Labor Day is swiftly receding in the rear view mirror, a potentially transformative (or at least disruptive) mid-year election is only eight weeks away, and Medicare payment regulations for FY 2011 start to go live (acute inpatient hospital) in less than a month — not a bad time to step back and assess some longer-term prospects for medical technology reimbursement and overall healthcare spending.
I can think of at least four distinct ways in which healthcare spending can be controlled. One of those, explicit rationing of services, isn’t a viable option in the U.S. today and isn’t likely to become one in anything like the foreseeable future. Real rationing entails controlling costs by using hard spending caps and/or regulatory controls to limit the production and supply of services and/or technologies. Now abandoned state "certificate of need" programs for hospital beds and high-cost capital equipment functioned as back-door rationing tools. Despite the fulmination of certain conservative legislators and commentators, no current serious healthcare policies or policy proposals entail this kind of restriction on the health service or technology supply side. A good thing for medical technology, as that would be the first target for rationing decisions.
A second way to control expenditures is rationalization of the care delivery system. There are three closely related arms of this approach. One, elimination of inefficiencies and waste in the organization and delivery of services, is hard to oppose and is the object of a good deal of ongoing effort. A second, reduction in medical errors, hospital-acquired conditions and their associated expense, is similarly noncontroversial and the target of policies being broadly implemented by Medicare and private insurers. The third "rationalization" arm, elimination of unnecessary and ineffective services, raises difficult problems because it introduces subjective or evaluative elements not present with administrative waste or observable error. One physician’s "unnecessary service" may be another’s "confirmatory diagnostic;" one’s "discredited therapy" may be another’s "best patient-specific option."
All three rationalization strategies do have a common dependence upon adoption and utilization of advanced health information technology tools, whether for practice management, sharing of patient records and service information across practitioners and sites, or as knowledge management tools to provide the most current clinical and comparative effectiveness research findings, clinical care standards and institutional protocols. These HIT tools promise long-term cost benefits, but have high front-end costs. Furthermore, putting them in place is one thing; convincing or incenting practitioners to use them to their fullest is another. The payoffs from this area are potentially real, but full realization will require major professional cultural change for many physicians. That will happen, but not very quickly. And there is, of course, a major commercial opportunity for HIT technology developers, a sector widely understood to be positively impacted by the Obama healthcare initiatives.
Insurers have already begun aggressively to pursue a third cost-control tool — the development of increasingly refined and sophisticated coverage policy algorithms. It was once the case that a service or technology either was (or was not) deemed "reasonable and necessary" and consequently subject to a very broad coverage (or non-coverage) policy. In recent years, Medicare and private insurers have increasingly baked detailed diagnostic criteria and/or requirements for trials of less expensive or less invasive interventions into their coverage policies. These policies are reinforced by professional society guidelines, comparative effectiveness research findings and the broad and increasing acceptance of the principles of personalized medicine. There is resistance to these initiatives from practitioners objecting to insurer "interference with the practice of medicine" (as if that were not central element in every coverage policy determination), and from some patient advocacy groups concerned about the paucity of approvable therapies for certain conditions. But the direction is well-established and will only gain momentum as better and more stable research findings accumulate and our understanding of the genetic and proteomic determinants of therapy response improves. Device developers would do well to take careful note of this trend and to anticipate the consequent insurer demands for more sophisticated clinical utility data to inform their coverage policy determinations.
The fourth broad cost control strategy is to transform physicians’ economic incentives. The traditional fee-for-service system compensates physicians on a piece-work basis, yielding increased physician incomes for increased volume of visits. "Value received" isn’t addressed, nor are "outcomes." Some healthcare economists believe that paying physicians a good salary and providing add-on incentives based on quality outcome measurements would yield better patient care at lower total service costs. Others advocate various levels or forms of capitation — payment of a fixed amount to provide a defined bundle of services, with some element of practitioner risk for costs in excess of the capitation amount — as a preferred alternative incentive model. Capitation and risk-sharing were discredited in the 1990s by the excesses of costcontrol efforts (at the expense of patient satisfaction) of the HMO industry, but they are coming back slowly with a kinder and gentler face. CMS’ implementation of bundled payment for chronic end-stage renal disease services will turn dialysis provider incentives upside down and will be a critical test of whether the new incentive structure can improve quality while allowing a reasonable return to providers. Success — and success is likely — will provide a potent spring-board for other disease-management initiatives.
Once again, HIT as a tool will be important as a contributing factor in enabling successful adaptation to new incentives. And once capitation models gain a foothold, they will establish considerable momentum — it is difficult if not impossible to organize and manage services in a facility if some patients are capitated and others are not. As momentum behind bundled or capitated payment grows over the coming years, medical technology will be under greatly increased pressure to provide clinical value commensurate with cost, and to document the value proposition more robustly.
Edward Berger is a senior healthcare executive with more than 25 years of experience in medical device reimbursement analysis, planning and advocacy. He’s the founder of Larchmont Strategic Advisors and the vice president of the Medical Development Group. Check him out at Larchmont Strategic Advisors.