Government Sponsored Failure Spawns Organized Chaos

In May, 2001, Janet M. Corrigan a director at the Institute of Medicine reported before a U.S. Senate committee that “medical science and technology have advanced at an extraordinary pace, the health care delivery system has floundered,” and falls far short in an “ability to translate knowledge into practice, and to apply new technology safely and appropriately. As currently structured, the health care enterprise does not make the best use of its resources.” Why after four decades of government mandates, regulations and price controls do hospitals lack the incentive to achieve excellence in clinical outcomes and operational efficiencies? Simple answer, hospitals are rewarded for failing.

How Rewarding Failure Conditioned Hospitals To Failure
When Medicare was first implemented four decades ago, it utilized fee-for-service reimbursement based on a hospital’s costs, which inadvertently introduced rewards for operational inefficiencies. If leadership at all levels could not manage a process, unneeded staff was hired bloating payrolls and lowering productivity with the reward of future Medicare payment increases. Failure quickly became a cash cow giving rise to a culture of failure and inadequate leadership. Senior leadership focused on preserving the status quo hiring “team players” who would be comfortable with failure as a cash cow rather than change agents who would address productivity and preventable clinical outcomes. The costly consequences drove Medicare to price controls and insurers to experiment with managed care.

How Price Controls Cut CMS’s Cost of Failure But Inflated Insurance Premiums
In 1983, CMS introduced Diagnosis Related Groups (DRG), a form of price controls, to control bloasting Medicare payments to hospitals which inflated 13 percent the prior year. Medicare speculated that price controls for different types of services would give hospitals the incentive to perform the procedure more efficiently to maximize profits. But, two decades of being rewarded for operational inefficiencies conditioned hospitals to seek other means rather than cost accounting and managing resources to compensate for price controls. No surprise, two decades of CMS regulations gave government sufficient influence over hospitals devolving hospitals into bureaucratic subsidiaries. Like an inefficient government agency, hospitals did what governments do; they focused on innovative ways for new revenue streams (taxes) rather than gaining new efficiencies. Enter cost shifting.

Cost-Shifting: A Stealth Federal Tax On Commercial Premiums
DRGs (price controls) introduced a new dimension to the culture of failure: underpayments for success and upward adjustments for preventable clinical outcomes, which conditioned hospitals to have a tolerance for clinical failure, the new cash cow, further devolving hospitals into a culture of failure while accelerating health care inflation into warp speed. Hospitals recouped losses from price controls through “cost-shifting,” which is adding losses from price controls to services paid by commercial insurers and patients with no insurance like a stealth federal tax.

A study addressing the inflationary impact of cost-shifting by Premera Blue Cross of Washington found, “In 2004, this hidden tax cost Washington employers an average of $902 per family health insurance contract –13 percent of all commercial hospital and physician costs.” Even though Blue Cross has to absorb losses from Medicare price controls, it also negotiates its own discounts forcing hospitals to shift both Blue Cross and Medicare discounts to commercial insurers with less negotiating or regulatory power.

The consequences of CMS indirectly shifting its cost of failure to commercial insurers can be seen when comparing premium growth to Medicare cost growth from 2000 to 2004 when Medicare cost averaged an increased of 6.55% annually while employer premiums averaged 11.16% annually. In other words, commercial premium inflation includes their cost of failure and through cost shifting a significant portion of Medicare’s cost of failure. Should we be surprised that employers offering health care coverage have dropped from 69% to 61% as the rewarding failure “tax” taxes employers out of the health insurance market?

The irony is that government policies that reward failure have caused health insurance premiums to inflate faster than inflation forcing individuals and businesses to drop policies. Now the same government wants to subsidize commercial premiums with these saved tax dollars so that individuals and businesses forced out by government policies can reenter the insurance market under government control which will cause more cost shifting to commercial premiums resulting in more uninsured seeking government controlled premium subsidies.

The devolution of the nation’s health care delivery system is evidence that government controlled markets inspire organized chaos with an insatiable appetite for tax and premium dollars and a tolerance for patient suffering.