Single-Payer Healthcare: Principles and Policies for Effective System Design

By Stephen Kemble and Kip Sullivan, One Payer States Policy Working Group

June 20, 2020

Hospital Payment Under Single-Payer Proposals: Payments to Risk-Bearing Entities Versus Budgets for Hospitals

The COVID-19 pandemic has exposed the severe flaws in financing health care through employment and state tax revenues, both of which have experienced sharp reductions due to the pandemic. This has stimulated renewed interest in single-payer healthcare financing, but different proposals, at both the federal and state levels, rely on very different policies for paying for hospital care. Achieving savings from a single-payer proposal depends on getting the policy right. One Payer States (OPS) is a single-payer healthcare advocacy group, and this paper is a product of the OPS Policy Working Group.

Should single-payer proposals authorize competing risk-bearing organizations by any name (accountable care organizations, HMOs, integrated delivery systems)?

Since it is not possible to pay hospitals simultaneously with budgets and through risk- bearing entities, by which method should hospitals be paid?

Competing Risk-Bearing Organizations

Can or should a single-payer system at either the state or federal level include Health Maintenance Organizations (HMOs), Accountable Care Organizations (ACOs), “Integrated Delivery Systems (IDSs)” or any other competing entities or systems that bear insurance risk?

The OPS Policy Working Group defines insurance risk-bearing entities as organizations that

have specified enrollees or assignees/members, and

have a contract with either each enrollee (premium paying subscriber) or with a payer contracting on behalf of enrollees that obligates the organization to pay for all necessary medical services needed by their enrollees over a given time period.

For the past several decades, efforts to control excessive health care costs in the U.S. have been built on the fundamental ideas of shifting insurance risk onto providers of care and competition among risk-bearing entities, but the combination of these strategies introduces serious perverse incentives. In health care, too much of financial risk is predictable due to pre-existing conditions, socio-economic status, and demographics. Competing risk-bearing entities soon find that the key to economic survival is not to offer better benefits and improved access to care, but to capture a healthier than average risk pool and to drive higher risk individuals and populations out of their risk pool and onto the competition

Since its emergence in the early 1970s, the managed care movement’s most fundamental objective has been to shift insurance risk onto doctors and hospitals. Managed care advocates at first promoted HMOs as the ideal mechanism for risk-shifting, but they have since promoted several other vehicles that do not differ substantially from HMOs, including ACOs and IDSs. Advocates of HMOs, ACOs, and IDSs base their support for these entities on the assumption that the high cost of health care in the US is due to over-utilization of health care, and this in turn is caused by the fee-for-service method of payment. This diagnosis of the problem suggests that the problem could be solved if the fee-for-service incentive were turned upside down, that is, if insurance risk were shifted onto doctors and hospitals so that they make more money by delivering fewer services and supposedly only services that have “value.”

Although some overuse of some services exists, the theory that over-utilization explains high

U.S. health care costs has never been supported by evidence. U.S. per capita physician visits and hospital utilization rates are low compared to other advanced countries with universal healthcare systems that cover everyone, largely use fee-for-service payment, and cost half what we spend. A far bigger problem in the U.S. is lack of access to needed care and under-utilization, leading to costly complications. There is now extensive evidence that the high cost of health care in the

U.S. is caused primarily by much higher prices, which are in turn driven by excessive administrative costs and the absence of effective price regulation.

HMOs and other risk-bearing entities achieve little or no reduction in medical costs, and little or no improvement in quality. However, the tools required for management of insurance risk, including pay-for-performance and risk adjustment, depend on detailed documentation and data reporting that have resulted in markedly increased administrative costs and burdens for physicians and hospitals as well as for the HMO, ACO or IDS. Connecticut reduced per-person Medicaid costs and slowed their growth by eliminating risk-bearing managed care plans, and Medicare’s partial privatization through risk-bearing Medicare Advantage plans has raised cost. And yet, despite this poor track record, HMOs, ACOs, and IDSs are still being promoted today as cost-cutting strategies. Proponents of this view include the Centers for Medicare and Medicaid Services (CMS), the insurance industry, state Medicaid programs, and authors of some bills that resemble single-payer legislation. We recommend against including any of these risk-bearing entities in what would otherwise be single-payer legislation. Doing so will simply replicate the wasteful competitive insurance business model the single-payer proposal was designed to replace. The fact that many ACOs and IDSs are owned by, or have contracts with, insurance companies is perhaps the most compelling evidence for this statement.

Reducing the high administrative cost of the current multiple-payer system is essential to the success of any single-payer proposal at either the state or federal level. Any proposal that only expands coverage but does not achieve substantial administrative savings will likely die in the legislative process, especially when, at the national level, it gets a score from the Congressional Budget Office.

