As chatter about “Medicare-for-All” ideas heats up—at least among the field of Democratic presidential hopefuls—the Congressional Budget Office decided to offer its own take.
Well, sort of.
Wednesday, the CBO issued a report that dove into the key considerations policymakers might want to think about before they overhaul the U.S. healthcare into a single-payer system. Putting it mildly, they said, the endeavor would be a “major undertaking.”
They don’t actually offer up specific cost estimates on any of the Medicare-for-All bills floating around, though other researchers put Bernie Sanders’ Medicare-for-All plan at between $32.6 trillion and $38.8 trillion over the first decade.
But the CBO analysts did weigh in on a slew of different approaches to financing, coverage, enrollment and reimbursement that could be built into a single-payer plan.
“Establishing a single-payer system would be a major undertaking that would involve substantial changes in the sources and extent of coverage, provider payment rates and financing methods of healthcare in the United States,” the CBO said.
So what exactly did the CBO have to say about what it would take to create a single-payer system? Here are some key takeaways:
1. There could be a role for private insurance—or not
There has been plenty of heated debate around Medicare for All focused on the role that existing private coverage could—or could not—play in that system. Most insured Americans are enrolled in a private plan today, including about one-third of Medicare beneficiaries.
If they’re allowed, commercial plans could play one of three roles in a single-payer system, according to the report: as supplemental coverage, as an alternative plan or to offer “enhanced” services to members in the government plan.
Allowing private insurers to offer substitutive plans is unlikely, because they could potentially offer broader provider networks or more generous benefits, which would draw people into them. A solution to this issue could be mandating that providers treat a minimum number of patients who are enrolled in a single-payer plan.
Private payers could also offer coverage for care that is traditionally outside of the purview of government programs, such as dental care, vision care and hearing care.
Supplemental plans like these are offered in the existing Medicare program, and several countries with single-payer systems allow this additional coverage.
For example, in England, private plans offer “enhancements” to members of the government plan, including shorter wait times and access to alternative therapies, But members of these plans must pay for it in addition to tax contributions to the country’s National Health Service.
2. Other government programs could stick around
In addition to Medicare and Medicaid, the federal government operates several health programs targeting individual populations: the Veterans Affairs health system, TRICARE and Indian Health Services.
A single-payer system could be designed in a way that also maintains these individualized programs, the CBO said. Canada does this today, where its provinces operate the national system while it offers specific programs outside that for indigenous people, veterans, federal police officers and others.
There could also be a continuing role for Medicaid, according to the report.
“Those public programs were created to serve populations with special needs,” the CBO said. “Under a single-payer system, some components of those programs could continue to operate separately and provide benefits for services not covered by the single-payer health plan.”
On the flip side, though, a single-payer plan could choose to fold members of those programs into the broader, national program as well, the office said.
3. A simplified system could also mean simplified tech
Taiwan’s government-run health system has a robust technology system that can monitor patients’ use of services and healthcare costs in near real-time, according to the report.
Residents are issued a National Health Insurance card that can store key information about them, including personal identifiers, recent visits for care, what prescriptions they use and any chronic conditions they may have. Providers also submit daily data updates to a government databank on service use, which is used to closely monitor utilization and cost. Other technology platforms in Taiwan can track prescription drug use and patients’ medical histories.
However, getting to a streamlined system like this in the U.S. would be bumpy, the CBO said. It would face many of the same challenges the health system is already up against today, such as straddling many federal and state agencies and addressing the needs of both rural and urban providers.
But the payoffs could be significant, according to the report.
“A standardized IT system could help a single-payer system coordinate patient care by implementing portable electronic medical records and reducing duplicated services,” the agency wrote.
4. How to structure payments to providers? Likely global budgets
Most existing single-payer systems use a global budget to pay providers, and may also apply in tandem other payment approaches such as capitation or bundled payments according to the report.
How these global budgets operate varies between countries. Canada’s hospitals operate under such a model, while Taiwan sets a national healthcare budget and then issues fee-for-service payments to individual providers. England also uses a national global budget.
Global budgets are rare in the U.S., though Maryland hospitals operate under an all-payer system. These models put more of the financial risk on providers to keep costs within the budget constraints.
Many international single-payer systems pay based on volume, but the CBO said value-based contracting could be built into any of these payment arrangements.
5. Premiums and cost-sharing are still in play, especially depending on tax structures
A government-run health system would, by its nature, need to be funded by tax dollars, but some countries with a single-payer system do charge premiums or other cost-sharing to offset some of those expenditures.
Canada and England operate on general tax revenues, while Taiwan and Denmark include other types of financing. Danes pay a dedicated, income tax to back the health system, while the Taiwanese have a payroll-based premium.
