Sunday, March 27, 2011

Global Payments System: Is it déjà vu all over again?

I have found an issue that seemingly has everyone on the same side. No disagreements. No debates.

The cost of health insurance is too high.

The IRS generates a chart each year comparing small group health insurance premiums state by state. For 2010, Massachusetts topped the list with family plans at $14,138 per year, the average across the country being $11,560.

Solutions to runaway health insurance premiums abound. Interstate competition; capping insurance company profits; high deductible health care plans; a single payer system; a global payments system.

One version of a single payer system is called “Medicare for All.” The concept is simple: Eliminate the eligibility age for Medicare. One argument for this approach is that Medicare administrative costs are far below that of private insurance companies. Although debatable, Medicare places its administrative costs at about 2%. This compares to an average of over 15% for private health insurance companies.

In the category of lies, damned lies, and statistics, one must watch out for the math as it pertains to the cohort served by Medicare versus those served by private health insurance companies. The cost of caring for people 65 and older, Medicare’s cohort, averaged $6,600 per person in 2003. The average for privately-insured individuals that year was $2,700. Simple math tells you that the 2% administrative cost figure is lower partly as a result of the higher per capita cost to provide health care to senior citizens.

There are other items not counted in the 2% figure for Medicare’s admin costs, such as the cost of the IRS acting as Medicare’s collection agency and the cost of working capital (cash used to fund operations), which is borne by the U.S. Treasury. The Council for Affordable Health Insurance has an interesting white paper called “Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private Sector.”

The biggest issue ignored by a simple slogan like “Medicare for All” is that Medicare pays health care providers significantly reduced rates for doctor visits, diagnostic tests, treatments, hospital stays, and therapy. These health care providers balance their books on the backs of privately-insured patients. No hospital can survive solely on the payments received by Medicare, which are less than the cost of providing the services.

I touch on these issues to illustrate the complexities in the arena of health care finance that are often overlooked by advocacy groups that cannot be overlooked by responsible legislators when crafting solutions to the problem of high costs.

So what is being proposed by the governor and our Beacon Hill legislative leadership? A concept called the Global Payments System. Seems like a plan that might help us find our way to a solution to high health care costs. (At least the initials, GPS, would imply that.)

The idea is for providers to form coalitions that offer health care, starting with a primary care physician (PCP) and including all facets of health care providers, from diagnostic centers to specialists to hospitals to therapeutic and chronic care practices. The popular term for these health care provider groups is Accountable Care Organization, or ACO. That has replaced MCO, Managed Care Organization, and its subset, HMO, Health Maintenance Organization.

These ACOs would then be paid a fixed amount of money by health insurance companies to care for their enrollees. A qualitative calculation would be made to offer bonuses to those ACOs whose populations are healthier than some standard that will be established by a government agency.

Being a fan of Back To The Future and the many quips attributed to Yogi Berra (“it’s déjà vu all over again” being one of them), I was moved to dust off my HMO financing book, circa 1973.

At that time, this concept was called capitation. HMOs were paid a fee per enrollee and encouraged to keep everyone healthy, because if they weren’t kept healthy, the cost of treating sick people would come out of the profits of the health care provider, not the insurance company. In effect, the risk was shifted from insurance companies to doctors and hospitals. Each doctor became a miniature insurance company, having to weigh the cost saved by not ordering a diagnostic test against the possibility that the patient might have a more serious condition that would cost the HMO even more money down the road.

After years of frustrated patients trying to get primary care physicians to make referrals to specialists, PPOs (Preferred Provider Organizations) were born because people were willing to pay more to have a choice of doctors rather than dealing with the gate keeping PCP.

So are we watching a rerun of the same movie with the names of characters changed? Stay tuned for the GPS debut.


  1. Randy
    We all know that the "Lion's share" of health care is used when we are elderly. Therefore the cost being decreased is not surprising since the the market dictates the more you buy the cheaper it is, i.e. big box stores. Not that I see health care as a commodity,I do not, but I think the analogy fits. If we did have a single payer system the cost could be lowered. Our health care system is bloated and wasteful just look at the "Platinum parachute" given out for Blue Cross Blue Shield executives, hardly non profit. (I do understand though that people need to be compensated appropriately but where is the outrage on the level of anger with municipal employee salaries & benefits that are merely middle class wages.) The government could then institute some cost control with suppliers.
    More people paying into the program and a surcharge on wealth would allow all Americans to enjoy what I believe should be a right; health care. This belief is rooted in my Catholic faith and man's struggle for social justice.

  2. Very well put RA. Did you get to see the CCT this morning?


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