Solving the Medicare payment structure riddle

The New England Journal of Medicine released a timely article yesterday, “Building a Bridge from Fragmentation to Accountability — The Prometheus Payment Model,” which attempts to solve perhaps the most vexing problem in healthcare: How do you change the payment structure in Medicare to better incentivize healthier outcomes, while reducing costs? The current fee-for-service structure in Medicare simply encourages more tests and procedures without the guarantee or evidence these steps are in the patient’s best interest.

President Obama and others have pointed to hospital systems like the Cleveland Clinic that pay their doctors a salary rather than for the fees they rack up and bill to Medicare. What the New England Journal article suggests is that putting salaried physicians in an integrated system alone will not provide the necessary incentives for them to work together on a team to give the patient the best care possible. Mike Painter, one of the three authors of the study, expands on this point on his blog:

“With capitation we’ve essentially replaced fee-for-service payment in which everyone thinks about their own piece of the pie with a payment scheme in which everyone is ‘just doing their job’ and expecting the system to take care of the rest.”

Their proposed solution would allow providers to earn profits by eliminating what they coin as PACs (potentially avoidable costs), such as readmissions. They estimate that “PACs account for 22% of all private sector health care expenditures in the United States.” Their Prometheus model would assign a budget for every illness based on best practices and then pay out bonuses for eliminating preventable complications. By studying private sector data, they believe they could translate those results and save Medicare an astonishing $700 billion over 10 years.

Obviously the plan relies on a number of complicated formulas in budgeting for each single illness and if there is one thing the world needs less of, it’s formula fights. The authors argue that it’s not that critical to get every illness’s budget right — just the ones that cost the most, like congestive heart failure in which “PACs account for nearly 80% of all dollars spent.” If you are looking for a good primer on how some simple changes like checklists in an operating room can prevent costly and deadly medical errors check out this Atul Gawande article from 2007.

What’s admirable about the Prometheus proposal is that it attempts to match incentives directly as possible to reduced costs and better health outcomes, and as White House economist Austan Goolsbee recently said, “My answers usually begin with: change the incentives.”

The views expressed in this blog do not represent the views or opinions of Generations United.