Prior to the 1980s hospitals were reimbursed on the basis of their costs, so management’s focus was on having the beds and equipment necessary to maximize occupancy.  Physicians were  the principle customers, and hospitals attracted them by providing the amenities and resources they needed to admit and manage their patients. 

 The shift in the 1980’s from a cost recovery to prospective payment system changed that approach.  With the introduction of a single payment to cover an entire episode of care, hospitals had an incentive for shorter lengths of stay and more efficient use of resources.  Administrators began shifting their attention from providing physician-friendly amenities to the operational efficiency of the hospital units and process that supported physician decision-making.  This new approach emphasized optimizing the use of diagnostic and therapeutic assets employed in care delivery. Patient care decisions, however, remained the exclusive province of the physician.  What mattered was the efficient use of the hospital’s resources; the physician decisions that created the demand for those resources were not actively managed. 

 With the growing public and regulatory emphasis on patient safety and outcomes, a third and more transformational management paradigm has begun to emerge.  Hospitals are beginning to acknowledge that the organization’s core business is the actual delivery of medical care.  This is creating a shift in management’s focus to the clinical decisions that determine the resources a patient will utilize and the path he will take as he moves through the hospital.  This disease-focused approach requires that management become more involved in the decisions made by physicians that define the care an individual patient receives.  Measuring patient outcomes and holding physicians accountable for the cost and quality of care they deliver are becoming key management competencies.

 This evolution in the focus of hospital management and the changing role of the physician over the past 40 years is summarized in the table below.

 Very few hospitals remain in the pre-1980s Stage I paradigm.  Most are currently in Stage II, but beginning to prepare for the transition to Stage III.  A few, e.g., Intermountain Healthcare, the Mayo Clinic, Cleveland Clinic and similar organizations, have fully embraced Stage III, though many more will in the decade to come.

The transition to Stage III will represent a challenge for many physicians.  Most of today’s practicing doctors have labored their entire career as members of a protected guild, organized around practice specialization and able to exercise fully independent decision authority.  As hospitals begin to assume increasing accountability for the cost and quality of patient care, physician independence and decision authority will become more constrained .  Doctors will still be responsible for patient care decisions, but subject to clinical protocols and decision rules collectively approved by the medical staff. 

 This will not be an easy transition for many physicians to make.  Success will require strong physician leadership capable of building consensus and creating a team-based approach to care.  Fortunately for healthcare, these physician leaders are beginning to emerge and assume a more pivotal role in hospital and health system decision-making. 

John F. McCracken, PhD

The objective of the 2010 Accountable Care Act was to extend health insurance to millions of uninsured Americans.  It attempts to achieve this by prohibiting insurers from denying coverage to individuals with pre-existing conditions (guaranteed issue) and from varying premiums based upon an individual’s health status (community rating).   To minimize potential adverse selection, the Act requires individuals to purchase insurance subject to a tax-penalty and requires employers with more than 50 FTEs to offer group health insurance or face a penalty.   The act also provides for premium and cost-sharing subsidies to individuals and small groups who purchase insurance through a state-level Health Benefits Exchange.

There are growing signs, however, that the cumulative effect of these provisions, once fully implemented in 2014, will lead to a significant increase in health insurance premiums.  Health insurers are privately warning brokers and agents that premiums for many  individuals and small businesses could increase by 25% to 60%, with the largest increases facing younger individuals.  A March report by the Society of Actuaries warned that over 40 states could see double digit increases in premiums in 2014-15, with an average increase of 32% nationwide by 2017. There are a number of reasons this could happen.

Individual and small group health insurance plans will have to meet new minimum benefit standards starting next year.  A recent analysis by HealthPocket, Inc. indicates that fewer than 2% of the existing health plans in this market provide all of the essential health benefits required by the Act.  On average, existing plans provide 76% of the mandated benefits, including hospitalization, emergency care and ambulatory services.  The missing 24% is concentrated around high cost services like substance abuse and mental health  coverage, maternity benefits, and children’s dental and vision care.  These  services will have to be added to existing plans, subject to the strict ACA actuarial value requirements on the maximum out-of-pocket costs that can be charged to beneficiaries.  The result will be upward pressure on premiums.

