Introduced during the Trump administration, “direct contracting” is a Medicare payment model that allows private medical practices and insurance companies to arrange set payments from Medicare for the year, rather than bill the administration for services. But critics warn that the system, which has continued under the Biden administration, is being exploited by venture capitalists. Merrill Goozner is a reporter who has spent decades covering the slow-moving crisis of American health care, and he joins Ryan Grim to discuss the present and possible future of Medicare.
Ryan Grim: You may not have heard much about it, but in the Medicare system, there’s now something called direct contracting. It was started under Trump, and it has continued under Biden, and it allows private physician practices, hospitals, or insurance companies to contract directly with Medicare and get a set amount of money over the year. That contrasts with traditional Medicare, in which healthcare providers bill Medicare directly for services.
The stated point of direct contracting is to experiment with new models that would save money and improve care, but its critics warn that it’s a runaway scam that is being exploited by venture capital and private equity firms, and that it’ll lead to worse care in the long run, based on private equity’s poor record of delivering care in other settings.
The project in question was designed by Adam Boehler, who was previously a dorm mate of Jared Kushner’s, and also the founder of Landmark Health, a VC-backed healthcare company. He was brought in to run the Centers for Medicare and Medicaid Innovation (CMMI) under Trump, and as he was designing this new model, career staff became concerned about conflicts of interest.
When a calender alert went out to staff in May 2019 reading “discussion with Landmark on the direct contracting model,” career staff were appalled. I obtained a group text in which they commiserated with one another and expressed their disgust over the corporate influence. This is a family podcast, so I’ll edit the messages, but a sampling: “This stuff is so effing gross,” wrote one. “Ugh. What the eff,” replied another. A third sent a link to the Office of the Inspector General, suggesting somebody report it.
These were not off-the-wall concerns. The Office of the General Counsel for the Health and Human Services Department warned, in comments on a draft of the proposal that I obtained, that it appeared as if the new project was being set up to benefit specific companies: “We are concerned based on the regular references to organizations like Chen Med, Oak Street Health, and Verily in the comments and otherwise, that this model has been designed with specific private sector entities in mind. If accurate, this could create ethics concerns, as the creation of this model would give those entities a leg up in the market.”
And the model has indeed been extremely attractive to VC- and private equity-backed firms. It’s now being overseen by Liz Fowler, who serves as director of CMMI. She was previously the top healthcare aide to Max Baucus during the Obamacare fight, and if you remember, Baucus was the chair of the Senate Finance Committee, which wrote the meat of the bill. CMMI itself came out of the Affordable Care Act. Previously, Fowler had worked in the insurance industry, and between her time with Baucus and now, she was an executive at Johnson and Johnson.
This week, I published a story about the roots of the direct contracting program. Not long afterward, Fowler appeared at a conference by video in Washington and responded to the story. She appeared to be reading from a prepared statement.
Liz Fowler: I have [perceived or received] the concerns that have been raised, some legitimate and some overblown. But as a responsible steward of Medicare, we appreciate the input and we are continuously looking for improvement opportunities, including how the model can help achieve our goals for advancing health equity. So, I know that wasn’t part of the question, but since I had the opportunity and since this issue has been in the press, I wanted to take the chance to weigh in and give you my perspective.
RG: Now, claiming that your for-profit model is actually in the business of generating equity — and they don’t mean equity as in the stock market — is a rather old corporate trick. But what makes this story so interesting is that the principle behind this new Medicare effort is actually quite a good one.
The insight behind it is that it is better to pay healthcare providers for getting good outcomes for their patients rather than simply paying them more the more they treat them. In other words, make health the goal of healthcare. Too often, progressives in general, and specifically when it comes to healthcare, spend too much time thinking about the spending side and not enough time on the delivery end. Even if Democrats somehow managed to enact Medicare for All, they’d still be doing it in a system where many of the providers are for-profit, and where even the ones who are non-profit act like they’re for-profit.
But here’s where it gets interesting: The boondoggle launched by Trump and being continued under Biden is indeed lucrative for private companies, and there’s growing pressure from progressives in Congress to end it. In fact, I’m told a large letter is now circulating that’ll call for just that.
But as long as it or something like it exists, why should VC guys, private equity firms and insurance companies be the only ones exploiting it? What’s stopping cities and states around the country from setting up their own public provider networks and billing the federal government?
That’s one of the things I want to talk about with my guest Merrill Goozner today, because this isn’t really a story about privatization. Or, I should say, it’s not only a story about privatization. By next year, half of the people in Medicare are forecast to be signed up for Medicare Advantage, which itself is a privatized version of Medicare. So the public horse is out of the private barn, or the private horse is out of the public barn, or however that analogy might work. This is more a story about how we’re going to deliver care, who’s going to deliver it, who’s going to get it, and whether it’ll be any good.
