In early 2012, Oregon launched a new way of delivering Medicaid—the Coordinated Care Organizations (CCO’s).  I’d been spending much of my free time during the previous two years reading books and articles about how to reduce the unsustainable growth in health care costs.  When I read the description of the new CCO’s, I realized they incorporate many of the needed innovations.  I was initially surprised that Medicaid would be at the vanguard of reforming our delivery system.  Why not Medicare or private insurance companies?   As I’ll explain below, I soon realized there’s a good reason why Medicaid is now taking the lead.

Each CCO will receive a fixed number of dollars each year from the state and federal governments based on the number of Medicaid recipients living in the part of Oregon that the CCO serves.  Local providers, e.g., doctors and hospitals, will form the CCO governing boards and assume responsibility for determining how to reorganize medical services so quality care is provided within this global budget.  The Oregon Health Authority (the agency that administers Medicaid in Oregon) will monitor the CCO’s to ensure that quality standards are maintained, but otherwise will let local authorities innovate.   Medicaid had already changed the way it pays primary care providers—going from fee-for-service to “managed care.”  The CCO’s will expand managed care by putting all providers—including primary care doctors, hospitals, specialists, dentists, and mental health agencies—under one global budget.

The rest of our health care system suffers from two fundamental problems.  First, Medicare and private health insurance plans aren’t required to operate within a fixed budget.  Medicare recipients are allowed open-ended access to all the medical services they desire and Medicare pays whatever this costs.  Private insurance companies raise their premiums to offset cost increases.  Workers ultimately pay for these premium increases through slower wage growth.  Second, successful reforms must be lead and supported by medical professionals and we currently aren’t motivating them with the right incentives.   The widespread use of fee-for-service payments has caused doctors and hospitals to focus on providing more services and often to ignore the effects of their actions on costs.

I realized that Medicaid is the only part of our health care system facing a firm budget. With both state and federal budgets under severe pressure, the growth in Medicaid funding is likely to be flat or, at best, to increase slowly.  The traditional approach of reducing Medicaid costs by cutting payments to providers has gone about as far as it can go.   Further cuts will cause an unacceptable number of providers to stop seeing Medicaid patients.  I believe the local medical community realizes all this.  With a fixed budget, the only way providers will receive adequate compensation and have the resources to provided needed new services is to make the system more efficient.  With the new CCO structure, providers have been given the power and a new motivation to make changes—so the limited resources go where they will provide the most benefit.

My Involvement

Last April, I attended my first CCO meeting—a regional kick-off luncheon in Hood River featuring a panel of local providers and public health officials plus an inspirational talk by Dr. Bruce Goldberg, the Director of the Oregon Health Authority.   I learned that the medical community in Wasco and Hood River Counties was in the process of forming the Columbia Gorge CCO (CGCCO) and I decided to attend their meetings over the next year.  Their next step was selecting an insurance company to make payments and help with administration.  They interviewed two insurance companies—PacificSource and ColumbiaPacific—and, after two close votes, PacificSource was selected.

I suspected that county governments would be involved in the CCO’s since I’d seen Karen Joplin, a Hood River County Commissioner, on the panel in Hood River.  I didn’t see anyone from Sherman County (where I live) at the initial meetings.   Sherman County has a health clinic in Moro that provides primary care for the majority of Sherman County Medicaid patients.  However, most of the specialist and hospital care is provided in The Dalles (the closest large town) and it seemed logical that Sherman County would be part of the CGCCO.  I contacted the Sherman County Court and offered to report what I was learning at the CGCCO meetings.  The Sherman County Court then appointed me as one of their two representatives on the group forming the CGCCO.

Over the next several months, we spent almost all our time wrestling with how the governance structure should be set up—particularly how the three county governments would be involved.  During these meetings, I was impressed with all the people I met, but especially with Dr. Kristen Dillon (the chair of the formation group), Dr. Judy Richardson, and Ellen Larson.  Coco Yackley was very helpful in providing administrative support and keeping the group moving forward.  I always saw a cooperative spirit at the meetings.  I didn’t observe “turf battles”—even between the two rival hospitals.  Before the last meeting of the formation group, my county decided to join the Eastern Oregon CCO rather than the CGCCO.  The EOCCO includes most of the rest of Eastern Oregon, including all the counties to the east of Sherman County.  The EOCCO promised to focus on the special problems of providing health care in sparsely populated rural counties.  The Sherman County Court’s deliberation was more difficult because neither CCO had yet started making substantive decisions about planned changes.   Sherman County’s decision left important questions unanswered.   How will care for Sherman County Medicaid patients be coordinated and paid for when care is provided by providers located in a different CCO?

I started attending CCO meetings for two reasons.  First, I wanted to meet the health care leaders in my local area and observe how they and their organizations work together.  I’m well on my way to accomplishing this goal.  I very much appreciate the friendship and help I’ve received.  My second objective is to learn how the governing board will tackle the huge problems it faces of controlling costs and better coordinating care.  These issues are just starting to be addressed and the upcoming meetings should be even more interesting.  I plan to continue attending.  Keeping cost growth within a very slowly growing global budget will involve limiting payments to some of the organizations represented on the governing board.  To paraphrase one of my favorite health care economists, “Every bit of waste and inefficiency in our healthcare system is someone’s current income.”  From what I’ve seen over the past year, I’m confident the CGCCO’s governing board will be able to make the hard choices necessary to make the CCO a success.

