The Next Frontier in Healthcare Reform and Why it Will Harm Consumers

There is a working group chartered by Health and Human Services (HHS) comprised of a combination of private, public, and non-profit players in the healthcare industry that have been active in determining the direction of the next frontier in healthcare reform. Namely, the next frontier in healthcare reform will focus on how providers and organizations are paid for the services that they deliver. This working group has been given that rather lengthy title of, “The Health Care Payment Learning & Action Network (LAN),” and they recently created a whitepaper that sheds tremendous light light on the Centers for Medicare and Medicaid Services (CMS) most likely direction and next steps with looming payment reforms. The whitepaper can be found at At the outset I will say that I am a tremendous skeptic of this type of crony capitalism in which entrenched monopolistic industry players such as large hospital networks and insurance companies that have close connections with government are the ones that are creating frameworks for payment models. We won’t be surprised when such models are favorable to them at the expense of consumers and the small-market players, would-be new entrants, and competitive market forces that are so sorely needed in healthcare.  That is a topic I will leave to a future post and in many ways I discussed in my healthcare section of  a recent blog post where healthcare is one section addressed within a broader economics manifesto in which I borrow liberally from University of Chicago Economist John Cochrane.  Suffice it to say that asking the fox for the right ways to guard a henhouse are likely to result in a more well-fed fox then it will result in protected hens.  Let me also say at the outset that I am not an advocate of the largely fee-for-service regime that exists in healthcare today. I will briefly indicate that I do not believe government “expert” led attempts to change healthcare demand and supply through insanely complicated bundled payments for episodes of care will be the new tweak that bends down our healthcare cost curve while protecting quality and consumer choice. The new reforms are analogous in my mind to building a pretty white picket fence on a trash heap. Broad market-oriented reforms are the real cure, the effective way to remove the trash heap and create meaningful healthcare reform, but again, that is a future post.

Now turning to the merits of the plans put forth by the HCPLAN. What good is a government body if it does not have a 6 letter acronym?  The graphic below reveals how they group categories of Alternative Payment Models being advocated.

Payment Reform

It is clear that the working group (and one can assume they will guide in large part the decisions that CMS will make) holds in high regard the bundled payment for a specific episode (i.e. hip and knee replacement) and a population based payment (payment that is for a beneficiary as a whole and agnostic to the services they actually wind up using) as the holy grail models of payment reform. It is also interesting to note the convergence of government and private payer focus on such payment reform models (my point above on crony capitalism at work). Thus, this is not simply a government thrust, but is being directed by the large industry players that will benefit from more complicated payment structures that only large providers will have the scale to work around  The working group makes their strategy clear with statements in the white paper such as, “The Work Group believes that shifting from traditional fee for service (FFS) payments to person focused payments (in which all or much of a person’s overall care or care for related conditions is encompassed within a single payment) is a particularly promising approach to creating and sustaining delivery systems that value quality, cost effectiveness, and patient engagement.” Thus, healthcare systems can anticipate that what CMS has begun with bundled payment pilots and the recent Comprehensive Care for Joint Replacement Model (CCJR or CJR) is but a mere crack in the opening of the door that will highly likely culminate in many other healthcare conditions being moved into a bundled payment models. Indeed, in the work group whitepaper, the call is for health payments to increasingly shift towards Category 3 and 4 payments. This will intuitively fuel consolidation across the acute and outpatient settings as well as drive a much more narrow and controlled continuum of care networks. In other words, as healthcare consumers, we will be left with much fewer options and much less control over where and how we consume healthcare services.  In this era of payment structures, hospitals will have great incentives to create unprecedented levels of of hospital-based control (if not outright ownership) over outpatient and post-acute settings through tightly controlled referral agreements and at risk quality and financial contracts between hospitals and outpatient settings. The outpatient settings that can’t keep up in this space will inevitably be shutting their doors.Many hospitals will find it to their advantage to simply acquire the outpatient and post-acute players around them. Indeed, to their credit the working group admits in their whitepaper that, “The transition away from FFS may be costly and administratively difficult….the Work Group recognizes the possibility that shifts in payment can result in unintended and unanticipated consequences, such as cost increases owing to provider consolidation, reduced provider willingness to exchange data, and a potential reduction in costly but effective medical services”