Goozner is a veteran healthcare reporter who spent years at The Chicago Tribune and also served as editor of Modern Healthcare. He’s the author of the 2004 book “$800 Million Pill: The Truth Behind the Cost of New Drugs,” which was ahead of its time, and he currently writes a substack called gooznews.
Merrill, welcome to Deconstructed.
Merrill Goozner: It’s my pleasure to be here, Ryan. Thanks for inviting me.
RG: So to start, can you tell us who Dr. Arnold Relman is?
MG: Bud Relman, as his friends, and I wasn’t a friend, I did work with him from time to time and interviewed him, while he was still alive, was the longtime editor of The New England Journal of Medicine. He was the one who really initiated around 1980 the whole idea that there’s an awful lot of conflicts of interest in medicine, and that we ought to pay attention to them. While editor, he instituted the conflict of interest disclosure rule there. He was a single payer advocate and, really, towards the end of his life, really devoted himself to models for delivery system reform.
He’s got a number of books. I would recommend anybody who wants to get his last, and in some ways, most complete thinking on subjects, he had a book called “Second Opinion” [that] came out around 2007. And it really outlines many things that perhaps we’re going to talk about this morning.
RG: Right as a single payer advocate who zeroed in on conflicts on the problem that profit making kind of injects into the healthcare system, the healthcare delivery system. And I wanted to talk today about the idea that you fleshed out in your Washington Monthly article of capitation, because there’s been talk recently on the left about what’s being called a privatization scheme, or, basically, the direct contracting program that CMMI has been pushing.
First of all, let’s talk about the problems with it. What has been identified as flawed in that particular model? But I also want to get to whether or not the model itself is not only defensible, but may be the better way to go.
MG: Sure, before we can even begin talking about that particular model and the whole idea of capitation, and I’ll define that in a second, we have to understand what is and what we have now within our healthcare system is largely what’s called fee-for-service medicine.
In other words, you go to the doctor or you go to the hospital, if you wind up there, you have the unfortunate circumstance of being sick, you’re going to be treated by doctors and received services, whether it’s an operation or whatever, where every individual piece of what happens to you gets paid a certain amount of money. It’s the equivalent of piecework in the clothing industry. And it creates perverse incentives that people have identified for years, which is that the more you do, the more you make.
RG: So if a clothes-maker could charge by the button, you might have a lot of shirts with an awful lot of buttons.
RG: And so when you transfer that over into healthcare, you might have — say you’re talking about senior citizens’ aging, creaky knees — every senior who walks into my orthopedic clinic, I’m the hammer, I know how to put in a replacement knee, this is going to be my nail. So I want you to get a $20,000 knee replacement operation. I don’t want to send you for a series of $100 an hour therapy sessions with a physical trainer to get the proper exercises so you don’t need that operation. Even though you could probably spend years in physical therapy and just an equal quality of life, if not better quality of life. Because even when you get a replacement knee, if you remain, say, overweight or any other problems that are associated with that, your new knee is just going to have the same problems as your old knee — if not right away, eventually. So I have an incentive as the orthopedic surgeon to do the most expensive operation on you possible. So all of that is the problem with fee-for-service medicine and people have been thinking about ways of addressing that for literally decades.
And what Relman talked about in his book, Arnold Relman, who was the longtime editor of The New England Journal of Medicine, died around 2010, thereabouts, but near the end of his life, he really said we really got to come up with a different way of paying people and a different way of paying people is to give capitated payments to providers — what he said — was in nonprofit settings, where their incentive now is to deliver the best care also with the lowest cost because now you have to stay within the capitated payment that you receive for each patient.
RG: Right and define capitated. What do we mean by capitated?
MG: Well the way it’s done in healthcare, where it’s done today, is you pay an entity a per patient, per month fee for taking care of all of the healthcare needs of that particular patient. So therefore, it’s like working on a fixed budget. So if the average Medicare payment, let’s use that, for example, is say about $12,000 a year, we can talk about risk adjustment if you want to, but the point is if we have an average panel of patients — in other words, we have a bunch of sick people, we have a bunch of people who are completely healthy, and that for the whole group, say last year, there was an average cost of x, which actually in Medicare right now is about $12,000 a year — we’ll pay you for your full panel of patients $12,000 for each one — divided up, say, about $1,000 a month, it’s called PMPM — per member per month payment — into your nonprofit entity and then you have to operate within that budget.
So the incentives have been reversed. Instead of trying to do more and collecting each fee-for-service payment from Medicare, or any other insurance entity for that matter, you are getting a fixed payment, and so it’s your incentive as a provider to make sure that the care I give you, for my whole group of patients, brings in that amount of money spent below the amount. And that’s where any additional money gets made, if you’re going to have a profit, or if you’re a nonprofit, you can then argue to Medicare: Hey, we should have more people in our system, because we’re actually delivering high-quality care at a lower cost. And therefore we’re helping lower your overall costs.
