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Why Healthcare Costs Rise Faster Than General Inflation

Over the last few years, the latest buzz in the healthcare industry has been Accountable Care Organizations (ACOs), and the next wave will be the promotion of “value-based contracting”. These are similar approaches, different words.

Generally, an ACO is formed around a physician group or a hospital linked to physicians. The basic concept is for the provider system to be accountable for patients, and the providers are financially motivated to impact their patient population’s overall costs. Makes sense, right?

For the past 25 or so years, physicians have been linked to Independent Practice Associations, Medical Groups, and Management Services Organizations. Many of these provider organizations have had financial incentives tied to performance. Data have been available to assess physician performance. So what’s different now?

Today the Feds are re-emphasizing performance in their physician contracting under the new Medicare Access and CHIP Reauthorization (MACRA), which replaces the current reimbursement formula.

Beginning in 2019, the existing incentive programs now used for Medicare physicians will be replaced by a new performance-based model with four components. Those components are 1) quality, 2) resource use, 3) meaningful use of technology, and 4) clinical practice improvement.

Based on the Medicare physicians’ results, the reimbursements can be decreased by as much as 4% (adjusting to 9% by 2022). The program will have upside incentive for achieving exceptional performance up to 12% in 2019.

As the largest purchaser, Medicare is striving to establish per unit cost consistency in every market. Yet Medicare’s 2014 costs vary from $6,631 to $10,610 across markets. Why? Even if the cost per unit of service is standardized, extremely wide variation exists in how patients are treated for given conditions. When wide variation in care plans exists, some are right and some are wrong, as regular readers of Cracking Health Costs know. Some are better and some are worse. Period.

It’ll be interesting to see if the four new performance measures under MACRA will have a better impact than what’s in place today.

Self-insured employers don’t need to wait four or five years to see the results. They can leverage their purchasing scale with the providers to drive out both inappropriate care and unit price variations. The time to start is now.

Tom Emerick is the President of Emerick Consulting and co-founder of Edison Health.

Tom’s latest book, “An Illustrated Guide to Personal Health“, is now available on Amazon.

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CivisisusWilliam Palmer MDPeter Recent comment authors
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William Palmer MD
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William Palmer MD

Insurers want more money to go through them. They seek to grow. Hospitals do the same. Plans do the same. Docs do the same. 8 million consultants feel the same.The patients do not care…if someone else is paying. [this changing now] Only employers do not like this but now they have an excape in the Exchanges. So, in sum, almost no one cares if there is health care inflation. Ergo, there is inflation. The same inexorable inflation would occur if you paid for food and household expenses through insurance and much of this was covered by government or employers. In… Read more »

Civisisus
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Civisisus

If only it were so black & white. Our first mistake is a form of category error: we call 1/6 of our economy healthcare, when it is on closer inspection a grab-bag of disparate ‘stuff’. Some is fitness, some is health monitoring, some is diagnosis of conditions, some is care for a manageable chronic condition, some is high-input-intensity rescue care, some is palliative, etc, etc, etc. Some people require financial assistance to pay for some types of their care – and often all of us benefit from some coherent means of ensuring that people who need financial support for care… Read more »

Peter
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Peter

“Beginning in 2019, the existing incentive programs now used for Medicare physicians will be replaced by a new performance-based model with four components. Those components are 1) quality, 2) resource use, 3) meaningful use of technology, and 4) clinical practice improvement.”

How many docs will leave Medicare when this gets implemented? My hip surgeon opted out of Medicare, under the rules for doing that I am prevented from getting even partial reimbursement from Medicare for his bill.

Civisisus
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Civisisus

“How many docs will leave Medicare when this gets implemented? ”

Not appreciably more than have already opted out – low single-digit percentages in most places.

You sound like someone who never asked whether your inconsiderate doctor accepted any 3rd party payment for his no-doubt-vastly-superior-to-his-colleagues surgical performance