The type of tax considered would have different implications on financing, according to the CBO. A progressive tax rate, for instance, would impose higher levies on people with higher incomes, while a consumption tax, such as one added to cigarettes, would affect people more evenly.
Policymakers will also have to weigh when to impose new taxes, shifting the economic burden between generations.
The CBO did not offer any cost estimates in terms of the amount the federal government would need to raise in taxes to fund a single-payer program.
Anyone interacting with the U.S. health care system is bound to encounter examples of unnecessary administrative complexity—from filling out duplicative intake forms to transferring medical records between providers to sorting out insurance bills. This administrative complexity, with its associated high costs, is often cited as one reason the United States spends double the amount per capita on health care compared with other high-income countries even though utilization rates are similar.1
Each year, health care payers and providers in the United States spend about $496 billion on billing and insurance-related (BIR) costs, according to Center for American Progress estimates presented in this issue brief. As health care costs continue to rise, a logical starting point for potential savings is addressing waste. A 2010 report by the National Academy of Medicine (NAM) estimated that the United States spends about twice as much as necessary on BIR costs.2 That administrative excess currently amounts to $248 billion annually, according to CAP’s calculations.
This issue brief provides an overview of administrative expenditures in the U.S. health care system. It first explains the components of administrative costs and then presents estimates of the administrative costs borne by payers and providers. Finally, the issue brief describes how the United States can lower administrative costs through comprehensive reforms and incremental changes to its health care system. Many of the universal health care plans being discussed to expand coverage and lower costs would lower administrative costs through rate regulation, global budgeting, or simplifying the number of payers.3 Each of these financing changes deserves consideration—even in the absence of major systemwide reform.
Components of administrative costs
The main components of administrative costs in the U.S. health care system include BIR costs and hospital or physician practice administration.4 The first category, BIR costs, is part of the administrative overhead that is baked into consumers’ insurance premiums and providers’ reimbursements. It includes the overhead costs for the health insurance industry and providers’ costs for claims submission, claims reconciliation, and payment processing. The health care system also requires administration beyond BIR activities, including medical record-keeping; hospital management; initiatives that monitor and improve care quality; and programs to combat fraud and abuse.
To date, few studies have estimated the systemwide cost of health care administration extending beyond BIR activities. In a 2003 article in The New England Journal of Medicine, researchers Steffie Woolhandler, Terry Campbell, and David Himmelstein concluded that overall administrative costs in 1999 amounted to 31 percent of total health care expenditures or $294 billion5—roughly $569 billion today when adjusted for medical care inflation.6 A more recent paper by Woolhandler and Himmelstein, which looked at 2017 spending levels, placed the total cost of administration at $1.1 trillion.7
Billing and insurance-related costs
Many studies of administrative costs limit their scope to BIR costs. The BIR component of administration is most relevant to systemwide reforms that seek to reduce the expenses related to claims processing, billing rates, or health insurance. The largest share of BIR costs is attributable to insurance companies’ profits and overhead and to providers8where BIR costs include tasks such as record-keeping for claims submission and billing.
The costs associated with BIR administration can extend beyond the chief parties involved in receiving and submitting claims. The process of claims denials has become an industry unto itself, with private firms squeezing dollars out of Medicaid programs.9 One study estimated that the aggregate value of challenged claims ranges from $11 billion to $54 billion annually.10 Claims can also be manipulated to boost providers’ or insurers’ profits by recording services rendered in maximum detail and exaggerating the severity of patients’ conditions—a practice known as upcoding.11 Upcoding costs Medicare Advantage billions of dollars in excess expenditures,12 and in many cases the practice constitutes fraud.13
The NAM published one of the most thorough reports on U.S. administrative costs related to billing and insurance in 2010. In a synthesis of the literature on administrative costs, the NAM report concluded that BIR costs totaled $361 billion in 2009—about $466 billion in current dollars—among private insurers, public programs, and providers, amounting to 14.4 percent of U.S. health care spending at the time. The NAM estimated that BIR costs account for 13 percent of physician care spending; 8.5 percent of hospital care spending; 10 percent of spending on other providers; 12.3 percent of spending on private insurance; and 3.5 percent of public program spending, including Medicare and Medicaid.14
Applying the NAM’s percentages of BIR costs to recent projections of national health expenditures from the Centers for Medicare and Medicaid Services (CMS), CAP estimates that BIR costs will amount to $496 billion for 2019.15 (see Table 1) According to CAP’s calculations, this includes $158 billion in overhead for private insurance; $56 billion for administration of public insurance programs; and $282 billion for the BIR costs of hospitals, physicians, and other care providers. CAP’s estimate does not include the administrative costs associated with retail sales of medical products, including prescription drugs and durable medical equipment.
