Under the Radar

Former HHS Secretary Tommy Thompson offered his prescription for a “Medicaid Makeover” during a speech last weekend to the National Governors Assn. meeting in Charleston, SC.

Some ideas are good and some not.

The not-so-good:

  • As a former governor of Wisconsin, Gov. Thompson knows well the strains that Medicaid is putting on state budgets. His solution is to have the federal government take over the costs of dual-eligibles — seniors and younger disabled people who are eligible for both Medicare and Medicaid. They account for about 40% of all Medicaid spending, or well over $100 billion a year, largely for long-term care services.

    Bob Helms of AEI and I have heard many examples in our Medicaid Commission hearings of the incredible innovation at the state and local levels to develop innovative long-term care programs that improve the quality of care, often at lower costs. The solution is more local control and flexibility over long-term care, not more federal control. (We have offered recommendations to the commission for a new Medicaid Advantage program.)

  • With their savings, Gov. Thompson would then encourage states to expand Medicaid coverage “to reach more low-income individuals?and lessen the strain on our health care safety net.”

    Putting millions more Americans on Medicaid is not the answer. Creating new targeted subsidies to help people purchase private health insurance is the right way to go.

The good:

  • Mr. Thompson calls for much more flexibility for the states to shift from a defined benefit to a defined contribution to help recipients transition to private insurance, for states to make sure beneficiaries have a “medical home,” for incentives to increase the use of health information technologies and telemedicine, and creating a new FMAP (Federal Medical Assistance Percentage) formula to “eliminate state financing games designed to maximize federal matching dollars.”

The speech reportedly was well received by the governors, who share Mr. Thompson’s desire to shed the costs of dual-eligibles. But this central idea will be a non-starter in Washington because of its high price tag.

Our Medicaid Commission will surely be hotly debating these same issues before we issue our own report in December. Stay tuned.


A young economist from the Massachusetts Institute of Technology may have found the Rosetta Stone to explain ever rising health costs. Amy Finkelstein challenges the conventional wisdom that technology is the culprit, pointing instead to the “massive expansion of medical insurance over the past 40 years.”

She concludes from her research that consumers opt for more services and more expensive care because they perceive someone else is paying for it. And that hospitals and doctors invest in expensive equipment because insurance provides a ready source of steady cash.

Joe Antos of AEI calls this “pathbreaking work,” and MIT Prof. Jonathan Gruber said, “This really changes the whole landscape in the way we think about health economics.”

So might high-deductible health plans that encourage consumers to consider costs be part of the solution? We certainly think so.


Under the radar: Sometimes an issue seems too confusing and obscure to warrant much public attention. But one is brewing right now that could involve huge costs and consequences that would ripple through the whole health sector.

Congress has passed legislation that would require all health plans — public and private — to implement an updated diagnostic coding system by 2010. These new codes would be required for virtually all inpatient and outpatient treatments paid for by private and public health plans.

The current system was developed in the 1970s, and researchers say it is not specific enough to provide the detailed information they need for health research. The new codes and sub-sub-categories are so detailed that they will cause your eyes to glaze over, with more than 200,000 listings. For example, if your child has a sports injury, the doctor must list a separate code depending on whether he was hit with a hockey puck, a hockey stick, or a baseball bat.

Karen Ignagni, president of America’s Health Insurance Plans, has taken the lead in educating Congress about the unrealistic timeline the current legislation would require. The transition to the new coding system “will be a massive undertaking that will involve reworking all aspects of health care operations.” It is called ICD-10 for International Classification of Diseases and is updated annually by the World Health Organization.

Doctors and hospitals — and everyone providing medical services — would have to learn to use the new codes, implement major systems changes, and reprogram entire computer systems.

AHIP says that plans will update to ICD-10, but the health sector needs more time to set up the standards. The 2010 “Drop-Everything Deadline” is unrealistic and could cause a huge and expensive jolt in the health sector, with doctors fighting over even more bounced claims, patients wondering why their doctors are preoccupied with codes and not their care, and payors pouring hundreds of millions of dollars into these new systems on a too-tight deadline.

They need time to do this right.


Health Policy Matters will take a break for the rest of August. We hope you all take some time to enjoy the rest of the summer.