And that, of course, is the way I feel how we can address one of the major problems in healthcare today, which is that our costs are escalating as fast as the rest of the economy. You want healthcare to grow at a slower rate than the rest of the economy. Why? Because you want a healthier population, and you want lower-cost healthcare.
RG: And so, in an ideal world, how does this model deal with the the reverse incentive problem of practices reducing the cost that they have by reducing the amount of care they have, by making it harder for patients to get appointments or throwing up paperwork barriers, or there’s an asymmetry of knowledge, and so a doctor might know that a particular treatment might be the most effective in this situation, but it’s super expensive, so take a couple aspirin instead. How do you get around that problem?
MG: Well, if we understand that 5 percent of patients in any given patient panel will account for about half of your costs — well, this is implicit in any insurance scheme. Not everybody has a car accident every year, but if you do have a car accident, you want insurance to be able to pay for all the costs associated with that.
Well, the same is true in healthcare. Not everybody gets sick every year. But some people have a lot of chronic disease. In fact, America has a very high rate of chronic disease. We have a lot of untreated hypertension, we have huge numbers of social problems that lead to mental health and other behavioral health disorders. There’s all kinds of things that are wrong with our society, that healthcare can only begin to contribute to addressing. Healthcare is the bandaid that we put on the sicknesses that result from a lot of those problems.
So now if I am a healthcare provider, and I’m on a fixed budget, I can take a look at my patient population and say: Who are most likely to be that 5 percent who are going to account for 50 percent of my costs, and what can I do extra for them within a fixed budget, that might begin to address some of the underlying problems?
So who are most likely to fall within that 5 percent? They’re most likely to be poor. They’re most likely to be unemployed. They’re most likely to suffer from discrimination, which leads to all kinds of health problems. It’s the old “living while Black.” Hypertension is a huge problem in the African American community. And so if I’m a healthcare provider, I have a real interest — another issue I want to mention is asthma. The amount of asthma in our society is extremely high.
RG: Oh, yeah.
MG: It leads to a lot of hospitalizations of kids every year — brief hospitalizations, but they have to have these asthma attacks. OK, so how do you address that? Well, if I’m on a capitated budget and I’m a healthcare provider, I might want to say: Wow, rather than keep sending people to specialists in the hospital, if I can hive off money and hire caseworkers and social workers, if I can have people go into people’s homes, let me deal with those problems directly by hiring the kind of workers that can help these families and people address those problems. And capitation provides you the ability to do that, in theory, whereas fee-for-service medicine, there’s no code where you’re going to get reimbursed for sending a social worker into a person’s home. That’s not a medical code.
RG: Right. But you do get reimbursed if they go to the hospital with an asthma attack.
MG: Exactly. And so therefore, that’s why our fee-for-service can’t begin to address the underlying problems that contribute to so much disease in our society.
RG: And so speaking of what we have now, you recently wrote about how the Biden administration curiously put a lot of energy into advertising in this last open enrollment period, pushing people into the kind of privatized version of Medicare called Medicare Advantage, and are likely, you are guessing, to push the number to as high as 50 percent — that half of people in Medicare will be in Medicare Advantage by next year.
What is Medicare Advantage? Is that fee-for-service? Talk a little bit about that program.
MG: Sure. So Medicare Advantage has been around for close to two decades now. And it is a system where essentially Medicare, which is the largest insurer in the country, covers all seniors and all people on disabilities who are disabled and qualify for Medicare because of that, and it pays them a fixed amount every year, which is, in theory, the average cost of a Medicare patient.
Now, this gets risk adjusted, which means you analyze the number of people who buy your plans in Medicare for what their underlying conditions are, and then you get paid additional money if they happen to be sicker. OK? But still, you’re getting a fixed amount.
But who sells Medicare Advantage plans? Medicare Advantage plans are sold by insurance companies. Alright, so United Healthcare, Humana, Aetna, Cigna, this is who you’re buying a Medicare Advantage plan from when you go into that form of Medicare. Medicare pays the insurer. And then the insurer turns around, and there are some examples around the country where they themselves pay capitated payments to providers. But for the most part, Medicare Advantage plans then turn around and pay a fee-for-service fee to the doctors and hospitals who use care when somebody in a Medicare Advantage plan gets sick. And so they have not reversed the incentives. They’ve actually used the incentives, same incentives, to do a bunch of things that have made Medicare Advantage more costly for Medicare than the average Medicare beneficiary.
