President's Page August 2003

Robert W. Haley, MD

The Cure for Medicare
Indexing public reimbursement to cost-effectiveness

Last month in laying out the case for the impending train wreck in Medicare, I argued that the force driving the process is the runaway pace of our providing and consuming healthcare services, fueled by perverse incentives inherent in the system. Those incentives in our patchwork of government and private third-party payors are driving patients to want more, physicians and hospitals to provide more, pharmaceuticals and device manufacturers to market more, insurers to skim off more, and government to pay for more—all with little regard for the effectiveness or expense of the services—a fiscal conservative’s nightmare. With the perverse incentives in place, passage of a Medicare drug benefit will only press harder on the throttle. As a result, Medicare will continue cutting physician reimbursement rates until physicians eventually desert the system—the train wreck.

In trying to resolve this dilemma, we must face the fact that the demand for healthcare services is limitless, but the public and corporate funding base to pay for it is limited. We need a new funding system that reconciles these realities.

Currently favored solutions will not work. The old system of copayments, rate caps, and managed care, although modestly effective, is overwhelmed by the drive to consumption from the perverse incentives. Likewise, privatization—putting Medicare under the control of competing private insurers—will replace the 3% administrative costs of Medicare with a 15% to 30% corporate overhead, while the private insurers skim off the healthy seniors, leaving the seriously ill on the public dole or uninsured. Under both alternatives the perverse incentives remain in place, driving consumption.

Any long-range solution requires substituting a new set of adaptive incentives designed to reconcile the limitless demand and limited funding base. The new approach must give all the players strong incentives to constrain utilization toward the relatively narrow set of services that truly work in improving health and to eschew the huge amount of waste, the high-priced marginally effective, the outright gimmickry, and the clearly futile. The one approach that would reorient these incentives is to index the Medicare reimbursement rate for each service to its cost-effectiveness ranking: the ratio of proven efficacy to price.

In practical terms, here’s how it would work. Congress would pass legislation establishing a Health Services Commission for Medicare, composed of physician healthcare researchers, economists, ethicists, and consumer advocates. The Commission would rate the scientifically established efficacy of each condition/treatment combination in reducing morbidity or mortality and document its usual price, to form the cost-effectiveness ratio. All condition/treatment combinations then would be ranked by this ratio, from the most cost-effective (eg, appendectomy for acute appendicitis, measles immunization) to the least (eg, cosmetic surgery, the latest colored pill), and categorized into tiers.

Condition/treatment combinations in the top, most cost-effective tiers would be available to all plan participants without co-pays, and from there down, the co-pay would become a progressively higher proportion of the price. Those in the lowest tiers would be full pay.

As now, all medical services would be available to everyone, but the precious public dollar would go preferentially to the most cost-effective services, and consumers would share more of the burden for the less cost-effective ones. Most importantly, look at what the system would do to the incentives.

With payment by cost-effectiveness ranking, everyone would have full access to effective treatments with moderate price tags. Physicians and patients would jointly study whether the small advantage in efficacy or side effects of the new, high-priced drug offers a meaningful advantage over the low-priced generic. Pharmaceuticals and device manufacturers would reorient research to seek breakthrough drugs offering large increments in efficacy rather than knockoffs of existing drugs with small increments, or they would price marginal offerings with marginal price increments. Research to test treatment efficacy would increase.

Sound too idealistic to work? Well, the prototype has been functioning successfully for a decade in Oregon’s Medicaid program. The physicians like it, the patients like it, the corporations like it. And Oregon’s Health Services Commission has maintained its updated cost-effectiveness ranking list and related technology, which easily could be adapted to Medicaid programs in other states or to Medicare.

The reason it has not been widely adopted is because it is disliked by both extremes of the political spectrum and ignored by the center. Those at the far left, who want a universal blank check, condemn it as rationing, which it isn’t. And those on the far right, who want no government participation, condemn it as socialized medicine, which it isn’t. Those in the big center have not cared because they haven’t yet perceived a problem.

As we speed toward the train wreck, however, it’s time to consider this alternative.

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