Even the most inclusive studies of administrative costs have not included at least one key piece of the U.S. health care system, namely, patients.16 The administrative complexity of the U.S. system also burdens patients, whether they are deciphering bewildering bills or shuttling records between providers. Three-quarters of consumers report being confused by medical bills and explanations of benefits.17 A Kaiser Family Foundation survey of people newly enrolled in the health insurance marketplace found that many were not confident in their understanding of the definitions of basic terms and concepts such as “premium,” “deductible,” or “provider network.”18 Insurers and employers spend an estimated $4.8 billion annually to assist consumers with low health insurance literacy, according to the consulting firm Accenture.19
Excess administrative costs
While U.S. administrative care spending is indisputably higher than that of other comparable countries, it’s unclear how much of the difference is excess and how much of that excess could be trimmed. The NAM report estimated that excess BIR costs amount to $190 billion—$245 billion in current dollars—or roughly half of total BIR expenditures in a year.20 The NAM report estimated that 66 percent of BIR costs for private insurers and 50 percent of BIR costs among providers are excess.21Based on these percentages, $248 billion of the total $496 billion BIR costs in CAP’s updated estimate are excess administrative costs.
Most studies that have attempted to identify excess costs in the American health care system rely on comparisons between the United States and Canada.22 In their 2010 review of the literature on the difference between the two countries’ health expenditures, economists Alexis Pozen and David M. Cutler looked at the sources of the gap between U.S. and Canadian health spending. They found that 62 percent of the difference between the two countries was attributable to prices and intensity of care, and 38 percent was linked to administrative costs.23Compared with Canada, the United States has 44 percent more administrative staff, and U.S. physicians dedicate about 50 percent more time on administrative tasks.24 Inflated to current dollars and today’s population, Pozen and Cutler’s estimate of per capita administrative excess in the United States, when compared with Canada, translates into a gap of $340 billion.25
Woolhandler and Himmelstein estimate that the United States currently spends $1.1 trillion on health care administration, and of that amount, $504 billion is excess.26Woolhandler and Himmelstein rely on surveys of physicians’ time use and utilized physician income data to translate the share of time physicians spend on administrative tasks into monetary value; their estimate of excess costs is the difference between U.S. and Canadian administrative spending27 Woolhandler and Himmelstein’s original 2003 article estimated that Canada spent $307 per capita on health system administration, compared with $1,059 per capita in the United States. Assuming this difference is excess requires an assumption that a Canadian-style health care system would achieve an identical level of administrative costs in the United States.
A separate criticism of the original 2003 Woolhandler and Himmelstein estimates, as articulated by Henry J. Aaron, an economist at the Brookings Institution, is that their methodology failed to account for differences in prices.28 Woolhandler and Himmelstein arrive at their national total administrative costs by tallying up costs in each country for items such as rent and salaries. As a consequence, the U.S.-Canada comparison captures not just the differences in the quantity of resources devoted to administration—such as physician time or office space—but also the differences in office rates, wages, and salaries. Taking Woolhandler and Himmelstein’s estimate of total administrative costs as a given and then making standard adjustments for price differences, Aaron argues that the two researchers exaggerated U.S. administrative spending in their 2003 report and that the true portion of excess would be about one-quarter less than what they estimated.
All estimates of administrative costs are inherently sensitive to what portion of health care spending one considers administrative.29 For example, time spent recording diagnosis or prescription information used in billing may also be vital for patient care, allowing medical teams to share up-to-date information or avoid harmful drug interactions. A recent study of an electronic health records (EHR) system estimated that on average, half of a primary care physician’s day is spent on EHR interaction, including billing, coding, ordering, and communication.30 Such tasks, however, can fall into a gray area between administrative and clinical. In a separate study, economist Julie Sakowski and her fellow researchers reported finding varying attitudes among physicians about whether interaction with electronic medical records—a subset of EHR—represented administrative or clinical time. As Sakowski and co-authors wrote, “Some felt they spent extra effort adding documentation that was needed only for billing. Others seemed to feel that nearly all of that information was needed for accurate clinical records.”31
Administrative costs for payers
Within the U.S. system, the share of expenditures that are attributable to administrative costs varies greatly by payer. The BIR costs for traditional Medicare and Medicaid hover around 2 percent to 5 percent, while those for private insurance is about 17 percent.32Some public finance experts, including Robert Book, have argued that the low levels of Medicare overhead are deceptive. Because seniors have relatively high health expenditures, the argument goes, administrative costs make up a relatively small share of their total health care spending. However, Medicare’s per capita administrative expenditures are higher than those in other forms of insurance.33 Even if one compares higher-end estimates of Medicare administrative costs to low-end estimates of costs for private insurance, the gulf between administrative costs for Medicare and private coverage is large.34 Organisation for Economic Co-operation and Development (OECD) data also show that other nations are able to achieve low levels of administrative costs while maintaining universal coverage across all ages of the population.35
