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US spends too little on social welfare: Fact or fiction?

US spends too little on social welfare: Fact or fiction?

US spends too little on social welfare: Fact or fiction?

As we had alluded to previously (see comments section here), we have been hearing the argument “we don’t spend enough money on social services in the US” for quite some time now. So, let’s dissect this argument one step at a time.

First, what exactly do we mean by social spending and how does the US compare with other developed nations? Since good international comparative data on the topic of social spending are hard to find, it is very easy to adjust available data to suit one’s argument. Thus, rather than trying to come up with a single definition and measure of social benefit expenditures, below we highlight some key categories of spending that fit (at least in our minds) into the broad definition of social welfare expenditures.

In the US, it is politically correct and convenient to count social spending as only public/ government spending. Taking the OECD definition of social expenditures, which includes the following social benefit areas:

“old age, survivors, incapacity-related benefits, health, family, active labour market programmes, unemployment, housing and other social areas…public spending on early childhood education and care up to age 6”

and looking at public expenditures as a percentage of GDP, we find that the US ranks #24 out of 35 OECD members, but still above both Australia and Canada, countries often cited as doing more for their citizens than the US (see Figure 1 here). Moreover, when looking at sub-categories of general government spending, we find that in 2015, US spending as percentage of GDP is ranked (among OECD members) as 1st in health; 2nd in defense; 7th in public order and safety; 8th in education – quite a bit better than our overall ranking.

Moreover, social spending is actually more than public/ government spending alone. Interestingly, when both public and private social spending (as defined above by OECD) are accounted for and include the full range of social benefit transfers, the US ranks second only to France in total net social spending as a percentage of GDP (see Figure 4 in same OECD report).

Since spending on health is included in the OECD definition of social expenditures and the US is a known outlier in terms of healthcare spending, a follow up argument we often hear is: “We spend too much on healthcare and not enough on other social services.” While we absolutely agree that US healthcare is in dire need of improvement (both in terms of effectiveness and efficiency), a look at the available data shows that even if we subtract out healthcare expenditures, total spending on “other” social services in the US stands at roughly 13% of GDP and again above some comparison countries (Australia, Canada, Switzerland).

So, maybe the question we should be asking ourselves is not, “are we spending enough on social services?”  Maybe what we should be asking instead is, “are we getting what we are paying for in social solutions?” This is a question of value, that in many ways parallels the one being asked about the state of US healthcare.

Unfortunately, whether one uses broad measures (e.g., overall social spending vs. income inequality) or more specific examples (e.g., spending on education vs. secondary and tertiary graduation rates), Figures 7 and 9 here suggest that we are not getting good value for all the money we spend. Moreover, while the US government spends more on public safety as a percentage of GDP than many OECD nations or the EU28 (see Table 1 here), our rates of incarceration are some of the highest in the world, with some US states spending more money on incarceration than higher education. And while directing some of the “waste” away from healthcare into other social services seems like a sound idea, simply pouring more money into the existing system without any regard for how it is being spent, is unlikely to generate better social outcomes whether the benefit in question is education or income assistance programs.

Rather than spending more money, the US has to look at existing social expenditures as an INVESTMENT and manage these expenditures on an ongoing basis to continuously improve social outcomes, by relentlessly learning from both international and within-US success stories (does that sound familiar?). Social spending needs to be built into a balance sheet (which the US does not currently keep), otherwise everyone will continue to ignore how the funds are managed with no expectations for measurable ROI. This, in turn, will require a shared vision, a shared reality that recognizes the evidence above, and strong leadership from policy makers – all sorely missing in Washington, DC at this time.

Coming to grips with the value of social welfare expenditures is particularly important due to the profound demographic shifts happening around the world over the coming decades. As the OECD social spending report highlights (see Figures 1 and 2) – the vast majority (79%) of public social spending comes in two categories: health and pensions, both heavily influenced by demographics. Thus, rather than focusing simply on the absolute levels of social spending, both the US (with its aging Baby Boomer population) and the EU27 (projected to see a 68% increase in the number of adults over age 65 over the next 50 years) could benefit from a closer evaluation of: a) the sustainability of government social welfare expenditures, given that working age populations will be increasing much less than the older beneficiaries and b) what we get in return for the significant funds already being spent on social welfare.

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“What Maryland’s All Payer Rate Setting Tells Us About Traditional Medicare Payment Rates”

“What Maryland’s All Payer Rate Setting Tells Us About Traditional Medicare Payment Rates”

What Maryland’s All Payer Rate Setting Tells Us About Traditional Medicare Payment Rates

With some political leaders calling for the US to move to Medicare-for-all and California weighing a proposal to have all patient care reimbursed at Medicare rates, it is worth taking a step back to examine the level of traditional Medicare’s provider payment rates. Specifically, do the current payment rates ensure high quality and access for Medicare beneficiaries, while keeping high-value providers in business. Our review of the latest MedPAC report to Congress and statements made by the Medicare Actuary paints a pretty grim picture, as far as delivering on the above objectives.

