By Paul A. Branstad
and Claude R. Maechling
APRIL 5, 2023
Source: Health Affairs
Photo Source: Unsplash,
Not that long ago, primary care practices sold for hundreds of dollars per patient, depending on how “fat” their files were and what proportion were economically undesirable Medicare patients. The principal buyers were hospital-based health care systems that used them for front-line triage and as capture networks for higher-profit, specialist-driven lines of service.
Now, suddenly, the likes of Amazon, CVS Health, Walgreens, Walmart, UnitedHeath, and Humana are vying to acquire and build primary care practices targeted at serving the US’s seniors. So far, we estimate they have committed $50 billion, and the competition has driven prices north of $50,000 per patient. When the US finally grasps what is going on, how this competition was triggered in the first place, and what the long-term consequences will be, none of us will like it.
Value-based contracts with full-risk capitation payments, mostly Medicare Advantage (MA), but also variants of accountable care organization (ACO) models, have grown rapidly to become the majority payment model for Medicare beneficiaries. However, there is no demonstrated proof that these payment arrangements improve the health of beneficiaries more than fee-for-service arrangements. We also fear that, in their current forms, such contracts reward ever-increasing scale and will evolve into a competition that only the very largest consumer companies can win. Once these winners emerge, their vested interests will focus on preserving their oligopoly at an additional cost to US taxpayers of $75 billion a year. Too late will we realize we have lost our last best chance to reinvent a health care system centered around the large-scale provision of high-quality primary care—even though this is what value-based contracts started out trying to do. The problem lies not with the Centers for Medicare and Medicaid Services’ (CMS’s) intentions, but with how the game they have structured plays out.
Triggering The Competition
An important recent article in the New England Journal of Medicine concludes that the root cause of the $50 billion investment frenzy is the financial opportunity created by CMS’s commitment to convert all Medicare beneficiaries to accountable care relationships with value-based payment models. MA is the dominant exemplar of full-risk value-based contracting (VBC), but all direct-contracting ACO plans are similar in equating accountability for care with capitated reimbursement. Fifty billion may sound like a lot, but it is just table stakes to vie for the $1 trillion prize that McKinsey and Company estimates will be claimed by the winners among the consumer oligopolists competing for the prize. The question begs to be answered: What is CMS thinking?
CMS would certainly disavow its mission is to incentivize and enable the development of an oligopoly among the US’s largest consumer companies, who will then prioritize earning $1 trillion worth of profits over providing high-quality primary care and improved patient health outcomes. It would not claim its objective is to raise the costs of insuring the health of the US’s seniors. Nor would it say it wants to promote the profiteering practices embedded in the clinical operations of VBC organizations. Yet, these are all (presumably unintended) consequences of CMS’s drive to replace fee-for-service reimbursement with value-based payments by 2030.
What CMS Does Not Seem To Understand
CMS seems to lack the foresight to anticipate how market forces will adapt and respond to its policies, so it is not able to foresee unintended consequences of its reimbursement and insurance practices. This problem long pre-dates the advent of value-based contracts. CMS’s tortuous primary care reimbursement practices have been more than 30 years in the making and have led directly to the erosion of the central role that primary care physicians could and should play in the US health care system.
In the case of value-based contracts, the problem starts with the fact that there is simply no convincing evidence that enforcing compliance with process-of-care standards improves patients’ care experiences or health outcomes.
Furthermore, as Harvard’s Michael McWilliams concludes in an editorial for the Journal of the American Medical Association, evidence does tell us that quality of care is not contractible through payment system incentives—yet, this is the premise underlying why CMS is structuring its value-based contracts as it does.
If value-based contracting is not about improving patients’ health, then it must be about reducing the costs of providing their health care. But that is not true either. For decades, CMS has paid more to MA plans than it spends for equivalent patients on traditional fee-for-service Medicare. Furthermore, current efforts to reduce MA overpayments—led by the Medicare Payment Advisory Commission, an independent agency chartered to advise Congress on issues affecting Medicare—face entrenched political opposition because the plans enjoy such strong, bipartisan and bicameral support. Senior voters like the supplemental benefits and lower premiums offered MA enrollees, and so politicians do too.
