Advice to the governor: Tough medicine

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Health care spending is back at the top of the agenda in Massachusetts, and addressing it must be a top priority of the next governor. Four years ago, the state made a historic commitment to expand insurance coverage to nearly all citizens of the Commonwealth. Last spring, the federal government made a similar commitment with passage of the Patient Protection and Affordable Care Act. Both state and federal governments, however, face intense pressure to limit budget growth, and are already setting tight limits on Medicare and Medicaid payments.

Over the past decade, health care providers have made up for continuing public program shortfalls by negotiating higher rates from private insurers. But if premiums continue growing rapidly, companies will shift more costs to their employees and some will drop coverage altogether, increasing the public sector’s cost of covering uninsured workers. The danger of such a cycle is that the hard-fought gains in health insurance coverage the state has achieved could unravel. This danger is very real. If premiums grow as fast over the next decade as they have during the past one, the cost of family health insurance in Massachusetts would more than double from $14,700 today to more than $30,000 by 2019.

The impact of unrestrained spending growth goes far beyond its effect on insurance coverage. In Massa­chu­setts, health care spending has grown from 21 percent of the state budget in 2000 to 34 percent today, squeezing our ability to adequately fund vital areas such as education, infrastructure needs, and local aid. The national debt burden is higher now than at any time since the 1950s, and Medicare and Medicaid are principal drivers of future growth in federal spending and projected deficits that threaten the nation’s long-term prosperity. More immediately, health spending is a main culprit behind stagnant growth in worker take-home pay. Although there is gridlock in Washington, the Commonwealth cannot afford to postpone bold action.

The first thing needed is an unambiguous signal that business as usual will not continue. We propose that this signal come through establishment of a statewide global budget that sets a limit on total health care spending. Both the state and its health care organizations need time to prepare, so we propose a three-year planning period before such a budget goes into effect. The state should not try to micromanage the health care system. We propose a structure that would give health care providers flexibility to determine how they will manage costs and im­prove quality within overall spending growth limits and defined quality goals. A critical element of our proposal is changing the current method of paying for health care services to one that re­wards organizations for improving quality and efficiency.

Today health care providers are predominantly paid on a fee-for-service basis. If governments impose price controls, the rational response is to increase the volume of profitable services and reduce the volume of unprofitable services—things like psychiatric care, primary care, and trauma services. This is already happening in Medicare, where a near 10-year freeze in physician fees has been accompanied by rapid growth in imaging, testing, and discretionary procedures. Across the board cuts in fee-for-service payments will reduce access and hurt quality if pursued for any sustained time period. What’s more, the burden of such cuts would fall heavily on the Common­wealth’s most vulnerable citizens.

Nevertheless, we must move towards more sustainable health care spending growth rates. The question is, how and how quickly. Some believe that the state should adopt market-based solutions while others want stronger regulation. Over the past 40 years, however, market competition has driven up spending, while attempts at regulation have not been effective. Health care competition has focused on revenue generation rather than efficiency or value because of market failures: information asymmetry (consumers have very little useful information on the cost and quality of health care providers and services), insurance design (individuals are shielded from the true costs of their health care choices), and fee-for-service payments (which lack incentives for efficiency and reward good quality and poor quality equally). Given the persistence of these problems, regulation begins to look attractive. But skeptics are rightly concerned about asking an underfunded state bur­eaucracy to manage a highly complex enterprise that represents nearly one-fifth of the Massa­chusetts economy.

We believe the state should resist the temptation of short-term price regulation that does not change the fundamental incentives in fee-for-service medicine. Instead, we urge the state to encourage health care payment reforms and simultaneously promote development of provider networks capable of delivering reliable, evidence-based care within realistic budgets. Such networks have been shown to provide more appropriate patient care while maintaining or enhancing its quality. If future spending levels are constrained, approaches such as “bundled payments” for episodes of care (e.g., heart surgery) or “global payments” that cover all care for an individual over a specific time period allow health systems to reduce avoidable hospitalizations, provide care in less costly settings, and limit un­necessary testing without incurring financial losses.

While we do not support short-term price controls, we are not optimistic that most providers or insurers will make the hard choices needed to establish quickly these more efficient delivery and financing models unless they face a real threat of reduced revenues under the present system. Therefore, we recommend that the governor lead the state towards a two-step process. First, the state should immediately invest in an infrastructure that will address some of the above mentioned market failures and facilitate a transition of the delivery system to a more integrated model. Second, if the private sector does not show meaningful reductions in spending growth within three years, a state established all-payer global budget system should begin to phase in. This second phase would go into effect automatically but could be stopped by specific legislative action. To implement this strategy, we propose that the Legislature establish an independent Massachu­setts health care authority.

The Health Care Authority

The new authority must be independent, insulated from politics, trusted by stakeholders, and adequately funded. We propose a model based on the Federal Reserve, with a board appointed by the governor and approved by the Legislature. Neither board members nor authority staff could be state employees, although the secretary of health and human services and secretary of administration and finance would serve on an ex-officio basis. Board members would be selected based on their knowledge of health care systems, clinical operations, actuarial science, and economics, and would be drawn from a national pool of experts. The authority would convene a separate advisory committee made up of Massachusetts providers, payers, employers, state officials, and consumer advocates. The authority would need a budget that is protected and subject to appropriation only every five years. Similar approaches are now in operation at the federal level (MedPAC) and in Maryland, the one state with an all-payer regulatory system.