I’ve discussed many ideas proposed to reduce the unsustainable growth in our health care costs.  Most involve changes in the way providers are paid — e.g., eliminating fee-for-service, Accountable Care Organizations (ACO), bundled payments, HMO’s, and Coordinating Care Organizations.  Will these reforms be accepted and work?  No one knows.  The results of most past reforms have been disappointing.

The U.S. spends twice as much as other advanced countries on health care.  I believe the ultimate reason can be traced to one unique characteristic of our system.  Everyone thinks someone else is paying the bill.  The government pays for half of our health care and higher costs are either tacked onto the federal deficit or taken from the Medicare Trust Fund.  Since taxes aren’t increased, taxpayers have little reason to demand (or even accept) reforms.  Much of the rest of our healthcare costs are paid by business.  Employees think health insurance is a free benefit and don’t realize they’re paying premium increases with lower wage growth.

The best (and maybe the only) way to generate support for actually implementing reforms is through a dedicated tax that would provide health care vouchers to all Americans.  The tax could be used only for health care, would eliminate the need for Medicare, Medicaid, and employer-provided insurance, and would automatically increase as costs increase.  Victor Fuchs, the dean of American health care economists, and John Shoven recently published an article outlining how a dedicated VAT tax would work.  Read their six-page plan.  For a good discussion of our cost problem and shorter discussion of the solution, see a recent interview with Fuchs.  You can also watch Fuchs and Shoven discussing their plan in a short video.

Last December, our Senator Ron Wyden and Representative Paul Ryan released a plan to reform Medicare that featured vouchers for Medicare enrollees.  The document describing their plan uses the terms “premium support” and “coverage support,” but their plan is a voucher plan similar in many ways to the plan that my AFBF Deficit Task Force endorsed.  Each senior would be given the option of continuing in traditional Medicare or using their voucher to purchase a health insurance policy from a private company.  Private plans would be required to offer at least the basic benefits Medicare now provides.  Each year, both participating private insurance companies and traditional Medicare would announce the cost of their coverage for each region of the country.  The size of the voucher would be set to equal the cost of the second least expensive plan.  After 2022, the growth in the total cost of Medicare would be capped at the growth of GDP plus 1% and it’s possible this cap will limit the growth in the size of the vouchers in future years.

I’m an enthusiastic supporter of the Wyden/Ryan Plan for three main reasons.  First, switching Medicare to vouchers would finally give Congress direct control over Medicare spending and establish a reasonable limit on the future growth of the program.  Under our current fee-for-service Medicare, the government is obligated to pay seniors’ medical bills no matter how rapidly costs increase, and the Congressional Budget Office (CBO) is projecting costs will increase from 3.7% of GDP now to 6.0% in 2037.  Even with the retirement of the baby-boomers, Social Security is projected to have a much smaller increase—going from 5.0 % to 6.2% of GDP over the same period.  Allowing expenses for senior health care to continue on automatic pilot will cause Medicare to take a steadily increasing share of the federal budget—causing either dangerous federal deficits, higher taxes, and/or the crowding out of defense spending, infrastructure investment, education and other important programs.  Like everything else, Medicare needs a budget and the Wyden/Ryan Plan provides one.

Second, vouchers will provide seniors with a new powerful incentive to seek out lower cost plans. If they select a plan costing less than their voucher, they keep the difference.  If more, the senior will pay the extra out-of-pocket.  To gain customers, both traditional Medicare and private insurance companies will be under new pressure to make changes in the way care is delivered to lower costs and improve quality.  I believe seniors will accept the needed changes in our current fee-for-service Medicare only if they are given a financial incentive to do so.  The Wyden/Ryan Plan provides that incentive.

Conservatives argue that allowing competition among private insurance companies will be enough to rein in costs.  Liberals base their hopes on government price controls and on panels of experts who will mandate “best practices” and hence reduce ineffective treatments.  Both the conservative and liberal approaches have merit.  However, I doubt either will be adequate without the new incentives provided by vouchers.

Insurance companies have spent many years competing for the business of private companies—with little success in controlling costs.  Over the last decade, the cost of private plans has been growing slightly faster than the cost of traditional Medicare.  Top-down government price controls and the restrictions in choice that come with “best practices” guidelines will be strongly resisted by both providers and seniors who have become accustomed to getting what they want from fee-for-service medicine.  Once the Wyden/Ryan Plan has been implemented, seniors will, for the first time, have a financial incentive to accept a low-cost plan that focuses on effective care and pays doctors for quality, not more procedures.

Third, the Wyden/Ryan Plan is a bipartisan plan— something that’s much too rare these days.  The urgently needed reforms in Medicare won’t happen without support from both Republicans and Democrats.  Senator Wyden and Congressman Ryan deserve our thanks for incorporating good ideas from both the right and the left into a plan that has a chance of eventually being enacted. I’m not surprised this plan came from Senator Wyden and Congressman Ryan since both have a history of working with members of the other party on health care reform—see Wyden/Bennett and Ryan/Rivlin.  Another big attraction of the Wyden/Ryan Plan is that it allows both traditional, single-payer Medicare and private insurance companies to compete for seniors’ vouchers in the same market place.  Performance, rather than ideology, will then decide the best way to rein in costs.