California’s new single-payer proposal embraces some costly old ways

May 31 2017

Three of the dirtiest words in health care are "fee for service."

For years, U.S. officials have sought to move Medicare away from paying doctors and hospitals for each task they perform, a costly approach that rewards the quantity of care over quality. State Medicaid programs and private insurers are pursuing similar changes.

Yet the $400 billion single-payer proposal that's advancing in the California legislature would restore fee-for-service to its once-dominant perch in California.

A state Senate analysis released last week warned that fee-for-service and other provisions in the legislation would "strongly limit the state's ability to control costs." Cost containment will be key in persuading lawmakers and the public to support the increased taxes that would be necessary to finance this ambitious, universal health care system for 39 million Californians.

Several health experts expressed skepticism about the bill's prospects in its current form.

"Single-payer has its pros and cons, but if it's built on the foundation of fee-for-service it will be a disaster," said Stephen Shortell, dean emeritus of the School of Public Health at the University of California-Berkeley. "It would be a huge step backwards in delivering health care."

Paul Ginsburg, a health economist and professor at the University of Southern California, agreed and said the legislation reads like something out of the 1960s in terms of how it wants to reimburse providers.

"There's broad consensus we ought to go from volume to value. This bill ignores all the signs pointing to progress and advocates a system that failed," he said.

Backers of the Healthy California proposal are pushing for a vote in the Senate by Friday so the legislation can go to the state Assembly and remain in play for this year's session.

The authors say that their single-payer proposal won't rely entirely on old-fashioned fee-for-service and that there's plenty of time for the bill to be amended. According to the authors, some of the criticism in the legislative analysis reflects a misreading of the bill: It would, they say, include some use of managed care.

In managed care organizations such as HMOs, providers receive a lump sum every month based on their per-capita enrollment. The idea is to encourage providers to offer preventive care and to scrutinize every test or treatment, since they bear the losses if they go over budget.

More than other states, California embraced this approach. In its Medicaid program, about 80 percent of enrollees are in managed care.

Michael Lighty, director of public policy for the California Nurses Association/National Nurses United, the lead sponsor of the California bill said "it will be a mixed-payment approach. Per capita payments are envisioned in this system."

"We want to address how different payment methodologies work before mandating specifics in the bill,” he added.

Lighty said more provisions to curtail costs will be added shortly.

As opposition builds over congressional efforts to dismantle the Affordable Care Act, progressives in California and New York have responded to the ACA repeal threat by crafting proposals for universal coverage. (Such efforts failed earlier in Vermont and Colorado.)

Single-payer supporters are tapping into Americans' deep dissatisfaction with the high costs and red tape embedded in the current hodgepodge of private insurance and public programs. But some defenders of the existing national health law say single-payer proposals are a costly distraction from the immediate fight in Washington over the health care safety net that millions of Americans rely on.

The California legislation, Senate Bill 562, requires that payments to providers be made on a "fee-for-service basis unless and until another payment methodology is established by the [Healthy California] board," according to the bill.

It says health care delivery systems can choose to be paid on a capitated basis. But the analysis by the state Senate Appropriations Committee said it may be difficult for the single-payer program to establish such a payment system because of other features in the law, such as patients' ability to see any provider with no referral necessary. A report in April from the state Senate Health Committee made a similar determination, saying multiple provisions in this bill "would make cost control unlikely to occur."

The bill doesn't address other innovative approaches being rolled out across California and the country. For instance, Medicare and private insurers are shifting to "bundled payments" for knee and hip surgeries, in which providers are paid a set fee for all treatment. More physician groups and hospitals are forming accountable care organizations (ACOs), which try to coordinate care within a budget.

While fee-for-service medicine can lead to excessive spending, Lighty said, ACOs and other "pay-for-performance" initiatives haven't been entirely effective at reining in costs either.

The California bill faces another daunting challenge: coming up with the estimated $400 billion annually required to pay for universal coverage. Existing government money used for health care could cover half of that amount, but the other half may need to come from payroll taxes on workers and employers — not a politically palatable prospect. (The taxes could be offset in some measure by reduced health spending by employers and workers.)

Every Californian, regardless of age, employment or immigration status, would be eligible for coverage and there would be no premiums, copayments or deductibles. In addition, patients could see any willing provider without a referral and receive any service deemed medically appropriate.

Those factors would make it difficult for the program to use "drug formularies, prior authorization requirements or other utilization management tools," the Senate analysts wrote. As a result, they estimated that health care utilization may increase by 10 percent compared to fee-for-service in Medi-Cal, the state's Medicaid program.

At a hearing May 22, state Sen. Jim Nielsen (R-Tehama) said the single-payer proposal appears to invite patients to "come in for what's almost like a blank check."

State Sen. Ricardo Lara (D-Bell Gardens), a chief sponsor of the bill, acknowledged the concern and said he's looking at what single-payer systems outside the U.S. do to contain costs.

The bill's sponsors are opposed to the proliferation of narrow insurance networks that exclude providers to keep costs down. But the Senate analysis said that approach means the state couldn't use potential exclusion from the single-payer system as a means of negotiating favorable prices, as health insurers often do.

Lighty said significant costs can be pared from the current system in other ways. For instance, consumers will no longer subsidize lavish salaries for hospital CEOs and excessive profits because reimbursements will be tied to "efficiently providing health care services."

Lara said eliminating the middleman role of health insurers and consolidating the state's purchasing power would lead to huge savings. "By pooling health care funds in a publicly run fund, we get the bargaining power of the seventh-largest economy in the world," he said.

Insurers and brokers in California and nationwide oppose single-payer proposals because they could literally put them out of business. And legislative analysts and health policy experts question whether California would be able to exert sufficient bargaining power. They noted the political constraints that Medicare has faced in flexing its market power on prices.

"Our system of government may mean single-payer is much less successful than in other countries," Ginsburg said. "We are so open to lobbying it means we can't count on some of the very strong actions other countries have taken to keep costs down."

This story was produced by Kaiser Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation.