As we consider how payments to healthcare providers might be made under a national health system I'd like to review the history of payment mechanisms under the largest national health system to date. Medicare effectively provides "socialized medicine" under a "single payer" based model for those over 65. The means by which Medicare has paid hospitals and physicians has changed substantially over the years.
Let's start in the mid 1960s and President Johnson wants to get the two cornerstones of his "Great Society" programs (Medicare and Medicaid) passed. In terms of the support from the industry, Medicaid (a means tested program for the poor) was comparatively easy. Because hospitals and doctors often never got paid for services given the poor any payment from the government was a gift and readily accepted. As a joint state/federal program the amount and means of determining specific Medicaid payments was generally a decision of the state. The incentive for states to keep it low was that the State would have to put up about half the funds for whatever was paid. Thus, from the beginning Medicaid payments tended to be low in comparison to payments from private insurance and Medicare, but the healthcare industry was okay with that.
This was not true for Medicare which was to cover all the elderly, even the well to do elderly who until then had been able to pay for healthcare (or insurance) on their own. President Johnson faced considerable opposition from physicians and their powerful trade lobbying group (the AMA) and hospitals represented by the AHA. These organizations criticized various Medicare proposals as "socialized medicine" for the elderly that would lead to all the disasters of socialized medicine.
Congress and the President addressed these concerns in a time honored manner to coopt this strong opposition to Medicare . . . they bribed them. Under these political influences Medicare was enacted with a very generous reimbursement scheme, thereby reducing the strong indsutry opposition to the proposed program. Under Part B of Medicare physicians would be reimbursed based on their "customary charges." Under Part A of Medicare hospitals would be reimbursed based on their "reasonable and necessary costs."
Needless to say under these generous reimbursment schemes (that allowed physicians in particular to basically bill the program whatever they collectively wanted) "customary charges" and "reasonable and necessary costs" skyrocketed. So did total government spending on Medicare and it soon started breaking the budget.
Fast forward to two decades after implementing Johnsons's "Great Society Programs" and a more conservative President named Ronald Reagan. With Medicare program costs skyrocketing there was strong bipartisan support to fundamentally alter the payment structure. So starting in the early 1980s things began to change, with a metamorphis that was largely complete by the end of that decade.
Hospital reimbursement based on "reasonable and necessary costs" changed to reimbursement (at least for inpatient care) based on the "Prospective Payment System" (PPS). Under PPS inpatient care was reimbursed based on a set amount for the diagnosis of the patient. Hundreds of "Diagnostic Related Groups" (DRGs) were established and the patient's diagnosis, not the cost of providing the care, decided the payment to the hospital. The payment for each DRG was determined based on Medicare calculation of the average cost for hospitals treating that particular DRG. If the hospital could treat the patient for less, it makes money. If it costs the hospital more to treat that patient, tough luck, the hospitals loses money. Thus, the incentive switched to encourage hospitals to reduce the costs of care. The DRG system quickly led to a declining emphasis on inpatient care and a tendency for hospitals to discharge patients "quicker and sicker."
On the Part B side in the late 1980s Medicare effectively abandoned the "customary charges" payment model for physician services and instead implemented a "Fee for Service" system. Under this system physicians are paid a set amount for each discreet service they furnish. The discreet services are actually defined by the AMA in something called the "Current Procedural Terminology" (CPT) coding system. These are five digit codes breaking down what physicians do from surgeries to lab tests. Each CPT code has a set fee that Medicare pays. Medicare decides what it will pay based on its evaluation of the value and intensity of care behind each CPT code.
This remains the basic means of reimbursement to this day. Hospital inpatient care is paid for based on DRG and services of physicians are paid for based on a set fee schedule.
"A man never drinks anything that a plant lives in" --DBone (A Real Man).
http://vimeo.com/4938173
