Wooden-Headed Health Care Reimbursement

The physicians whom I interviewed for my article on health care dysfunction(1) frequently spoke about perverse financial incentives, particularly those favoring high-technology and invasive procedures, and disfavoring primary care and general acute care. An example I cited in the article was that device manufacturers could get away with charging $1500 for a bare metal coronary artery stent, which resembles a small stainless steel spring or mesh cylinder, even though its manufacturing cost cannot be as much as $1.
When the physicians I interviewed formed the nucleus of an email list, one of the frequent topics of conversation was also the worsening contrast between lavish reimbursement for again, high-technology and invasive procedures and penny-pinching for primary care. The Health Care Renewal blog has provided some vivid examples of this contrast. Some recent ones were:

• Implantable cardiac devices, specifically pacemakers and implantable cardiac defibrillators (ICDs), remain very expensive (about $25,000 for the latter), despite progressing technology that ought to bring down manufacturing costs, and evidence that the quality of the manufactured devices has been lacking (see post here and the links in it.)
• Cancer drug pricing continues to increase rapidly without any obvious basis in the costs needed to produce the drugs. One particular example is thalidomide, a drug that costs $25,000 a year, even though it was first developed in the 1950's and available as a generic in South America. (See post here.)
• Cardiac drug pricing also continues to soar. One particular example is BilDil, a combination product of two drugs that are both at least 40 years old, but which is now being aggressively promoted with a racial angle. (See post here.)
• Hospitals charges for routine services often exceed superficially rational limits. For example, hospitals may charge thousands for individual physical therapy sessions (see post here). In at least one instance, UnitedHealth, whose stated mission is to "make health care more affordable (while paying its top executives hunders of millions, see post here), was willing to reimburse a hospital $1275 for a single physical therapy session, for which physical therapy experts would charge, at most, $200. (see post here).
• Diagnostic technology reimbursement has increased far faster than any reasonable costs estimates. For example, from 1974 to 2004, inflation was over 300%, the (unadjusted) cost of CT scanners has gone up over 400%, but Medicare reimbursement for a head CT scan has gone up over 700%! (See post here.)

However, up to now, there has been very little discussion in the medical, health care research, and health policy literature of pricing discrepancies between different kinds of health care services.
Thus, a new commentary now available on-line in Health Affairs is very significant (link here)(2) The article was based on analysis of limited financial data, and interviews with a variety of people in government and industry. (Note that the article did not deal with charges for pharmaceuticals and devices, which sometimes are reimbursed as part of physicians or hospital services, but sometimes are reimbursed separately. It also did not deal with the prices physicians and hospitals pay for goods and services.)
Its main points , written in a very understated academic style, were:

• There are major discrepancies in reimbursements provided for different kinds of health services -"Unintended relative overpayment of some services and the relative underpayment of other services, in combination with other market factors, is driving increased use of expensive care, which in turn could become an important driver of health care cost trends."
• These discrepancies "do not accurately reflect the relative costs of providing different services" - and thus create large differences in profitability among different services.
• Much of Medicare's reimbursement rates are based on charges, not on any assessments of the costs of providing the services - In particular, Medicare's system for reimbursing hospitals, which uses diagnosis related groups (DRGs), bases its reimbursement rates on what hospitals charge, not on any assessment of the costs of providing services.
• When Medicare reimburses based on cost estimates, these estimates are very old - The relative value based system used to reimburse physicians is based on data from the mid-1980s. Although the amounts paid have been adjusted for inflation, the underlying cost estimates have not been rechecked in more than 20 years.
• Managed care, when its reimbursements differ from those of Medicare, is content to simply discount what providers charge - "Private payers, despite not placing a priority on more accurate payment measures, often follow Medicare payment policies...." "Many private payers pay negotiated per diem rates for a large portion of inpatient care, and these per diems are typically adjusted for high-cost or 'outlier' cases based on charges for those admissions. In addition, some inpatient care and much outpatient care other than for physician services are paid for on the basis of negotiated discounts from provider charges. Plans are mostly likely to use prospective payment methods besides negotiated per diems or discounted charges for hospital-based surgical procedures, emergency department visits, and laboratory and imaging services provided outside the hospital. In developing these payment systems, private plans also typically rely on charge data to set relative values."
• Updates to reimbursements again rely on charges, not cost assessments - "Respondents stated that they focus primarily on controlling upward trends in aggregate payments and rarely gather market information to identify and adjust payments for specific services that are paid too much or too little."
• These policies favor reimbursement for high-technology - "A likely result of these practices is that charges for services with the most rapidly advancing technology tend over time to have the highest markups over cost."

The authors did not address why organizations whose main purpose is to pay for health care services have seemed uninterested in the prices they are charged, only noting "historically, a political constituency to drive improvements in payment mechanisms has been lacking."
Now, let's see. The rising cost of health care has been a major national (and international) issue for at least 20 years. Health care has become a trillion dollar business, and health care costs have been rising at double-digit rates, much faster inflation, for longer than most people can remember. Medicare, the US national single-payer system for the elderly and disabled, has been focussed on cost-cutting since then. The major rationale for the rise of managed care was to deal with increasing costs. And yet these organizations have paid very little attention to what services actually cost when making reimbursements. What is wrong with this picture?

In The March of Folly, historian Barabara Tuchman described how the amazing wooden-headedness of political leaders lead to huge disasters. I cannot think of a more charitable way to described how Medicare officials and managed care organization executives decided to pay for health care than as wooden-headed. Given that controlling health care costs is a central component of managed care organizations' missions, making reimbursement decisions without any effort to determine what health care services actually cost suggests something much worse than wooden-headedness on the part of managed care leaders.

Ginsburg and Grossman have noted that the emperor has no clothes. Its too bad that, as they wrote, "The United States has probably lost a decade in addressing these payment problems." We need to start addressing them no, with a vengeance. This will require health care researchers pulling their heads out of the sand, aggressive investigative reportings, and big-league conggressional inquiries.

And if we don't do something soon about this metastatic, malignant wooden-headedness, our foolish and irrational payment policies will probably drive primary care, general medicine, and general hospital acute care right out of business.

References
1. Poses RM. A cautionary tale: the dysfunction of American health care. Eur J Int Med 2003; 14: 123-130.
2. Ginsburg PB, Grossman JM. When the price isn't right: how inadvertant payment incentives drive medical care. Health Affairs 2005.