Journal Issue: Health Care Reform Volume 3 Number 2 Summer/Fall 1993
In the debate over health care reform, analysts disagree as to whether increased competition among insurance plans or increased government regulation will be more effective in controlling health care costs. This disagreement often pits plans in which the emphasis is on managing care to control overall spending against plans in which the emphasis is on limiting the fees that can be charged for specific health services. Although these two competing approaches each have proponents who argue vehemently that only one of them can be effective in restraining health care spending, health care reform may actually depend a bit on both. For example, one strategy for reform may be to allow managed care plans to compete against traditional insurance plans that pay providers on a “piece rate” basis subject to predetermined limits. Another strategy may be to rely on rate regulation to control costs while phasing in a system that encourages managed care. While the debate continues, it is appropriate to examine regulatory efforts to control the price (and sometimes at least part of the volume) of health care services.
It was in this context that Paul Ginsburg of the Physician Payment Review Commission and Donald Young of the Prospective Payment Assessment Commission presented a forum to a group of professional staff members for the health committees of the U.S. Congress in the summer of 1992. Their presentations centered on the question of what could be learned from Medicare's experience with rate setting and whether it could then be applied to a health insurance system that included children. Jerold Aronson, representing the American Academy of Pediatrics, and Bruce Steinhardt, of the National Association of Children's Hospitals and Related Institutions, discussed the issue from the provider's perspective. This article was compiled by Marilyn Moon to capture the essence of those presentations. Both Ginsburg and Young find much that is praiseworthy in Medicare's efforts to refine hospital and physician payment systems.
The Medicare reforms that were implemented in the 1980s not only sought to hold the line on spending, but also resulted in other important changes. Hospital payment moved away from a cost-plus payment system to a prospective payment system based on the average costs of care for an entire hospital stay. Thus, hospitals were given incentives to seek more efficient ways of providing care. Changes in physician payment shifted the relative fees away from procedures and toward primary care. This change in relative prices has been termed extremely important by those who would like to see more emphasis on primary care in the United States; left alone, the health care market made little progress in that direction.
Ginsburg and Young speak from a wealth of knowledge about these two programs: they are the chief professional staff of the two primary oversight organizations. Yet they also must speak cautiously, providing a balanced view. How have others assessed the success of Medicare? Summarizing the wealth of analytic and critical material would be very time consuming and beyond the scope of this note, in part because of the diversity of views on Medicare payment policy. Nonetheless, a few generalizations seem to be emerging from the literature in this area. The hospital payment changes have been in force longer, and considerable analysis indicates that Medicare's prospective payment system (PPS) for hospitals certainly saved money for the federal government, although many claim that it did so by shifting costs onto other payers. Hospital lengths of stay came down, and there is some evidence of a reduction in hospital staffing; certainly a number of hospitals became more efficient. But there are some lingering doubts about how much more efficient hospitals became and whether some efficient hospitals are paid too little by Medicare. There is also some evidence of adverse consequences on beneficiaries who are discharged prematurely from hospitals.
The evidence concerning physician payment is much more sketchy because the reforms have just begun. But it too has both critics and supporters. One of the most closely watched areas will be whether this new payment mechanism can redirect care toward evaluation and management services and away from excess procedures and surgeries. Initially, the program is supposed to be budget neutral, shifting relative fees while holding constant the overall level of payment to physicians. Thus, it is not yet being used as a tool for cost containment. Few doubt, however, that the structure of the Medicare Fee Schedule could be used to achieve lower payments over time.
One sign of the overall assessment of these two reforms is the extent to which they are of interest to other payers. The Medicare Fee Schedule has been adopted by some other insurers, often with modifications. The hospital payment system has attracted some interest; a number of other countries have studied it as one way to allocate overall hospital budgets, for example.
Any serious debate over health care reform will need to include Medicare's payment policies as one possible approach. If the reform emphasis shifts to a system of managed care and managed competition in which several competing plans develop their own particular payment schedules, then the lessons will be less important. On the other hand, if reform moves to more regulatory action, then Medicare may be the focus of the debate on how to establish different but fair rates of payment for providers of health care.