Seniors in Texas

Medicare Prospective Payment and the Shaping of U.S. Health Care

Description

This is the definitive work on Medicare's prospective payment system (PPS), which had its origins in the 1972 Social Security Amendments, was first applied to hospitals in 1983, and came to fruition with the Balanced Budget Act of 1997. Here, Rick Mayes and Robert A. Berenson, M.D., explain how Medicare's innovative payment system triggered shifts in power away from the providers (hospitals and doctors) to the payers (government insurers and employers) and how providers have responded to encroachments on their professional and financial autonomy. They conclude with a discussion of the problems with the Medicare Modernization Act of 2003 and offer prescriptions for how policy makers can use Medicare payment policy to drive improvements in the U.S. health care system.

Mayes and Berenson draw from interviews with more than sixty-five major policy makers -- including former Treasury secretary Robert Rubin, U.S. Representatives Pete Stark and Henry Waxman, former White House chief of staff Leon Panetta, and former administrators of the Health Care Financing Administration Gail Wilensky, Bruce Vladeck, Nancy-Ann DeParle, and Tom Scully -- to explore how this payment system worked and its significant effects on the U.S. medical landscape in the past twenty years. They argue that, although managed care was an important agent of change in the 1990s, the private sector has not been the major health care innovator in the United States; rather, Medicare's transition to PPS both initiated and repeatedly intensified the economic restructuring of the U.S. health care system.

Reviews

Rating: 5 / 5
Date: 2009-11-03
Summary: "Very illuminating little book; a must read on healthcare policy"

I have been trying to make sense of the healthcare mess. It is not easy. I find that most of what I read seems off target and out of focus. Everyone knows the system is a mess, but no one can explain quite why.

This little book -- it is about 150 pages -- brings a remarkable amount of clarity to the discussion. The book focuses on one particular episode in Medicare history, the shift to prospective payments. That sounds awfully technical, and it is. As the authors explain, however, that moment was critical and understanding that moment sheds light on the whole subject.

Let me summarize what I took away from this. When Medicare was first passed in 1965, it had no cost controls mechanisms of any type. Congress basically just said, we are going to pay for medical care for old people. How much are we going to pay? Whatever the doctors and hospitals ask for. The original formula was to pay the costs incurred by the doctors and hospitals, plus a certain mark up.

Well, when Uncle Sam tells a major industry that it has a blank check, the results are predictable. That industry spends, spends and then spends some more. And that is exactly what happened. The cost of health care exploded through the ceiling.

This resulted in such huge spending that, over time, Medicare started to threaten the solvency of Uncle Sam. There were various attempts in the Carter years, in the 1970s, to get medicine to voluntarily reduce its spending. They failed. Under Reagan, a new approach was tried. Rather than simply paying hospitals and doctors whatever they asked for, Medicare adopted a new scheme: prospective payment. Under this approach, what doctors and hospitals do is divided up into lots of categories, with codes assigned to each. The feds then set the amount which they will pay for each code. If you, the doctor or hospital, can do the job for less money than Uncle will pay, you keep the difference as profit. If you can't do the job for what Uncle will pay, too bad; you eat the difference as a loss. This was the first time anyone imposed any cost controls on Medicare. This happened in the early to mid 1980s.

At first, the amounts were set deliberately high. to make the transition to the new system more easy. Then, Congress gradually woke up to the fact that, for the very first time, Uncle Sam had some real control over the medical budget. Congress thus started to use this system, to cut the deficit. Payments were cut, very successfully, to reduce overall federal spending.

That put the squeeze on healthcare providers. (We are talking late 1980s.) They responded by increasing the rates they charge to private insurance companies. They call this "cost shifting." Since Uncle Sam is no longer a push-over, they jacked up the cost to insurers, which employers pay. (The idea that they might actually cut costs and grow more efficient seems not to have occurred to anyone.)

For a while, they got away with this. Eventually, however, employers woke up to what was going on. They saw that they were paying absurdly high rates for medical insurance, to compensate for the lower rates which Medicare was paying. This lead private employers to look for ways to cut rates. What they found was the managed care, HMO, experiment. This failed. When Medicare cuts rates, it does not cut service to patients; it simply cuts into the profits of healthcare providers. Managed care, however, cut rates, by reducing access to service. This was so tremendously unpopular that it crashed and burned.

So now we are left with a system where Medicare has some ability to control costs, but the private insurers do not. As a result, the cost of private insurance keeps going up and the number of employers who offer insurance keeps going down. This is the story which this book tells. It rings true to me, and I never read it anywhere before.

The story raises different questions, according to point of view. Our authors are not free market people. To them, the moral of the story is that government controls on medical costs can work. They advocate more, better and more focused controls, based on learning from this experience.

I am a free market supporter, so I have different questions. My question is simple. Why doesn't the free market function in health care? Why, when Medicare lowered its rate, could the costs simply be passed onto private insurers? This signals that the market is not working, at all, in this field. Why not? What is preventing the market from working in health care?

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Rating: 5 / 5
Date: 2007-11-11
Summary: "Definitely 5 stars"

I concur with the previous detailed reviewer and the book review clipped into the Amazon site. Excellent book.

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Rating: 5 / 5
Date: 2007-01-14
Summary: "Fascinating New Book on Impact of Medicare Policy on U.S. Health Care System Overall"

When asked about health care innovations, especially practices directed at controlling costs, most policymakers and wonks point to private sector solutions, such as the cost-constraining effects of HMOs in the 1990's or today's ideation of consumer-directed health plans. But is this conventional wisdom wrong? What about public sector health policies, most notably in Medicare or Medicaid?

In a fascinating new book, two top thought leaders show how a powerful and complex Medicare payment formula led to fundamental changes across the health care system, facilitating a dramatic power shift from providers (hospitals and physicians) to buyers (Medicare, Medicaid, and employers).

In Medicare Prospective Payment and the Shaping of U.S. Health Care, Rick Mayes, Ph.D. and Robert A. Berenson, M.D. describe how Medicare's transformation from retrospective, cost-based payment methods to prospective payment systems (PPS) "both initiated and repeatedly intensified the economic restructuring of the U.S. health care system." In addition to providing a thoughtful history of Medicare PPS from a research concept to the single most powerful financial driver in health care, Drs. Mayes and Berenson make the case that the public sector has been the major innovator.

In building their case and exploring how PPS works in the real world, they interviewed 65 health financing experts, including several former CMS administrators. Bob Berenson and Rick Mayes do a nice job challenging conventional wisdom, which in health policy is always a good thing.

Earlier in my career, I cut my teeth on PPS at the White House Office of Management and Budget (OMB), where my scope included Medicare Part A and hospital reimbursement policy. Therefore, for me, Medicare Prospective Payment and the Shaping of U.S. Health Care made for a particularly intriguing read. But you don't need to be a Medicare wonk to understand and benefit from this crisp, well-written book.

- Kip Piper