They do what’s called upcoding — in other words, what they do is they look through a patient’s medical records, find diseases that may not be treated, and then they get an additional payment because that patient is classified as sicker, even though they’re not being treated for being sicker.
RG: Right, and it has nothing to do with their treatment.
MG: Let me give you an example that’s totally personal, and because it’s my personal — I am in a Medicare Advantage plan and I’ll tell you why in a moment. But let’s just start with what this upcoding is.
I have slightly elevated cholesterol. I deal with that by not taking a statin drug, which is the prescription that you would get — and a lot of statins are actually generic today and are not that costly, but just a few years ago, these were some of the most expensive drugs that you Medicare was spending like $10 billion a year on statins. I don’t know what the number is today, but it’s not that high. And I don’t take that statin, but what I do is I try to eat the Mediterranean diet, I try to control my cholesterol that way. But in my record, it might say that I had elevated cholesterol. Well, if I dealt with it by other means, it hasn’t been treated, it hasn’t caught that cost my health insurer anything, yet they’re still getting paid for that. So finding this in a lot of people is the primary way that they game the system in order to increase their payments.
The other way, which is we’re quite familiar with, people who are old enough to remember the patient backlash against Health Maintenance Organizations, it’s because they use bureaucratic means to what’s called stint on care — in other words, deny care — through methods of prior authorization by making it more difficult for the physicians who are in their networks, and narrow networks is another way that they only use the least costly physicians, people who might give them a cheaper price when they go out into the marketplace to price physician services.
So there’s a lot of gaming that goes on in Medicare Advantage, and it’s run up the cost.
However, within that additional profit that now the insurers are making, they make it advantageous for people to join. How? By eliminating the need for a supplemental plan, people often forget that Medicare does not cover all costs — besides the doughnut hole and the drug benefit that we hear about — there’s also the co-payments. You go to the hospital, the first $1,000 in traditional Medicare is on you. It might even be a little higher now. As well as co-payments for physician services, and other things that you have to pay extra for within Medicare. And so what they will do with some of their profits is either reduce or eliminate a lot of those extra costs.
I don’t have to buy a supplemental plan in my Medicare Advantage plan. And I don’t have to buy a drug plan. And as a result, it saves me close to $200 a month. For me, it’s like: OK, I’ve saved $2,400 a year. That’s like a slush fund that I can conceptually think I have in order should something happen to me, I can begin to pay the co-payments that might be in my Medicare Advantage plan. And that’s why the other big flaw in Medicare Advantage is that it tends to be most attractive to seniors who are relatively healthy, and to poor people who really like the idea that they don’t have to pay anything extra upfront for the supplemental plan.
RG: And so just to be clear, the way that you’re sort of saving the $200 a month in a roundabout way is because the Medicare Advantage plan has figured out a way to upcode you —
MG: That’s right.
RG: — make a little bit of extra money in there. And they’re sharing a piece of that with you. Is that more or less, right?
MG: Exactly. It’s called adverse selection by the actuaries. And if they have through a variety of means of how they market people to come into their plan, they’re getting mostly relatively healthy seniors, then they’re going to have a lower medical cost. In other words, their cost of doing business. They got to pay claims. But for people like me, knock on wood, I don’t have a lot of claims. And so therefore, that’s why they can have additional profits from that as well.
RG: And so with 50 percent of Medicare in Medicare Advantage, that’s half privatized, even before you get to all of these other models.
MG: Yeah, and that’s an estimate, by the way, for next year.
MG: We won’t know for several months, but based on everything I’m hearing, it looks like it. Last year, in 2021, it was 42 percent. And we’re talking about, if you go back just a decade ago, it was like 25 percent. It has been steadily rising for the past decade — the percent in there — and given the government advertising that went on to supplement the Joe Namath ads we all see, which is a lot of brokers who are just brokering people into the insurance companies. There is an insurance brokerage industry. And I think that’s who’s running a lot of those private sector ads. Now we even have government ads encouraging you to choose a plan during the end-of-the-year signup period, which we just went through.
And so a lot of the people who have declined to jump out of traditional Medicare into Medicare Advantage, are now getting put into these direct-contracting plans by virtue of being a patient at a provider who is one of these plans.
RG: So tell me a little bit about the the criticisms that Donald Berwick and Rick Gilfillan have had of this direct contracting model that was started under Trump, is still going on under Biden, and whether or not it has potential to be fixed or it just needs to be shuttered and something else needs to replace it?
MG: Right. So as we describe Medicare Advantage as a capitated payment, going out to insurance companies, direct contracting opens up the concept, at least when it was first raised as an issue of opening that up to provider-led organizations. When we say providers, that is sort of an industry code word for doctors who are organized into physician practices and/or hospital systems or hospitals — we use the word hospital systems because the system often owns a lot of physician practices, they own outpatient clinics, and of course, they own the hospital which is at the center of the system.
So, in theory, direct contracting would allow for a provider network to be able to get that capitated payment themselves without the insurance company as an intermediary. But at the same time, the way that it was built under the Trump administration, it was opened up so that insurers could also do direct contracting, and direct contracting will have its own system for figuring out: Are we paying these people too much? And it will be harder to figure out the way they set it up, because we’re not even going as accurately reporting back on what the actual costs were as we see in Medicare Advantage.
And this gets deep into the weeds, but how much care are they actually paying for? When you have a Medicare fee-for-service, well, Medicare pays every claim, so it knows exactly what the taxpayer is paying for for seniors and people who are disabled. When you give a capitated payment, the insurance company has to report back: What did I pay for hospital care for this patient? What did I pay for doctor care for this patient? And Medicare can look at that and say: Wow, the risk adjustment was off, and maybe we can figure out if we’re overpaying. And they do, and we have been, as taxpayers, paying too much for Medicare Advantage, and then there’s all this debate about how to fix that. And now we have a direct contracting model where there’s even less reporting requirements than Medicare Advantage. And so we’re not even going to know what’s going to be going on inside some of these organizations — and opening that up to the insurance companies rather than directly to providers, which a good argument can be made that it could be a useful program with appropriate guardrails if it goes directly out only to providers. But that’s not the way they set up the probe.
RG: And so, in your recent piece you profiled some of the companies who also are participating in this program. What does it look like if you’re a patient in a well-run direct contracting or a well-run, value-driven operation?
MG: Let’s drop back and think about how you access healthcare in our society.
We have given the role of organizing our healthcare to the primary care physician. You identify who is your primary care physician, and this person is the first person you call when you get sick.
If it turns out your symptoms are such that, my God, you’ve got this unexplored pain, it’s really bothering you, the primary care physician looks at you and says: Oh my god, you better go get this test that I’m going to send you over to the oncologist, I’m afraid it’s that — it’s some form of cancer. And now all of a sudden, you’re in the hands of a specialist. So the primary care physician is the most ideally suited person for really managing your care. So if we were to give a capitated payment to the primary care physicians, or their practices that have the resources in order to actually do care coordination, as well as the initial diagnosis and management of your day-to-day medical needs that are not serious, if we were to infuse them with the cares, then they are best positioned so you get sent to the oncology practice — and it may be they’ll have 20-40 physicians that are practicing oncology, or you go even to your primary care physician, they’ll be four, six or eight, they tend to be smaller primary care practices across the country. But they are a partnership!
So all practice of medicine in this society, even at the hospital level, except for government-owned hospitals, and government-owned clinics, which are federally qualified healthcare clinics that serve mostly the poor, and you have maybe the Veterans Administration, OK? Other than those exceptions, everything is privately owned practices and hospitals.
Now, a majority of hospitals, most people don’t realize this in this country, are not-for-profit hospitals. A good number of them are religiously affiliated. All right? And you have the Catholic hospital systems, you have Presbyterian, Methodist, Adventists systems that are out there. It’s a product of our history of who originally set up hospitals, and physician practices are largely privately owned, owned by the doctors in many cases. But what has happened over the last quarter century, and even going back further than that, is you’ve seen increased consolidation in the physician practice to where hospital systems now employ over 50 percent of all doctors, organized within physician practices, and a lot of private firms have opened up or bought up physician practices.
I don’t want to go into all the problems — that gets deep into the weeds about what they’re doing and just the overall consolidation movement — but suffice it to say that they are profit-maximizing organizations and are creating many of the same disincentives for lower quality care by making the physicians see more and more patients within an hour, and it’s all and then turning around and billing people and fee for service.
So we have huge problems in our delivery system. And what we really need to do is to make it so that potentially, through direct contracting, to use that phrase, you could give them the per-patient, per-month fee so that they can coordinate care — and if they’re within a nonprofit organization, give them incentives to organize the best kind of care.
And, interestingly enough, there have been some privatized startups, many of them financed by Wall Street funds, that have actually begun to use this model, many of them getting started with among the poorest patients within Medicare. So for instance, one of the companies — I live here in Chicago and I visited their clinics — Oak Street Health. They’ve expanded around the country, but they started here in Chicago. And they operate, for people who know the city, the Near West Side, so one of the poorest neighborhoods in Chicago, and they take Medicare Advantage payments from private insurers and take care of some of the sickest patients and they just take that capitated fee. And they do many of the things that I talked about earlier, which is that they try to address many of the social causes that are causing people to have excess numbers of hospitalizations in excess numbers of chronic disease. They send caseworkers into people’s homes, they call the building department, if there is something wrong with the home, they send home health aides to go in there to make sure they’re taking their medications. They’re not on a fixed time budget with patients when they come in, they actually run almost like a senior citizen drop-in center in the neighborhood.