The March, 2018 MedPAC report shows that aggregate hospital margins from Medicare have gone from -4.9% in 2010 to -9.6% in 2016, and are projected to be -11% in 2018. It is of interest to note that MedPAC looks only at Medicare ‘allowed’ costs – which removes many other expenses incurred by hospitals such as private rooms for patients, telephones and TVs in patient rooms, marketing communications, interest on certain borrowed funds, etc. Thus, true Medicare margins, that are based on total costs, are actually worse than those reported by MedPAC.

Low Medicare payment rates and their implications for both beneficiaries and providers have also been the subject of repeated commentary by the Medicare Actuary, e.g.,

  • “Limiting (Medicare) cost growth to a level below inflation would represent an exceedingly difficult challenge… Providers for whom Medicare constitutes a substantial potion of their business…might end their participation in the program”
  • “…the prices paid by Medicare for most health services will fall increasingly short of the cost of providing such services. If this issue is not addressed by subsequent legislation, it is likely that access to, and quality of, Medicare benefits would deteriorate over time for beneficiaries.”

The CMS Maryland experience
So, how can we estimate the true magnitude of the problem with current Medicare provider payment rates? One state in the US, Maryland, has had all payer rate setting for over 40 years. The Health Services Cost Review Commission (HSCRC), an independent agency established by the Maryland legislature in the early 1970s, is charged with setting uniform hospital service rates. As such, all Maryland payers are charged the same rates approved by the commission (with a modest discount allowed for Medicare and Medicaid). While Maryland can certainly work on improving efficiency (and is moving in that direction with the recent transition to global budgets), one would presume that the present rates are set to meet the following goals of the commission:

  • “Ensure that hospitals have the financial ability to provide efficient, high quality services to all Marylanders
  • Increase the equity or fairness of hospital financing”

If the above presumption is true, then Maryland’s all payer rates can shed light on the adequacy of traditional Medicare’s payment rates to accomplish the same two objectives.

Fortunately, CMS-commissioned evaluation reports of the Maryland All-Payer Model have done some detailed work on this particular topic. Specifically,

  • “The analyses compared the weighted average payment per inpatient admission in Maryland and a comparison group for the same mix of admissions… also examine the weighted average payment per hospital outpatient visit. Using the same mix of admissions and hospital outpatient visits controls for utilization differences between Maryland and the comparison group so the comparison only reflects payment rate differences.”

The latest evaluation report shows that between 2011 and 2016, Maryland Medicare rates for inpatient admissions were 33-40% higher than in the comparison group paid at traditional Medicare rates. The payment gap was even wider for outpatient hospital services, with Maryland Medicare payment rates (FY2013-2016) coming in at 55-62% higher than those of the matched comparison group paid at traditional Medicare payment rates. Clearly, the present policies of increasing traditional Medicare payment rates by less than inflation, have created a major Medicare payment shortfall, which (absent major changes) will get even bigger in the coming years. The rate gap further suggests that the under age 65, privately insured patient population, is currently subsidizing the care of Medicare beneficiaries. Thus, trying to put all patients on traditional Medicare payment rates would make the Medicare Actuary’s worrisome conclusions even more dire. Conversely, assuming Maryland is doing a good job setting payment rates, going to Medicare-for-all using the Maryland model, would require massive increases in rates over what Medicare presently pays everywhere else. Unless there was a change in provider efficiency, there would need to be ~40% increase in what Medicare pays for inpatient admissions and ~60% increase in payment for outpatient hospital services.

Medicare payment policies could benefit from a major overhaul
Based on the various sources of evidence presented above, we believe that Medicare payment rates are too low and getting worse every year. That said, we also believe that it is incumbent on the delivery system to improve efficiency and thus get better value. While providers would certainly welcome increases in Medicare payment rates, changes in payment rates alone will not be sufficient to drive improvement in healthcare delivery.

As we think about what providers should be paid, it would behoove us to remember a Commonwealth Fund blog by Dr. Stuart Guterman and others, which stated that: “… payment levels must be carefully calibrated to ensure providers’ financial viability while providing incentives to reduce costs and safeguards to ensure high quality.” Unfortunately, our conclusion is that traditional Medicare payment rates and policies fall short of the Commonwealth Fund recommendations. The financial viability of the US healthcare provider depends heavily on private payers (and thus the younger and employed population), while traditional Medicare is characterized by wide variation in service utilization, costs, and patient outcomes.

We believe that accomplishing the objectives described by Guterman et al., can best be accomplished by payment structures that ensure the financial viability of high value providers – those getting better patient outcomes at lower than average costs. In turn, the rates should be based on the real costs of doing business by these highest value providers (and not what Medicare currently pays them) plus a 2-4% margin, since even non-profit organizations need reserves to address changing staffing needs, replace aging equipment, etc. With regard to the need for a positive margin by providers, it is of interest to note that the Maryland HSCRC agrees. It has established hospital profitability targets of 2.75% operationally and a 4% total margin.

