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Massachusetts Bites Off More Than It Can Chew

Once again, Massachusetts is pointing the way toward a possible model for national healthcare reform--but one that most healthcare providers would have a hard time swallowing. To reduce costs that are rising at 8 percent annually, a state commission will soon recommend that insurance companies pay hospitals and physicians a lump sum to treat each patient for a year. And if that's not shocking enough, Massachusetts Governor Deval Patrick supports this radical change.

The purpose of this "global capitation" system of reimbursement would be to force doctors and hospitals to work together to coordinate care and decrease the amount of wasteful, redundant care that's provided. The 10-member Special Commission on the Health Care Payment System estimates that this budgeting approach could reduce health spending growth to 5 percent per annum.

To effect such a radical transformation of the system, the state legislature has to approve changes in Massachusetts insurance laws. In addition, the federal government would have to waive some Medicare and Medicaid regulations. While the state's 2006 reform law did not provoke a major challenge from self-insured employers that are covered by the federal ERISA regulations, there is no guarantee that this payment reform would sail through the ERISA strait unscathed.

Healthcare providers would present a much larger obstacle. To begin with, global budgeting is guaranteed to slash somebody's income. Second, the proposed method is very similar to the global capitation that HMOs tried in the 1990s; while some healthcare organizations did well with it, in the end providers rejected the idea of taking on insurers' financial risk. And third, except for a handful of large organizations like Partners Healthcare and Atrius Health, few doctors and hospitals in Massachusetts--or in other states--are organized to accept global financial risk.

The problem is not just that most providers do not yet have EHRs or are unable to exchange electronic patient data. More fundamentally, the majority of physicians are still fragmented into small, often competing businesses and don't know how to cooperate with one other, let alone with hospitals. The hospitals are also competing with each other, and many share physicians with the staffs of other institutions.

Recently, Blue Cross Blue Shield of Massachusetts began offering what it calls an "alternative quality contract" that requires physician practices to take global capitation, with or without hospital partners. The Massachusetts Blues is trying to counter the incentive of capitation to do less by paying up to 10 percent of doctors' reimbursement in quality bonuses. At the same time, it promises not to reduce capitation rates if providers become more efficient. The first two takers are very large physician groups. John Fallon, MD, senior vice president and chief physician executive of the plan, says that many other group practices are interested, but they know they're not ready for this kind of contract.

The Massachusetts commission is right when it says that the fee for service payment method will continue to drive up costs. But neither the state nor the nation is prepared for a whole-scale conversion to global capitation. That's why it's essential to look at how to reorganize the healthcare delivery system at the same time that we consider how to change healthcare financing.

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