About the Author

James C. Capretta

James C. Capretta

New Atlantis Contributing Editor James C. Capretta is an expert on health care and entitlement policy, with years of experience in both the executive and legislative branches of government. E-mail: jcapretta@aei.org.


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James C. Capretta’s Latest New Atlantis Articles

 Health Care with a Conscience” (Fall 2008) 

 Health Care 2008: A Political Primer” (Spring 2008) 

 The Clipboard of the Future” (Winter 2008)

 

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Text Patterns - by Alan JacobsFuturisms - Critiquing the project to reengineer humanity

Monday, July 28, 2008

Something to Write Home About 

“Medical Homes” and Reforming How Health Care Is Delivered

Last week, the New York Times had a piece on the latest policy fad in health care: the “medical home” -- “a base where doctors, staff and patients pull together as one big health-care family. Or at least that is the ideal.”

It may not be a bad idea. The article reports on an effort in Philadelphia to pay primary care doctors to oversee, in a comprehensive fashion, the health needs of their patients. It is now widely understood that today’s dominant fee-for-service insurance, especially in the Medicare context, shortchanges the time that doctors spend making sure their patients are following appropriate prevention strategies. The fee-for-service system rewards volume, not time. Consequently, there is an emphasis on diagnostic testing and procedures, not the labor-intensive task of ensuring patients stay on course with a treatment plan.

The idea of the medical home is that the solution is to pay doctors more for the time and effort needed to provide appropriate oversight of the health needs of their patients. And with more quality time from primary care physicians, there is a hope that complications from chronic illnesses will decline -- as will the demand for tests and procedures. Medicare is set to begin testing the medical home concept in coming years, too.

The medical home may very well produce some positive results. But it is far from clear that the pressure for more testing and procedures will decline. Medical homes would indeed reward more primary care, but they would not necessarily alter the strong incentive for volume. Specialists and hospitals would still gain if they were able to provide more services to more patients.

A more promising approach to reforming how health care is delivered would get at the underlying financial incentives faced by doctors and hospitals by allowing them to reap the gains from more efficient arrangements.

For instance, in Medicare, beneficiaries could be given a choice of delivery systems for their health care. Each delivery system would have to include physicians, hospital care, and other services, and the presumption would be that the beneficiary would get all of their care through their chosen network. Payments would be reformed so that a large portion of the Medicare entitlement would be managed by the network on behalf of the beneficiary. The idea would be to give physicians and hospitals the incentive to reorganize themselves to be more efficient. If more beneficiaries selected such a network based on their attention to prevention and wellness, they would gain from associated drop in use of other services.

It is certainly worth testing the medical home idea. But it is unlikely to solve the underlying problem. For that, a more sweeping and difficult reform is needed, one in which consumer choice is harnessed to incent sweeping, provider-led delivery reform.

posted by James C. Capretta | 4:23 pm
File As: Health Care

Tuesday, July 1, 2008

Employer-Based Health Coverage Threatened 

Obama’s plan would undermine the job-based insurance system

It is becoming a standard line in news stories on the presidential contest -- including this one from Congressional Quarterly -- that, if elected president, Senator Barack Obama would “build on” the employer-based system.

But is it true? No, not by a long shot.

The Obama plan has three features that would work in concert to rapidly undermine all private health insurance, including employer-sponsored plans:

  1. A new public insurance option for the working age population, modeled on Medicare.
     
  2. The requirement that all but the smallest employers “pay or play” -- meaning they must offer acceptable coverage or pay a tax to finance coverage through the government.
     
  3. Price controls for services in the new public option.

The “pay or play” tax -- 4 percent of payroll in California’s abandoned plan, and 7 percent in this proposal from Commonwealth Fund researchers -- would, by itself, provide a strong incentive for just about every employer to get out of the health insurance business. The tax, tied to wages, would provide certain costs, whereas health premiums have risen above wage growth consistently for three decades. Why would an employer, especially small–to–mid-size firms, continue to take the risks associated with running a plan when they could fulfill their obligation to workers by paying a tax instead (which, incidentally, would come out of wages)?