American insurance companies and other risk-bearing entities have demonstrated that they compete by using strategies to capture a healthier than average risk pool (commonly referred to as “cherry-picking”) and driving higher-risk individuals and populations out of their plan or network and onto the competition (often referred to as “lemon-dropping”). Examples include marketing to healthy people, patient cost-sharing, offering benefits that favor healthy non-poor people (such as gym memberships and Fitbit programs), eliminating benefits or programs or formulary drugs for expensive chronic conditions, restricting networks to exclude doctors who specialize in treating expensive conditions, creative parsing of risk pools into different plans for different customers, and denying necessary care, all of which result in declining access to care for sicker and socially disadvantaged individuals and populations.

Cherry-picking and lemon-dropping worsen healthcare disparities. However, the insurance industry and other advocates of shifting risk onto doctors and hospitals have argued for decades that cherry-picking and lemon-dropping can be eliminated by adjusting per-enrollee payments to reflect the health of enrollees, a process known as “risk adjustment.” In theory, risk adjustment adjusts premium/capitation payments to reflect factors that can affect health that are outside the entity’s control such as the enrollee’s pre-existing conditions, age, income, education, ability or willingness to exercise, exposure to stress at home or work, genes, etc. But despite a half-century of research, risk adjustment remains very crude and exceedingly complex.

Consider the gross inaccuracy of the most widely used risk adjuster in America – the Hierarchical Condition Categories formula that CMS uses to adjust payments to Medicare Advantage plans and ACOs that participate in Medicare. In theory, accurate risk adjustment should remove the incentive to cherry-pick and lemon-drop because then the risk-bearing entity would receive no reward for doing so. Risk adjustment will supposedly claw back all profits from those that cherry-pick and lemon-drop and, conversely, it will protect those that enroll an above-average share of the sick. However, the CMS risk adjustment formula captures only about 12 percent of observed variation in spending among enrollees. It overpays for the healthiest 20 percent of enrollees by 62 percent and underpays for the sickest 1 percent by 21 percent. The result is that doctors, hospitals, and health plans engage in cherry-picking, lemon-dropping, and gaming of documentation to make patients appear sicker in order to beat risk adjustment formulas and increase their reimbursement.

It is not possible to increase the accuracy of risk adjusters substantially, and any attempt to do so requires a prohibitive escalation in provider administrative costs and burdens. The reason risk adjustment is so crude, and so difficult and expensive to improve, is two-fold: (1) the factors that affect human health, and therefore the cost of treating humans when they get sick, are numerous and very complex; (2) it is financially and technically impossible to identify all relevant factors, collect data on all those factors, and calculate their relative contributions to the cost of medical care.

If risk-shifting actually resulted in better health outcomes, the high cost of risk-shifting and crude risk adjustment might be justifiable. The evidence does not support that claim. There are much more effective strategies to promote quality improvement that rely on the intrinsic motivation of physicians and other health care professionals to provide high quality care for their patients.

Quality improvement metrics that are developed and modifiable by front-line providers of care and do not rely on financial incentives have been shown to be effective and cost far less to administer than pay-for-performance administered by health plans. Likewise, care coordination is best handled by front-line physicians in a unified, open care delivery system in which all specialties and consultants are available to every primary care practice, instead of by competing health plans with restricted networks, run by administrators who do not have specific knowledge of the needs of individual patients.

Over the last decade, many policymakers have proposed paying HMOs/ACOs/IDSs to provide care coordination services that do not involve direct patient contact, and non-medical services such as transportation, that are not eligible for fee-for-service payment by insurance. Examples include transportation and translation services, and evidence-based interventions such as nurses staying in touch with patients after discharge, interdisciplinary team-based care of complex patients in the community, specialized programs for substance abuse or the seriously mentally ill, and many specialist consultations. Rather than paying HMOs/ACOs/IDSs a per-enrollee fee and hoping some of the money winds up being used to provide such services, we support paying for these services directly through publicly financed, community-based programs with their own budgets authorized by the single-payer.

Should hospitals be paid with global budgets or through competing risk-bearing entities?

The OPS Policy Working Group has concluded that:

Hospitals should be paid individually (not as members of chains).

Hospitals should be paid via budgets, not via payments per enrollee (premiums, capitation payments, shared-savings payments, or any other form of payment that shifts insurance risk off the single government insurer), and hospital budgets must be divided into capital and operating budgets.

In order to achieve the maximum reduction in system administrative costs and to give society control over the allocation of hospital resources, single-payer legislation must authorize budgets for hospitals; but hospital budgets are not feasible in a multiple-HMO/ACO/IDS system.