A second inflationary factor is the requirement for guaranteed issue and community rating, which taken together create a perverse incentive for young healthy people to refrain from purchasing health insurance until they actually need it.  If this occurs, the result would be adverse selection, with insurance pools comprised of a higher percentage of older, infirm and more costly policy holders.

The penalty-backed mandate to purchase insurance was supposed to counter this incentive. However, as noted in a recent article by law professor Thomas Lambert, the Supreme Court upheld the ACA by transforming the penalty into a tax for constitutional purposes.  The Court’s reasoning suggests that a penalty for failure to carry health insurance can count as a tax for constitutional purposes only if it is kept so small as to be largely ineffective.  In fact, Lambert shows that the penalty for 2016 and beyond (when it reaches its maximum limit) is significantly lower for household incomes above $45,000 than would be the cost of insurance.  Given this calculus, a rational response for healthy individuals would be to pay the penalty and wait to purchase insurance until it is actually needed.

A final warning sign is the recent CMS announcement that it has suspended enrollment in the Pre-Existing Conditions Insurance Plan (PCIP).  The PCIP program had a budget of $5 billion and was supposed to be able to insure up to 375,000 high-risk individuals until they could buy their own policies on the exchanges beginning in 2014.  Since beginning in 2010, it has enrolled only about 35% of that target, but nevertheless has exhausted all of its funds because the costs per person were so much higher than expected.  When these individuals, plus others like them from state high-risk pools, are moved into the individual market in 2014 it could easily contribute to  “sticker shock” that will keep young, healthy people out of the insurance market.

Collectively, these factors should be viewed as warning signs that the commercial health insurance markets will soon face a period of high uncertainty, putting upward pressure on the cost of individual and small group coverage.   HHS Secretary Kathleen Sebelius has admitted that “some individuals will face higher premiums,”  but argued that individual subsidies provided for in the Act will cushion the blow.  This only addresses who will pay, however, not what the cost will be.  Whether through higher federal deficits or greater out-of-pocket payments, the cost must still be paid.

John McCracken, PhD

Trend #1  The pace of physician realignment and consolidation will accelerate. Physicians looking for stability, administrative support and a more accommodating lifestyle will seek employment with large practice groups, hospitals and health systems.  This trend is particularly pronounced among younger physicians.  A majority of graduate medical students completing residency programs this summer will choose to become employed by hospitals.

In anticipation of new models of care delivery, hospitals are actively strengthening their relationships with physicians through employment, EMR financing and shared savings programs.   The independent medical staff model is rapidly giving way to physician-hospital integration and employment.   This trend is well advanced in most metropolitan medical markets and is now beginning to take hold in ex-urban and rural markets as well.

There is a downside to physician-hospital consolidation, however.  Extensive research shows that consolidation is a major driver of price increases, and is also associated with significant payment variation in markets for both hospital and physician services.  Though there are potential benefits in the form of economies of scale,  improved care coordination and correlated quality improvement, it is historically true that greater provider market power has always led to higher prices.

Trend #2   The evolution of new models of care reimbursement and delivery will accelerate, including bundled and episode based payments, accountable care organizations and patient-centered medical homes.  This trend will be reinforced by cuts in Medicare and Medicaid reimbursement and by private payers responding to coverage and affordability requirements imposed by the Accountable Care Act.

At the end of January, CMS announced that over 500 organizations will be participating in its Bundled Payments for Care Improvement  (BPCI) initiative.  The initiative seeks to change the traditional Medicare fee-for-service model to a bundled payment reimbursement for a single episode of care.  It offers four different payment models covering 48 specific episodes of high-cost care, such as stroke, diabetes and chest pain.  The fourth model, which is where CMS is heading, provides for a single, bundled payment to hospitals for all services, including physician services, provided during an inpatient stay and related re-admissions for up to 30 days after discharge.

