Global Budgeting: A Viable Alternative to Fee-for-Service Health Care?

Global Budgeting: A Viable Alternative to Fee-for-Service Health Care?

A payment plan similar to that of Great Britain could serve to control costs, but faces fierce opposition

Which should come first – universal coverage or cost control? Universal coverage advocates say that until everyone has insurance, health care providers will simply shift costs around when the uninsured need care, frustrating insurance company efforts to control costs. Cost control advocates, on the other hand, say rising health care costs must be brought in line with the rest of the economy before an attempt can be made to cover everyone.

Last July, the universal coverage crowd seemed to get the upper hand in this chicken-or-egg discussion when a Massachusetts commission recommended moving toward a global state budget for health care expenditures. Massachusetts, a pioneer in universal care, was viewed as a model for the rest of the nation when the program brought its uninsured rate below 3 percent. But when rapidly rising health care costs threatened to undermine that state’s entire reform effort, global budgeting — a radical cost control measure — was on the table.

Opponents tried to scuttle the initiative, but Democrats, who controlled the governor’s office, the legislature, and leadership in both houses, backed the unanimous call from the 10-member commission to adopt global budgets. State Rep. Harriett L. Stanley, co-chair of the House committee on health care financing and a commission member, told the journal Health Affairs  (subscription required) that despite strong pressure from providers, "the unanimous commission vote told me we have some cover." She expected to introduce legislation last fall.

How would global budgets control costs? It’s simple. You tell providers how much they get to spend, and it becomes their job to deliver health care to the entire patient population under their care within that budget. It’s the way health care is delivered by the National Health Service in Great Britain, and how Taiwan set up its universal coverage system. Both have experienced significantly lower health care inflation than the U.S.

However, there’s one major problem with global budgeting. It leads to rationing of care, although most of its proponents don’t like to call it that. In Great Britain, the National Institute for Clinical Excellence (NICE) uses cost-effectiveness analysis to make technology coverage recommendations to the NHS. That’s one way to ration. Taiwan’s health minister admits there are two-to-five-year delays in getting access to the latest high-priced drugs. Delaying introduction of new technology is another way to ration.

In the U.S.’s fragmented health care system, critics say rationing could become pronounced if global budgeting were limited to just one sector like Medicare. “A global budget for Medicare would destroy the key attribute of the program — the assurance that the elderly and disabled will have access to care similar in quality and quantity to that available to the general population,” said Henry Aaron, a long-time health care analyst at the Brookings Institution.

But others aren’t so sure. Michael Millenson, a visiting scholar at Northwestern University’s Kellogg School of Management, writing this week on The Health Care Blog, points to Medicare’s 1983 adoption of the Prospective Payment System, which predetermined a fixed amount for medical services. PPS succeeded in dramatically lowering hospital payments without reducing quality or access to services.

“Prospective payment was the strategy of a prudent purchaser committed to encouraging efficiency,” Millenson wrote. “Hospitals were put at financial risk: those who could efficiently deliver care for less than the average price made money; inefficient hospitals lost money.”

Unfortunately, hospitals and providers quickly figured out ways to game the system. They introduced new technologies that dramatically increased the episode-of-care payments, a bundled payment for a single procedure, such as an arterial stent. Another loophole involved repeat procedures. Hospitals delivering low quality care that had to repeat a procedure because of errors wound up getting paid twice — hardly an incentive for lower cost or better quality care.

The original version of the Senate health care bill now languishing in Congress took stabs at removing such loopholes and moving toward global budgeting. The Medicare Payments Advisory Commission plan would have given MedPAC, currently a toothless advisory board, the power to make binding cost-control recommendations (unless overridden by Congress) if health care costs rose by at least one percentage point faster than gross domestic product growth.

Bioethicist Daniel Callahan, president emeritus of the Hastings Center and a proponent of rational rationing of health care to preserve Medicare’s long-term viability, endorsed that proposal and recently called for a Medicare czar with the tightly managed budget power to control cost growth. "That’s the way they run things in a business. That’s the way we run things in our family. Health care is the only place where we have no budgeting of any type," he said.

Would it work? The annual physician payments fix, where Congress every year rolls back previously-enacted reductions in Medicare physician pay (itself a stab at global budgeting in one segment of the Medicare budget), shows the overwhelming power of provider interests to frustrate budget control efforts. And a quick call this week to the office of Massachusetts Sen. Richard Moore, chairman of the health care committee, revealed that the bill promised last fall still hasn’t been written.

Like almost every idea to control costs, global budgets face overwhelming political opposition — from providers, from patients, and from industrial interests that want zero limits on their ability to set high prices for new technologies. Chicken, meet your egg.

Merrill Goozner is the author of "The $800 Million Pill: The Truth behind the Cost of New Drugs."