Skip navigation

Dr. Stephen Kemble's Presentation & Q&A from our Annual Meeting

Highlights from Dr. Kemble’s talk
Find a PDF of his slideshow here.

A lot of money flows through public programs, particularly Medicare and Medicaid.

Private business interests want to tap into this money, but claims processing is only about 2% of healthcare dollars. If private business interests can persuade government programs to allow them to take on insurance risk and manage care they can reap 12% to 40% of the health care dollars

They invented a rationale to tap into this money, which is built on partial truths.

  • Government is always inefficient. Private insurance companies can manage health care to make it more cost effective
  • The major driver of excessive costs in US healthcare is fee for service because it incentivizes doctors to deliver an excessive volume of largely unnecessary care. 
    • Only we, the insurance companies, can rein them in.

    • Turning health care over to capitated private entities makes costs predictable as competition and market forces will control the costs.

  • Care is fragmented under fee for service. 
    • Private health plans and integrated delivery systems can more effectively coordinate care, restrain unnecessary care, improve access and reduce cost.

  • ACA has accelerated privatization (as an unintended consequence) of requiring everyone to move away from fee-for-service with its volume incentives and replace it with Value-Based Payment. 

The claims are that we can reduce cost, eliminate fragmentation and improve quality by shifting insurance risk on to providers through Accountable Care Organizations. So comes the practice of large insurance plans and hospital chains paid with capitation to buy-out physician practices and integrate them.

None of this is actually true! It's all made up to serve the insurance industry's interest in tapping into the finances of public publicly funded programs. Large numbers of politicians and health policy experts have been drinking this hallucinogenic Kool-Aid.

Overutilization of care

A quick dive into the overutilization of care argument before we start. 

Overutilization of care is a trivial problem.  The OECD data shows that US per capita doctor visits and hospitalizations are among the lowest in industrialized countries. So that cannot explain the high cost of healthcare in the USA.  However there is plenty of evidence to show that corporate fraud and abuse by insurance plans are the drivers. 

HMOs, Medicare Advantage and Medicaid Managed Care, all capitatied entities, engage in:

  • cherry picking the healthy and lemon dropping the sick
  • up-coding
  • deceptive marketing
  • denial of necessary care
  • narrow networks
  • restricted access to care
  • slow claims processing
  • high rate of denials
  • meaningless quality metrics that have more to do with what's easy to measure than what matters to a patient

Now back to risk shifting and risk management.  

The Problem With Risk Shifting

The primary means of risk management is risk pooling where everyone chips in, with the belief that the money will be there because it's spread across a large population.  The problem is that way too much of the risk is predictable. 

Just as in the business of home insurance, in the business of health systems risk is mitigated through underwriting. The price of health insurance is determined by examining the applicant's medical history and risk factors.

The old adage that your zip code is the best predictor of your health is true. Demographic factors and the social determinants of health allow risk to be substantially predictable so the insurance business model becomes counterproductive and toxic in health care. 


Because the strongest determinant of financial success is securing a healthier than average risk pool and kicking out those who are sick. 

Underwriting has been restricted under the affordable care act but cherry-picking and lemon dropping are still going on. 

What's the problem with risk adjustment

Risk adjustment is seen as a solution to cherry picking by paying more for high risk and less for lower risk patients and populations. 

The original Medicare Advantage Program only used demographic data for risk adjustment. But as it only predicted about 2% of the variability in cost and grossly overpaid for the healthy and underpaid for the sick, it was not an effective deterrent to cherry picking and lemon dropping.  

Hierarchical Condition Categories

In 2004, Center for Medicare and Medicaid Services introduced the hierarchical condition categories to risk adjustment which added diagnoses to the criteria.  While it improved the accuracy from 2% to about 12%, it also allowed capitated plans such as Medicare Advantage and Medicaid Managed Care, to gain payment by up-quoting. If your risk adjustment is based on diagnosis, the graver the diagnosis, the deeper your profit. 

This has been the main driver for doubling the enrollment in Medicare Advantage over the past decade, as Medicare Advantage is seen as a profitable entity.

Risk adjustment cannot be made accurate

The implication is that this is not a fixable problem. 

If you try to improve risk adjustment formulas by adding more diagnoses or more social determinants, the formula stalls out at about 12% to 15%. The end result is an increase in administrative costs as they try to gather more detailed data without achieving an accurate risk adjustment formula.  

Hence the very process of risk adjustment which is to mitigate the severe incentive of cherry picking, introduces new ways for capitated entities to game the system by up-coding diagnosis codes.  The result is pervasive cherry picking and lemon dropping to maximize profits. 

Real World Results 

If you are a patient who has been given inflated or false diagnoses by your Medicare Advantage plan that diagnosis follows you. 

If you decide to leave Medicare Advantage, you can only do so in the first year or you are subject to underwriting. 

If you apply for a Medicare supplemental plan, the plan will get your diagnoses and charge you more because of those inflated diagnoses.  If you applied for life insurance the same thing is held against you.

The result is that capitated systems like Medicare Advantage:

  • drive doctors out
  • reduce access to care
  • raise costs

A deeper look at capitation and why global budgets are a better  model

Capitation is when a provider is paid up front, a capital amount, for care over a specified period of time. So if you spend less than the capital amount you keep it but if you spend more you lose that potential saving. This is the incentive to avoid sicker patients, often from communities of color, who are more expensive to treat. In other words, there is an incentive to game diagnoses, cherry picking the healthy and lemon dropping the sick. 

To counteract these incentives, risk adjustment formulas are needed, as we are told they pay more for sicker people and less for healthier ones. If you pay with capitation without risk adjustment, you have a very strong incentive to cherry pick and lemon drop. But that too is not the answer. 