Trend #3  Private payers will react to rising costs and state caps on insurance premium increases by aggressively pursuing tiered, narrow and high performance provider networks and less costly delivery sites, such as post acute versus acute care facilities.  This trend will be bolstered by growing employer demand for narrower networks  as a cost-containment strategy. The effect will be to reduce the negotiating strength of dominant and high-cost providers in a given market area.

At the same time they are pursuing a narrower network strategy, private payers will also be seeking to shift more financial risk to network providers through global budgets and population-based payment models.   Managing this risk will require both infrastructure investment and new practice patterns on the part of providers.  The requisite organizational changes will be disruptive, and in the short-run lead to increased  provider conflict.  This conflict is likely to be greater between primary care and specialists rather than between physicians and hospitals.

Trend #4  The original promise of health information technology to bend the cost curve and improve quality will remain unfulfilled.    It will not be fulfilled until four major obstacles are overcome: the lack of interoperability between systems, the inability of patients to easily access their data, user-unfriendly interfaces, and the failure of providers to re-engineer care processes to take advantage of the efficiencies offered by health IT.

The lack of interoperability reflects the absence of standardization in how encrypted health data is transmitted, which in large part results from competition among health IT vendors  to gain a dominant market share for their respective products.  This competition has also lead to non-standard user interfaces, which makes it difficult to intuitively learn a new system without extensive retraining.  Fortunately, the inability of patients to access and send their medical records in a standard format to a selected provider is addressed in the HITECH Act, which in 2014 will require EHR systems to provide such functionality in order to qualify for federal incentives.

The biggest obstacle to realizing the promise of health IT, however, is that provider care processes have yet to be re-engineered to take advantage of the efficiencies potentially offered by electronic health records.  This re-engineering is unlikely to occur until providers are forced to change to accommodate new care reimbursement models.

These four key trends—physician consolidation and employment, the evolution of new reimbursement models, efforts of private payers assemble narrower provider networks and shift financial risk, and the failure of health IT to realize its promise—will dominate the healthcare landscape in 2013.

John McCracken, PhD

Over the past four decades, healthcare spending has grown at a 35% faster rate than GDP, causing healthcare as a percentage of GDP to almost triple over the period.  The Congressional Budget Office projects that spending on healthcare services will consume 20% of GDP by the end of this decade.

Today, healthcare expenditures account for nearly all of the projected structural deficits at both the federal and state levels.  Excessive growth in healthcare expenditures is having serious economic consequences for the country, impacting state and federal debt, wage growth and unemployment.  These facts are not in dispute, nor is the conclusion that healthcare spending is on an unsustainable trajectory.  What is fiercely disputed, however, is what to do about it.

The problem arises from the fact that with consequential issues like healthcare, people’s moral position tends to shape their perception and evaluation of the facts.  We tend to weigh facts and evaluate lines of reasoning more favorably when they favor our own moral beliefs; and where our moral judgments come into conflict with the evidence, we look for ways to dismiss or minimize it.  The stronger is the moral belief, the stronger is this tendency.  A recent report by two professors from the University of California confirms this bias across a wide range of human situations.

There are two opposing moral judgments concerning healthcare.  It’s important to recognize that they are moral judgments, not subject to confirmation or refutation by facts:

1. Access to healthcare is a basic human right that must be actively assured and supported by government.
2. Access to healthcare is principally an individual responsibility, where government support is warranted only to the extent the individual is unable or incapable of self-providing a basic level of care.

Though there are many variations between these extremes, by and large these two opposing moral judgments shape the debate.  Proponents of the first tend to minimize or dismiss  evidence that greater government control leads to increasing misallocation of resources, or that self-reliance and personal accountability are important public virtues.  Advocates of the second tend to give little weight to how much information asymmetry in healthcare disrupts normal market functioning, or the human toll that barriers to access can create.

Neither side ignores the evidence presented by the other, they simply give it less weight than their own.   Both sides claim to be acting rationally, i.e., acting to produce the most favorable cost-benefit ratio.  In fact, each is weighting the evidence in a manner to bring their cost-benefit conclusions into line with their moral judgments.

