The Inspector General Observes

Posted by

Paul Levy

First published 3/17/11 on [Not] Running A Hospital

recent report by the Massachusetts Inspector General raises a thoughtful concern about the implementation of global payments in the state.

In the effort to contain health care costs, much discourse has centered on moving from a predominantly fee-for-service system to one based mainly on global payments to providers organized as Accountable Care Organizations (“ACO”). There is little doubt that fee-for-service reimbursements create incentives for providers to increase utilization of health care services, with obvious inflationary consequences. But moving to an ACO global payment system, if not done properly, also has the potential to inflate health care costs dramatically.

There is nothing inherent in the current marketplace that would cause an ACO-based global payment system to contain health care costs. The evidence, in fact, suggests the opposite conclusion. For the past two years, the primary experiment with global payments in the private insurance market in Massachusetts has been the Alternative Quality Contract (“AQC”) popularized by Blue Cross Blue Shield of Massachusetts (“Blue Cross”). The payments to providers under this contract are made on a global capitated basis. The capitated amounts are determined by starting with the previous year’s experience of the population of lives covered by the specific AQC. That entire amount becomes the base year from which all future payments are derived. Therefore, the AQC embraces and adopts any excessive or wasteful payments in that base year, including all overutilization resulting from over a decade’s worth of fee-for-service provider contracts. Implicitly, the premium increases of that decade, which overall were well in excess of 100%, are made a permanent part of our health care system’s cost structure.

Once the base year is determined, any excessive provider costs from that year are trended into the future. And the rate of the trend is alarmingly high. While specific details of individual AQCs are kept confidential by Blue Cross and the contracting providers, the OIG estimates that increases in reimbursements to providers over the five-year term of an AQC could be in the 50% range.

The IG’s remarks are especially apt in that the first global contracts contained very good deals for those providers who signed on, as rewards for being early adopters. The big problem he identifies, as I have mentioned before, is the lack of transparency surrounding this issue. Absent an open presentation of rates and practice patterns, we will never know how effective this payment regime really is. Meanwhile, the Governor and other policymakers have chosen to proceed, blindly trusting a path that has huge ramifications for patients.

I know of no other arena in public policy in which so many decisions are being made with so little substantive support and so little data-driven debate. Reporters, too, seem willing to accept relatively unsupported and undocumented assertions that global payments are working — parroting statements made by stakeholders who have tremendous financial interests — while demanding no independent verification.

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