The Healthcare Business Model — Medicare Cuts to Catalyze Innovation?

By: New Markets Advisors

Starting today, the U.S. Medicare program is to cut payments to doctors by 21%, due in part to Congressional gridlock on how to fund the program at its current spending level. 

There is ample reason to think these cuts will never come to pass, and that Congress will retroactively extend higher rates for at least several months. But it is useful to think through what the cuts would mean for the healthcare business model, and how they might impact innovation in this vast sector of the American economy.
If payments fell so drastically, many medical practices would stop their intake of Medicare patients, and some might seek to move these patients to other physicians as much as possible. Yet Medicare spent nearly $470 billion last year (20% of national health expenditure), and such vast sums are not easily ignored by physicians. Doctors may also feel a moral obligation to continue treating these elderly patients, who tend to be the sickest. For practices that continue to have a high percentage of Medicare patients, how might they cope?
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Many cost-saving healthcare innovations have languished for years due to American healthcare’s odd business model. Because physicians typically contract with many health insurers, and these insurers restrict their business to risk aggregation and health plan sales/administration, few parties exist to push through use of new technologies that require novel forms of reimbursement. Insurers do not have the leverage to force physicians into using these technologies, doctors have little bandwidth to undertake a fundamental change in workflows, and patients have scant influence at all.
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A prime example is the practice of telemedicine, or “connected health.” There is little doubt that many patients could be seen remotely, via webcam or with more advanced instruments, to diagnose diseases, monitor vital signs, and check in on treatment progress. The technology for these consultations is straightforward, and many companies offer well-proven systems. Yet adoption of these platforms can require a substantial change in how practices are organized, a modest time commitment for patient training, investment in IT equipment, suitable reimbursement from insurers, acquiesence from regulators and state medical boards, and a host of other factors. As a result, telemedicine’s highest penetration is in settings where there are few good alternatives, such as offshore oil platforms, prisons, and the military.

If physicians had their practice economics turned upside down by Medicare cuts, they would need to consider a radical re-work of how they interact with patients. Large practices could have the clout to approach Medicare and private insurers with a request to at least pilot a substantial shift in care toward telemedicine. While there are increasing funds for such pilots, including from the new healthcare reform law (PPACA), the scale of change needed would require a re-think by payers on how much to invest in this field. Doctors, who can be notorious for resisting changes to long-held practices, would need to embrace telemedicine to survive. Regulators — heavily influenced by physicians — would go along. Facing a huge uptick in demand, suppliers of telemedicine systems would need to focus their efforts which would lead to a much-needed rationalization in this sector.

We could see a similar effect on the adoption of other cost-saving technologies such as online patient records, ambulatory surgical centers, and non-surgical forms of cancer treatment. Health outcomes would likely improve as a result, given that these technologies need to at least equal the effectiveness of current approaches to have a hope of regulatory approval and commercial adoption.

Without a doubt, Medicare cuts may lead to difficulties, such as long wait times, rushed appointments, and staff layoffs. Yet healthcare needs a catalyst to spur long-needed change and shift the healthcare business model to one where insurers and physicians tightly collaborate to lower costs and provide novel forms of care. Medicare’s cuts could have this significant silver lining.

Story by Steve Wunker.