Resolving differences of moral opinion is difficult enough, but when one’s moral opinion colors one’s view of the relevant facts, it becomes almost impossible to enter into fruitful negotiations.  The only thing that can resolve this impasse is a true crisis that threatens systemic collapse.  Such a crisis would force competing positions to negotiate in good faith, recognizing and giving weight to opposing evidence.  Absent this compulsion, however, the side with the most political power will prevail; but because political power periodically shifts, no stable resolution is ever forthcoming.

On its current trajectory, healthcare is approaching such a crisis.  Given the increasingly precarious nature of the outlook for both U.S. and European economies and the  uncertain impact the Accountable Care Act is likely to have on health insurance markets, there is no shortage of potential catalysts.  It’s impossible to predict when the potential for systemic failure will rise to the level of the national agenda, or, or even the decade in which it will arise.  But the good news is that when it does, it will have a cathartic effect, and we can hope that  after an informed and intense national debate, a more stable, rational U.S. healthcare  system will emerge.

John McCraccken, PhD

On January 1 Washington faces both huge tax increases and numerous automatic spending cuts, collectively known as the Fiscal Cliff.  The Congressional Budget Office has estimated that absent Congressional action, it would have up to an $800 billion adverse impact on the economy in 2013.  Specifically, the Fiscal Cliff includes:

Tax  Increases

• The expiration of Bush-era tax cuts on income, investments, married couples and families with children and inheritances.  If the full package of cuts is allowed to expire, taxes are estimated to rise by an average of approximately $1,600 per household next year.

• Expiration of a 2% payroll tax holiday, first enacted in 2011 then extended through 2012.  If allowed to expire, it will increase the average household tax burden by $700.

• Expiration of the inflation adjustment “patch” to the Alternative Minimum Tax, which would extend the tax to an additional 26 million households, raising their taxes by an average of $3,700.

• Imposition of additional Medicare taxes provided for in the 2010 Patient Protection and Affordable Care Act.

• A variety of smaller taxes cuts for both businesses and individuals collectively known as tax ‘‘extenders’’ in Washington-speak. They include a tax credit for research and development and a deduction for sales taxes in states that don’t have an income tax.

Spending  Cuts

• Expiration of measures delaying the Medicare Sustainable Growth Rate Formula (the “doc fix”) from going into effect, resulting in an immediate 27% cut to Medicare physician payments.

• Implementation of automatic spending cuts provided for in the Budget Control Act of 2011 (sequestration), resulting in a $55 billion (9%) cut in defense spending next year and another $55 billion in cuts to domestic programs, including a 2% cut to Medicare providers, Medicare Advantage plans and Medicare drug plans. This is  over and above the 27% called for by the expiration of the doc fix.

• Expiration of extended  unemployment benefits for the long-term jobless, which will reduce eligibility from 93 back down to 26 weeks.

Looming over this Fiscal Cliff is the fact that the statutory $16.39 trillion federal debt ceiling will be reached by the end of this year.  Although the Treasury Secretary may use “extraordinary measures” to delay default for a limited time, by early spring Congress will once again have to raise it or face default on government obligations.

Congress has indeed painted itself into a corner, the result of attempting to postpone the day of reckoning for a long history of past actions.  But that day has now arrived.  Recognizing that they can’t deal with these issues one-by-one, political leaders are talking about a “grand bargain” combining higher taxes and money-saving changes to healthcare entitlement programs.

Medicare and Medicaid provider payments are unlikely to fare well in these negotiations.  Congress created this mess by kicking the can down the road and upon reaching the end of the road, hauling out the road-grading equipment and extending it.  But ballooning government deficits have made that approach increasingly unsustainable, and there is widespread recognition on both sides of the aisle that entitlements—principally healthcare—must be fundamentally reformed.  There is controversy over the preferred approach, but the common denominator is that the trajectory of government spending, i.e., provider payments, must soon be slowed.

