MACRA’s Endgame

Students of economics and business know that one of the fundamental tenets of microeconomics is that firms will enter a marketplace until an equilibrium is reached whereby the economic profit in that market becomes zero. Once this happens, some firms will drop out of the market; others will innovate, reduce costs, and eak out an economic profit greater than zero. The cycle then repeats until a new equilibrium is reached, over, and over, and over. As these cycles move forward productivity increases and costs drop. Ultimately micro crosses over into macroeconomics. Consumption of goods increases and GDP rises.

So as we enter the era of MACRA and MIPS where are we headed as an industry? Are we going to suddenly violate the aforementioned economic laws? Of course not, MACRA is set-up to be budget neutral. In the short run, the winners in this competition take from the losers, but over time the losers will either consolidate with the winners, or elevate their game to match the winners. At that point, like a millennial soccer game, everyone is a winner and everyone’s reimbursement will reset back to the mean. A new equilibrium is reached.

So, although it may appear that CMS is offering a carrot to innovative practices and physicians to adapt the prescribed quality metrics, this appearance is an illusion. CMS is quietly coercing compliance to their metrics through fundamental economic principles.  This behavior from CMS would be somewhat justifiable if their metrics were linked to improving efficiency in the marketplace, but in most cases there is no evidence of this link.

Of course, when a new MACRA equilibrium is reached, we can expect CMS to further disrupt the system and add new hurdles; wash, rinse, repeat. Meanwhile, compliance with these hurdles will cost the industry a tremendous amount of money, to the point where they can no longer make an economic profit. CMS’s plan risks ultimate medicare market collapse.

So how long will the medical industry tolerate the government’s regulatory game before they wake up and a mutiny ensues? This is hard to predict. In my experience, physicians and hospital administrators tend not to be very economic or business savvy. Sooner or later as the losers get their act together and the equilibrium resets, the industry may realize CMS’s game.  If they don’t, they will follow CMS right over the cliff towards marketplace collapse.

I recall my Economics professor frequently quipping, “I can predict the future, I just can’t tell you when.”

3 thoughts on “MACRA’s Endgame

  1. Andy

    “CMS’s plan risks ultimate medicare market collapse.”

    That’s a zero sum game (game theory, not economics.)

    What’s the mitigation that agents utilize to either absorb or survive the risks of market collapse? Disruption or realignment of markets arrive when the nudge – quality, cost and experience – compels participants to buy in. Or out.

    It appears that monopolist tendencies are dictating both access and compensation for even being in the market. Accordingly, informed and engaged players who can perceive a terminal threat due to the ceiling and floor of the monopoly are reacting by innovating.

    Look for new products, companies and capital being allocated into the space to enable actors to insure themselves against failure that you have forecast as inevitable. Apparently, no fireproof insulation against demise exists, yet.

    That’s the condition that creates new markets and a shit ton of fraud. Winners and thieves may be the same entity. But when there’s not enough life rafts…

    Thanks, Doctor.

    Like

  2. Scott M. Truhlar, MD, MBA, MS, CPE

    Nice post. My personal assessment is slightly different. You describe increasing environmental pressures on the profit margins of healthcare enterprises. One solution (the government’s “intended” one) is innovation and increased productivity. But that is difficult and risky. Another, easier solution for market incumbents is simply to consolidate and gain monopoly pricing power – a trend we are in fact seeing nationally. The medical environment is heading towards large, regional or supra-regional healthcare enterprises having monopolistic (or at a minimum, oligopolistic) market position. Once they have that status, and because they provide an essential public service practically and politically, then they balance the power at the negotiating table. At that point the market has equilibrated, leaving only one card for the government to play, which is to declare that healthcare provision is too great a public activity to be in private hands, and for the sake of our citizens, we go single-payer or nationalize the whole thing.

    Or maybe, that is the intent from the get-go, and they are taking an incrementalist approach to it.

    Like

    1. I agree with your vision and already believe we are at the oligopoly stage in many large and small markets. What you are describing already exists with utilities, and Amtrak (to some extent). I don’t think medicine is a stretch.

      In large markets people have a choice of cable, gas, and electricity. Health care may be similar. Rural markets will be at a disadvantage.

      Like

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