International health system data demonstrate that the United States is a clear outlier on administrative spending. And while the OECD’s definition includes administrative costs to government, public insurance funds, and private insurance, but not those borne by hospitals, physicians, and other providers, the stark difference is still informative. In 2016, administration accounted for 8.3 percent of total health care expenditures in the United States—the largest share among comparable nations. (see Figure 1) Countries with single-payer systems are among those with the lowest administrative costs. For example, administrative spending accounts for just 2.7 percent of total health care expenditures in Canada.36 OECD data also show that within a country, administrative costs are higher in private insurance than in government-run programs.37
Countries that have multipayer systems with stricter rate regulation also achieve much lower administrative costs than the United States. Administrative expenditures account for 4.8 percent of total health care expenditures in Germany, 3.9 percent in the Netherlands, 3.8 percent in Switzerland, and 1.6 percent in Japan, according to the OECD. If the United States could reduce administrative costs down to Canadian levels, it would save 68 percent of current administrative expenditures; reducing to German-level administrative costs would save 42 percent of current administrative expenditures. However, to assume that by simply adapting another country’s health care system—whether it is Canada’s single-payer Medicare, Germany’s sickness funds, or Switzerland’s heavily regulated private plans—the United States would automatically achieve the same level of administrative costs may ignore other fundamental differences between countries, including the market power of health care providers, political systems, and attitudes toward health care. Nevertheless, the experience of other multipayer systems such as those in Germany and Switzerland suggests that the United States could substantially reduce both administrative expenditures and overall health care spending by bringing down reimbursement rates and regulating insurance—even while continuing to allow multiple payers and private health care providers.
The lowest possible level of administrative spending for the U.S. health care system is not necessarily the optimal level of spending. As researchers Robert A. Berenson and Bryan E. Dowd have noted, administrative spending in Medicare may in fact be too low; the program would be more efficient with greater investment in initiatives to lower costs and improve quality.38 Many reforms that could generate overall savings require administrative resources to design and implement. Innovations such as bundled payments—the practice of paying providers a lump sum for an episode of care such as a knee replacement or childbirth rather than reimbursing each individual component—involve upfront investment in development. Increasing resources to combat fraud and abuse would also lower overall spending. While the U.S. Department of Health and Human Services (HHS) boasts that it sees a $5 return on every $1 it puts toward fraud and abuse investigations, that number indicates that the government may be underinvesting in those efforts.39
Administrative costs for health care providers
A number of studies have focused on the administrative costs borne by providers. Beyond BIR expenses, hospitals, physician practices, and other health care institutions house departments that are complementary to clinical services such as medical libraries, public relations, and accounting.40 A study of administrative costs in California found that administrative costs represented about one-quarter of physician revenue and one-fifth of hospital revenue, and BIR costs accounted for roughly half of administrative expenditures for physician and hospital services covered by private insurance.41 (see Figure 2) In a separate study, Himmelstein and others reported that one-quarter of U.S. hospital spending went toward administration; they found little difference between nonprofit hospitals and for-profit institutions, where administrative spending was 25 percent and 27.2 percent of total spending, respectively.42
On a per-encounter basis, BIR costs vary as a proportion of overall cost depending on the type of visit. In a 2018 study of an academic health care system, Phillip Tseng and others found that professional billing costs amounted to $20.49 for a primary care visit, $61.54 for an emergency department visit, and $124.26 for a general inpatient stay.43 Relative to the professional revenue associated with each encounter studied, the emergency department visit ranked the highest, with billing costs equal to 25.2 percent of revenue. Inpatient visits were the lowest, at 8 percent of a general inpatient stay and 3.1 percent for inpatient surgery.44 Encounters involving hospital care incurred additional facility-level billing costs. (see Figure 3)
In addition to the dollar cost of BIR activity, the study also reported the time spent on administration for typical encounters. The average processing time was 13 minutes for a primary care visit, 32 minutes for an emergency department visit, and 73 minutes for a general inpatient stay.45
Among other research on provider BIR costs, a 2009 study by Larry Casalino and others estimated that the cost of the time physicians spend on interactions with health plans is about $23 billion to $31 billion per year.46 A 2011 study by Dante Morra of the University of Toronto and others estimated that interaction with payers costs the equivalent of $22,205 per physician annually in Canada and $82,975 per physician annually in the United States, suggesting that the United States would save $27.6 billion annually if U.S. administrative costs could be brought down to Canadian levels.47
As with BIR costs, provider administrative costs in the United States are higher than those in other comparable countries. Hospital administrative costs in the United States far exceed those of other nations. In their comparison of hospital administrative costs among eight Western nations, Himmelstein and co-authors found that the United States had the highest levels, at 25.3 percent of total hospital expenditures.48 They conclude that in nations where hospital administrators have minimal responsibilities for procuring financing and where the hospital reimbursement system is least complex, administrative costs can be reduced to 12 percent of expenditures.49 These findings suggest that reforms that introduce global budgeting or limit the need to bargain with multiple payers could potentially bring down excess hospital administrative costs in the United States.