The principal obstacle to a grand bargain is that America is more politically divided and polarized than at any time in the past half century.  In the recent election voters signaled that they are neither ready to slow the growth of government spending nor pay for it.  Over the past five decades, bipartisan consensus has always centered around dividing the fruits of an expanding, debt-fueled economy among political constituents.  But now America (as well as Europe) faces an era of deleveraging and entitlement downsizing, and prior promises will have to be scaled back.  This is a fundamentally new role for the nation’s political leadership, and to date they have provided no evidence that they are up to it.

The next six months will be messy, and the noise to signal ratio will rise dramatically.  Stay focused on the signal, and try to filter out the noise.  And keep the faith.

John F. McCracken PhD

Care improvement efforts conventionally begin with a search for an “evidence-based best practice,” as identified in peer-reviewed literature or as practiced at a recognized high-performing organization.  Once identified and (often) reduced to a computerized algorithm, improvement champions begin the difficult of trying to implement it through multiple layers of organizational resistance.  Sometimes through heroic effort these champions prevail, but more often than not they are ultimately worn down by the intractable resistance of colleagues unwilling to change.

This approach to quality improvement is based on an understanding of a healthcare organization (or system) as a machine or mechanical device that receives inputs, transforms them and produces outputs, such as improved health.   If the machine isn’t working efficiently, the response is to examine its parts and either repair or replace those that aren’t functioning properly, e.g., a flawed care protocol.  This is the most common metaphor for organizational redesign, and it’s the basis of the never-ending search for “best practices” that can be transplanted across organizations.

This machine metaphor leads to a common belief on how an organization can be improved:  if it’s not working as planned, repair or replace the broken part; if it costs too much, restructure it to achieve economies of scale; it its parts are not coordinated, tighten the interconnections.  While this model of a healthcare organization is recognized as a simplification of reality, it nevertheless shapes the way most practitioners and policy-makers think and act in their efforts to improve it.

An alternative metaphor is to think of a healthcare organization—particularly a large, multi-site organization—as a complex adaptive system (CAS).  A CAS can be characterized as a dense web of independent, interacting agents each operating from its own schema or mental model.  This is the “invisible hand” metaphor, which leads a collection of self-interested agents to organize into a well-formed structures that is not reflective of any single agent’s intention.  Both positive and negative feedback loops alter relationships among the agents leading to either change or stability.  Complex adaptive systems are context-dependent, thus each CAS is unique and responds differently to a given disturbance or intervention.

This perspective of complex adaptation is common in the study of biological systems, but has only been recently applied to the study of large, complex organizations.  Healthcare organizations are ideally suited for this approach due to their diversity of organizational forms, complex inter and intra-organizational relationships and feedback loops, and rapid pace of evolution.  In these respects they share many of the characteristics of complex biological systems.

If this metaphor more accurately characterizes large healthcare systems, it fundamentally alters the starting point for efforts at quality improvement.  Instead of attempting to import and promulgate a best practice algorithm, a more productive approach would be to identify and provide the system’s providers with data on those variables that are central to the organization’s goal, e.g., data on costs and outcomes required to improve value from the patients’ perspective.  The adaptive nature of the enterprise will take over from there as clinicians adjust their behavior in order to improve the data.

This is not to say that evidenced based protocols are not important—they most certainly are.   It is rather that they will organically evolve and become accepted as part of the organization’s adaptive response to hard evidence of the need for improvement.  Because complex adaptive systems are context-dependent, that path will be different for each organization.  An informative New England Journal of Medicine article by Thomas H. Lee, MD, describes the experience (and lessons learned) by Partners HealthCare System with this approach.

This approach to quality improvement will probably be a real stretch for most clinical faculty, who are deeply committed to subject matter expertise and the machine model metaphor.  Nevertheless, as Partners’ experience shows, approaching healthcare organizations as complex adaptive systems can result in significant and lasting improvement in the quality of care.