Our conclusion is: CMS’s commitment to value-based contracting is simply the next stage of its long-standing, philosophical aversion to fee-for-service reimbursement. This aversion is reflected in the increasing justification and reporting requirements imposed on primary care physicians, requirements that represent an affront to their integrity and challenge their medical judgment. The resulting suppression of practice revenue and increased administrative burden have pushed many previously independent primary care physicians past their breaking point and into the arms of hospital-based health systems. Even the well-capitalized, highly touted primary care-centric start-up platforms such as Oak Street Health, Iora Health, and VillageMD found profitability to be elusive. So, they are now selling out to the consumer behemoths vying for the $1 trillion prize in value-based contracting.
It is not mere coincidence that, over the past decade, the percentage of primary care physicians employed by a hospital-based health system or corporate entity has increased from 36 percent to 74 percent, while MA coverage of Medicare beneficiaries increased from 27 percent to nearly 50 percent. The trend toward corporatizing primary care is unmistakable.
The issue is not about who owns primary care practices but about how the proliferation of value-based contracts in Medicare is leading to a profound change in the historic physician-patient relationship. The health systems and corporations that own primary care practices often find it most efficient to organize care delivery around CMS’s process-of-care measures to maximize their reimbursement opportunity. So physicians who, heretofore, practiced patient-centered medicine that earned trust by focusing on personalized diagnostic and treatment services, are now obliged to align with these same quality protocols. They are being told how to drive from the passenger’s seat, while the patient is moved to the back.
The economic heart of value-based contracts is negotiation over capitation, in which aspiring MA plans bid to manage all care for a group of patients, according to prescribed CMS protocols, for a fixed price per patient. They are, in effect, reinsuring CMS. A bid is successful if it is lower than the benchmark, defined as the amount that CMS currently spends for traditional fee-for-service Medicare per enrollee, after geographic adjustment. MA contractors win the right to control their patients’ care delivery if they commit to CMS protocols and promise that the services provided will not cost CMS more than it pays for traditional Medicare enrollees. It is clear CMS thinks the path to higher-quality care requires that it should dictate how medicine is practiced.
The benchmark is subject to two further adjustments. First, the benchmark can be increased by 5 percent, a “quality” bonus, if the MA plan earns a four on CMS’s star rating performance measurement system. The system is based on 46 measures of access, process, patient experience, and clinical quality and is indexed such that, last year, 90 percent of MA enrollees were in plans rated four stars or higher. Individuals shopping for plans on Medicare.gov use these same quality ratings for comparison.
Second, the benchmark is adjusted in subsequent years for the risk score of the enrolled population. In theory, this adjustment can be upward or downward, depending on the risk scores of a plan’s enrollees compared to the county average for traditional Medicare patients. Once enrolled, however, intensive coding efforts translate into higher risk scores when the plan comes up for annual renewal.
As many of us know from relentless television advertising, MA plans offer enrollees extra benefits that traditional Medicare enrollees cannot access without purchasing additional health insurance coverage. These perks, which can be worth up to $2,000, are a significant source of patient satisfaction and loyalty, and of the political clout that MA plans enjoy. CMS funds these perks by paying rebates to MA plans, equal to 50–70 percent of the difference between their initial bid and the benchmark. CMS spending for such rebates adds about 15 percent to what they pay MA plan reinsurers.
The surface complexities of MA plan reimbursement obscure the fact that, at bottom, they are a poorly structured insurance policy destined to have repercussions for CMS and the broader health care system. First, like every insurance provider to every insurance market, VBC reinsurers have a strong incentive to attract patients who will need fewer services than CMS expects and eschew patients who will need more. While we presume it is unintended, CMS helps MA plan contractors do exactly that. How?
Within limits, MA plan contractors have the incentive to bid low relative to the benchmark so as to earn sufficient rebates to pay for the supplemental benefits members love.
The segment of the population that highly values these supplemental benefits is the segment that also does not feel they need a lot of care otherwise.
By contrast, the segment that knows they need a lot of care prefers to keep their traditional Medicare fee-for-service plan because these plans allow them to pick their doctor and facility, which MA plans do not.
