Free the Doctors
by John Goodman
Issue 129 - April 8, 2009

MEMO

To: Kathleen Sebelius, Newt Gingrich, Commonwealth Fund, Robert Wood Johnson Foundation, Center for Studying Health System Change and health reform wannabes everywhere

Subject: The Syllogism

I learned this in high school. Let's see if I can remember how the structure works.

Whoops. Something's amiss here. If all successful innovations come from the supply side, then clearly we must liberate the providers. How can that be done? What follows are some ideas I developed with Mark McClellan. They first appeared in this Wall Street Journal editorial and are expanded here. They involve liberating doctors, patients and entrepreneurs. Here's the provider part.

Problem: Doctors are typically forced to practice medicine under an outmoded, wasteful payment system designed for a different century. They should instead be allowed access to 21st Century alternatives.

Typically, doctors receive no financial reward for talking to patients by telephone, communicating by e-mail, teaching patients how to manage their own care or helping them be better consumers in the market for drugs. In fact, doctors who help patients in these ways will end up with less take-home pay. To make matters worse, as the insurers suppress reimbursement fees, doctors are increasingly unable to perform any task that is not reimbursed. Hospitals face the same perverse incentives. Facilities that figure out how to lower patient costs, raise quality and offer warranties and other guaranties are penalized for doing so. Unfortunately, high-cost, low-quality care is reimbursed at a higher rate than the alternative.

Solution: New Payment Opportunities. It should be as easy as possible for providers to get paid in better ways. We should be willing to reward doctors who raise quality and lower costs - including improving patient access to care, improving communication and teaching patients how to be better managers of their own care. What is needed is not pay-for-performance, but performance for pay — with ideas and proposals coming from the supply side of the market (which is more knowledgeable about potential improvements than the demand side).

Since Medicare is our largest payer and since private insurers tend to pay the same way Medicare pays, let's begin there. In Medicare, any provider should be able to propose and obtain a different reimbursement arrangement, provided that: (1) the total cost to government does not increase, (2) patient quality of care does not decrease and (3) the doctor proposes a method of measuring and assuring that (1) and (2) have been satisfied.

Case Study: Surgery with a Warranty in Pennsylvania . According to a RAND Corporation study, patients on the average receive recommended hospital care - such as an aspirin after a heart attack or antibiotics before hip surgery — only about half the time. There is also a lot of variation in quality. In Pennsylvania alone, the mortality rate for heart surgery among hospitals varies from zero to 10 percent. Even more surprising, hospitals usually profit from their mistakes. When patients have to be readmitted to deal with complications from the initial surgery, the hospital is in a position to bill again.

Geisinger Health System in central Pennsylvania has discovered a better way — better at least for patients and their insurers. It offers a 90-day warranty, similar to the type of warranties found in consumer product markets. Specifically, Geisinger charges a flat fee that includes three months of follow-up treatment. If the patient returns with complications in that period, Geisinger promises not to send the patient or the insurer another bill.

The problem is that Geisinger loses money on the proposition even as it saves money for Medicare, Medicaid and private insurers. What we need are third-party payers willing to pay for such guarantees. They should be willing to pay more to hospitals that save them money.

Case Study: Efficient Treatment of Back Pain in Seattle. Virginia Mason Medical Center in Seattle has a modest goal: To produce health care as efficiently as Toyota produces cars. In fact, the senior staff has actually traveled to Japan to witness Japanese auto production firsthand. Continuous quality improvement is part of its company mantra.

Treatment of back pain, a source of considerable medical spending nationwide, is an example of how Virginia Mason is changing its approach to health care. Under the old system, a patient with back pain would first receive an MRI scan and other tests before referral to a physical therapist. Under the new system — which cut the cost of treatment in half — patients are first sent to therapy and receive an MRI scan only if the therapy doesn't work. Yet while this improvement in efficiency saves money for the payers, it makes the providers financially worse off. As in the case of Geisinger, Medicare should negotiate a new payment arrangement one that is win-win for Medicare and Virginia Mason.

Implementation: Streamlined Approvals. For the reform to be workable, the transactions must be easy to negotiate and consummate. Paperwork and time delays are the enemy of entrepreneurship. However, given a willing Medicare administration, the process of reform should not take long. There are already low-cost, high-quality pockets of excellence just waiting to be replicated. And once Medicare changes its payment system, all other payers would not be far behind.

Implementation: Relaxation of the Stark Restrictions. Another essential ingredient is allowing doctors and facilities to work together as a team — making needed improvements and profiting from those improvements. To facilitate this change, we must repeal or relax regulations that prohibit profitable provider arrangements.

John Goodman is President of the National Center for Policy Analysis