John F. McCracken, PhD

Replacement of Fee-for-Service

The first obstacle is the replacement of volume-based, fee-for-service (FFS) provider payments with comprehensive per capita prepayment that explicitly reward value creation.  FFS rewards doctors and hospitals for doing more and more costly services, and it positively discourages nontraditional but cost effective means of providing care that do not result in billable office visits, e.g.,  telemedicine, remote monitoring of health status,  group obesity counseling.  The physician who prevents the most costly medical problems or who addresses them early and inexpensively cannot prosper under FFS.  To the contrary, FFS actually rewards poor care or negative outcomes by earning providers additional payment.

Volume-based payment for production is deeply entrenched, however, even among the growing number of physicians that are ostensibly salaried, and there are formidable obstacles to replacing it.   The first is that there is an enormous industry investment in FFS infrastructure and billing systems, replacement of which would be highly expensive and very disruptive.  The second is that change will be vigorously opposed by organized and powerful hospitals and specialist physician groups who would see its replacement as a threat to their income.  Transforming care delivery into a high-performance, value-driven model will undoubtedly reallocate resources away from specialists and hospitals in favor of primary care.  The former have prospered under FFS at the expense of primary care, and they assuredly will fight hard to preserve their advantage.

Restrictions on Patient Choice

To be successful, ACO organizers also will have to find a way to limit patients’ freedom of choice.  To meet its cost-reduction goals, ACOs necessarily will have to change the lifestyles and treatment options available to patients suffering from costly chronic diseases.  There is no evidence that patients will  willing accept the behavioral consequences of these efforts.  The ACO’s ability to achieve its cost reduction goals is severely compromised by the ability of its patients to find a provider outside the network who will be more accommodating and won’t try to limit diagnostic or treatment options.

Allowing  patients who don’t get a requested procedure or referral to go elsewhere undermines the whole concept of the ACO.  For competitive reasons health insurers are unlikely to limit patient options by agreeing to copayments and deductibles that direct patients to a specific ACO.    Sharing savings with patients is also unlikely to succeed, since payoffs are too uncertain an/or too far in the future to be effective.  Finally, the political class—dependent on healthcare consumers for votes—has been unwilling to even consider restricting choice.

Dealing with the Issues

The ACO concept is well suited for provider groups that agree to take collective responsibility for delivering coordinated care for a defined population with the objective of improving outcomes and containing costs.  But payment reform and patient choice have to be addressed before it can work.

So far the response of ACO proponents has been to equivocate the first issue and ignore the second.  The thinking seems to be that creation of value-based, integrated care can be achieved through a staged phase-in of a new payment model, allowing time for provider organizations to adjust.  During the transition, ACOs would presumptively employ a mixed model of fee-for-service and partial capitation.  Over time, the percentages of the first component would fall and the second would rise in a staged, predictable fashion.

Unfortunately, this is wishful thinking.  There’s no evidence to suggest that mixing directly opposing incentives into the same compensation package will work.   Economic theory would not support it, and what empirical evidence has been gathered on how well it has worked has not been encouraging.  Eventually payers—both public and private—likely will choose to bite the bullet and rapidly transition to a payment methodology that rewards value over volume.    Once that happens, the adjustment period for providers is likely to be shorter and more traumatic than they now envision.

Because it is a politically charged topic, the challenge of limiting patient choice has not been given the attention it deserves.  But it must be done if ACOs are to become truly responsible for the health outcomes of a defined population.  As ACO begin to promote new care delivery models and begin to favor medical over surgical management—as they surely will—patient churn will become a growing problem.  Ultimately, the issue can only be addressed by payers.

John McCracken, PhD

With the Supreme Court upholding the insurance mandate and striking down the requirement that states expand Medicaid up to 133% of the federal poverty level, media speculation has focused on what this means for healthcare stakeholders in the months ahead.  The truth is, it’s impossible to say.

Short-term forecasting is confounded by the fact that there are numerous unresolved anomalies in the law.  For example, a drafting oversight fails to authorize subsidies for health insurance purchased through a federally sponsored exchange.  Another is the absence of purchase subsidies for those under 100% of the FPL in states which elect not to expand Medicaid (the law provides subsidies for those above the 100% level but not for those below it in the belief that they would have been covered by Medicaid).