The OPS Policy Work Group recommends that model single-payer legislation control expenditures for hospitals and other institutional providers (hereinafter referred to simply as “hospitals”) with budgets for hospitals that meet these criteria:

They apply to individual hospitals, not groups of hospitals or hospital-clinic chains that are part of HMOs, ACOs, or IDSs;

They are based on factors such as the historical volume of services provided, comparison to other hospitals in the area, projected administrative savings from billing and collections, projected changes in volume and type of services, wages for employees, maintaining recommended staffing-to-patient ratios, education and prevention programs, quality improvement, adjustments to improve access to shortage specialties and to correct disparities in access to care, and adjustments to respond to epidemics and natural disasters; and they are divided into operating and capital budgets.

Rep. Pramila Jayapal’s HR 1384 contains a provision that permits physician groups that have contracts with nearby hospitals to be paid through the hospital's global budget. A single-payer system could readily include such an arrangement. Doing so would not sacrifice efficiency or social control over allocation of resources, and it would not shift risk on to providers (that is, there would be no need to enroll patients and pay the hospital on a per-enrollee basis). Patients who chose to seek care under an integrated hospital and medical group would remain free to see any qualified provider in the community, and hospitals and medical group practices that chose to organize under a single global budget would not be closed systems like Kaiser Permanente and other HMOs are now. However, this provision would enable physicians to be paid with salaries instead of with fee-for-service.

Hospital budgets reduce health care costs primarily by reducing hospital administrative costs. They do so by eliminating the cost of assigning expenses to each patient and the complex claims adjudication process this now requires. Research has shown that single-payer systems can cut hospital administrative costs in half if they set budgets for hospitals (as Canada and Scotland do), and by smaller amounts if the system pays hospitals on a standardized per patient basis.

Moreover, splitting hospital budgets into operating and capital budgets, coupled with the requirement that budgets be negotiated with individual hospitals, gives society control over the allocation of both operating and capital expenditures. In our view, society, not the executives of hospitals, chains, HMOs and other risk-bearing entities, should decide whether to open or close a hospital in a low-income community, to close an ob-gyn department or an addiction clinic in a rural town, or to expand needed services to correct shortages. If we want society to make those decisions, then our model legislation should not authorize the single-payer governing board to negotiate budgets with hospital chains. If it did so, the CEO of those chains could decide where to allocate emergency rooms and other resources within the chain. If society is to control resource allocation, each hospital has to be given its own budget.

At present, hospitals rely on budget surpluses to fund capital improvements and improve their competitive positions, and this drives promotion of profitable service lines for well insured patients at the expense of services that lose money, no matter how necessary they are to the surrounding community. Separating hospital budgets into operating and capital budgets, with no profit carried over year to year allowed, ensures that operating budgets are only for hospital operations, and capital improvement funds are allocated according to community need.

Budgeting for individual hospitals also removes funding streams that hospitals now use to join or create chains that primarily serve business goals and investors. The consolidation of the U.S. healthcare system into fewer and larger entities has played a significant role in driving U.S. per capita costs far above those of the rest of the industrialized world.

Some single-payer proposals, such as Sen. Sanders’ S 1129, the Healthy California Act, the New York Health Act, and the Massachusetts Medicare-for-All bill all retain risk-bearing entities by various names (HMOs, ACOs, or IDSs) as their “cost saving” measure. Such bills typically do not authorize budgeting of hospitals, presumably because it is not possible to set premium/capitation payments for HMOs, ACOs, or IDSs that include hospital care and also set budgets for individual hospitals. If hospitals are paid via operating and capital budgets negotiated with a single payer, then their budgets are entirely accounted for. It makes no sense for the single payer to attempt to budget an HMO, ACO, or IDS that includes services provided by the same hospitals that have already been fully funded.

If the excessive cost of U.S. health care is to be brought into the range of all other industrialized countries, we must adopt policies that have been proven to work. Hospitals should be paid with separate operating and capital budgets allocated by a single payer, not payment for each service and item used by each patient from multiple payers, each of which makes up their own payment system and rules.

Insurance risk is most cost-effectively managed by establishing a single risk pool for an entire population and markedly simplifying the payment system, not shifting risk onto doctors and hospitals, fragmenting risk pools in ways that worsen disparities in health care and inducing “competition” that rewards avoiding sicker and socially disadvantaged patients and gaming of medical documentation. Broad risk pooling, simplified payment policies, and global budgeting of hospitals will create large administrative savings that can make a single-payer proposal cost- effective, and therefore more politically feasible, than universal coverage proposals that rely on the unproven theory that competition between risk-bearing entities will somehow reduce costs.