On the points made related to the unintended consequences, something to watch out for will be how CMS plans to address the natural incentives that bundled payments will create to reduce innovation and quality of care in order to cut costs. It won’t come as any surprise that a bundled payment will fuel cost reduction at the expense of quality and consumer value.  I personally am skeptical that government apparatchiks will be able to command these tradeoffs from up on high effectively.  Since the ultimate aim in any industry should be to both reduce cost and increase value in order to please and gain more customers, a bundled payment by its inherent nature will greatly incentivize lower cost care that does not in fact improve quality, or even worse, will highly likely decrease quality. Thus, there will have to be some efforts to couple the bundled payment to pay for quality reforms. All that being said, health systems and consumers can anticipate government reform to continuously work towards the rapid shift from fee for service to at least one of the APM payment frameworks despite the recognized challenges. After all, recognized challenges did not stop the Obama administration from rolling out disastrous insurance exchanges.

The graphic below reveals a rough representation of the shift that the Work Group believes must occur. While the precise amount that flows into Categories 2-4 can’t be predicted at this juncture, what seems a foregone conclusion is the shift out of Category 1 (Fee-For-Service) is all but inevitable in today’s current environment. Those organizations that do not opt for full on Accountable Care Organization models created under ObamaCare will increasingly find the majority of their payments in the form of person-centric population bundled payments, episode of care bundled payments, or payments for services in which a significant portion of the payment is dependent upon achieving certain quality measures.


Model Shift

In its discourse on the payment models, the Work Group unveils its construct of the holy grail of health care delivery: the integrated care delivery network. It states within the white paper that, “On one end of the spectrum, plans and providers in Category 4B models may be virtually integrated. On the other end of the spectrum are highly integrated arrangements that are characterized by vertical integration of financing and care delivery, common ownership, and strong linkage across strategy, clinical performance, quality, and resource use. These groups may also have a higher percentage of salaried physicians. After reviewing the literature and discussing these highly integrated arrangements with people who operate within them, the Work Group has reached the conclusion that they can be ideally suited for delivering person centered care because they: 1) force transformational thinking about delivery system reform; 2) optimize coordination of infrastructure investments; 3) most fully remove financial incentives for volume; and 4) expedite community investment and engagement.”

There you have it – a frank admission that these payment models will drive consolidation of health systems, drive small players out of the market, and drive private physicians into the arms of working directly for hospitals. I personally believe that a competitive market without the insane supply restrictions and prevention of new entrants of the market and removing of the insurance premiums and government programs that create tremendous price and demand distortions would create the cost and quality driven models we seek, but what we are getting instead will be more complexity, less choice, and potentially less quality. With some luck, maybe our costs will go down, but I am not betting on the benevolence of even larger industry monopolies passing their cost savings on to consumers.


2 thoughts on “The Next Frontier in Healthcare Reform and Why it Will Harm Consumers

  1. Hi Matt – nice post. I hear you on the challenges posed by provider system consolidation;

    That said, I would not fully discount HCP-LAN. There are some very well-intentioned parties supporting the initiative, for example, Walmart’s head of benefits recently wrote a nice post supporting the program. She is acting out of fiduciary obligation as well as the best interest of her members.

    The broader problem is that there is so much excess utilization and waste in the system, coupled with the nonsense prices that are loosely linked to Medicare rates. Bundles have some potential to change that. Anecdotally, I’ve been hearing some positive views about savings potential from different folks I’ve spoken to recently.

    If you haven’t seen it, check out Our CMO recommended it and they are doing some really cool things – and the exec director is a Tuck Alum!

    Also, if you haven’t seen it check out the new Martin Gaynor paper on pricing – I think you’d really dig it. Includes some interesting findings that support your concerns about consolidation and market power


    1. Thanks for these links Sam. I will check them out and have a postscript. Perhaps my strident tone is some frustration that we aren’t doing more to focus on the supply and demand distortions that I believe are the fundamental culprits, but I will concede that these payment reforms are improvements compared to fee for service. I am just really skeptical that the consolidation that will occur will be good things ultimately for consumers.


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