Grace-Marie Turner


  • Part D Optimizer: A new way seniors can save on their drug bills
  • Curing European health care
  • Health care taps ‘mystery shoppers’
  • The web returns to health
  • US hospitals for the 21st century
  • Health care cost and quality transparency: Improving health care affordability

Source: Center for Medicine in the Public Interest, 08/08/06

The Center for Medicine in the Public Interest has teamed up with Destination Rx to launch a campaign to educate seniors about managing the Medicare Part D “doughnut hole.” A key part of the campaign is The Part D Optimizer, a new website that allows seniors to compare and lower their prescription drug costs when and if they hit the gap in prescription drug coverage. More than 850,000 seniors already have used the website to save an average of $900 in prescription drug savings.
Full text: www.stockholm-network.org

Newsweek International describes the “small but growing backlash against the popular vilification of capitalism” throughout Europe. “Unthinkable only a decade ago, business associations, think tanks and a whole slew of capitalist and libertarian activists?are leading a tiny but noisy counterattack,” writes Newsweek. “Their common goal: making sure the next generation of Europeans is less in tune with Karl Marx and more with Adam Smith.”
Full text (pdf): www.stockholm-network.org

Author: Shirley S. Wang
Source: The Wall Street Journal, 08/08/06

“As competition builds amid efforts to encourage patients to comparison-shop for health care, medical facilities and hospitals are increasingly looking for ways to improve the patient experience,” according to The Wall Street Journal. “Some are turning to mystery-shopping services — a mainstay of the retail and hotel industries — which send employees to pose as customers and later report back on how they were treated.” Hospitals, doctors’ offices, and other facilities have reportedly used feedback from mystery shoppers to improve wait times, provide patients with better descriptions of medical procedures, and develop new ways to speak to customers. Hospitals may have good reason to focus on customer service as the Centers for Medicare and Medicaid Services will begin publicizing data about patient satisfaction at hospitals around the country on October 1, according to the Journal.
Full text (subscription required): online.wsj.com

Author: Annys Shin
Source: The Washington Post, 08/08/06

Studies show that nearly 80 percent of adults with online access have searched the Internet for health related information, and the majority of them have been disappointed in what they found, according to The Washington Post. A number of “famous deep pockets, including American Online co-founder Steve Case?have put more than $100 million into building virtual destinations that offer consumers something beyond disease encyclopedias,” reports the Post. The article describes how companies are creating new businesses with services including personalized health information and tools for finding doctors and making appointments online.
Full text: www.washingtonpost.com

An article in today’s Chicago Tribune describes the difficulties consumers continue to face while trying to receive and compare prices for medical services.
Full text: www.chicagotribune.com

Authors: Kurt D. Grote, Edward H. Levine, and Paul D. Mango
Source: The McKinsey Quarterly, August 2006

A new article in The McKinsey Quarterly says that hospitals must “change drastically” to compete in the 21st century with stand-alone ambulatory service centers, diagnostic-imaging centers, and other specialized facilities that have become strong competitors. “A vital first step is to compete on the basis of strengths in specific clinical service lines rather than relying on the power of full integration,” write the authors. A “stronger cultural and economic alignment” between hospitals and physicians is also needed, according to the authors. “For many physicians — particularly clinical specialists in the service lines where hospitals hope to differentiate themselves — the traditional arm’s-length and more recent competitive relationship must give way to some sort of formal employment or to gain-sharing schemes such as joint ownership of equipment or even whole facilities,” they conclude.
Full text: www.mckinseyquarterly.com

Author: James G. Knight MD, CEO
Source: Consumer Directed Health Care, Inc., May 2006

Health care price and quality transparency are necessities in a health care marketplace “that is rapidly moving toward increased personal financial responsibility,” writes Dr. Jim Knight, CEO of Consumer-Directed Health Care, Inc., a San Diego-based health benefits and policy consulting firm. But he warns that physicians interested in publishing their fees should pay particular attention to antitrust and anticompetitive trade law. Knight cites a Supreme Court case which “found that publishing of maximum-allowed fees for specific physician services?was per se a price-fixing agreement, unlawful under the Sherman Act.” The Federal Trade Commission and the Department of Justice published in 1996 new antitrust enforcement policy for health care, but Knight writes that, even though the policies allow safe harbors, “public disclosure of specific medical fee related information is probably best managed by non-providers.”
Full text: cdhcinc.com


Preparing for the National Provider Identifier: What it Means for the Industry
America’s Health Insurance Plans Audio Conference
Thursday, August 17, 2006, 1:00 p.m. – 2:30 p.m.

For additional details and registration information, go to: www.ahip.org.

Welfare Reform Turns 10: A Look Back, A Look Ahead
Cato Institute Policy Forum
Tuesday, August 22, 2006, 4:00 p.m. (Reception following)

For additional details and registration information, go to: www.cato.org.

Crisis of Abundance: Rethinking How We Pay for Health Care
Cato Institute Book Forum
Tuesday, August 29, 2006, 12:00 p.m. (luncheon to follow)

For additional details and registration information, go to: www.cato.org.

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at http://www.galen.org/.

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