Medicare pay reform misses the bigger question

Tuesday’s announcement by the Department of Health and Human Services, setting firm targets for shifting Medicare away from fee-for-service payments, has for the most part generated positive reviews. That makes sense – that payment structure provides incentives for excess care, and HHS is right to move past it.

But that shouldn’t mean the Medicare agency gets a pass on the details. There are a few reasons to wonder just how serious HHS is about these changes.

First, the alternative payment structures highlighted by HHS haven’t yet succeeded in pilot programs. The whole point of changing Medicare’s payment method is to cut costs while increasing (or at least not hurting) quality of care. And the whole point of pilot projects is to demonstrate the applicability of a concept, before it gets scaled up.

Under Obamacare, the agency started projects to test whether accountable-care organizations can cut costs. Of the 32 health-care groups that signed up for the most ambitious program, the Pioneer project, just 19 remain; many of the rest were unable to save money.

For the rest, the total savings were roughly equal to the startup costs. And as the Wall Street Journal noted in October, these were the groups best suited to make the accountable-care model work. Now HHS is citing that model as a superior alternative to fee-for-service, without having demonstrated as much in a pilot project. (The results from another pilot project – for what’s called bundled payments, another model highlighted by HHS – have yet to be released, which doesn’t inspire confidence.)

That leads to the second reason to worry about the seriousness of what HHS announced: The agency has installed what could amount to an escape hatch, by using a broad definition of alternative payment methods – including those that are less likely to save money, but easier for health-care providers to swallow.

The accountable-care model in the Pioneer pilot uses what’s called “downside risk,” which means that if a group of health- care providers fails to cut costs, its Medicare payments fall. That’s the stick that ensures these models work at saving money.

But the targets announced by HHS – 30 percent of Medicare payments flowing through “alternative payment methods” by 2016, and 50 percent by 2018 – also include accountable-care organizations that don’t impose downside risk. That means the agency could theoretically hit its goal without expanding the number of health-care providers in those arrangements.

But wait, you’re asking – if the alternative payment models that HHS promises to expand don’t all require mechanisms for saving money, and there’s no minimum target for those that do, how does HHS expect to produce lower costs? Simple: The agency isn’t yet sure that it will.

Conspicuously absent from Tuesday’s announcement was any target for reducing Medicare costs. The answer isn’t that such predictions are too hard; when I spoke with the five largest private insurers in 2013 about their plans for alternative payment methods, all but one were willing to tell me what they expected to save.

Then again, unlike Medicare, private payers don’t have to answer to the hospital and doctor lobbies, or to Congress. The real test for HHS isn’t whether it’s willing to move away from a system that everybody acknowledges is crazy. It’s how hard the agency is willing to push hospitals and doctors that don’t, or can’t, make the alternative system work.

Christopher Flavelle writes editorials on health care, economics and taxation for Bloomberg View.