If CMS meets its enrollment goals, favorable selection won’t last forever. Eventually, VBC reinsurers will have to cover the 63.7 percent of US seniors who have two or more chronic conditions, are higher risk, and need higher levels of care—sometimes much higher. Not to worry, however, the benchmark for MA plans is pegged to the prior year’s cost for traditional fee-for-service Medicare patients. This is established by statute. The progression of the VBC enrollee population means the traditional Medicare population will become ever more densely concentrated with those who need the most intensive care. So the benchmark will inexorably rise, and with it the bid price floor for MA plans.
Vying For The Prize
It is the structure of these capitation reimbursement plans that fuels the competition among consumer behemoths to become leaders in value-based contracting because they represent an almost guaranteed win. CMS is helping them attract patients and the physicians to serve them. Their market opportunity is intensifying as the newly arriving enrollees increase the benchmark for bid price levels. CMS is committed to driving these new enrollees to them. CMS also subsidizes their spending to deliver a four-star or better quality rating and provide the supplemental benefits their patients love—both of which build loyalty and retention.
To top it all off, the annual process for resetting benchmarks limits risk. That is, once a MA reinsurer has acquired control of their patient populations’ medical lives, they are in charge of making sure they adequately assess their health risk status. Ceding the information advantage for risk upcoding to the value-based contractors is, at best, an invitation to beat the system and, at worse, to cheat the system. Upcoding games are already estimated to cost CMS an additional $12 billion to $25 billion annually, and this estimate is destined to increase disproportionately with the growth in VBC covered lives.
As economists Liran Einav, Amy Finkelstein, and Ray Fisman point out in their new book, Risky Business, insurers that succeed long term do so by learning how to win the customer selection game. Health services is a market where a priori risk can be very hard to correctly identify, where the costs to remedy a risk, once it is made manifest, can be huge, and where the demand for such remedies is highly inelastic. Regulating such a market effectively, so that neither the insured nor the payer (CMS) is exploited, is intrinsically very hard. CMS has punted this challenge to VBC organizations, while wrapping it in a contractual form that virtually guarantees a win for them—and a loss for the country.
McKinsey’s expected $1 trillion prize is the reward available to those few, very large-scale value-based contractors who will come to dominate the economies of scale required to win. We think McKinsey is right, the size of this prize isn’t hyperbole. Primary care practices are the front door to the health care system. So, those who would vie for the prize must first control the entrance to the network, by controlling what the patient is allowed to do. Since this is the way value-based contracting is designed to work, it is no wonder corporate giants are in a frenzy to stake out their claims. The medium-term rewards will be great, the longer-term rewards will be greater still.
UnitedHealth, Humana, Cigna, and Aetna are betting on their existing health-risk management capabilities by spending to acquire front-line physician networks. Walgreens has invested $9.7 billion for a majority stake in VillageMD and Summit Health, creating the opportunity to build out its own care delivery network and capabilities as a direct contracting entity for VBC programs. Walmart is rolling out Walmart Health primary care clinics next to their supercenters, seemingly intending to serve as the front-line health care delivery partner for multiple VBC organizations.
Amazon lost out to CVS in the $8 billion fight to acquire Signify Health, a home-health care company primarily focused on performing health risk assessments of MA plan participants. They subsequently beat out CVS for the now-completed $3.9 billion acquisition of One Medical/Iora Health, a primary care provider and MA plan reinsurer. We would not be surprised if Amazon continued to add complementary expertise (for example, insurance, health risk scoring, and analytics) to their platform base as they lay the foundation to grow from within, a strategy their track record would certainly justify.
CVS has been far and away the most acquisitive. Notwithstanding their $69 billion acquisition of Aetna, they do not appear satisfied imitating the insurance-centric growth strategies of UnitedHealth, Humana, and Cigna. They won the fight for Signify Health and, just recently, assuaged their loss of One Medical/Iora to Amazon by announcing a $10.6 billion commitment to acquire Oak Street Health. Who knows, but their strategy might simply be to keep acquiring all the way to the end—as long as they can keep raising the capital at a reasonable cost. Only time will tell.
It Matters To All Of Us
When time does tell, and the inevitable consolidation shakes out, what will be the consequences for Americans? We have identified several, none represent good news.