Lower administrative costs in single-payer and multipayer systems
Although administrative costs contribute to the high expenditures in the United States, they are not the primary reason for the health care spending gap. As economist Uwe Reinhardt and others candidly put it, “It’s the prices, stupid.”50 The United States pays more for care than other countries do—both for administrative services and for other components of health care.
Policies that target administrative costs alone would not necessarily bring overall U.S. health care expenditures in line with other countries. As economists Sherry Glied and Adam Sacarny observed, “there are very substantial variations in administrative costs among countries with universal health insurance, which do not translate directly into variations in overall costs.”51Comparative evidence from U.S. states also suggests that America’s multipayer system explains some, but by no means all, of the discrepancy between the United States and other developed nations. Harvard University researchers Joseph P. Newhouse and Anna Sinaiko observe that “there is considerable variation across the states in spending levels, with the lowest quintile of states spending approximately the same percentage as the higher spending OECD countries other than the U.S. This implies that the [United States’] pluralistic financing system may not be an important cause of the large percentage of GDP that the U.S. devotes to health care.”52
Systemwide reforms to lower administrative costs
Health care financing experts believe that changes to how Americans pay for coverage could dramatically reduce administrative costs. Researchers simulating the effects of single-payer programs have assumed that administrative costs would be brought down substantially. The Urban Institute set administrative costs at a “plausible” 6 percent of health care claims for their simulation of the single-payer plan proposed by Sen. Bernie Sanders (I-VT), noting that they “do not believe that administrative costs can fall far below this level; far too many administrative functions must be conducted.”53 In its analysis of a single-payer system for New York state, the RAND Corporation assumed administrative costs at 6 percent of total health expenditures in its base case, representing a reduction from 18 percent among commercial insurers and 7 percent in New York’s Medicaid program. RAND specified administrative costs at 13 percent and 3 percent in its alternative scenarios. 54 In a separate column, however, RAND researcher Jodi Liu cautioned that achieving the administrative expenditure levels of other countries “may be aspirational and is not guaranteed” under a single-payer system.55
Exactly how such lower costs could be achieved is another question. Reducing BIR costs requires simplifying the billing and payment process, which could be accomplished in a number of ways. Two avenues for reducing administrative costs as well as overall health costs are global budgeting and uniform rate-setting.56 These two concepts are central to health systems around the world and are also responsible for keeping administrative costs lower, whether a country has a multipayer or single-payer system. Another paperwork-reducing option would be a centralized claims clearinghouse to allow providers to submit all claims to a single entity, as they do in Germany and Japan. 57
All-payer rates and global budgeting
Setting all-payer reimbursement rates would eliminate the need for providers to negotiate rates with individual private insurers, while also giving policymakers better leverage for controlling overall health care cost growth. In the current U.S. system, providers charge different rates to different payers, and the billing process is complicated and opaque. The list prices that hospitals are now required to publish bear little connection to what individual patients—or those patients’ insurers—actually pay.58 Setting all-payer rates would simplify billing and improve transparency by establishing a single set of rates for each provider, while also giving regulators a tool to protect consumers from exorbitant rates.59
Global budgeting—the practice of paying providers revenue based on their expected costs—also holds promise for both lowering administrative spending and overall costs. As opposed to traditional fee-for-service payments, which reward providers for doing more, global budgeting incentivizes providers to deliver care more efficiently.60 Global budgeting is a feature of many countries with much lower health care administrative costs, including Scotland, Wales, and Germany.61 As Woolhandler, Campbell, and Himmelstein point out in their 2003 article, “The existence of global budgets in Canada has eliminated most billing and minimized internal cost accounting, since charges do not need to be attributed to individual patients and insurers.”62 As Germany shows, both single-payer and multipayer systems can use global budgets.
