Bloomberg Government Insider

Health-Care Economies of Scale


Health-Care Economies of Scale

Illustration by Team Macho

Only 1 of 10 cost-control efforts attempted by Medicare over two decades has saved the government money, the Congressional Budget Office (CBO) reported in January. Richard Gilfillan, head of the most ambitious attempt yet, says he can get over that very low bar.

Gilfillan runs the $10 billion Center for Medicare and Medicaid Innovation created by the 2010 U.S. health-care law to identify ways to lower medical costs and improve the quality of care. His solution, now taking shape, is to transfer the job from bureaucrats to companies and private individuals competing in a changing marketplace.

He started slowly last year, spending $52 million on projects including an effort to improve treatment of elderly poor with multiple chronic diseases and an experiment to have a single doctor coordinate all the specialists a patient might see. The spending surges this year to $1.6 billion as Gilfillan and a staff of 203 look for ways to lower Medicare and Medicaid costs that could serve as models for the broader health-care system.

Republicans say the law created a slush fund that the Obama administration can use to manipulate how Medicare is run without congressional oversight. Gilfillan says independence from entrenched political and bureaucratic interests is the only way to guarantee private-sector involvement and creativity. “This is not a government-run demonstration project,” he says. “This is about private-sector initiatives across the country.”

Historically, Medicare officials and Congress have come up with ideas to improve care or reduce costs and then signed up doctors and hospitals to participate. Gilfillan wants the ideas to bubble up from the private sector—and they have, in multitudes.

Enthusiasm was evident during a meeting in January that Gilfillan held with more than 1,000 health professionals, drug company officials, and entrepreneurs. Midway through his speech, Gilfillan got a rise from the audience after he gave an incorrect deadline to apply for grants this year. A murmur ran through the crowd, and several people shouted out “Friday?” concern clear in their voices. “I’m sorry,” Gilfillan responded with a laugh, correcting himself. “Guess there are a few interested people here.”

Last April the center awarded $15 million to 15 states to experiment with ways to improve care for low-income people eligible for both Medicaid and Medicare, who tend to be costlier than more well-to-do elderly patients. California’s project, starting in January 2013, plans to test whether paying organizations to coordinate medical and social services for more than 1.1 million dual-eligible patients can improve their care and cut costs.

The center’s spending began to accelerate in the fiscal year that began on Oct. 1. In December, contracts worth $218 million went to 26 hospital systems, including about $5 million for LifePoint Hospitals of Brentwood, Tenn., for an effort to reduce hospital-acquired infections and preventable complications. The next big step comes in March, when the center plans to award as much as $1 billion to companies and entrepreneurs who pitch “compelling new models” of delivering or paying for health care, according to a funding announcement.

Gilfillan, who ran a local managed-care plan in Pennsylvania before taking on the innovation center job, is optimistic he can overcome skepticism, in part because he doesn’t feel handcuffed by some of the government rules that have weighed down previous cost-cutters. If actuaries for Medicare certify that a program reduces the cost of patient care without affecting quality, Gilfillan’s boss, U.S. Health and Human Services Secretary Kathleen Sebelius, can expand it nationwide under the health-care law without having to get Congress’s permission.

He also doesn’t have to demonstrate that an experiment will be “budget-neutral,” Washington parlance for not requiring any new spending, before he approves a grant for it. “If we find something that can work, we have the ability to spread it rapidly” across Medicare because of the innovation center’s involvement, says Julie Lewis, vice president of health policy for Amedisys, a Baton Rouge (La.)-based company that provides home health care and operates therapy centers.

It’s that independence that concerns the law’s opponents. Something like the innovation center could work, says Representative Charles Boustany, a Louisiana Republican who is a heart surgeon, with “proper oversight and guidelines as to how that money’s actually used.” That’s now lacking, says Boustany, who sits on the Ways and Means Committee, which supervises Medicare. “The question is, is that going to end up being a slush fund, where you hand out money to a certain health-care group that you’ve decided you want to benefit?” says Boustany. “I’m very concerned this is going to be a way of picking some winners and losers, rather than one actually looking at how you improve health care and innovate.”

The law requires Health Secretary Sebelius to evaluate each project the center funds and to report to the public. Gilfillan says he’ll run his agency like the National Institutes of Health, the $30 billion U.S. biomedical research agency that selects science projects through a peer review process. Money will be handed out using “competitive processes,” he says. “We’ll be measuring in a very concrete way the results of every one of our initiatives and doing rigorous evaluations of every program. We’ll see meaningful results over the next few years and be able to demonstrate success.”

An experiment Amedisys plans in New Orleans is similar to those funded by the grants to the 15 states. The center will monitor it, though it won’t be contributing money. Conducted with Louisiana State University, also in Baton Rouge, the project will focus on keeping low-income patients with multiple chronic health conditions out of hospitals, says Lewis, one of 73 unpaid “innovation advisers” at Gilfillan’s agency.

A group of doctors and nurses will focus on just a few dozen patients with diabetes and other health problems and manage their cases without taking cost into account, says Lewis. The theory is that doing intensive preventive care may be costly upfront, but it will cut down on more expensive hospital stays down the line.

The newest efforts stand in contrast with what’s been attempted in the past, say those involved with the center. Among prior experiments that the CBO has categorized as failures was a project that let physician groups keep any share of savings they could generate by more efficiently caring for their patients and six attempts to control health costs by employing nurses as care managers, the budget office said in its January report.

The only experiment of the 10 it studied that succeeded at reducing costs was a project to change the way Medicare paid for heart bypass surgery, the CBO said. Medicare “went in before with more of a cost objective in mind, and any time you do that you’re probably not going to get better care and better health,” says Suzanne Blaug, head of Janssen Alzheimer Immunotherapy, a Johnson & Johnson (JNJ) subsidiary. By flipping the script and focusing on health improvements first, “we believe that costs will be reduced,” she says.

The bottom line: A new government-run center will distribute $10 billion in grants to those experimenting with cost-saving approaches to health care.

Wayne is a reporter for Bloomberg News.

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