Thomas Scully was Administrator of the Centers for Medicare and Medicaid Services (CMS) under the second Bush administration. He contributed to the development of major healthcare reforms like the creation of Medicare Part D, the expansion of Medicare Advantage, and the implementation of quality measures for nursing homes nationwide. Prior to joining CMS, Scully was the President and CEO of the Federation of American Hospitals and served as Deputy Assistant to the President and Associate Director of the Office of Management and Budget in the George H. W. Bush White House. He currently serves as a partner or board member of several healthcare organizations, and remains a leading expert in federal health policy.
Rishabh Rao: What are the major conflicts between lawmakers that shape the design and implementation of the American healthcare system?
Thomas Scully: If you’re in health care, the fundamental disagreement between Democrats and Republicans is that you either believe in private insurance or you don’t. Obviously, I agree with Republicans on this.
My general view is that Medicare means well, the Centers for Medicare and Medicaid Services (CMS) means well, but when you fix prices and you pay every doctor and every hospital the same thing—which Medicare Fee-For-Service does—very predictably, you get a lot of claims volumes. I watched it happen. I was in the first Bush White House, I worked on a lot of reforms to Medicare, and I helped pass RBRVS, which is the way we fix prices for doctors. I was very involved in creating Diagnosis-Related Groups (DRGs), which is the way we fix prices for hospitals, and I came to the conclusion from watching that and then running a hospital association after that, that price-fixing just doesn’t work, and it doesn’t work anywhere.
A lot of my Democratic single-payer friends don’t like that, but my comparison to it is the federal government has to do three fundamental things. It’s got to provide health care for everybody—hopefully poor people especially—provide food, and provide housing. We don’t go out and have the Department of Agriculture run grocery stores and fix prices. It just doesn’t work.
RR: I want to talk about the politicization of health care. It seems like health care spending for Medicare and Medicaid especially have taken on the character of political footballs for both parties.
TS: It’s been the same way forever. But was it incredibly intense and partisan and nasty? Less than now, probably, because the Democrats and Republicans got along a little better 25 years ago, and there were more people in the middle. But it was pretty ugly. It’s always been pretty ugly. It’s rough politics. There’s very little substance involved, usually.
This whole debate about extending the health care tax credits between the Republicans and Democrats is a complete bunch of non-substantive silliness. Nobody’s talking about what’s actually happening. It’s just raw politics. Who can win a vote? It’s just sad. When was the last time I heard somebody sit down and actually talk about how these things work and what the people have recovered and what their income is? The substance disappears, and it’s all political rock throwing. People don’t know what they’re talking about.
The number one thing I would think has changed—because health care has always been controversial, politically controversial, it’s a lot of money, it’s a big, big, big, big chunk of the federal government—is that the middle has dissolved. The Republicans have moved further right and the Democrats have moved further left, which is sad. My own view is whoever’s smart enough to move back to the middle is going to crush the other party in the next four to six years after Trump. But the Republicans are getting further and further right and the Democrats seem to be determined to go further and further left. And the vast bulk of Americans are in the middle. They want moderate competency, which both parties seem determined not to provide.
RR: Why don’t we talk about the Medicare Prescription Drug Improvement and Modernization Act. You were an integral part of the creation of Medicare Advantage as we know it today through that law. Can you explain what that legislation actually did for Medicare Advantage?
TS: If you look at how Medicare Fee-For-Service works, CMS doesn’t pay the bills. CMS used to contract with 125 different Blue Cross plans. One of the things I reformed 25 years ago, we took it down to 15, and now it’s down to 10. So there are basically 10 Blue Cross plans around the country to get chunks of Medicare. CMS gives them the price list that they determine for doctors and for hospitals, and they tell the Blue Cross plan what roughly 1 percent to 1.5 percent of what the cost is, and they just write claims. All the claims come in from doctors and hospitals, and it’s largely Blue Cross of Florida that’s actually handling it. They actually pay the claims.
For Medicare Advantage, the average spend this year for a senior is roughly $18,000 a year. It varies massively on age and income. Would you rather fix prices and have Blue Cross of Florida write the checks for a cut of 1 percent of premiums? Or would you rather give them 85 percent of the payment, so they can make a 5 percent margin, but they’re at risk? Which do you think is going to provide the better incentives? If you manage them well, you’d think Blue Cross of Florida is going to say, well, our money’s at risk and we can make a 4 percent margin or a 6 percent margin, but their incentive is they don’t wanna lose money, so they’re gonna spend a lot more time managing the process, which is what the concept of Medicare Advantage was.
RR: How do you evaluate the success of that program now?
TS: Spectacular, but not what I expected. We had, I think, 4 percent of the program was Medicare-managed care when I came in in 2001. It was shrinking and it was in deep trouble. I thought maybe someday if we create a really interesting dynamic for for-profit, competitive health plans, maybe we get it to 20 percent. Now it’s 52 percent. So it’s worked better than I expected. The reason it’s worked so well—and now it’s, by the way, probably more popular than Democrats and Republicans—is that it’s much better for low-income people.