A system combining all-payer rates and global budgeting is already partially in place in the state of Maryland, where each hospital has a single set of rates it bills to Medicare, Medicaid, commercial insurers, and other payers. Maryland’s system is keeping overall cost growth lower than the national trend.63 According to RAND analysis of hospital costs, Maryland hospitals have administrative costs that are 9 percent lower than the national average and not far off from the 13 percent savings RAND assumed providers would achieve under a single-payer system. 64
Centralized claims processing
Germany and Japan both have multiple payers but centralized claims processing.65Despite having more than 3,000 health plans,66 Japan’s administrative expenditures were a stunningly low 1.6 percent of overall health care costs in 2015, one of the lowest among OECD member nations.67
In their analysis of three universal health care options for Vermont, including single payer, researchers William C. Hsiao, Steven Kappel, and Jonathan Gruber estimated substantial savings from administrative simplicity from each option. The two single-payer options they examined would result in even greater administrative savings of between 7.3 percent and 7.8 percent, depending on the rate-setting mechanism.68 The group estimated that a third scenario, which would establish a centralized claims clearinghouse while allowing multiple payers, could generate savings equal to 3.6 percent of total expenditures.69This suggests that about half of the total administrative savings from a single-payer system could be obtained within a regulated multipayer system.
Policy proposals directed at administrative costs
While major changes to the U.S. health care system have the greatest potential to bring down costs, more incremental changes could reduce administrative waste. A recent bill proposed by Sens. Bill Cassidy (R-LA) and Tina Smith (D-MN) would direct the HHS secretary to set goals to cut “unnecessary costs and administrative burdens” throughout the health care system by 50 percent over the next 10 years. It would also provide grant money for state-based efforts to bring down administrative costs.70Some possible avenues for achieving those kinds of reductions include changes to payment rules, improvements to facilitate electronic record-keeping and information exchange, and simplification of public insurance programs.
In their 2009 article in TheNew England Journal of Medicine, David Cutler, Elizabeth Wikler, and Peter Basch proposed one such package of reforms. The authors estimated that providers could save $17.9 billion to $23 billion annually with several, more incremental changes to the system, including greater adoption of EHR systems; integrated administrative and clinical systems; national and standardized reporting requirements and credentialing of providers; streamlined enrollment in public insurance programs; and greater automation.71 In a separate report, the same authors proposed additional reforms that they estimated could reduce excess administrative costs by $40 billion, or 25 percent of total health care expenditures.72
In a 2010 study published in Health Affairs, Bonnie B. Blanchfield and other Massachusetts researchers concluded that the administrative burden on physician organizations could be reduced by a “single transparent set of payment rules for a system with multiple payers.” The authors recommended that the United States adopt “a standard set of payment requirements, increased payment-rule transparency, standardized forms, and a standard set of data exchange requirements.” Doing so could save $7 billion in billing costs for physician and other clinical services, according to the authors’ estimates.73
Although estimates vary, a large body of evidence shows that the United States is spending about twice as much as needed on the administration of health care. Other nations enjoy world-class health care systems while spending a fraction of what the United States does on governance, billing, and insurance.
A structural overhaul of how health care is financed and priced that includes key features of other countries’ systems—whether one payer or many—would go a long way toward eliminating excess administrative costs. Simplifying the payment system should be an essential part of future health reform and would make the U.S. system work better for taxpayers and patients alike.
The shift in health care from volume-based, fee-for-service to value-based reimbursement (VBR) continues to push forward. In its wake, unintended consequences and new challenges have emerged — not only in aspects of delivery but also when determining fair market value (FMV) and remaining compliant with the federal Anti-Kickback Statute and the Stark Law. Below we touch on those consequences and how they’ve emerged from both new and old regulations.
The New: MACRA
Now in play, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) promises to fundamentally change the way the country evaluates and pays for health care. Its new payment schedules, however, have created ramifications that not only tangle the hospital-physician relationship but also create implications for VBR transactions and valuations.
As part of the transition to value-based medicine, four new MACRA elements in particular represent significant changes:
1. Pay for Performance (P4P) Arrangements: The remuneration system makes part of payment dependent on performance, measured against a defined set of criteria, and creates measurements and performance standards for establishing target criteria.
2. Shared Savings Arrangements: The new approach incentivizes providers to reduce health care spending for a defined patient population by offering a percentage of net savings realized as a result of their efforts.
3. Episodic Payments: An episode payment system offers a single price for all the services needed by a patient for an entire episode of care; for example, all the inpatient and outpatient care needed following a heart attack. The intent is to reduce the incentive to overuse unnecessary services within the episode. It also gives health care providers the flexibility to decide what services should be delivered rather than constraining them by fee codes and amounts.
4. Global Budget: With a fixed prepayment made to a group of providers or to a health care system (as opposed to a health care plan), this arrangement covers most or all of a patient’s care during a specified time period.
Clearly the value equation is shifting. Value is defined no longer solely by how much revenue a physician generates but rather by solving problems for patients and patient experience. Value can also be derived not by revenue per patient, but by how many patient lives a physician directs, and with that comes control over how some payments are allocated for patient related services.
As the value dynamics change, hospitals have sought to establish closer relationships with physicians. Acquisitions of physician practices by hospitals have continued at dramatic rates alongside the move toward direct physician employment and provider service agreements. New players in the market and marketplace forces have also emerged as competition to hospitals. Private equity groups and insurance companies are pursuing the acquisition of physicians and clinics for control of patient lives, and therefore revenue.
