that the willing buyer and willing seller concept had a funeral and I missed it.

  10. Simon says:

    I agree, re-pricing alone without repackaging could be bad. It’s not intuitive and limits competition.

  11. Earl L. Grinols says:

    John, I continue to enjoy reading your health care comments, and I am glad you are on the side of light. Re-packaging and re-pricing has the right ring. Presumably Congressman Price and the working group is seeing it too.

  12. Dr. Bob Kramer says:


    The problem with your solution is that there are physicians who will never be satisfied with either the reimbursement or the standards of care, which as you know is “a plague on both your parties” (liberally referring to the famous Shakesperian quote). All too often there is a solution promulgated by one of the entities which has no regard or care for any of other groups. Somehow it gets endorsed by both parties, by the medical profession, the hospitals and the Insurance industry. And most important by the populace. If you can do that I want to become your medical director. Unfortunately we live in a world of greed and fear. It doesn’t matter what motivates one other than his own needs and desires.

    Dr Bob Kramer

  13. Karl Stecher says:

    Sorry, John, I don’t agree with you.
    First, you are letting the bureaucrats, with absolutely no knowledge of how to treat patients, no front line experience, no understanding of the nuances of medical practice, call the shots. Their focus (and yours) is on how to save money.
    Doctors will do the best they can for patients. If a new procedure is devised, a more efficient or safer way to do things, those doctors who have spent their lives learning and practicing medicine will find it.
    That money-saving motive, or a piddly 1% reward for some outdated “best practices” guideline, just makes for a sideshow, a little game that has nothing to do with best care. Best practices assumes one size fits all.
    You want doctors to negotiate with Medicare, but not cost Medicare more? Tell me, how would you fix this problem: Neurosurgeon in Colorado meets with family and patient, does preoperative history and physical exam on patient (yes, this is in the global fee), meets family the next AM at 0715. Patient is pushed down into operating room, surgery starts at 0900, continues until 1300-1400 as surgeon opens skull, locates tumor, does biopsy and frozen section reading to determine tumor type, takes as much tumor as he judges safe and appropriate, closes wound, takes care of patient 5 days and nights in ICU, 9 days and night on regular hospital floor, then to 90 days after surgery. Medicare allows neurosurgeon to be paid $1,760.00, pays 80%, rest paid by/if secondary insurance. Tell me how you would negotiate price. BTW, this neurosurgeon trained for 14-18 years before he could start practice, and has an office overhead of $150.00 per hour.
    Next point: 30% waste in Medicare? Show me. I am aware of phony billing entities (medical equipment, bogus clinics); but this is separate from doctors who take care of patients.

  14. Gerald Clarke says:

    In Ophthalmology, bundle pricing for cataract surgery (Procedure and surgery center) can work very well, but we need to balance bill the patients who want extra services, like 90 day guarantees or premium lenses – going forward, balance billing patients for the extras can be a nice increase in income for providers and a win-win for the patients…

  15. Ron Bachman says:

    I would be satisfied by startig with hospitals and physicians posting “cash prices” for selected “bundled” services, an explanation of what the services are, and some proof or evidence that they can be lower cost with improved outcomes. I believe that if they did that and approached employers with a better service to return healthy employees back to work, they could reverse the traditional reimbursement negotiations with the insurers. The providers would take control of the pricing and delivery of care process. John, ideas are great ones that can be proven in the commercial market first. Providers just need to be creative inventive entrepreneurs.

  16. John Goodman says:

    @ Al

    You asked, “Why is the idea of a third party payer seemingly so entrenched in the economist’s book of solutions?”

    It isn’t entrenched in mine. But it is entrenched in Medicare. This proposal is just one of many we have for liberating the providers.

    @ Karl Stecher

    I can’t give you an acceptable answer for the example you gave. It may be that there is no way to successfully repackage in that case. Although I doubt it. I just don’t know enough. Most doctors and hospital administrators I know can point to all kinds of waste. They just have no incentive to get rid of it.