The new public insurance option would only increase the incentive for employers to drop their company-run plans. How would such a plan determine what to pay doctors and hospitals? It seems obvious that it would use Medicare’s price controls, flawed as they are. These payments systems, as can be seen in the current fight over physician fees, are well below market rates because the government can effectively offer them on a “take-it-or-leave-it” basis. In so doing, the government could set premiums for the new public option at an artificially low rate. Price controls do not provide real cost control; they simply frustrate demand by limiting supply. But, no matter. Especially in the short term, employers would quickly make the decision that investing in real efficiency gains would no longer pay off, given the strong pull of a low-cost option run by the government.

The Lewin Group estimates that some 40 million people would be in the new public insurance option in the first year of the plan proposed by the Commonwealth Fund authors -- a plan that closely tracks the Obama outline. That’s not building on the employment-based system. It would be the first step in what would become the very rapid demise of job-based health insurance.

posted by James C. Capretta | 6:54 pm
File As: Health Care

Friday, June 20, 2008

CMS-Driven Delivery Reform? 

No -- Build a Marketplace Instead

 

The Medicare Payment Advisory Commission (Medpac) issued its annual June report (available here in PDF) to Congress last week. This year’s report has as its main theme reform of the delivery system -- which is to say, reform of those arrangements which govern how and where patients get care. What can be done to make this “system” more efficient, patient-focused, and of higher quality?

This is how Medpac’s commissioners describe the reason reform is necessary:

The 2008 Medpac reportIn previous reports, the Commission has recommended that Medicare adopt tools for increasing efficiency and improving quality within the current Medicare payment systems.... However, in the current Medicare FFS [fee-for-service] payment system environment, the benefit of these tools is limited for two reasons. First, they may not be able to overcome the strong incentives inherent in any FFS system to increase volume. Second, paying for each individual service and staying within the current payment systems (e.g., the physician fee schedule or the inpatient PPS [prospective payment system]) inhibit changes in the delivery system that might result in better coordination across services and lead to efficiencies or better quality across the system.

This commentary from Medpac marks an important shift in the tenor of health policy discussions. In effect, Medpac is arguing that we need a fundamental shift in how Medicare pays for services in order to provide the incentives needed for a restructuring of existing provider arrangements for everyone. Beneath Medpac’s recommendations is the admission that Medicare’s current design is the most important reason health care provision today is so fragmented, uncoordinated, often of poor quality, and highly inefficient.

So what would Medpac have Congress do? The series of recommendations put forward in the report -- including testing a new bundled payment system covering both hospital and physician fees for certain expensive admissions -- amount to a request that Congress legislate new, government-run payment systems to replace the old, government-run payment systems.

But this is a prescription for delay and failure. Congress and CMS (the Centers for Medicare and Medicaid Services) are utterly incapable of rapidly designing and implementing any type of payment reform which entails losers -- which any sensible reform will. The political pressures are simply too intense.

One need only watch what’s happening in Congress this month to see why. For the better part of a decade, CMS has been working to test and implement a competitive bidding approach to selecting durable medical equipment suppliers for beneficiaries. But, just as the reform is about to be implemented, opponents of the reform have convinced many in Congress that it is unfair and will harm beneficiaries. Nothing is certain, but it seems more likely than not that the CMS effort will be postponed into next year by Congress.

Medpac is right that Medicare needs to move in an entirely new direction. But a much more promising approach to delivery system reform would be to build a marketplace in which providers would have strong incentives to reorganize on their own based on competitive pressures, not government regulation.

For instance, if Medicare moved more in the direction of a defined contribution program, beneficiaries could be given two choices each year: one for their preferred insurance arrangement, and one for their preferred provider arrangement. The provider arrangements would be integrated delivery networks, with hospitals, physicians, labs, surgical centers, labs, and hospices combined into some form of organizational unit. Some might look more like staff model HMOs, other more like loosely affiliated PPOs. Either way, they would be required to provide beneficiaries with some level of coordination so that patient records would be electronic and accessible and billing would be streamlined. These provider arrangements would not act as insurers, but they would have in place contracts with each of the private Medicare insurers in the marketplace. Beneficiaries would therefore have the ability to find the combination of insurance and provider network most to their liking.

