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Bagley and Medicare

Prof. Bagley's Paper: Medicare Design Flaws Mandate Reform

By John Masson
June 20, 2012

With the Supreme Court's decision on health care reform looming, the Affordable Care Act is set to take center stage over the next few weeks. For scholars like Michigan Law Prof. Nicholas Bagley, lingering concerns with the Act's efforts to reform Medicare are never too far from their minds. Bagley puts those efforts into perspective in his new draft paper, "Physician Bureaucrats: Why Medicare Reform Hasn't Worked," set to be published in early 2013 in the Georgetown Law Journal.

"The article is really focused on charting exactly how some of the design choices made at the inception of the program have undermined reform efforts over time," Bagley said. "Those same design choices are very likely to hamper the Medicare reforms embedded in the Affordable Care Act."

When Medicare was enacted in 1965, Medicare put doctors at the center of the program, not government workers. Part of the reason was that large numbers of Americans mistrust governmental involvement in health care. Private physicians were thus empowered to act as Medicare's bureaucrats at the bedside and, in practical effect, would decide which treatments the government would pay for. Congress trusted that doctors' ethical commitment to providing medical treatment regardless of cost would keep programmatic outlays in check and assure high-quality care.

It hasn't worked out like that, Bagley argues. Medicare outlays have grown at a blistering pace over its 48-year history, swelling in 2010 to $520 billion in a single year—representing about 12 percent of the federal budget. That figure is rising rapidly, yet there is little appetite to shoulder the tax burden necessary to cover increasing expenditures. What's more, the quality of care that Medicare beneficiaries receive, particularly those with chronic conditions, is often shockingly low.

Part of the reason, Bagley maintains, is that Medicare was structured to eliminate its capacity to assure that physicians adhere to programmatic goals. Bagley writes, for example, that "Congress originally assigned responsibility to oversee Medicare to a small group of about 2,600 employees." And oversight remains feeble. Through 2010, that number remained stuck at 4,000, "meaning that an agency about the same size as the Smithsonian Institution administers a Medicare budget the size of South Africa's economy."

The problems do not end there, Bagley argues. Congress structured Medicare to rely heavily on private insurance companies to process claims, notably Blue Cross and Blue Shield plans. Loose oversight of these companies has exacerbated challenges. Plus, Medicare remains committed to a fee-for-service payment system that values high-intensity care regardless of its medical benefit. And the program has guaranteed that virtually all physicians can participate, even those with demonstrated track records of poor-quality care.

"This is Organizational Theory 101," Bagley said. "This is not a workable system. Medicare reform is likely to become a budgetary necessity in the near future, and I think there does need to be a reconceptualization of the program before we're going to get a handle on escalating expenditures."

In Bagley's view, the success of future Medicare reform—even in a post-ACA world—depends on sidestepping the program's structural inadequacies and embedding Medicare's physicians in private organizations with the capacity, incentives, and legitimacy to effectively shape practice patterns.

All of which may be easier said than done, Bagley acknowledged.

"The Affordable Care Act is not the final word in Medicare reform," Bagley said. "Budgetary imperatives alone make reform a practical necessity, and I hope this paper helps defuse some of the political tension around it. Inevitably, there's going to be a ton of pressure to get a handle on escalating expenditures."

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