By David J. Gibson, MD &

Jennifer Shaw Gibson

While the music died[1] on February 3, 1959, the PPO died on January 1, 2010.  On that Friday, America’s perambulation through the tangent of managed care ended.  That was the day when the realization that the health care market had evolved from a buyer’s to a seller’s market became apparent.  Physicians no longer need to sell their services under a discounted contract.

On that day, 3,000 Medicare patients who had been getting care at the Glendale Mayo Clinic facility in Arizona had to begin paying out of their own pocket or find another doctor. Patients choosing to continue receiving care at the Clinic were then required to pay $1,500 per year out-of-pocket.

So, why is the Mayo event of national importance?  The answer, it gives permission for doctors across the country who are contemplating a similar move to proceed.  In June of this year President Obama in June cited the Mayo Clinic and the Cleveland Clinic for offering “the highest quality care at costs well below the national norm.”  Furthermore, throughout the health care reform debate this year, the Mayo Clinic has been supportive of health care reform as defined by ObamaCare.

Now it is learned that self-interest and economic survival trumps utopian idealism.  The Mayo Clinic reported that last year its 3,700 staff physicians and scientists treated 526,000 patients. The clinic lost $840 million during that year on Medicare.

In an informal poll, we visited with colleagues in large and small group and individual practices across the country.  All of our contacts in every region of the country indicated that they were either seriously contemplating or about to implement the Mayo business move.

The reality of a physician shortage is just now becoming apparent within health care.  In a June 2008 report, the Medicare Payment Advisory Commission, an independent federal panel that advises Congress on Medicare, said that 29 percent of the Medicare beneficiaries it surveyed who were looking for a primary care doctor had a problem finding one to treat them, up from 24 percent the year before. And a 2008 survey by the Texas Medical Association found that while 58 percent of the state’s doctors took new Medicare patients, only 38 percent of primary care doctors did.

In a national survey taken this spring, the American Medical Association suggested that 60 percent of physicians would have stopped taking new Medicare patients if the plans to reduce Medicare payments by 21.2 percent beginning March 1, 2010 had been implemented

Furthermore, if Congress passes health care legislation that extends insurance coverage, mostly through Medicaid, to a significant part of the 47 million Americans who lack insurance, the experience in Massachusetts over the past several years has demonstrated that the need for more doctors is going to exponentially escalate.

At the heart of the tectonic market shift to a seller’s market is the rising demands for increased physician services as the 78-million Baby Boomers born from 1946 to 1964 begin to turn 65 in 2011 and will require increasing medical care while the current group of seniors is already underserved.

The primary care specialty of Internal Medicine illustrates the business fundamentals now driving the market.  There is a shortage of internists nationally — the American College of Physicians estimates that by 2025 there will be 35,000 to 45,000 fewer than the population needs and internists are increasingly unwilling to accept new Medicare patients.

The projections relating to Family Practice are even more alarming.  The number of U.S. medical school students going into primary care has dropped 51.8% since 1997, according to the American Academy of Family Physicians (AAFP).  The AAFP is predicting a shortage of 40,000 family physicians in 2020, when the demand is expected to spike. The U.S. health care system has about 100,000 family physicians and will need 139,531 in 10 years. The current environment is attracting only half the number needed to meet the demand.

Of even more importance than all of the above, a recently published study in the Journal of the American Medical Association JAMA)[2] concerning physician hours of work per week demonstrated that physicians have been reducing their hours per week in practice steadily from 1996 through 2007.  The study demonstrated that average hours fell from a stable 55 hours to 51 hours by the end of 2007.  As a harbinger of the future, the decrease was largest for those physicians younger than age 45 (at 7.4%).  This represents an overall decline of 7.2% and is equivalent to the loss of 36,000 doctors working at the previous hour levels

The authors observed that this decline in work hours per week coincided with a marked drop in physician fees, as measured by an inflation-adjusted fee index.  The increasing decline in work week hours, particularly among young physicians will progressively exaserbate the physician shortage documented above.