Additionally, the ACA has become the object of fierce partisan debate leading up to the November election.  Several prominent Republican candidates have pledged to “repeal and replace,’ creating further uncertainty around the near-term outlook.  The result is Congressional gridlock, and an absence of bipartisan consideration of several important issues that need resolution in order for the law to be successfully implemented.

All of this makes short-term forecasting a futile exercise.  It should not be difficult, however,  to predict the long-term consequences of the Accountable Care Act.  Two should be evident.

A Fundamental Change in Employers’ Perceptions of Employee Health Insurance

A decade hence sociologists will look back to the ACA as the decisive event that reshaped the social contract between employers and employees.  For more than sixty years employer sponsored health insurance has been regarded as a voluntary employee benefit.  For the most part, employers have maintained an active interest (though admittedly, not much control)  in how well their employees were served by their health plan.

Over the next ten years, however, employers will come to regard employee health insurance as a government tax and subsidy program.  They will begin to view it the same way they view Medicare, as the government’s responsibility.  They will lose interest in outcomes and employee satisfaction, focusing only on how much it costs.   Employees will become reliant on government administrators or contractors for advice and support.  In short, employers and employees alike will come to view health insurance—and perhaps even the provision of healthcare—as a government responsibility.

The End of Fee for Service

Ten years from now fee-for-service will no longer be the dominant payment methodology.  Though health reform’s champions claim the law will cut projected federal budget deficits in addition to covering the uninsured, that conclusion is based on budget gimmicks and completely implausible assumptions.  A more honest accounting of the ACA’s costly new mandates and restrictions on insurers and providers strongly suggests that once fully implemented, the law could have a dramatic inflationary impact on healthcare costs.  Faced with no other practical alternative, both public and private payers are most likely to abandon fee-for-service in favor of episode based payments.

Both CMS and the Medicare Payment Advisory Commission (MedPAC), an independent Congressional agency established by the Balanced Budget Act of 1997, are advocates of payment reform.  Over the past decade there have been over 30 separate programs in six major demonstration projects testing new approaches to care coordination, disease management  and provider payment for Medicare beneficiaries with chronic conditions or high expected healthcare costs.  None of these have proven  particularly successful in controlling costs or improving outcomes.

Rather than dampening support for payment reform, these disappointing results have only increased government resolve for creating accountable care organizations that tie provider payments to outcomes and overall cost reduction.  Ultimately this will lead to paying providers based on the basis of expected costs for clinically-defined episodes of care, i.e., bundled or episode-based payments.  The ACA will simply bring that change closer in time.

The short-term impact of the Supreme Court’s decision is impossible to forecast with any reasonable certainty; but if the health reform law is finally implemented in 2014, the long-term effects are much clearer.

John McCracken PhD

In 2001 the Institute of Medicine threw down the gauntlet by issuing a report, Crossing the Quality Chasm, which called for fundamental redesign of the U.S. healthcare system.  In the ensuing years the pressures for reform steadily increased, culminating in the 2010 Patient Protection and Accountable Care Act (ACA).

The approach taken by the ACA is the same as that taken by U.S. policymakers since the 1930s: allow experts to study the problem, identify how to fix it, and implement the solution through a complex web of legislative rules and administrative regulations.  This is the engineering approach to the reform of a dysfunctional or underperforming system.  It rests on the belief that a plan devised by intelligent, well-meaning experts and implemented through rules and regulations can be expected to work.

This engineering model has been the dominate approach to system reform for over half a century, from small reforms such as rent control to protect poor tenants and a 55 mph national speed limit to reduce traffic fatalities, to major reforms such as the Great Society legislation of the 1960s, immigration reform of the 1980s and welfare reform in the 1990s.  The common denominator of all of these reforms is that they were implemented with the best of intentions, but the ultimate consequences invariably turned out to be different—sometimes very different—from the original intentions.