While the trend toward hospital-physician alignment is intended to improve health care delivery, it has come under scrutiny for potential fraud and abuse violations due in part to established laws that now appear at odds with the new VBR movement.
The Old: Anti-Kickback Statute and Stark Law
Health care organizations, providers and their counsels are well aware of the laws in place they must abide by, namely the Anti-Kickback Statute (AKS) and the Stark Law, which have been in force for more than three decades.
Such regulatory considerations related to fraud and abuse have long had significant impact on the value attributable to each property interest and on the valuation process itself. There are in fact several distinct meanings of fraud within the context of the health care regulatory framework, and they affect a property’s profitability and sustainability, creating significant risk and uncertainty for business entities.
What constitutes fraud, however, is now under the microscope and creating potential liability under the False Claims Act. The new direction of collaborative relationships on behalf of the patient and patient outcomes can make some arrangements suspect. How do physicians refer patients in the new MACRA environment without it being considered a conflict of interest or fraudulent? How will payments made to physicians not exceed the range of FMV and be deemed commercially reasonable? How can alignment strategies be constructed to provide a full continuum of care under VBR reforms?
While there have been no changes to the longstanding regulations, discord between the old laws and the new VBR direction is necessitating a different approach to compliance. The American Hospital, in a letter to the U.S. Senate Finance Committee in a hearing on the Stark law, said, “As interpreted today, the two ‘hallmarks’ of acceptability under the Stark law — fair market value and commercial reasonableness — are not suited to the collaborative models that reward value and outcomes.”
The Ugly: The Push and Pull of the New and the Old
The friction between the enforcement of fraud and abuse laws by the Department of Justice and the Office of the Inspector General, and the VBR models being implemented by Health and Human Services is warranting a review of MACRA and the threshold and definition of commercial reasonableness. With no one clear definition of commercial reasonableness, its analysis is ripe for distortion.
Many regulators’ arguments are centered around Practice Loss Postulate (PLP) — that the acquisition of a physician practice that then operates at a “book financial loss” is dispositive evidence of the hospital’s payment of consideration based on the volume and/or value of referrals.
The problem? In maintaining the economic delineation between physicians and hospitals, the PLP focuses exclusively on immediate and direct financial (cash) returns on, and returns of, investments by health care organizations related to vertical integration transactions. The PLP ignores other economic benefits associated with vertical integration, such as social benefits, qualitative gains, efficiency gains and avoiding costs.
As a consequence, such a vertical integration move could be viewed by regulators as evidence of legally impermissible referrals under the Stark law. However, it would prevent vertically integrated health systems from withstanding fraud and abuse scrutiny. And it would create barriers to satisfying the threshold of commercial reasonableness.
More “New” Is in the Future Forecast
Active industry input and congressional committee discussion is underway in hopes of generating workable strategies to reduce the law’s burden. And although the actual outcomes are uncertain, changes are clearly ahead.
If you wanted to get control of your household spending, you’d set a budget and spend no more than it allowed. You might wonder why we don’t just do the same for spending on American health care.
Though government budgets are different from household budgets, the idea of putting a firm limit on health care spending is far from unknown. Many countries, including Canada, Switzerland and Britain, pay hospitals entirely or partly this way.
Under such a capped system, called global budgeting, a hospital has an incentive to deliver less care — including reducing hospital admissions — and to increase the efficiency of the care it does deliver.
Capping hospital spending raises concerns about harming quality and access. On these grounds, hospital executives and patient advocates might strongly resist spending constraints in the United States.
That brings us to Maryland’s experience with a capped system. The evidence from the state is far from conclusive, but this is a weighty and much-watched experiment for health researchers, so it’s worth diving into the details of the latest studies.
Starting in 2010 with eight rural hospitals, and expanding its plan in 2014 to the state’s other hospitals, Maryland set global budgets for hospital inpatient and outpatient services, as well as emergency department care. Each hospital’s budget is based on its past revenue and encompasses all payers for care, including Medicare, Medicaid and commercial market insurance. Budgets for hospitals are updated every year to ensure that their spending grows more slowly than the state’s economy.
Because physician services are not part of the budgets, there is an incentive to provide more physician office visits, including primary care. According to some reports, Maryland hospitals are responding to this incentive by providing additional support outside their walls to patients who have chronic illnesses or who have recently been discharged from a hospital. Greater use of primary care by such patients, for example, could reduce the need for future hospital admissions.
In 2013, early results found, rural hospital admissions and readmissions were both down from their levels before the system was introduced.