While we have detailed such value-based payment approaches in previous publications, it may be worth re-iterating a couple of the key components. Again, taking the state of Maryland as an example, Figure 1 shows the distribution of risk-adjusted quality index (based on the 90-day complication rate for hip/knee replacement) vs. the corresponding cost per episode of care. A base payment rate could be set at the 80thor 90thpercentile of the delivery organizations that are in the high value quadrant (i.e., those that get better than average quality at lower than average cost). A further quality withhold (e.g., 5%) could be used to ensure that providers don’t sacrifice effectiveness in the name of efficiency or that we do not reward low quality providers for simply being low cost. HSCRC has an objective establishing “rates sufficient to meet ‘full financial requirements’ of efficient/effective hospitals.” The pay for value approach we outlined above would create a strong incentive for providers to move to high value. If we truly desire a high value healthcare delivery system, we would be more likely to get it, if we actually paid for value.

2 thoughts on “What Maryland’s All Payer Rate Setting Tells Us About Traditional Medicare Payment Rates”

  1. Excellent piece – and the last sentence is so critically important.

    “The pay for value approach we outlined above would create a strong incentive for providers to move to high value. If we truly desire a high value healthcare delivery system, we would be more likely to get it, if we actually paid for value.”

  2. Denis and Bob:

    A great reminder that the Medicare for All advocates do not really understand the financial implications of their aspirations…there also is a hope that administrative savings will arise as marketing, customer service and claims processing needs diminish–really? Hope your summer going well…keep the conversation going…

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The Bridge Across the healthcare delivery chasm, from where we are, to where we want to be

The Bridge Across the healthcare delivery chasm, from where we are, to where we want to be

Denis A. Cortese, MD, joined Arizona State University (ASU) in 2010 as Foundation Professor, Director of ASU’s Healthcare Delivery and Policy Program, and President of the non-profit Healthcare Transformation Institute based in Phoenix, AZ. He is an Emeritus President and CEO of the Mayo Clinic, and former head of the Mayo Health Policy Center.

Professional activities as a staff member of Mayo Clinic were in the field of pulmonary medicine including interventional bronchoscopy, critical care, with special interests in early and advanced stage lung cancer, liver and lung transplantation. Activities in education included the medical school and director of the pulmonary-fellowship training program.  Research was focused on NIH funded endoscopic laser photodynamic therapy for early stage lung cancer and on NdYAG-laser phototherapy of advanced stage airway obstructing cancer.

In addition to his current ASU academic position, Dr. Cortese currently serves on the board of trustees of Dartmouth-Hitchcock, and the boards of directors for Cerner Corporation, Essence Global Holding Corporation, and Pinnacle West.

Dr. Cortese is a member of the Institute of Medicine of the National Academy of Sciences, where he served as the original chair of the Roundtable on Value and Science-Driven Health Care; a National Associate of the National Research Council; an honorary member of the Royal College of Physicians (London) and the Academia Nacional de Medicina (Mexico).

He formerly served in the following positions: member of the health advisory board of RAND; member, and served as the chair of the board, of the Health Care Leadership Council in Washington, DC.; member of the Harvard/Kennedy Health Policy Group; member of the Division on Engineering and Physical Science (DEPS) of the National Academy of Engineering.

Dr. Cortese received his undergraduate degree from Franklin and Marshall, an MD from Temple University, and completed residency training in Internal Medicine and Pulmonary Diseases at the Mayo Clinic. He is a recipient of an Ellis Island Award (2007) and the National Healthcare Leadership Award (2009).

Robert K. Smoldt, MBA is Chief Administrative Officer Emeritus of the Mayo Clinic and currently serves as Associate Director of Arizona State University’s Healthcare Delivery and Policy Program. He served as a member of the Mayo Clinic Board of Trustees and Mayo Clinic Executive Committee from 1990 through 2007, and is presently pursuing U.S. health reform in close partnership with Dr. Denis A. Cortese. Mr Smoldt served two terms on the Board of Catholic Health Initiatives and continues as a member of its Finance Committee.

Mr. Smoldt earned a BS from Iowa State University and an MBA from the University of Southern California. He has given numerous presentations and is a recognized speaker on the healthcare environment. Mr. Smoldt has provided leadership at Mayo Clinic facilities in Rochester and Scottsdale. He has completed two terms as secretary of the Mayo Clinic Rochester Board of Governors and served on the Mayo Clinic Scottsdale Board of Governors as a senior advisor from 1998 to 2000.

He has been involved in healthcare administration for over 30 years — both with the U.S. Air Force and the Mayo Clinic. Mr. Smoldt joined Mayo in 1972, and he has worked in a variety of administrative positions in both medical and surgical departments. Prior to his CAO role, he served as chair of the Department of Planning and Public Affairs.

Mr. Smoldt has also been active in Medical Group Management Association, along with other members who manage and lead medical facilities across the nation — and work together to improve the knowledge, skills and the effectiveness of medical group practices. He has chaired the organization’s research and marketing committees and has acted as moderator of its international conference in London, UK. Most recently, he was a member of the Medical Group Management Association National Awards Committee, which honors those who make significant leadership contributions to healthcare administration, delivery or education in medical group practice and presents the following awards: Harry J. Harwick Award for Lifetime Achievement Award, Physician Executive Award, Fred Graham Award and Medical Practice Executive of the Year Award.

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