First, consolidation will raise the cost of care without any improvement in care capacity or quality. The reimbursement and insurance issues in VBCs will pit the consumer behemoths operating as value-based contractors against CMS in a battle over the risk assessment of their populations and corresponding capitation payments. The behemoths have the potential to create an information advantage to complement their greater resources and stronger incentives; so they are likely to win.
Researchers estimate that Medicare Advantage will cost CMS $75 billion more in each of the coming years than would be the case if the same lives were enrolled in traditional Medicare. McKinsey estimates that the winners will boost their profits by $50 billion to $60 billion. Together, these estimates say the private sector will spend $15 billion to $25 billion to play the game for winnings of $50 billion to $60 billion. No one has yet estimated what added spending CMS will incur trying to regulate the game it has now set up—but this number will also not be trivial.
An extra $75 billion is less than 2 percent of national health expenditures, which totaled $4.3 trillion in 2021. But it becomes far more significant when we think of it in terms of primary care. The US spends approximately $2.9 trillion on medical care for adults older than age 18—the overwhelming majority of which is consumed by those with one, or more chronic diseases. Yet, the US only spends about $100 billion on primary care physician consultations for these same adults. Primary care is already scandalously underresourced, and the money wasted on VBC overpayments could be put to very productive use remedying primary care underinvestment. Empowering primary care physicians to serve at the center of patient care and provide high-quality chronic disease management and preventive services is essential for improving the health of Americans, according to the 2021 report of the National Academies of Sciences, Engineering, and Medicine.
Spent correctly, this same $75 billion could make a huge contribution to solving the biggest health care problem we have in this country—a lack of primary care to address the high burden of chronic disease. Reinvesting the funds could create comprehensive, relationship-based, personalized care overseen and coordinated by trusted, in-charge primary care physicians who have the time to make full use of their clinical reasoning, differential diagnosis, and Bayesian decision-making skills. Early results from a pilot of this model, observed by us but not yet publicly released, are encouraging. They exhibit promise that it could help meaningfully reduce the burden of chronic disease and improve the health outcomes for individuals who are covered by it. For the same $75 billion, this pilot could be national.
There is also a legitimate fear that, once CMS has converted all Medicare beneficiaries to VBCs, inertia will prevent its reversal. This is because the financial self-interests and avarice of the established winners of the new game will focus on defending their profits, freezing the entire system into a change-resistant state. Health insurers are already gearing up for a massive legal battle with the Biden administration to halt CMS from auditing MA organizations so as to claw back risk-score-related overpayments, but this fight will prove to be just an opening skirmish.
Tragically, conversion to VBC plans will also undermine efforts to address the social determinants of health for disadvantaged communities. When we sacrifice higher-quality, relationship-based primary care medicine, we also sacrifice the opportunity for a physician to understand each patient’s biography, or lived experience, which arguably contributes as much to their ill-health as their biology or genetics. Without integrating the biographic component of Biosocial Medicine, tailored patient care fails to address these societal determinants, relying instead on observable biological determinants. The opportunity cost for neglecting a patient’s biography is substantial, especially for the least-healthy, and often most vulnerable strata of Americans.
In their push for VBC solutions, CMS has seemingly become narrow minded and myopic. Accountability, improved quality of care, and the realization of equity and community health are important, laudable goals. The problem, we think, is the already apparent flaws in VBCs—both as conceived and as implemented—will make it impossible for these goals to be accomplished through any of their current contractual variations.
The massive problems besetting the US health care system today have been 30-plus-years in the making. The life expectancy of Americans is now at the lowest level in nearly two decades. Too many Americans bear too much burden of chronic disease, improve too slowly, and regress too often. We no longer have a primary care-centric health system, and far too few of us have a trusted relationship with a primary care physician who has the time, support, resources, and authority to take overall responsibility for our health care.
The reimbursement system has been a major cause of this degradation. The drive to make VBCs the universal answer for Medicare patients will not help. We would like CMS to consider hybrid payment models based on the premise that primary care physicians should be empowered to dedicate time to thinking, building trusted relationships with patients, and overseeing patient care beyond the four walls of an examination room. Accountability must be designed into high-quality primary care delivery based on results, not process. We think this is eminently doable but, if CMS doesn’t put its mind to it, and doesn’t embrace new thinking, we will never know.
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