Trump’s Radical Reform of Medicare, Part I

This post is coauthored by Lawrence J. Wedekind.

The Trump administration is making fundamental changes to the Medicare program. These reforms are every bit as radical as the changes we have seen in federal policy governing employer-provided coverage and the market for individual insurance. Further, it seems likely that the changes initiated so far are only the beginning of a continuing shift in the role of government in health care.

The vision behind these reforms can be found in Reforming America’s Healthcare System Through Choice and Competition. This 124-page document from the Department of Health and Human Services challenges a premise behind 50 years of thinking in health policy circles: the idea that our most serious problems in health care arise because of flaws in the private sector. Most problems arise because of government failure, not market failure, the document declares, and it goes into great detail on how to correct the policy errors.

Trump policy toward health care is based on the idea of promoting choice, competition and market prices. In Medicare, so far, that means liberating telemedicine, liberating Accountable Care Organizations, ending payment incentives that are driving doctors to become hospital employees, promoting hospital price transparency, deregulating paperwork and creating more transparency in the market for prescription drugs. We’ll cover some of those policy changes today and the rest next week.

Liberating “Virtual Medicine.” The ability to deliver medical care remotely is growing by leaps and bounds. It promises to lower medical costs, increase quality and lower the time and travel cost of patient care. For example:

  • After hip and knee replacements at Tallahassee Memorial HealthCare, patients are transported to rehab facilities, nursing homes and even to their own homes — where follow-up observations are made with video cameras.
  • A nurse at Mercy Virtual Hospital in St. Louis can use a camera in a hospital room in North Carolina to see that an IV bag is almost empty. She can then call and instruct a nurse on the floor to refill it. The telemedicine cameras are powerful enough to detect a patient’s skin color. Microphones can pick up patient coughs, gasps and groans.

The problem? Medicare doesn’t pay for any of this. And since private insurers and employers tend to pay the way Medicare pays, the entire country is missing out on incredible advances in telemedical technology.

This is not an accident. Federal law (the Social Security Act) allows Medicare to pay for telemedicine only under strictly limited circumstances. For the most part, doctors can examine, consult with and treat patients remotely only in rural areas and even there, patients can’t be treated in their own homes.

Readers may be surprised to learn that even Medicare Advantage (MA) plans face the same legal constraints. An MA plan can contract with a separate vendor, like LiveHealth or Teledoc, who has met the many onerous regulations required by the Centers for Medicare and Medicaid Services (CMS) for Telehealth vendors.  But MA plans cannot pay their own doctors to conduct remote consultations with their patients.

The CMS is acting aggressively to change that. As of January 1 of this year, doctors in MA plans and Accountable Care Organizations (ACOs) can now bill Medicare if they use the phone, email, Skype and other technologies to consult with patients remotely to determine if they need an in-office visit. Patients can be anywhere, including their own homes. Doctors can also bill Medicare to review and analyze medical images patients send them. And, they can bill for telemedical consultations with other doctors.

So, how did Seema Verma (the administrator of CMS) and her colleagues overcome the legal barriers? By classifying these activities as “virtual medicine” or “communications technology” instead of “telemedicine.”

The new changes don’t go as far as people in the industry would like. But a CMS white paper makes clear the administration’s intention to do more. CMS is aggressively using its authority to sponsor federal telemedicine demonstration projects. Beginning in 2020, Medicare Advantage plans and Next Generation ACOs (see below) may seek and obtain waivers to use telemedicine for the monitoring and treatment of diabetes, heart disease and other chronic conditions.

If things go well, expect more liberalization in the future.

Liberating ACOs. The idea behind Accountable Care Organizations and Medicare Advantage plans is similar. In both cases, the federal government is encouraging the private sector to find innovative ways to reduce costs and improve quality – generally through integrated, coordinated, managed care. If the plan successfully reduces costs, it gets to keep some or all of the savings. If it improves quality it receives a bonus payment. Beyond that, the two models diverge.

Yet, as we explained in a recent post at the Health Affairs Blog, the MA market is better designed to meet four social goals: lower cost, higher quality, better information and the ability to adjust to changes in market conditions.

The original plan for ACOs was one of progression – evolving from shared savings to more savings for plans that take more risks to fixed payment for each patient in return for delivering all medical care. At the end of the line, ACOs will look more and more like Medicare Advantage HMOs. For the Trump administration, we can’t seem to get there quickly enough.

The administration is allowing Next Generation ACOs to (a) have greater freedom to communicate with patients,  (b) reward patients for meeting compliance measures, (c) offer additional benefits that patients must forgo if they go “out-of-network,” (d) have broad freedom to utilize telemedicine and in some cases (e) opt for full capitation.

Equalizing Physician Fees. The CMS vision paper expresses alarm over increasing concentration in medical markets – especially in the hospital and physician sectors. It cites a number of studies which conclude that increasing concentration means less competition and higher consumer prices. One reason for concentration in physician services appears to be the acquisition of doctors by hospitals. In 2010, 27.7% of primary care physicians worked for hospitals. By 2016, that number had climbed to 43.5%.

One reason for such consolidation appears to be that Medicare pays higher fees for the same service when the doctor is employed by a hospital. According to the Ambulatory Surgery Center Association, Medicare pays almost twice as much for hospital-based outpatient services as it pays for the same services provided by a free-standing facility. For example, Medicare pays hospitals $1,745 for performing an outpatient cataract surgery while paying surgery centers only $976.

Under a new CMS rule, Medicare will be moving toward parity over the next two years for billing codes covering about 50% of outpatient services. According to the CMS, current Medicare payment for a typical hospital-based clinic visit is approximately $116, with an average beneficiary copayment of $23. After two years, the payment rate for the clinic visit will fall to $46 and the beneficiary copayment will fall to $9, thus saving beneficiaries an average of $14 each time they visit the clinic.

The American Hospital Association is suing to block the rule change. But this illustrates something important about the powers of the executive branch. Many of the reforms described here would have been done by Congress – but for the influence of powerful special interests.

When Congress tries to reform health care institutions, special interests stop the reforms in committee. Under the Trump administration, increasingly the special interests must turn to the courts.

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