    @ Gerald Clarke

    I agree with you on balance billing. And there are ways to do that so that the cost to Medicare does not increase. But patients are willing to pay out of pocket because the new package is worth more than the old package.

    @Ron Bachman

    Good ideas, but most physicians are not going to want to practice medicine one way for one group of patients and another way for another group. The reason Medicare is so important is because it dominates so many sub medical markets. If you change your practice for Medicare, you will probably be willing to change it for every other payer.

  17. Al says:

    John G. writes: “@ Al You asked, “Why is the idea of a third party payer seemingly so entrenched in the economist’s book of solutions?” It isn’t entrenched in mine. But it is entrenched in Medicare. This proposal is just one of many we have for liberating the providers.””

    If the idea of third party payer isn’t entrenched in your ideas then why provide ideas that simply enhance the ability of third party payer to survive? Why are your recent ideas leaving the patient out of the equation? This is even more apparent when you say “for liberating the providers” which I don’t think it does.

    We have four players CMS, insurers, physicians (I’m leaving out hospitals etc.) and patients. Medicare Advantage involves mostly CMS and the insurers. There is a false illusion of choice for the consumer and the physician. According to Adam Smith the deal should be made between the physician and the patient so I don’t see how this option or the other fits Adam Smith’s economic model.

  18. Ron Bachman says:

    @John, I have always been told that physicians change practices for all (or most) after they do so for about 20% of their patients. (unsourced rule of thumb!)

    I am not necessarily advocating physicians change their practice of care, rather that they change how they price it and market it to employers first. (going directly to large self-insured employer plans which can tell the insurance administrators to pay on the basis of the physician-employer agreement).

    With packaged (bundled) employer offerings they could include services that they know they should do and maybe currently do perform without current CPT code reimbursements. They could also add services they know and are confident in providing that would improve their quality, less the time for services, and provide convenience to patients. By proving their value in the employer market the data results would be available for government program changes (if anyone in HHS would listen).

  19. EC says:

    After reading through the Bundled Payment Program, it seems like Model 2 is actually a lot like Geisinger’s warranty program. Under Model 2, participants would have be responsible for any follow-up care within 30 or 90 days (a couple options under Model 2). That sounds, at least implicitly, like a warranty. The hospital is bearing the financial risk of any “defect” in their product. If they end up billing Medicare more than the “target price” over the period, then Medicare will require them to repay the amount above the target price at reconciliation. This model seems to be a legitimate attempt to allow people to repackage services.

    Also, though I’m not sure exactly what this does to Stark, it does allow hospitals to legally gainshare with physicians in a major way (up to 50 percent of physician fees for the episode).

  20. Dr. Bob Kramer says:

    The first thing she can do is to give the hospitals lump sum payment. That is RIDICULOUS!! Many years ago Baylor tried to do this with the PHO (physician hospital organization) All the doctors were excited, but every last one of them lost considerable amounts of money, and it wasn’t till I blew the whistle to explain that the hospital system wants to insure their revenue at the expense of the doctors. I don’t know how supposedly bright physicians bit the dust, finally realizing that the hospitals have all the authority and none of the responsibility, while the doctors have just the reverse; docs with the responsibility and none of the authority Hospitals basically care about one thing, and that is the bottom line. If they have the best and the brightest, then they will be happy. I don’t care how much they pretend to care, but if they really did it would be in order to gain market share. I once had a situation where one of my staff was doing something wrong and making himself a pile of cash. When I talked to administration and told them I wanted to sever relations with the doctor. Administration told me I couldn’t because he provided too much revenue for the institution. When will all of the doctors who refuse to stand up and be counted can get off their rear ends, it will continue to sink further into the abyss of health care delivery. It is also painfully apparent that when they finally do wake up it will be too late. When will my colleagues wake up to the fact that the medical profession is run by banks who are owned by the brokerage companies who are owned by the leveraged buyout folks. Doesn’t anyone in Washington understand what is at stake? HHW Sebelius doesn’t have a clue that doctors are necessary and need to be heard, and the AMA should be shut down for lack of achieving anything positive for the profession.