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Former CMS Chief: 'Oversubsidized' PPACA is 'Asking for Trouble'

 |  By Philip Betbeze  
   May 16, 2014

Tom Scully, a former administrator of the Centers for Medicare & Medicaid Services is no fan of the healthcare reform law, but has found one thing to like about it: "It draws incentives away from volume-based reimbursement to quality-based because the government has its money at risk."


Tom Scully,
Former CMS Administratior

Tom Scully is no cheerleader for the Patient Protection and Affordable Care Act.

"The problem with the ACA is they massively overfunded it," he says. "You can't create an entitlement that goes to 400% of the poverty level. That represents 60% of Americans."

Now a general partner at private equity firm Welsh, Carson, Anderson & Stowe, and general counsel at law firm Alston & Bird LLP, Scully says that oversubsidization is one reason the health insurance exchanges, despite the well-publicized problems with healthcare.gov, eventually exceeded expectations on enrollment.

The exchanges finished the open enrollment period with a total of around 8 million enrollees nationwide. But that's nothing compared to what will likely happen down the road, says the former administrator of the Centers for Medicare & Medicaid Services under President Bush from 2001–2003.

'An Enormous Problem Going Forward'
"The ACA will be way more popular going forward and people will sign up in droves because of reasons I don't like: because they're oversubsidized," he says. "Once the smoke clears in another year, I think the thing will be way too big and will be an enormous problem for us going forward. But people like free stuff."

He's talking about whether the federal government will be able to afford the new entitlement. But another issue, whether enrollment will skyrocket and destabilize the employer-based healthcare system, is settled in his mind: It will.

What's particularly important about the transition he sees coming is the speed of it. The more the word gets out to the guy who's making $70,000 a year with a family of four that he can get 75% of his premium paid for in an exchange program, the more quickly the shift will happen, he says. Employers will begin dropping coverage for their workers much more dramatically.

"Employers will shift to that too, and I think they should," he says. "I've never been a fan of employer-based healthcare, but in the long run, as long as it happens gradually, it's not a bad thing."

He speaks with some experience based on what happened with the prescription drug program (Medicare Part D), enacted during his administration at CMS. "With the drug program, we knew a lot of employers would dump their retirees and they did."

But that involved retirees, not current workers—a big distinction, he says. He echoes the contention of many Republicans, as well as a report from the Congressional Budget Office, that details the powerful incentive for workers to hold on to the subsidy on health insurance provided for in the PPACA.

'Asking for Trouble'
"The store manager at Target making $70,000 won't want a promotion to making $74,000 because he'll lose the subsidy," says Scully. That disincentive has been a huge talking point in the run up to the midterm elections, as both sides spin the CBO report to their advantage. Republicans say it means the PPACA will destroy jobs. In reality, it's more nuanced than that.

The CBO report suggests that because of the subsidies, net hours worked during the period from 2017 to 2024 will decline by 1.5% to 2%. That's not the same as saying 2% of jobs will be lost. Instead, because of the fact that the subsidies are so large, employees will choose to supply less labor.

"That means there's a big marginal lack of incentive to earn the next dollar for an awful lot of people," says Scully.

For part-time workers, for example, who receive supplemental nutrition assistance benefits (food stamps) and housing vouchers and a big healthcare subsidy, "your incentive to make the next dollar is very minor, sometimes zero," Scully says.

"I've had this debate with my Democratic colleagues and they say when you scale something like this up that has to happen, and that's true, but when you go up to 400% of the poverty level you're asking for trouble. People are going to like it and they'll probably vote for more, which is a little bit dangerous."

Especially when the stated reason for the PPACA was not only to provide better access for the previously uninsured, but to cut healthcare costs, and especially, the unsustainable inflation rate for healthcare services.

Not All Negative
All that aside, Scully says one big positive from the law is that all of the enrollees through the health exchanges have ended up in private health plans, which have a widening variety of levers with which to drive down overutilization and improve care coordination and quality, while fee for service has the opposite effect.

The difference is simple, he says.

"If you give someone a checklist that says we'll pay you $3 for this, $4 for this and $5 for that, they'll check a lot of boxes," Scully says. "If you say we'll pay you 7 bucks for a good outcome, they'll do their best to do it for $6.95."

As chairman of a company that helps health plans and health systems better coordinate that care so that they can keep more of a bundled payment for good outcomes, Scully has done the due diligence. NaviHealth manages post-acute care for health plans and health systems, and has extensive experience in bundled payments through CMS's Bundled Payments for Care Improvement Initiative.

He thinks such "conveners" can take advantage of the similar incentives, through BPCI, that exist in Medicare Advantage, a program his administration introduced to CMS that's driven more coordinated care and less volume based care. Called Medicare Plus Choice when Scully was in charge, the Medicare Advantage share has gone from about 3% of the Medicare population to nearly 31%.


Medicare Advantage Program Standards Tightening


"A huge chunk of seniors has gone from government, price-fixed fee-for-service, which is a flaw in itself, to the capitated private plan model," he says.

Similarly, states have rapidly moved toward Medicaid managed care over the past decade or so.

"Ten years ago 20% of Medicaid recipients were in managed care programs and now it's like 76%," he says. "Almost every governor has realized that fee-for-service price setting Medicaid doesn't make any sense and they've contracted with Medicaid managed care plans. That resulted in a much better-run program and a lot more competition on price and quality—to the degree Medicaid can do that with their rates—among hospitals and doctors."

Similarly, the exchanges, whether they're run by the federal government or the states, enroll people in private health plans.

'Huge Progress'
"While there are many things I don't like about [the PP]ACA, what many people are missing is that the shift to private at-risk health plans has been huge progress. It draws incentives away from volume-based reimbursement to quality-based because the government has its money at risk. Medicaid and Medicare used to pay every doctor the same. When you do that you'll get competition for volume."

To a certain extent, Scully's 'talking his book,' in investor parlance, but as a former policymaker, he sees great promise in bundled payments, something that, because of all the moving parts, seemed close to impossible not so many years ago.

"The reality is that Medicare should do pre-acute bundling and they should do post-acute bundling and they should do acute bundling," he says. "Then they should bundle all three of them together, call it Medicare Advantage and get the hell out of the program."

Philip Betbeze is the senior leadership editor at HealthLeaders.

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