On the other hand, global operating budgets and fee for service do not convey risk as budgets are based on the cost of operations. Like police and fire departments, the budget is based on the cost of running their operations. There is no paying off shareholders, no underwriting, no cherry-picking, no exclusion of high-risk patients, no gaming documentation to beat risk adjustment formulas. If  costs rise unexpectedly they can ask for supplemental appropriations but they're not expected to take the loss. In this health systems model, there is no profit to be made by avoiding sick people.  

Questions & Answers from Dr. Kemble

Q: Can fee for service models focus on preventive care as much as curative care? 

Yes, all you need to do is have a procedure code for preventive care  that has a fee attached to it and you can include it in a fee-for-service system. There's nothing about fee-for-service that would interfere with or discourage preventive care.

Q: Are doctors now paid solely by diagnosis?  Don't they have to supply supporting data or treatments, for example up-coding from obesity to morbid obesity doesn't require BMI data or weight loss plan is that right? How can they up-code and not incur more expense without additional  treatment?

You have to distinguish between the way a risk bearing entity health plan is paid and how a doctor is paid. In a Medicare Advantage Plan they are paid by the person and then adjusted based on the diagnoses. The doctor may still be paid with fee-for-service, so they need to submit a diagnosis to support a claim, but it doesn't matter which diagnosis they choose. A diagnosis is all they need. So the health plan comes to the doctor's office and says you put in a diagnosis of obesity, would you think this patient might qualify for morbid obesity, and if yes, the plan gets more money for that. But not the doctor. So if you capitate the doctor, which is being done in many places, then the doctor is the one with the incentive to up-grade. The moment you say that doctors are not getting an incentive to up-code, it's really at the plan level. 

Q: These issues that you've been raising have also been raised by advocates working for universal health plans in New York and California. What is the impact so far because those states also seem very interested in healthcare reform?

In California the problem is some on the Healthy California Commission are invested in the Kaiser system, in HMOs and ACOs, and even though these concerns have been raised, they basically got their fingers in their ears. While there is a process now to develop a new bill for California, California already has a great bill available. AB1400 Guaranteed Health Care for All, all but excludes HMOs like Kaiser and ACOs.

AB1400 proposed to pay a hospital and the physician group together on a global operating budget. This approach basically preserves the hospital and doctor as an integrated system and eliminates the insurance functions. Furthermore, because there are no members that are being paid per capita, HMO’s like Kaiser become an open system with no opportunity for profit or loss, no funding for empire building and chain development.

The second part to this question is will Secretary Becerra, Department of Health and Human Services, do anything to curtail Direct Contracting Entity scheme for 2022? What exactly has been put on hold for 2023? Do we have reason to think that the administration understands and is opposed to this and other forms of privatization of Medicare?     

This is a serious problem Four members of the U.S. House of Representatives (Reps. Mark Pocan, Bill Pascrell, Jr., Lloyd Doggett, and Katie Porter) sent a letter to Dept. of Health and Human Services Secretary Xavier Becerra expressing concern about Medicare Direct Contracting and calling for an immediate freeze of the program because so many are funded by venture capital or  insurance companies.  But as yet there has been no response.

To dig a bit deeper into Medicare Direct Contracting Services. There are two models, the Geographic Model and the Professional Direct Contracting Model.  The Geo model has 15 geographic regions and requires everyone in that area to be assigned to an ACO or an HMO. It would totally privatize Medicare. The vast majority of beneficiaries in an area will not know that they have been assigned to an ACO or HMO. Many will not understand what a Direct Contracting Entity is and what mandatory beneficiary participation will mean for their care and existing provider relationships.  

The Geo model has been put on hold but has not been killed. Until people in leadership positions at Centers for Medicare & Medicaid Services are either gone or dissuaded of their false beliefs, we are in constant danger from risk shifting as the solution to our so-called health care cost problems.

Q: Can you explain the difference in operating and capital budgets in global budgets and what we have now in our private system?

 I'll first cover our private system which uses both operating or capitation to fund capital expenditures. If they are capitated, a certain amount is spent on healthcare and a certain amount is set aside to build a new hospital wing or new facilities. It is a competitive environment of trying to beat out other hospitals by having facilities. But the problem is you end up with duplications in a community with ensuing waste.

A global operating budget only covers operating expenses, with capital expenditures funded from a separate fund allocated according to community needs.  For example in trying to decide where to place another MRI the commission sees hospitals are clustered in the suburbs and with none or one in the inner city or in rural areas. So obviously the commission would decide to build a hospital in those areas of poverty not another suburban hospital

There would be no way the hospital with the global operating budget would be able to fund capital expenditures except by applying for that grant from the separate fund by showing the need and getting paid to fill it.

 Q: It is my understanding that Congress has no authority over the Direct Contracting Entity (DCE) privatization schemes, who should we lobby to address this draconian policy?  

The Affordable Care Act includes the Center for Medicare and Medicaid Innovation (CMMI), which has been given the authority to try new ways of paying for care primarily by pushing for shifting insurance risk onto providers. CMMI can do whatever they want with no input from Congress, so we need to change the law that created the CMMI and strip it out of the  Affordable Care Act.

Continue Reading

Read More

March FTAC Meeting: Our Advocacy is Paying Off!

March 28, 2024

By Consuelo Echeverria Our advocacy is paying off! This was the first time we heard the members really engage in substantial discussion. The presentation of Whole Washington’s WA Health Trust triggered a substantial discussion on steps to universal health care, its feasibility, cost and...

Read more

February UHCC Meeting Recap

February 28, 2024

The Universal Health Care Commission Needs a Reboot by Marcia Stedman In a state where a majority of voters supports a universal healthcare system, Washington is not well-served by its Universal Health Care Commission.  At its February meeting, the Commission once again punted on its...

Read more