Sociologist Robert Merton blamed this divergence on what he called the “imperious immediacy of interests,” which occurs when people so desire a particular outcome that they overlook the potential for unintended consequences.  A less charitable explanation is that policymakers—and the public which elects them—place entirely too much faith in the ability of experts to understand and control the operation of complex socioeconomic systems.

The alternative economic approach to system reform is the opposite of the more widely practiced engineering model.  To an economist, complex socioeconomic systems display unpredictable spontaneous order, with all kinds of unintended consequences arising from purposeful intervention.  The key to improvement lies in adjusting the menu of incentives and rules of behavior facing market participants in such a way that each economic actor, in pursuing his or her own self-interest, also advances the common good.

This economic approach rests on the presumption that the day-to-day operation of large complex systems are too complicated to fully understand and fine tune, but that if you get the incentives right, system participants eventually will realign to produce an optimal outcome.  This is the foundation of Scottish economist and moral philosopher Adam Smith’s “invisible hand,” introduced in his classic An Inquiry into the Nature and Causes of the Wealth of Nations published in 1776.

A significant segment of the American public has not yet embraced this economic model of system reform, in part out of a continued faith in the ability of well intentioned experts, and in part because of a belief that the economic world is divided between good actors and bad actors, and that tight constraints and rules of operation are needed to constrain the latter.  It is this worldview and the approach to policymaking that arises from it that has given rise to the well known Law of Unintended Consequences.

John McCracken, PhD

Considerable effort has been invested in developing and testing the concept of a PCMH as an approach to providing comprehensive, coordinated primary care.  The concept makes intuitive sense, and first emerged in pediatrics where children with special needs would presumably benefit from closer coordination of both clinical and social services.  The concept has since spread to most of the major primary care specialties in the treatment of patients with multiple chronic diseases.  A coalition of primary care associations have collectively created a website that lays out the guiding principles, objectives, and key competencies of a successful PCMH.

Most observers have focused on the organizational challenges facing development of a PCMH, including attracting and incentivizing an appropriate mix of providers; implementing the necessary clinical information and performance reporting technology; developing supportive commercial payer relationships, and creating an organizational culture that encourages teamwork and takes collective responsibility for the ongoing care of patients.  The presumption is that if these organizational challenges are met, the result will be the delivery of higher quality, more cost effective care.

What’s frequently overlooked, however, is the PCMH’s relationship and interaction with the rest of the medical community, and the obstacles that this boundary between the Home and outside providers presents.

The first such challenge is that effective care coordination for patients with multiple chronic diseases requires the willingness of all the hospitals, clinics and physicians involved in treating the patient to collaborate and coordinate their care, including those providers that function outside the PCMH.  Unless the Home includes a majority or significant percentage of  all providers in a given service area (a circumstance to which the Department of Justice would strenuously object), providers outside the Home would have to share information and decision-making with member providers.  Competitive issues (and jealousies) aside, the information infrastructure required to support this degree of shared decision-making is not present, and not even on the horizon.

The second challenge arises from the pressure to control or even reduce the pool of funds available for physician payment.  Monies available to fund heretofore uncompensated services—such as care coordination—almost certainly will have to come at the expense of other providers.  It is unlikely either specialists or hospitals outside the Home will willing accept fewer patient encounters and allow their incomes to fall.  This inevitably would heighten provider conflict, further reducing the likelihood of shared decision-making.

The third challenge is perhaps the greatest threat: a growing body of evidence that improved care coordination and disease management does not result in fewer hospital visits or more cost effective service delivery.  Over the past decade, CMS has paid a management fee to 34 separate programs in six major demonstration projects to provide care coordination and disease management for Medicare beneficiaries with chronic conditions or high expected healthcare costs.  In a January 2012 report, the Congressional Budget Office found that on average these programs had little or no effect on hospital admissions.  In nearly every program spending was either unchanged or actually increased when fees paid to the participating organizations were taken into account.

Providers interested in exploring the PCMH concept need to give careful consideration to all of the challenges it presents, not just recruitment and infrastructure, but also the likelihood that the PCMH can effectively coexist with the rest of the local medical community.

John McCracken Ph.D.