Medicare is an ideal harbinger of things to come in the private health care market.  Government entitlement programs are PPO products that have been colossally mismanaged over the past half century.  As an example, fraud within both Medicare and Medicaid is now approaching 20-percent (with high-end rates of fraud concentrating in California, Texas, New York and Florida).  Conversely, fraud within private indemnity health insurance products where patients must select and then pay for services is less than 1-percent.  Each dollar lost to fraud increases the likelihood that reimbursement to honest providers will be reduced even more dramatically in the future. 

So, what have we learned from this 30-year experience in managed care and network discount contracting; and what does this portend for the future?

1.      Reducing medical services to a commodity structure based upon Current Procedural Terminology (CPT) defined fixed reimbursement rates was an anomaly based upon a temporary buyer’s market within health care.  It had no chance of long-term survival.  Furthermore, this payment methodology is foreign to the entire service based economy within the U.S.  No other group of professionals has ever agreed to this structure for reimbursement.

2.      The idea that third parties can manage care and thereby improve quality, rationalize utilization, coordinate care for chronic conditions or stabilize cost has been definitively discredited.  We have further learned that these third parties are incompetent when they insert themselves into clinical decision making.  The only role they can credibly play is to rationalize the rationing of services.

3.      The only segment of the market where PPOs will likely continue to function will be in government financed health care.

4.      The government will continue to have a safety–net role in financing care for the unfortunate and for those covered by entitlement programs and government retirement plans.  However, the care delivered will be well outside the mainstream. 

a.      It now costs over a million dollars to put one hospital bed into service here in California.  Government health plan reimbursement levels will not support that level of facility costs without a significant degree of cross subsidization from the private sector.

b.      Within the context of WellPoint’s 39-percent fee increase and the subsequent demonization the company has experienced by the politicians at both the state and federal levels; the private market will no longer tolerate the cross-subsidization required to support the government’s inadequate reimbursement levels for top-tier medical services.

c.      This cross-subsidization has financed the mainstreaming of government health plans. A report by Milliman published in December 2008 demonstrated that the cost shifting to the private sector totals 15-percent.[3]

d.      The care financed by government will therefore become second tier.  Beneficiaries will have much more restricted access to services.  As we have seen in the health care debate this past year, “best practice” guidelines will limit high cost services, particularly for the elderly and those with limited survival rates.  It will lack the breadth of coverage, access to cutting edge technology and service accoutrements delivered to the top-tier private sector.

e.      In all likelihood government funded PPO delivery structures will devolve back to the old county hospital systems of yesteryear with “take-a-number” (think Department of Motor Vehicles) packed waiting rooms and appended clinics that are staffed by idealistic physicians or those seeking employment.

5.      Beyond the structure of the delivery system, the role that organized medicine will play in the future representing the interests of practicing physicians in the private sector has been called into question.  Why, because the revenue from licensing fees for the CPT codes has alienated the relationship between the American Medical Association (AMA) and its dues paying members.  The AMA now derives a significant portion of its income from revenue generated by the licensing fee for the CPT codes and other proprietary products.  This revenue dependence left the organization vulnerable to extortion from the administration as it relates to support for ObamaCare.  The administration’s explicit threat to develop an alternative procedure defining system and move away from the AMA’s CPT definitions resulted in the AMA’s support for ObamaCare despite significant resistance from the organization’s membership.

6.      Unless ObamaCare is enacted, which seems unlikely at this point, all of the health care, Washington centric membership organizations (the AMA, the American Association of Retired Persons (AARP) and as illustrated by the just announced resignation of Billy Tauzin, president of the Pharmaceutical Research and Manufacturers of America) will be marginalized.  Cutting deals with partisans has consequences when you play and lose.  When the Republicans increase their numbers in Congress next year, the likelihood of preventing the 21.2-percent pay cut for physicians called for in 2010 under the 1998 enacted Sustainable Growth Rate Act for physicians participating in Medicare will be problematic.  The AMA is now viewed as any other Democratic special interest group by the Republicans.

Welcome to the new world of American health care.  We predict that managed care will be remembered as a temporary market experiment that had its origin in academic utopianism.

We will be delivering a follow-on article examining the process of dissolution of managed care in the private sector of the market in the next issue of MedicalTuesday.

djgibson@winfirst.com

David Gibson is the president of Reflective Medical, a health care software development company. Jennifer Gibson is an economist specializing in evolving health care markets as well as a futures commodity trader specializing energy.