Fixing Payment System Will Improve Access To Healthcare

By Edward Black, founder and principal, Reimbursement Strategies

The Mayo Clinic made news last week in a way it wishes it hadn’t. But, at least it acknowledged one of the dirty little truths about U.S. healthcare financing — people covered by private insurance subsidize government-funded health care (Medicare, Medicaid, and TRICARE). We already knew that low-income people, even those covered by Medicaid, have less access to care. What most people don’t realize is how poorly the government pays hospitals and doctors for that care, and how that burden is borne, in part, by the privately insured. This disparity in payment is the overriding reason that hospitals and physicians to try to balance their volume of patients according to financial class.

It’s been broadly reported that Mayo Clinic CEO Dr. John Noseworthy told employees a few months ago that if patient conditions are equal, its hospitals should prioritize privately insured patients over those utilizing government-subsidized programs, such as Medicaid. Noseworthy subsequently explained, “In an internal discussion I used the word ‘prioritized’ and I regret this has caused concerns that Mayo Clinic will not serve patients with government insurance. Nothing could be further from the truth. Changing demographics, aging of Americans and budgetary pressures at state and federal government pose challenges to the fiscal sustainability in healthcare today. While these discussions are uncomfortable, they are critical for us to be able to meet the needs of all of our patients.”

Stated more clearly, no hospital can survive financially by solely treating government-funded patients. Let’s not be naïve. In 1991, when I worked in the Blue Cross Blue Shield system, I negotiated the first managed care contract the Mayo Foundation ever executed. We knew back then that our payments had to be higher because hospitals and doctors break even, at best, when treating Medicare patients, and lose money on every Medicaid or TRICARE (for active duty and retired military families) patient. Thus, the balance between government and privately insured patients becomes critical to financial viability. There are many private clinics and hospitals in the U.S. that refuse to accept Medicaid or TRICARE patients because of the low payment.

Now, the Minnesota Department of Human Services commissioner has stepped into the discussion. A spokesperson said the department was surprised and concerned by Noseworthy’s comments, and has questions about what Mayo really means, and how the directive would be carried out. The department is looking into possible violations of civil and human rights laws. The agency also is reviewing its contracts with Mayo Clinic to ensure the hospital is meeting its obligations to serve patients in public programs.

There is a reason that hospitals and physicians in inner city or rural hospitals struggle to survive financially — they are dependent mostly on Medicare and Medicaid for poor or elderly populations. They are aided by a special government payment program called the Disproportionate Share Adjustment, which directs supplemental payments to hospitals whose patients are primarily covered by Medicaid. It helps, but not much. 

Regarding TRICARE, recent years have seen a tremendous shift in attitude toward the manner in which we respect and treat military families in this country. About 9 million active duty and retired military personnel and family are covered under the TRICARE Military Health System, managed by the Department of Defense. These patients use designated, government-owned TRICARE medical centers, of which there are about 250. The patients are dependent, though, on a network of non-government hospitals and clinics, most of which won’t treat TRICARE families because the payment is comparable to Medicaid levels — another embarrassing truth of the industry.

Payment levels for government-funded initiatives vary widely across the country. As a general rule, Medicare pays hospitals about 60 percent of what private insurers pay for the same services.  Medicaid and TRICARE pay about 35 percent of private insurer levels. Moreover, Medicare payment formulas have been built on cost. Hospitals and physicians in high-cost areas of the country are paid more than those elsewhere, regardless of the quality of outcomes. As a result, Medicare payments to the Mayo Clinic and hospitals are lower, on average, than other highly regarded medical institutions because of Mayo Clinic’s Midwestern (primary) location. 

We expect our hospitals to be community resources while also run as businesses. But, the news from Rochester, Minn. was only an acknowledgement of a problem that has plagued many hospitals and clinics throughout the country for years.

Furthermore, this government-private insurer payment disparity is a factor in the development of new technologies. Technologies that primarily target patients over age 65 will have greater difficulty being adopted, because we have to search out those diagnosis-related groups (DRGs) and ambulatory payment classifications (APCs) where hospitals don’t already lose money.

Federal and state governments manage their healthcare costs primarily by controlling payment levels, though new value-based programs are trying to change that. Private insurers know they have to pay more per service, so they manage cost through more aggressive utilization management, including refusal to contract with hospitals and physicians whom they perceive to be too expensive or of below-average quality.

The other factor important to medtech is coverage. It is easier to get new technologies covered by Medicare than by private insurers. The latter has higher standards for coverage, and places greater emphasis on the development of peer-reviewed, published clinical evidence and an insistence that technologies be effective and manageable outside the investigative setting. It is easier to prove that a new technology is effective than to convince a health plan medical policy committee that it is manageable — able to be used on carefully selected patients, in the right order of therapy, in an institution that achieves outcomes of consistently high quality. This is the reason that private insurer medical policy coverage has become the greatest barrier to market entry in today’s medtech industry.      

I have had the privilege over the years of lecturing to medical technology clusters in Europe, Canada, and Japan. Trying to explain this system to medical entrepreneurs outside the U.S. always generates quizzical looks, even disbelief. To people who have understood this payment dynamic, the news from Mayo is less shocking.  But, it is revealing, and the financing conditions that prompted Mayo’s decision must be factored into Obamacare, Trumpcare, or NextPresidentCare.