RG: Your descriptions sound like community centers.
MG: Exactly. I mean, I went there, and I visited, and I remember that the medical director said to me: What middle class people don’t understand is they want this kind of care.
And I looked at it, and I said: I think that there’s a strong argument for the model of care delivery. And what you therefore need in a direct contracting program is the kind of financial guardrails to make sure people don’t game the system. And that starts with making sure that the up-coding doesn’t go on, trying to give them the technical support [so] that nonprofits can get into the game — because one of the things that for profit organizations do bring is the initial capitalization to set this up, and we don’t have a system in the nonprofit sector to be able to do that. But this could be in the form of government grants, it could be in the form of technical assistance, and it could be in the form of a combination of both of them. So there’s a lot of things that we could do to make sure that this kind of direct contracting model succeeded in a way that actually delivered better care for more people at lower cost.
RG: And on the government grant question: As I was reading your piece, and as I was learning more during doing my reporting on this direct contracting program, I was thinking to myself: Why are we allowing just the venture capital and private equity boys to walk off with all this money? If CMMI is going to set up a program that is going to be generously, in a capitated way, fund patients to get quality, comprehensive care, what would prevent Washington, D.C., or New York City, or Berkeley, or Morgantown, West Virginia, or the entire state of — well, New Hampshire would never do it.
RG: That feels like it’s not living free and dying.
RG: But what would stop a public entity from saying: We feel like we can do this just as well as these private equity guys, maybe better, and we’re not going to be ripping off the government while we do it.
MG: Right. So you mentioned CMMI, that’s the Centers for Medicare and Medicaid Innovations, and that was set up by the Affordable Care Act. And of course, most of their emphasis over its first eight, nine years until we got deep into the Trump administration and some of the people that he put in there at HHS got their hands on CMMI, it focused on setting up something called accountable care organizations, which tried to do exactly what you were describing — a lot of it through hospital systems and through privately held physician practices. In other words, they were dealing directly with providers, not through insurance companies, and trying to help them move towards a capitated model, although that was never the goal.
Most of what they set up was A) voluntary, and B) went with what was called a shared savings model. And shared savings is sort of like: OK, if the average cost of Medicare patients is going up x, if you bring it up at x minus 10 percent, you’ll take 5 percent and 5 percent will be in lower costs for us as the government payer, and it was kind of almost like, cute, right?
MG: Because you had, OK, we’ve got these people in our Accountable Care Organization, but basically, the way we’re making our money is through fee-for-service medicine. And nobody really as a system, or as a healthcare practice out there, got deeply engaged in the game.
And if you read the writings, you mentioned Rick Gilfillan — he was the head of a major hospital system — after he actually was running, he helped set up many of these programs at CMMI, originally. And Don Berwick, who headed CMS, the Centers for Medicare and Medicaid Services, which runs the Medicare program and helps contribute, the federal government pays the larger portion of Medicaid payments around the country. And the two of them were the big advocates of doing all of these experiments around the country and pushing the whole delivery system in that direction. But it never really got to any kind of critical mass. And that was because they made it voluntary. And let’s be honest about it: A lot of the nonprofit hospital systems around the country, including many of the government ones, like a city government one, run hospital systems where they have the sort of same incentives as even the private-run companies. In other words, their doctors are on fee-for-service, they’ve got a huge plan. So if I’m running a hospital, I have more revenue coming in, if I have more heads in beds, that’s the phrase that they use in the industry.
RG: Right. The executives are making fortunes, too.
MG: And some of the nonprofit CEOs are making $6 million, $8 million, $10 million a year, and their employment contracts have incentives for increasing revenue. And increasingly that’s the case because boards have been under pressure for the last decade to not have that happen.
And so the mindset of the delivery system hasn’t been there to do what you were asking, which is: Why can’t we set this up ourselves and do this model, because it really does have the greatest potential for delivering higher quality care at lowest cost?
And that’s because we really haven’t pushed them through government authority to do that. And that would either require an act of Congress to make it mandatory that they move into that kind of system, or setting up programs that really create the additional resources that are required to do it on the front end — you make them an offer they couldn’t refuse. In other words, we’re going to pay for the kind of infrastructure that you have to create in order to set up this system.
So when you look at Oak Street Health, and you look at, oh, they’ve really created kind of a neighborhood clinic here, and they’re paying their physicians on a salary, that’s a huge transformation if you’re in a private practice affiliated with a hospital in most areas of this country.
And so making that transition is a pretty abrupt shift! So you need to be able to cushion that transition.
