It All Comes Down to Dollars
Party politics are but one of Berwick's headaches. He also has to turn around the ship at CMS, a 4,000-person, $759 billion
behemoth that must now be motivated to embrace reform. At CMS, demoralization may be especially acute because the agency has
been reduced to a rubber-stamp function, which it performs secondhand through subcontracts with the private sector via a regional
network of fiscal intermediaries and carriers. Whether Berwick's reported charisma, coupled with the wholesale restructuring,
can make these dry bones dance remains to be seen.
Whatever else he may do, Berwick's success or failure will be measured in dollars and cents: Can he bend the curve of annual
federal healthcare spending by 50 percent, from 4 percent to 2 percent? CMS will not be able to meet this goal merely by slashing
budgets. Rather than just blindly signing the invoices, CMS will increasingly negotiate better prices for its beneficiaries.
In addition, the Affordable Care Act grants CMS new powers to set in motion a realignment of incentives around quality.
Yet the White House may seek to keep Berwick on a short leash. On the day after President Obama signed the healthcare reform
bill, Secretary of Health and Human Services Kathleen Sebelius announced big changes at CMS. The bureaucracy is being restructured
around five "centers" intended to align its organization with the bill's key provisions, and five healthcare advocates, all
sharing extensive government experience, were appointed as administrators.
A Thousand Small Cost Cuts
The collaboration of pharma and other stakeholders in the rollout of reform is essential for its success. The drug industry
was one of the first stakeholders to come to the table of the administration's reform campaign, trading its support for an
$80 billion cap on "givebacks," including a 50 percent discount to seniors in the donut hole. That rebate, going into effect
next year, will be a very costly writeoff for pharma. But the law will increase the demand for drugs: Not only does it expand
coverage to 32 million more Americans but its focus on cost-effectiveness and health outcomes will result in greater investment
in prevention and early diagnosis and treatment. (The elimination of cost sharing for preventive services, for example, means
that the use of vaccines will increase.)
A sharp spike in the demand for drugs, however welcome, will present problems of its own, says Connie Austin, a partner in
Ernst & Young's Global Life Sciences Practice. "Companies will have to look carefully at their manufacturing and supply-chain
capabilities to make certain that they are adequate—and make necessary investments if not."
At the top of CMS's agenda is what might be called quality-based cost cutting, which will target payments to hospitals, drug
and device makers, and other nonphysician providers. Federal healthcare layouts are slated for a 10-year, $455 billion slashing,
with Medicare Advantage cuts alone totaling $136 billion. The Part D donut hole may fall prey to the cost-effectiveness reaper,
accelerating its 2020 closing date.
The law's overall cost to the pharma industry over the next decade is generally estimated to break $100 billion. That's 20
percent higher than the original $80 billion deal, but scarcely a threat to industry innovation—pharma is expected to earn
more than $3 trillion in sales over the first 10 years of reform.
Berwick will be in charge of the new $10 billion Medicare and Medicaid Innovation Center, to test alternative incentive models,
including accountable care organizations, patient-centered medical homes, and episode bundled payments. CMS has been entirely
under Congress' thumb, with the inevitable result that some 30 previous pilot projects have all been ditcheds, casualties
of congressional inaction. The healthcare reform act attempts to overcome this obstacle by shifting decision-making authority
largely from Congress to the head of HHS, who can fund and run any one of 18 new delivery and payment models—and approve it
for wider application unless Congress issues a kill order.
Last year's stimulus bill allocated $1.1 billion for comparative-effectiveness research (CER), but this year's healthcare
reform bill prohibits the government from making decisions about cost and coverage based on the conclusions. The problem with
setting policy based on comparative data is well known: What works best for the "average" patient may not work at all for
a particular individual patient. Yet while Congress forbids CMS from "picking winners and losers," managed care and other
insurers are increasingly doing so. And in response to growing show-me-the-value pressure from payers in other countries,
drugmakers are incorporating comparative measures into clinical development decisions.
"Pharma is going to have to find new systems and processes of demonstrating the value of its products while getting to market
as quickly as possible," says Austin.
Pharma analysts agree that healthcare reform will accelerate efforts drugmakers are already making to transform their business
model and cost structure. As an empowered CMS increases pressure on pricing and outcomes, each company will have to decide
what level of risk it accepts, says Austin. "This will encourage them to further refine their overall strategy, modifications
to product and customer portfolios, and other changes."
Berwick spent his first day at CMS singing the praises of electronic medical records—one of the few controversy-free items
on his agenda. His "Meet Don Berwick" speech was reportedly a hit with the staff. Says Scully: "I have a friend at CMS, a
very conservative doctor, who said he was just floored—Don gave one of the most inspiring talks about healthcare that this
guy had ever heard."
Yet nothing would be less surprising than seeing Don Berwick fail. The Republicans could sink his appointment before the midterm
elections. The White House may crush his spirit with caution and compromise.
Less than a month into the job, he was already on the receiving end of a bipartisan congressional pile-on—for implementing
a pre-reform 2.9 percent cut in hospital inpatient payments to recoup $3.7 billion in overpayments over the past two years.
According to CMS math, this "correction" averages out to be only a 0.8 percent decrease for 2010, but that was sufficient
to unite the two polarized parties around a single cause: Patient care will suffer!
Still, this is the role that Berwick has been rehearsing for all his life, and his plainspoken powers of persuasion may prove
the cynics wrong. Says Berwick: "Healthcare [reform] has some of the properties of major social movements in this country:
civil rights, environment. So many oxen to be gored, and a lot of people with oxen that won't get gored but think they will.
And this [coalition of] the people who would be better off and the people who are needlessly afraid of change—that's 80 percent