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Can global budgeting help control healthcare costs?

Local healthcare professionals weigh in on the potential benefits of replacing the fee-for-service healthcare model

What if a dozen eggs cost $55? Seems ludicrous, yet that is the type of price increase Americans have seen in healthcare since the 1940s, according to the Institute of Medicine (IOM), a branch of the non-partisan, federally financed National Academy of Sciences. The IOM also claims that U.S. spending on healthcare reached $2.5 trillion in 2009, and that over the last decade, salaries have increased only 38 percent, while healthcare premiums have increased 131 percent.

“Healthcare costs too much,” said Jack Friedman, CEO of Providence Health Plans, part of Providence Health and Services, which operates in Oregon and southwest Washington. “It’s crowding out other investments, such as education, housing, and recreation, and is priced beyond the reach of even middle-class Americans.”

While there are no easy answers to solving the American healthcare puzzle, Friedman and other local healthcare professionals see global budgeting as one possible piece of the solution. Simply put, global budgeting replaces the fee-for-service payment model. No longer would providers, such as physicians and hospitals, be paid for every test, procedure or office visit. With global budgeting, providers are given a fixed amount of money per patient, and are responsible for providing quality care within that budget. If there’s money left over at the end of the year, typically the insurance companies and providers share that surplus.

“Fee-for-service rewards for volume,” said Friedman. “Global budgeting rewards for fiscal constraint and management, and aligns incentives between patients, providers and payers.”

Hardly a new concept, global budgeting is a new term for an old idea – capitation – and is the model used to distribute healthcare in several other countries, including Canada, Great Britain and Taiwan. Ann Wheelock, CEO of Columbia United Providers (CUP), a Vancouver-based insurance company, said that CUP receives a set amount of money per Medicaid patient per month from the state of Washington and that CUP had global budgeting contracts with some Clark County providers.

“We may have a loss or a gain in a particular year, and some participating providers share in that risk and potential reward,” said Wheelock.

No matter what you call it – capitation, global budgeting, or managed care – healthcare rationing is a common concern with this model. Bart McMullan, former president of Regence Blue Cross Blue Shield of Oregon, called this fear a “red herring.”

“We have rationing now,” said McMullan, “the most ugly, most inhumane form of rationing.” Without a job, or with even with a median income job, McMullan said, people can’t afford healthcare.

“Most people are one paycheck or one job away from finding that out,” he said.

“Global budgeting is a good idea if it’s done right and carefully monitored,” added Wheelock. She said that the global budgeting model “does make everyone aware that we have limited resources for healthcare.” But, she countered, checks and balances exist, along with very established rules about how to manage in the global budget environment, that ensure people get the care they need.

“We want to see health outcomes improve, such as immunization scores and preventative medicine,” said Wheelock.

Jim Patterson, a retired pulmonary and critical care physician with the Oregon Clinic and a clinical professor at OHSU, agreed with Wheelock that the focus needs to be on quality care and value, not just on controlling rising costs.

“Global budgeting, in and of itself, doesn’t create better value,” said Patterson. “We need to be spending more wisely.”

To work effectively, according to McMullan, global budgeting requires three components: a clear definition of who is eligible for care (no matter what), a clear definition of the basic level of coverage and benefits, and a clear definition of how much money is available for the eligible population.

“A lot of people forget the first two components,” said McMullan.

Global budgeting may be only part of the solution, but Friedman said “The way we distribute healthcare in America is becoming problematic. The healthcare system as we know it has got to change.”

“My guess is that over the next ten years,” said Friedman, “we’ll see a significant movement toward global budgeting for all our populations.”

Waste not, want not

While many people bemoan the rising cost of health care, there is evidence that part of the problem is simple waste.

“We have plenty of money in the healthcare system – we just need to make decisions about how we use it,” said McMullan.

The nonprofit Institute of Medicine recently released a report that corroborates McMullan’s opinion. The IOM concluded that $810 billion is wasted each and every year:

  • $190 billion excessive insurance administrative costs absorbed by doctors and hospitals
  • $20 billion insurance company inefficiencies
  • $210 billion unnecessary services (brand name drugs instead of generics, repetitive tests and procedures, etc.)
  • $85 billion prices too high for doctors and hospitals (relative to benchmarks)
  • $20 billion prices too high for drugs and devices (relative to benchmarks)
  • $75 billion errors and avoidable complications
  • $80 billion inefficient delivery of services
  • $75 billion fraud
  • $55 billion missed opportunities for disease prevention

Study published October 2007

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