RG: So what would it take for a public-run practice that’s big enough to get off the ground, because I feel like particularly young people coming out of medical school or doctors, nurse practitioners who have spent several years in the business, I think would leap at the opportunity at this point. I don’t think public healthcare has the same stigma that it used to. And I think if you argue that: Look, you don’t have to just rush through every patient in 15 minutes, you’re not going to have to do all of this paperwork that’s driving you out of the business, I feel like you could attract the people to do it. Then you need office space and you need the equipment — in other words, what would it cost? What would a venture capitalist throw into a project like this to get it off the ground before it starts turning these big profits from Medicare payments?
Let me just start with the first part of what you said, which is exactly right. I believe most young physicians — if you take physicians under 40 today — want to work as salary doctors, surveys have shown this, they want kind of regular hours, and they want to practice humane medicine.
RG: Imagine that!
MG: They don’t want to be on a fee-for-service treadmill, where they only see somebody for 13 minutes and then have to go enter something in a computer and then rush off to the next patient and never really get to know their patients. If somebody needs a half-hour or even an hour of intensive workup, and taking a look, and finding out what’s going on in their lives so that then I can deal with getting them the proper social work, or the proper home health aid, or the proper whatever it is that they need. That’s the way they want to practice medicine.
And not only that, we haven’t talked about this yet, but I want to throw into the mix the idea that these practices also would have the capacity to hire people like physician’s assistants, and nurse practitioners who have the ability to do a lot of the lower-level stuff like giving tests or providing counseling, therefore reserving the physicians’ time to actually deal with the more complex cases. And people want to practice medicine that way. So I think that the social base for making a transition absolutely is there within the medical professions and the medical support professions.
So how do you get there? Well, one of the things you need is you need a very sophisticated health information technology infrastructure, where you can pull down all of the information from all of the various places where this person may be getting care now, which can include the drugstore, which can include the government clinic, it can be the hospital: How do you bring that into a physician practice? Well, you need a fairly sophisticated information technology system that is — the code word in the industry is interoperable, OK? So we need a really strong infrastructure in this country to create interoperability between all medical records that is instantaneously apparent to the healthcare provider on that computer screen when that patient is on your radar, whether they come in today, or you’re trying to analyze how best to help them. And you need people who can do that. Well, that’s another long discussion about why we don’t have that. I won’t open a can of worms now. But we’re not there. And so, therefore, you have to create that infrastructure for these practices.
Another thing is just physical infrastructure. What does it mean to change your practice to have that way? Well, it’s gonna require hiring some new people to do tasks that you haven’t done before. You might need technical assistance for that, OK? And you might need a different kind of physical place where you’re operating. It’s not the: Here’s a waiting room, and here’s four single rooms, or five single rooms, or eight single rooms in the back where we lead everybody, once it’s their turn, past the front desk, where you have an office, you know what it looks like, right, when you go into a doctor’s office? Maybe that’s not what we need. Maybe what we actually need is a big front place where people can actually see that: Here’s a desk where you can get housing assistance, here’s a desk where maybe you can get food assistance if you need it. How do you create that for physician practices that want to be in a position to take a capitated payment in order to provide that kind of care for people?
RG: Well, let’s say you are one of those physicians’ practices, or let’s say you’re the mayor of Allentown, Pennsylvania: What does it take to make that possible at this point?
MG: I think government — local and state governments — can play a huge role in this. And the role that they currently pay is sending money to existing programs, primarily Medicaid or local assistance to fill in the cracks of social service programs. So in other words, local government may be involved in the housing department, or you might have a public health department which is dealing with vaccinations or right now we’re dealing with Covid-19. And you have a very truncated set of things you’re dealing with. The state’s primary role in healthcare is funding Medicaid, okay, which takes care of poor people, and it takes care of those who can’t afford health insurance, because they’re not employed for one reason or another. And it also has a huge long-term services and support program, where they are sending in the home health aides to people who are disabled, people who are in nursing homes. And of course, they’re paying for a tremendous amount of nursing home care if you have no assets to be able to afford nursing homes. So that’s what state governments are paying for.
Most people don’t know this, but over 70 percent of Medicaid patients in this country right now are managed by for profit-insurers. OK? So Medicaid programs have gotten out of the business of what Medicare does in its fee-for-service program, long ago, most of them, and turned it over by paying capitated payments to insurance companies to take care of Medicaid patients.
And of course, as most people who follow Medicaid closely know, the number of physicians who participate in Medicaid is less than what participates in Medicare, right? And so, by definition, if you’re on Medicaid, you are in a narrow network. And, of course, the people on Medicaid have — because they are poor, for the most part — a disproportionately high share of healthcare problems, for all the reasons that we talked about earlier. But you have a base of things locally that you can say: How can we reorganize this and use some of this cash flow to move in this direction that we’re talking about?