In the first three years of the expanded program, revenue growth for Maryland’s hospitals stayed below the state-set cap of 3.58 percent, saving Medicare $586 million. Spending was lower on hospital outpatient services, including visits to the emergency department that do not lead to hospital admissions. In addition, preventable health conditions and mortality fell.
According to a new report from RTI, a nonprofit research organization, Maryland’s program did not reap savings for the privately insured population (even though inpatient admissions fell for that group). However, the study corroborated the impressive Medicare savings, driven by a drop in hospital admissions. In reaching these findings, the study compared Maryland’s hospitals with analogous ones in other states, which served as stand-ins for what would have happened to Maryland hospitals had global budgeting not been introduced.
But a recent study, published in JAMA Internal Medicine, was decidedly less encouraging.
Led by Eric Roberts, a health economist with the University of Pittsburgh, the study examined how Maryland achieved its Medicare savings, using data from 2009-2015. Like RTI’s report, it also compared Maryland hospitals’ experience with that of comparable hospitals elsewhere.
However, unlike the RTI report, Mr. Roberts’s study did not find consistent evidence that changes in hospital use in Maryland could be attributed to global budgeting. His study also examined primary care use. Here, too, it did not find consistent evidence that Maryland differed from elsewhere. Because of the challenges of matching Maryland hospitals to others outside of the state for comparison, the authors took several statistical approaches in reaching their findings. With some approaches, the changes observed in Maryland were comparable to those in other states, raising uncertainty about their cause.
A separate study by the same authors published in Health Affairs analyzed the earlier global budget program for Maryland’s rural hospitals. They were able to use other Maryland hospitals as controls. Still, after three years, they did not find an impact of the program on hospital use or spending.
Changes brought about by the Affordable Care Act, which also passed in 2010, coincide with Maryland’s hospital payment reforms. The A.C.A. included many provisions aimed at reducing spending, and those changes could have led to hospital use and spending in other states on par with those seen in Maryland.
A limitation of Maryland’s approach is that payments to physicians are not included in its global budgets. “Maryland didn’t put the state’s health system on a budget — it only put hospitals on a budget,” said Ateev Mehrotra, the study’s senior author and an associate professor of health care policy and medicine at Harvard Medical School. “Slowing health care spending and fostering better coordination requires including physicians who make the day-to-day decisions about how care is delivered.”
A broader global budget program for Maryland is in the works. The U.S. Centers for Medicare and Medicaid Services is reviewing a state application that commits to global budgets for Medicare physician and hospital spending. An editorial that accompanied the JAMA Internal Medicine study noted that a few years may be insufficient time to detect changes. It suggests that five to 10 years may be more appropriate.
“Maryland hospitals are only beginning to capitalize on the model’s incentives to transform care in their communities,” said Joshua Sharfstein, a co-author of the editorial and a professor at the Johns Hopkins Bloomberg School of Public Health. “This means that as Maryland moves forward with new stages of innovation, there is a great deal more potential upside.” As former secretary of health and mental hygiene in Maryland, he helped institute the Maryland hospital payment approach.
Global budgets are unusual in the United States, but their intuitive appeal is growing. A California bill is calling for a commission that would set a global budget for the state. And soon Maryland won’t be the only state using such a system. Pennsylvania is planning a similar program for its rural hospitals.
Can this system work across America?
How much spending control is ceded to the government is the major battle line in health care politics. An approach like Maryland’s doesn’t just poke a toe over that line, it leaps miles beyond it.
But the United States has been trying to get a handle on health care costs for decades, spending far more than other advanced nations without necessarily getting better outcomes. A successful Maryland experiment could open an avenue to cut costs through the states, perhaps one state at a time, bypassing the steep political hurdle of selling a national plan.
A statewide experiment aims to test new payment systems, prevent unnecessary treatments, and constrain overall growth in the cost.
Tiny — and very blue — Vermont could be at the leading edge of the health reforms envisioned by the Trump administration and a Republican Congress.
The Green Mountain State, population around 626,000, got a broad waiver last October from the federal government to redesign how its health care is delivered and paid for. The statewide experiment aims to test new payment systems, prevent unnecessary treatments, constrain overall growth in the cost of services and drugs, and address public health problems such as opioid abuse.
The six-year initiative — an outgrowth of a failed attempt by Vermont a few years ago to adopt a single-payer plan for all residents — could eventually encompass almost all of its 16 hospitals, 1,933 doctors and 70 percent of its population, including workers insured through their jobs and people covered under Medicare and Medicaid.
The Obama administration approved the experiment, but it fits the Republican mold for one way the Affordable Care Act could be replaced or significantly modified. The Trump administration and lawmakers in Congress have signaled that they want to allow states more flexibility to test ways to do what Vermont is doing — possibly even in the short-term before Republicans come to an agreement about the future of the ACA.