- The Washington Times - Sunday, June 14, 2009



A group of six key players in the health care industry stood recently with President Obama and committed to slowing the rate of growth in costs by 1.5 percent. Though they want to be at the table as health care is reformed, no specific plan has emerged for slowing that growth.

UnitedHealth Group Inc.’s offer last week to save $540 billion in federal costs over the next decade demonstrates some of the flexibility and creativity needed by all parties to achieve meaningful reform, but it is far from comprehensive.

If the stakeholders are looking for a new idea that would appeal to policymakers on both sides of the aisle, I have this to offer.

The cost escalation we face is not caused by evil people or fraud, but the fragmented delivery system that makes every entity fight for its interests in often unproductive ways. Politics will ensure that these players are at the table; law enforcement can make them follow the rules. What we need is a new game specifically designed to slow the rate of growth and recognize the interests of each group.

Some single-payer advocates are pushing for a strong public-plan option that would leverage Medicare’s market power to lower fees. That might achieve one-time savings, but Medicare doesn’t have the tools or political independence to change the underlying behavior of insurers, physicians, pharmaceutical and device manufacturers, hospitals and unions. A redesigned system must create new incentives for those entities so their self-interested behavior leads to a better societal outcome.

Some imagine an ideal system with a better balance of primary care physicians and specialists, universal coverage not tied to one’s employer, physicians and hospitals cooperating to lower costs, and manufacturers developing cost-reducing innovations. How to achieve that ideal is unclear; wishing won’t make it so. This is where market forces come in. They create attractive opportunities for those willing to adapt and punish those who do not. Government action is needed to achieve universal coverage; market pressures are needed to change the way entities interact.

The public-plan concept includes risk-sharing, but this need not be through a public insurance program such as Medicare. Instead, a publicly chartered major risk pool could work directly with insurers to spread the risk for hospitalizations and the care of chronic illnesses - what insurance is designed to do. The pool, however, should be independent from government meddling,

The major risk pool would have several functions. Because it would accept large blocks of enrollees from insurers and state-sponsored public plans at simple demographic rates, insurers would have no need to avoid risky enrollees by engaging in expensive underwriting and selective marketing. With the pool absorbing and spreading risk, premiums for individual and small-group coverage would fall. With that, coupled with legislation creating an individual mandate and income-based subsidies, we could achieve close to universal coverage.

This major risk pool would not be simple reinsurance - classic reinsurance pools spread risk but do nothing to improve efficiency or quality. The new risk pool would use its massive enrollment to transform the delivery system - not by fiat or wish, but through the self-interested behavior of the players. Restructured provider-payment mechanisms would improve quality by rewarding coordination.

The pool would offer a bundled payment to those physicians and hospitals accepting responsibility for all the care a patient needs during an episode. The pool would set its payment at the average charges of those teams achieving above-average outcomes. Teams could negotiate higher charges with health plans, but they also could increase their incomes by improving care processes, reducing errors and seeking less expensive drugs and devices. Device and drug companies would respond with cost-saving innovations. Hospital workers could increase their wages by identifying better work flow.

The risk pool would need information on claims and quality of care to set its payments. It would make these data available for others to see what works and what doesn’t. Because the pool would be self-funded and independent, special-interest groups wouldn’t be able to bottle up findings as they can with government agencies.

No provider would be forced to accept the bundled payments. For those preferring fee-for-service payment, the pool would use Medicare rates. Most chronic-illness care, however, is managed outside the hospital. Over time, the pool’s funds would shift from inpatient to well-coordinated primary care - something Medicare has been unable to do. Health plans attracting primary care practitioners - probably by offering them higher fees and payments for telephone calls, e-mail and ongoing case management - would reduce hospital use and garner more pool payment.

This public-private partnership would replace the vicious cost-increasing cycle with a virtuous value-enhancing cycle - not by changing underlying behavior but by realigning incentives for all the players. This would be a new game all could play: Democrats and Republicans, those who want equity and those who want markets.

Harold S. Luft is professor emeritus of health economics at the University of California at San Francisco and director of the Palo Alto Medical Foundation Research Institute.

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