No reform is without complications, this one included. But it would fundamentally shift power from the CMS bureaucracy and political system of allocating resources to the patient. Most importantly, with patients given the power to make their preferences known, providers would have strong incentives to organize themselves for convenience, quality, and efficiency.

posted by James C. Capretta | 5:45 pm
File As: Health Care

Wednesday, June 11, 2008

Medicare Reform and Health Care Reform 

Medicare’s stark financial problems are well known but worth repeating often. Promised benefits are expected to exceed dedicated financing for the program by $36 trillion over the next seventy-five years (measured in present value terms). Between 1975 and 2005, annual program spending growth per beneficiary outpaced per capita GDP growth by an average of 2.4 percentage points annually.

In the latest Weekly Standard, I discuss Medicare’s immense financing challenge, covering fairly familiar ground for those familiar with the program. But I also argue that a central assumption of conventional health policy thinking in Washington is wrong. That is, most analysts argue that Medicare cost escalation is simply a function of system-wide cost pressures, and that Medicare spending growth will slow only with effective health care reform covering all payers.

This kind of thinking ignores Medicare’s dominant role in today’s marketplace. Medicare fee-for-service insurance is the number one reason today’s delivery system is fragmented, disorganized, and inefficient. Reforming Medicare, therefore, is central to encouraging more efficient hospital and physician arrangements. In other words, to slow health care costs down for everyone, a crucial first step is reforming how Medicare buys health care services.

The full article can be found here.

posted by James C. Capretta | 9:33 am
File As: Health Care

Friday, June 6, 2008

Obama’s Tax on Work 

The centerpiece of Senator Barack Obama’s health care plan is a so-called “play or pay” mandate on American employers. This idea has been a staple of Democratic health care reform plans for a quarter century -- going back to Michael Dukakis and Senator Ted Kennedy in the 1980s -- and it’s one of the main reasons these plans never pass.

The basic idea is to give employers a choice. They can either “play” (that is, offer coverage to their workers and pay a portion of the premium) or “pay” (that is, pay a tax to help offset the cost of subsidizing the premiums for coverage offered to their workers by the government). Proponents of play or pay often argue that the current system, which lets some employers provide no health benefits while employers do, is unfair.

Senator Obama does not specify the rate of tax employers would have to pay if they did not offer coverage, but a similarly constructed plan offered by health policy researchers at the Commonwealth Fund proposed a 7 percent payroll tax.

The problem with this idea is that it would hurt the very workers it is supposed to be helping because it ignores fundamental economic reality.

Workers, not employers, pay for health insurance premiums. If the government imposes a health insurance mandate on businesses, the additional cost will be absorbed by workers in the form of lower cash wages.

But for workers near the minimum wage, employers can’t pass on the costs of health insurance because the law won’t permit cash wages to fall below the minimum wage line. Thus, in these instances, many employers will choose to cut back on employment rather than pay more for labor than they think it is worth to their firm.

Katherine Baicker of Harvard and Helen Levy of the University of Michigan estimate that about 224,000 Americans would lose their jobs under one formulation of an employer health insurance mandate. Those job losses would be disproportionately concentrated among non-whites, high school dropouts, and women.

In another new study, Richard V, Burkhauser and Kosali I. Simon of Cornell University show “play or pay” to be poorly targeted. They estimate that there would be 11 jobs lost among the working poor for every 100 newly insured. Moreover, because most pay or play proposals exempt the smallest businesses, some 1.2 million low wage workers would still not have health coverage through the workplace, necessitating some other governmental policy to provide them with insurance options.

For now, some voters find Senator Obama appealing because he is a fresh new face on the national scene. But many of his ideas are just recycled versions of proposals that were rejected -- for good reason -- in the past. Play or pay is certainly one of them.

posted by James C. Capretta | 3:19 pm
File As: Health Care

Wednesday, May 28, 2008

Destroying Private Health Insurance 

A Closer Look at the Obama Health Plan

News stories continue to suggest that Senator Barack Obama’s health care plan would build on today’s employer-based system of private insurance. In a new National Review Online article, I argue that Obama’s plan would actually lead to the demise of private health insurance, including coverage provided by employers.

The reason is simple: the public insurance option Obama calls for in his plan would use price controls to keep premiums low, which would completely undercut the ability of private plans to compete and gain market share. Estimates from the Lewin Group confirm that the vast majority of new insurance enrollment for a plan like Obama’s would go with the public insurance option because of the premium differential associated with such price controls.

