Reflections on Impending Obamacare
Reform was surely needed to remove distortions imposed on medical care by its financing. The next big questions are what the Affordable Care Act really reforms; and, whether the result will be affordable for the whole nation. Here are some proposals, just in case.
In the early 1980s, American hospitals adopted the remarkable concept of being repaid by Medicare and Medicaid on the basis of the patient's diagnosis, instead of itemized bills for the patient services. The system spread to other health insurance companies, and the diagnosis list was greatly simplified. The result was "Diagnosis-Related Groups" or DRG.
I happened to be in the audience at the Congressional hearing considering this proposal, and was initially pleased with what seemed to produce a considerable reduction of paperwork and a potential increase in public understanding. Now proven entirely wrong on both predictions, I am in fact appalled by the changes in medical care DRG provoked. However, I must admit it was a brilliant way for the insurance industry to suppress costs of hospital inpatients. Unfortunately that was just pushing on a balloon, with the costs bulging out elsewhere. These unexpected consequences were even more devastating because it took so long to understand what was causing them.
Whatever the original motives, the DRG paperwork simplification has proven to be primarily a cost control measure. One illustration of this core theme lies in the way the DRG list itself was simplified. Starting from abandoning the Standard Nomenclature of Diseases and Operations(SNODO, a compendium of well over a million diagnoses) and going to the International Classification of Diseases (ICD) of only several thousand, as a basis, "diagnoses" were reduced to the original DRG set of about 250. Right there, was an unrecognized sign that medical science wouldn't play much of a part in it. Presumably it was easy to set 250 prices, hard to set a million of them. But both the hospital and the insurance company were really only interested in one thing: what was the aggregate amount of the reimbursement. If they could agree on some approximation, all that medical stuff could be skipped.
Refinements of the DRG list now amount to about three hundred different price numbers, one among which could be assigned to each patient with some sort of medical justification, like "all other". Increasingly, diagnoses were assigned to a particular diagnosis group more because of the similarity of their prices than similarity of their medical content. Increasingly, all bills were considered automatically fair by the auditors if the grand total of hospital payments was unchanged. Just over the horizon can be seen the approach of matching each DRG to some target based on a budget rather than progress in medical care. The purpose was to hold down the prices of hospitalizations through standardizing them; if the hospital received the same amount of money, what difference did it make? The answer to that question is: we always expected future medical progress to change the cost of care, sometimes up, sometimes down. Regardless of national cost problems, we did not expect the payment system to define the direction of medical care, or for the people most concerned with costs to over-rule the judgments of those primarily concerned with the patient, without even talking to them. Mutual respect and compromise -- now, those are different things. Freezing the revenue stream means if you want something new, you have to give something up. For a hospital of all places to exclude the patient's physician from the trade-off is going to lead to something the patient won't like. Making the physician an employee may silence him, but that only makes the medical catastrophe worse when it surfaces. As shown by recent statistics, the overall profit margin on inpatient hospital patients has remained close to 2%. If that is your only measure of success, the DRG seems a success.
However, a simple example casts doubt on the finality of that decision. Payment based on diagnosis means it no longer makes any difference how long a patient remains in the hospital. Such an effect surely raises costs, but since price is constrained, the extra cost reappears somewhere else. The same is true of laboratory tests, and bandages, and a whole lot of other costs like cleaning people and computer technicians. So now the burden of holding costs down shifts from the insurance to the hospital itself? Plausible, except that isn't what happened.
What happened was hospitals shifted their sources of revenue toward services not covered under DRG, like the Emergency Room and the outpatient area. They bought up doctor's practices and created satellite clinics. Since no one works as hard for a salary as he would work by being paid piecework, we get a doctor shortage. And consequently the cost of new medical schools has to be added to the indictment. Since episodic treatment does not cover an entire illness, it is not and never will be suitable for DRG. And since the hospital administration covers both types of services, it opens the business school opportunity to divert costs to the inpatient area and profits to the outpatient area, while paying big administrative costs to the umbrella organization. Getting hard boiled like that translates somewhere into even greater pain for the indigent and uninsured. Emergency services now have a profit margin of 15%, and outpatient areas now return 30%. Administrator salaries are now in seven figures.
But even that isn't so bad as the trick by which it is accomplished. It's called the Chargemaster, and it has the unfortunate byproduct of dumping the highest charges on the patients who can least afford them, the uninsured ones. When you joke about aspirin tablets which cost twenty dollars, see if you can laugh at bills of $300,000 for treating Hodgkin's Disease, the same conditions for which an insurance company pays 10% of the bill for aspirin or Hodgkins. A famous surgeon friend of mine once muttered, "Nowadays the main reason for having health insurance is to keep the hospital from fleecing you."