Why Medicare is the customer

When you walk into a successful restaurant, automobile showroom or retail store, there is no confusion that you are the customer. When you enter a physician office or hospital as a patient, your providers will likely demonstrate compassion and concern offering that same sense that you are the customer.  You may feel like you are the customer when you keep getting asked to spend even more money out of pocket for care. Yet in most cases, someone other than the patient is the customer.

In the United States, 90% of the money that healthcare providers receive for providing services comes from third parties (Medicare, Medicaid, Insurance companies).  These third parties determine:

  • Reimbursement – process for providers to get paid and what they can collect from patients
  • Operating Rules – how providers must operate and treat patients
  • Formulary – list of services that get reimbursement
  • Amount – how much the provider gets paid

While the patient receives the services and may have chosen the provider, a case can be made that the customer is the third party that reimburses the provider. If the provider is ineffective with the reimbursement process and/or with following the operating rules, they will not survive financially.  If providers deliver services not on the formulary, like responding to patient’s text messages and emails, their business will likely fail.  If they try to get the patient to pay for the services not on the formulary, they will likely lose the patient or violate an operating rule that could revoke all reimbursements from that third party.

With 21% of all health care spending in the United States reimbursed by Medicare, it is often the largest customer of healthcare providers.  The largest commercial insurer is United Healthcare which reimburses 2% of United States health care spending.  With Medicare reimbursing providers 10 times more than the largest insurer, insurers have little choice than to adopt the Medicare reimbursement framework.

When health insurance companies begin negotiating contracts with healthcare providers, the Medicare reimbursement system is the baseline.  They use it to negotiate contract rates, such as 130% of Medicare reimbursement rates. They also overlay utilization management rules such as pre-authorizations and medical justification for services.

It would be hard for healthcare providers to have two different business models, so Medicare also sets the legal framework. Ineffective billing and justification may prevent providers from receiving their entitled reimbursement. It could also subject them to an Office of Inspector General fraud and abuse investigation which could result in fines or even prison time. Providers must be careful how they work together as Stark and Anti-kickback Laws govern patient referrals carrying stiff penalties if providers are not compliant.

Medicare also guides the testing of new reimbursement models.  When they announced new reimbursement models such as Accountable Care Organizations and Bundled Payments, private insurance companies like CIGNA, Aetna and local Blue Cross quickly jumped onboard. The insurance companies leveraged the new reimbursement frameworks and have already equaled Medicare on their implementation.

The reimbursement system used in the United States is the result of the Balanced Budget Act of 1997.  It’s a 90’s reimbursement system that has prevented providers from leveraging science and technology advances like so many other industries.  The good news is that this is all about to change as Medicare has already begun testing 41 new reimbursement models that will be rolled out over the next 3 years. The good news is that each of the new reimbursement models will be tested as to whether they can deliver the desired performance goals before they become the law.

The customer of healthcare is the third party reimbursement system, just like we are the customer in a restaurant, car dealership or retail store. With healthcare in the United States based on the Medicare reimbursement system, Medicare is essentially the customer.  The customer (Medicare) knows it can no longer simply pay for services and needs to demand performance. The transition to performance over the next 3 years will is intended to begin delivering the healthcare we want.


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