Details in the NRO article.

posted by James C. Capretta | 10:39 pm
File As: Health Care

Tuesday, May 20, 2008

Google Health and Your Health 

Google Health logoThis week, Google unveiled Google Health, its long-awaited portal for storing patient medical records. This is another promising development in the long, slow movement to better use of information technology (IT) in health care. As matters stand, most patient records are stored on paper and housed inaccessibly in physicians’ offices, despite the revolution in IT which has transformed most other sectors of the American economy (see my New Atlantis article “The Clipboard of the Future” for more on the health IT conundrum).

The new Google portal is free to users. Data must be entered into the system by participating medical providers or the patients themselves. So far, Google has signed up a handful of high-profile participating providers, including the highly respected Cleveland Clinic. Patients getting care with these providers can have their medical information automatically uploaded into their Google Health account. But, most physicians and hospitals do not yet have the ability to easily place patient data onto the Internet, so Google Health users will have to rely on themselves to keep their patient information complete and up-to-date.

Microsoft Health Vault logoGoogle’s new health venture will compete directly with Microsoft’s Health Vault, launched in 2007. Both companies have invested heavily in privacy protection to give users confidence that their online patient records are secure.

posted by James C. Capretta | 11:09 am
File As: Health Care, Internet, Privacy

Wednesday, May 14, 2008

Taking Sides 

CBO’s misguided Medicare advice

Here is a key but subtle question in the health care debate: Is Medicare a passive victim of rapid health care cost inflation, or a primary cause of it?

To some, Medicare is just one car among many attached to the runaway cost train. From this perspective, slowing Medicare spending will require slowing down the engine which is pulling all of the cars too quickly down the tracks. And what is this engine? Most often, those sympathetic to this point of view suggest the problem is lack of discernment in the adoption of expensive new medical technologies. The implication is that what is needed most is not Medicare reform but health care reform which puts up more governmental barriers to innovative products and new technology on behalf of all payers, public and private.

But there is an alternative view. Medicare’s design — fee-for-service insurance, with virtually no cost-sharing at the point of service for most beneficiaries — is the most important source of financing for today’s fragmented and uncoordinated delivery system. In most markets, Medicare is the dominant insurer, and other private payers follow the program’s lead. As currently run, Medicare beneficiaries have strong incentives to use emerging technology more intensively with each passing year. Moreover, Medicare’s payment rules are set so that providers — hospitals, physician practices, labs, and others — can remain financially viable without effective integration or coordination. The resulting fragmentation in health care delivery makes it nearly impossible to reward efforts at improved efficiency and cost-effective care.

Looked at from this perspective, what is needed most desperately is a Medicare reform which changes the financial incentives so that insurers and providers themselves are rewarded for weeding out low value or ineffective use of services, including unnecessary use of high-tech medicine.

Normally, the Congressional Budget Office (CBO) is not supposed to take sides in these kinds of debates. But in recent months, there has been an unmistakable shift in emphasis in the agency’s health care work. This was particularly evident in a recent publication on the role of new technology in rising health care costs (available in PDF format here), in which CBO said the following:

Straightforward changes to the Medicare and Medicaid programs, such as more stringent eligibility criteria, greater cost-sharing, or changes in provider payments, could reduce federal spending in part by shifting costs from the federal government to households. Ultimately, however, such cost-shifting approaches are unlikely to be sustainable, and controlling federal spending on health care while maintaining broad access to care under these programs will therefore almost certainly need to be associated with slower cost growth in the health care sector as a whole.

CBO report on health care and techThe implication is clear: CBO is siding with those who say Medicare reform won’t solve the problem; what is really needed is a broader effort to impose more governmental control over the use of health care services, system-wide.

CBO based this conclusion on its finding that technological change accounted for about half of the real spending increase in health care over the last four decades, for public and private payers. This was anything but a straightforward calculation. CBO assigned cost inflation to other factors first, and then assumed that any unexplained residual was due to technological advances. But, although mentioned in passing, CBO underplayed the potential dynamic role of the various factors. For instance, CBO suggested that only about 10 percent of the real cost increase was due to the spread of expansive third-party payments, such as Medicare. But disentangling the effect of insurance coverage from new technology is not so easy. Indeed, other researchers have argued persuasively that it was the spread of third-party insurance that essentially paved the way for rapid technological advancement.