Now, you would need to really have some creativity at the local level, to begin doing this at the state and local level, but the experts are out there to help you do that. And if the government were willing to take the lead — and, in fact, for me, Ryan, as a professional journalist for most of my life, but I’ve spent a couple of stents in my life in the public interest movement, two five-year stints, to put it plainly, even though I’m now over 70 years old, but the progressive movement in this country has never focused its attention on delivery system reform.
MG: It’s focused all of its attention on insurance reform — a huge problem, remains a huge problem, and we need to deal with getting everybody insured in this country, by one way or another — because frankly, anybody who’s uninsured is a major problem for any system you’re going to set up. And we know all the reasons for that.
You have all of the increased healthcare needs for a poor person — because it’s disproportionately people who are low-income, who are unemployed — and when they do show up for healthcare, it’s because they’ve allowed the problems to fester, where they now become among the most expensive patients in the system. And so therefore, we need to get everybody insured. So I’m not putting that down as an emphasis. That’s very important, we have got to deal with that. But that’s what we basically spent most of our time doing. And we have not focused on the delivery-system side.
And I guess my message after spending many years in this field, writing and thinking about it — I was the editor of Modern Healthcare magazine, which went out to executives, hospital executives, primarily, that was our audience, it’s a trade journal, all over the country. And everybody sort of gets this intuitively, but nobody knows how to move from point A to point B. So therefore, all of the experiments have always been partial in delivery-system reform, and voluntary. You got to remember, even before Obamacare, there was Massachusetts’ Romney-care; you need state examples of people taking the lead.
So I would hope that in maybe the next couple of years — could be starting today or whatever — that people will begin to think about this model and then say: Hey, wow, you’re right. Let’s try to do this in the government sector! Let’s try to do this for Medicare and Medicaid patients all together in here in our state, which you have more immediate control over and we can open it up to employers and employer-sponsored plans that come into this and create a city-based or state-based system that tries to facilitate transformation of the system into this more coordinated care model that we’ve been talking about.
RG: Yeah, and the other reason I wanted to talk about this this week is because I was struck by your insight that that the left has really lacked a focus on the delivery side of it, but also come 2023, as everybody knows, it’s highly likely that Republicans are going to be in control of one or both chambers of Congress. And so if there’s going to be organizing activity and political pressure to try to make people’s lives better, you’re going to have to do it in places where it’s possible. And this seems like one of them.
MG: I think that’s absolutely the case. I think that there’s a lot of interesting statewide models around the country.
I would point to one that I would wish people would pay more attention to. And that’s in Maryland, where since the 1970s they’ve had what’s called an all-payer model, where every price inside a hospital has to be the same for every payer, whether it’s Medicare and Medicaid, or private insurance, or somebody walking in just off the street with no insurance at all. And right now, we have variable prices. Well, when you go to all-payer pricing, it increases government costs, but reduces private costs — you could say, well, it’s a subsidy for the private employers out there. Yeah. But it gets rid of a lot of the problems that are associated with variable pricing, which is where the uninsured pay the highest prices — and government, especially Medicaid, underpays for its services. And so if you were to actually move more of healthcare spending into the public sector, you’d have more control over how that money gets spent. And then you could try to talk about reforming the delivery-system model. And there is some evidence, actually a lot of evidence, to suggest that Maryland as a result of that has been able to devote more of its resources to taking care of some of the social conditions that are exacerbating the use of healthcare, and reducing, over time, the overall spend. Not an absolute reduction, but growing at a slower rate than the rest of the healthcare economy.
When you tried to create a single-payer system, even in Vermont, it just fell apart because of the level of taxation needed to completely wipe out private insurance. So I think focusing on delivery-system reform, and even opening it up to private insurance people to come into your system —
RG: Once you’ve built it right.
MG: Is maybe a way of unlocking some of the other things where we’ve not been able to make progress in terms of creating a better healthcare system for people and one that doesn’t cost as much as it does in the United States.
RG: Well, feels worth a shot. Meryl, thank you so much for joining me.
MG: Ryan, thanks for having me on, like I said. Can I make a plug for my own writing on healthcare?
RG: Oh, please do!
MG: Well it’s gooznews.substack.com, and I write a couple of times a week, maybe sometimes just once a week, where I focus mostly on healthcare. Like I said, I spent most of the last quarter century of my journalism career focusing on healthcare. And so it’s sort of become the way I try to continue keeping my hand in and I still think I have something to offer here. So if people want to sign up, feel free, there is a way to subscribe, but you don’t have to pay. Just sign up for the free stuff, and you’ll get most of what I write.
RG: Absolutely. And I’ve been a longtime reader and admirer of your work and I appreciate you joining us.
MG: Thank you.
RG: That was Merrill Goozner, and that’s our show.
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