Phase I: Analysis, Infrastructure Development, and Initial Payment Reforms

During its first three years, the authority would be charged with developing a robust capacity for monitoring the health care system. The Legislature has already ex­panded the state’s authority to collect data from providers and insurers, build a statewide claims database, produce analytic reports, and hold cost trend hearings. More work is needed to transform these data into actionable information. The authority would construct formal state health expenditure accounts to provide an accurate picture of aggregate state spending, conduct detailed evaluations of quality and efficiency by provider group, clinical service, payment model, and geographic region, and publish reports showing pro­vider group performance against key goals.

Also during its first three years, the authority would en­courage payment reforms by organizing pilots, evaluating programs, and providing targeted infrastructure support for medical groups. Last year, a state commission recommended that global payment—a risk-adjusted monthly payment per person covering all health care services—become “the predominant form of payment to providers in Massachusetts within five years.” Although global payment is our preferred model, full implementation of this goal is impractical because of the wide variation in the capacity of provider groups to accept risk and manage population health. The state could encourage expanded episode payment and global payment contracting by offering it as an option to MassHealth providers and through the state employee benefit program. We prefer a more flexible “tiered” approach that includes global payment as a principal option. Finally, the authority should encourage benefit redesign that aligns employer and consumer incentives with those of the delivery system to promote cost-effective, high quality care in appropriate settings.

Phase II: Statewide Global Health Care Budget

The authority’s final charge would be to develop a global budget model that would include Medicare and Medicaid as well as all private payers. A draft of the model should be completed during the three years of Phase I. The authority would begin implementing the all-payer global budget system in Phase II unless the Legislature acts to delay it. The model we propose is intended to encourage innovation in provider payment and delivery combined with rewards for quality within an overall health spending target. One option is to allow providers to participate in one of three tiers based on criteria developed by the authority. Tier 1 would be for fully integrated delivery systems or ACOs (accountable care organizations) that agree to accept risk-adjusted global payments (at rates determined with each payer group). Tier 2 would be networks of separate health providers that agree to work together. Each network would face a predetermined budget cap. Subgroups within the networks could continue to be paid under a fee-for-service system or accept other approaches such as episode payments. These groups would share annual budget surpluses and losses with payers. Tier 3 would be a residual fee-for-service model where each provider or provider group operates independently. All Tier 3 providers collectively would be held accountable to stay within a predetermined spending cap. Excess spending would result in future fee reductions for all Tier 3 providers.

The budget cap for each tier and for specific networks in Tier 1 and Tier 2 should be based initially on the historic revenue of each group. Some have argued that the state should “equalize” private payment rates in response to the attorney general’s report showing wide variance in provider payment rates. We believe that the politics of trying to do this could easily result in gridlock. Moreover, under the proposed system, higher priced providers will face significant pressure to demonstrate value in order to maintain referrals from other groups that are trying to manage within their own budgets.

While the system will need to recognize differences in rates paid by various payer groups, it should be cognizant of the growing imbalance between public and private payment levels. The authority must develop a Medicare waiver so that the incentives of the federal system are consistent with those in the private sector. Finally, the state should examine its Medicaid system, both to ensure consistency in design and to prevent its payment rates from falling too far from those of the other payers. A large differential poses serious problems, particularly for providers who care for a disproportionate share of Medicaid patients.

Annual budget growth rates would be established by the authority and would be the same for each tier. A portion of the overall increase—say 2 percent—would go into a fund for quality incentive payments and infrastructure support. Tier 1 providers would receive the bulk of quality incentive payments, Tier 2 would receive modest incentive payments, and Tier 3 would get a minimum allocation. The authority would also make some infrastructure grants to help groups implement data systems and medical management programs—as they aspire to move into more advanced tiers.

One of the greatest challenges for the authority will be determining the annual budget growth rate. Health spending has been growing considerably faster than the Com­monwealth’s rate of economic growth. This needs to change. But there is no “right” growth rate. If the authority sets the rate too high, health care organizations will not make tough decisions to eliminate waste and consumers will bear an expanding cost burden. If set too low, quality of care will suffer and institutions that are central to the Commonwealth’s economic and community fabric will deteriorate, jobs will leave the state, and medical and life sciences talent will become difficult to recruit and retain. Controlling health care spending is no simple task, and although the state must proceed with urgency it must not do so with haste. We have tried to propose a framework for whoever assumes the gubernatorial reins that creates urgency for action, allows room for health system innovation, and builds an information infrastructure that will support evidence-based policy making. These are essential elements for success regardless of the philosophical direction of the next administration.

Stuart Altman is a professor of national health policy at Brandeis University and was co-chairman of the Governor’s Health Care Task Force for the Commonwealth of Massachusetts from 2000 to 2002. Robert Mechanic is a senior fellow at the Heller School of Social Policy & Management at Brandeis and executive director of the Health Industry Forum.