Medical Device Daily Washington Editor

WASHINGTON – Much of the argument behind placing more of the healthcare economy under the federal umbrella is based on comparisons of the administrative costs incurred by the Medicare program to costs engendered in the world of private payers. However, a presenter at yesterday's session on healthcare reform at the National Press Club (Washington) argued that the numbers for Medicare were based almost solely on the cost of processing claims, and that while a more accurate comparison still favored Medicare slightly, the added cost of fraud under Medicare might put private payers ahead of public payers.

The session, sponsored by the Center for Healthcare Transformation (CHT; Washington), opened with a few remarks by CHT's founder, former House Speaker Newt Gingrich, who told the audience that the briefing was triggered in part by comments made by President Obama during his inaugural address, during which the president posed the question of whether government works. Gingrich said "what we need is not a debate about right versus left or bigger versus smaller," but a "debate about what works."

Gingrich affirmed the proposition that "if you first of all learn what is already working and benchmark [standards of care] against best achievements," providers can improve quality and cut costs. He also managed to strike a bipartisan tone, stating: "My sense is that President Obama and Secretary Daschle have pushed in exactly the right direction" where healthcare information technology (HIT) is concerned, but he also expressed concern about the inability of government to tamp down on fraud in Medicare and Medicaid, especially the latter.

Merrill Matthews, director of the Council for Affordable Health Insurance (Alexandria, Virginia), said the Obama administration's proposal to cut healthcare costs for each family by $2,500 hinged largely on savings in administrative costs, which he said is based on the notion that Medicare "is the most efficient administrative cost system in the world." He said Medicare's administrative costs are usually tabbed at 2.3% vs. about 20% for private payers.

However, Matthews said the usual comparisons of Medicare's administrative costs to those run up by private insurers "are not apples to apples" because infrastructure costs, salaries and so on are included for calculations of the overhead incurred by private payers, but Medicare's cost calculations omit a number of elements that are included in the tabulation of administrative costs for private plans, such as cost of gathering the Medicare tax. Private insurers must factor in the cost of collecting premiums.

Matthews also said that the percentage calculation gave Medicare another advantage. He said that because "Medicare tends to pay higher for claims, it makes administrative costs look better." Furthermore, he said, Medicare's numbers "do not include the fraud that Medicare has" and he argued that Medicare is "the most fraud-riddled system in existence, with the exception of Medicaid." He said that without taking the fraud problem into account, administrative costs for Medicare ran about 6%-7% and 8%-9% in private payers.

Matthews also pointed out that a recent audit by the Office of Inspector General had flagged about two thirds of Medicaid claims as problematic and that Sen. Chuck Grassley (R-Iowa), the ranking GOP member of the Senate Finance Committee, is of the opinion that Medicare loses $60 billion a year to fraud.

On the other hand, Merrill offered an exit strategy for public-sector payers: "If the federal government increased its administrative costs by a percentage point or two, you'd find" that fraud costs may fall to levels approaching those seen in private care.

Upon returning to the podium, Gingrich said that the fraud numbers for Medicaid were as substantive as Matthews alluded, mentioning an article appearing in the July 18, 2005, edition of the New York Times that states that 10% of the nation's Medicaid payments were for fraudulent billing, citing the case of a dentist who managed to obtain payment from Medicaid for a total of dental services in 2003 that came out to more than 900 procedures each day.

"You have a system today that traps us into bad performance because it's the only way you can bill," Gingrich said, but he also said that a paper-based system makes fraud control nearly impossible until after the fact, when fraud control generates even more costs.

Gingrich also gave attendees the heads up that CHT is working on a proposal that will suggest that policymakers "fundamentally rethink the way we pay for medical research." He said that Alzheimer's disease will drive a large portion of future healthcare cost increases, a fact of which he said the Senate Special Committee on Aging is aware, but asserted nonetheless that "if you look at the out-year costs" of Alzheimer's and other age-related cognitive disorders compared to "the amount we spend on brain research, there's a huge mismatch."

Gingrich said that large savings are available, but the opportunity must be captured soon. "If you postpone [the onset of] Alzheimer's by five years, you save half the cost [of the disease] for the Baby Boom generation."

Still, hope springs anew. Gingrich said that analysts at CHT "operate from the premise that there will be four to seven times the amount of new science in the next 25 years as there was in the past 25," a figure he said some see as conservative. "If we can accelerate by a decade our understanding of the brain, the impact across the board on our understanding" of diseases and learning "is breathtaking," he claimed.

When asked whether the least-costly alternative mechanism for determining reimbursement by the Centers of Medicare & Medicaid Services was essential to cost control in relation to the recent legal case of Hayes v. Leavitt (Medical Device Daily, Nov. 20, 2008), Gingrich said "our hope is that CMS would not have to appeal" the case. The judge in Hayes rejected CMS's use of cost as a determinant in choosing between two treatments that seem to promise equivalent outcomes. Gingrich said, "you would think Congress would be eager to pass a bill to allow CMS to go after that."