Medicare reform, properly understood and constructed, should be thought of as the indispensable first step of an effective approach to health care reform, necessary to get the financial incentives right for providers to pursue on their own new arrangements oriented toward high quality and cost-effective care. Introducing more governmental control over health care delivery is just as likely to lead to bad bureaucratic decision-making as to more efficient care.

CBO’s professional staff is highly productive and professional. But the agency’s mission is to provide objective analysis, not policy advice. And for good reason.

posted by James C. Capretta | 4:34 pm
File As: Health Care

Wednesday, April 30, 2008

McCain's Confidence 

Republicans have been on the defensive on health care for many years. Public opinion polls show more voters trust Democratic candidates on health issues than trust Republicans. On the campaign trail, that generally means Democratic candidates look for opportunities to bring up health care, while Republicans tend to avoid the subject unless pressed. When it comes to health care, think of Republicans as the visiting team in a sport that rewards home field advantage.

That may begin to change this year, however. On the central public policy question in health care — what can be done to slow cost escalation? — Republicans are far more confident than Democrats that they have an answer that will work and that the public will support.

John McCain meeting with nursesThat was apparent in Senator John McCain’s important health care speech yesterday. The presumptive Republican nominee for president discussed his vision for American health care, and, once again, he came down strongly on the side of a market-based solution. His presentation was forceful and persuasive.

McCain’s core argument is that conversion of today’s tax preference for employer-paid premiums into a tax credit flowing to households and individuals would spark much more intensive price- and quality-competition in health care. That kind of competition would, in turn, force insurers and those delivering care to improve productivity and the quality of care they provide.

McCain is far from alone in holding this view; conservative economists have been saying effective health care reform requires a tax fix since the 1970s. But this is the first time a Republican presidential candidate has made a market-based reform one of the central themes in his campaign for the presidency.

The Democratic candidates, Senators Hillary Clinton and Barack Obama, still enjoy the advantages on health care. Voters are of course attracted to their promises of lavish new insurance subsidies.

But on cost control, the Democrats are on shaky ground. Their health care plans will only work if they embrace the kinds of government-imposed budgets employed by Canada and Europe — price-setting by the government, and other measures which limit the supply of services. But their health care talking points make no mention of these steps because the candidates know they would be attacked, accurately, for supporting government-enforced rationing of care, which would not be popular with voters.

Senator McCain’s confidence on health care is clearly increasing, as it should be. He has the better argument on what should be done to slow health care inflation, and he can at least neutralize the health care issue if he makes the case repeatedly in the coming months.

posted by James C. Capretta | 6:22 pm
File As: Health Care

Friday, April 25, 2008

“Sweeping Change Will Be Difficult” 

On Wednesday, The Hill ran this very interesting story on the prospects for health care reform if either Senator Hillary Clinton or Senator Barack Obama were to win the presidential election in November.

Both Democratic candidates, of course, have spent months telling voters they are just the leaders the country needs to swiftly pass a major health care overhaul. Both have offered somewhat sketchy proposals that nonetheless promise the moon to voters — new subsidies to buy insurance, a publicly-run insurance option, and a federally-administered “exchange” where people can get private insurance.

But, now, it seems some in Congress are beginning to realize — perhaps after reading the candidates’ plans — that it won’t be so easy to pass them.

They’re right. The Democratic proposals, as described to voters so far, could never pass because they will not stand up to the kind of analytic scrutiny needed for realistic legislation. They would completely disrupt employer-based insurance pools, which would mean forcing millions of people to switch out of coverage they generally like today. And neither Democratic candidate has described anything resembling a plausible cost-control strategy. Consequently, their new subsidy promises will be “scored” as escalating at well above the rate of economic growth, which means ever higher tax rates or deficits.

Senators Jay Rockefeller and Charles Schumer are quoted in the story, and they clearly want to throw some cold water on the over-heated expectations of Democratic activists. But it might be too late for that. The Democratic presidential candidates themselves have raised expectations, and they are unlikely to say anything before November to take air out of the health care balloon. That will have to wait until late this year or early next year (if they are elected), at which point they will run the risk of alienating many voters who took them at their word.

posted by James C. Capretta | 3:57 pm
File As: Health Care

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