I just went on Medicare a few years delayed this year after I finally went off my law firm’s policy. You know, for better or worse, I can afford to buy traditional Medicare and pay $600, and there’s an income-related premium, so I pay a piece of that. Another one of the things I was involved in, so I can blame myself. But I’ve done well, so I pay an income-related premium to Medicare. Then on top of that, I have to buy Medigap, supplemental insurance from whoever it is, AARP, and that’s another $500 a month per couple.
It’s a lot. The average person can’t do that. I came from a modest background, but my parents just recently passed away. They couldn’t afford to pay for Medicare plus supplemental insurance. Most normal people can’t pay. So, you can pay for regular Medicare and go to any doctor you want in the old program and then pay AARP for another $600 a month, which is about what it is for a couple that’s roughly my age, and that’s really expensive. Or you can go buy a Humana plan or a United plan, and you pay no premiums and no deductibles and no copayments, and you get a drug benefit, a gym benefit. To most people, that sounds great.
Then the controversy comes when they say, “Oh, well, I want to go to the doctor, and I can’t go to every doctor in New York.” They’ve got to go to a limited number. That’s the tradeoff, and it always was. You pick a more limited network. In exchange for that, you get more benefits. And I knew from the beginning that the tradeoff was that lower-income people and more moderate-income people would take that choice because they vote with their money in their wallet. They can’t afford it.
RR: What about the potential for insurance companies to overreach with things like risk adjustment in the Medicare Advantage program?
TS: When I was in the Board of Oxford in the 90s, we paid deal plans differentially only on two factors, age and geography. So we used to joke, you want to have your enrollment office on the 15th floor of a walk-up because you sure as hell don’t want anybody that’s sick. So the incentive of managed care plans before 2004 was: avoid sick people. Sign up all the healthy people. Find all the marathoners. That’s how you made money.
So we tried to change the incentive and say, look, we want exactly the opposite. We want you to find sick people. We’ll give you a capitated amount, and you’ll be incentivized to take better care of them. That was what risk adjustment was all about. The idea was to have UnitedHealthcare and Humana and Oxford and the rest of these guys say, “Look, we can do better by finding sick people that cost $60,000 a year and managing them to $52,000 a year. Right?” Which is exactly what you want.
Problems arise with that if it’s not really well regulated, because it’s very political and the insurance companies have strong lobbies. We’ve had to fine-tune it a lot, and the pressure to not fine-tune risk adjustment is that none of the companies ever want to tweak it. When I first introduced risk adjustment, they hated it. Now they’re addicted to them, and they learn how to legally game them.
My argument about Medicare Advantage is that if you really believe in private health plans, you have to have the guts to regulate health plans and make them follow the rules, because if you don’t, like any other government contract, they’re gonna find the niches to make more money in every little nook and cranny they can. I can’t blame them for that. Those are the incentives you create. But finding a way to smack them around and make them follow the rules is not easy.
RR: I want to pivot and talk about health care quality, which was another big priority for you as a CMS administrator. What were the biggest challenges you faced in assessing comparative health care quality among nursing homes and other care delivery institutions?
TS: I think the biggest barrier is that nobody wants to change anything. The way I came up with the quality measures was, from ‘94 to 2000, I ran the Federation of American Hospitals, which is the big for-profit hospital associations. Believe it or not, the guy who had the best quality stuff, which I mimicked, was Rick Scott, who is now the Senator from Florida. When I got into CMS, I said, “What the hell?” I mean, what he was saying in all his markets was, here’s the hundred things we measure and what we’re good at and what our outcomes are. Why the hell don’t we do that? I basically mimicked what I thought I needed to do. And the hospitals went nuts.
I went out and said, look, we’re Republicans. We’re not going to mandate quality measures because we don’t mandate things. We’re going to do it totally voluntarily. We’re going to volunteer to pay you 100 percent of your reimbursement if you do quality measures and maybe 98 percent if you don’t. So how’s that for volunteering? They didn’t like it. They went crazy.
So we said, look, here’s X number of hospital quality measures and I think we took about a year and a half to phase them in. They were very basic quality measures. First, I did it for nursing homes. I did it for home health agencies. Just very simply said, look, you don’t have to do it. You don’t like it. But if you file the quality measures and give us information, you’ll get paid 100 percent of the rates we put out, and if you don’t, you’ll get paid 98 percent. They went freaking nuts. But magically, 99 percent of them complied because they only care about some money. But they were very unhappy. The nursing homes went most crazy because they had the biggest quality problems. I ran full-page ads in, I don’t know, 100 major newspapers every quarter measuring all the nursing homes by quality and what our outcomes were.
RR: Do you think that the increased focus on health care quality in the last few decades has yielded better results in terms of patient outcomes and a healthier overall population?
TS: Do I think it’s made a difference? I think it makes a huge difference. I think star ratings for managed care plans make a huge difference. I mean, you can complain about them, but when those star ratings come out, you know, the health plans get paid. The difference between a three and a half star and a four star and a four and a half star is a huge amount of money. If you just barely miss one of those break points, you’re dead as a health plan. So you get paid a lot less. So they work like crazy to get their quality measures up. So I think they definitely work. I think they work all over the place. I would do way, way more.
RR: We’ve touched on health care spending. Since you’ve been CMS administrator, health care spending has increased in this country pretty dramatically. Can you share your perspective on this pretty complicated issue and what steps you think can be taken to address this?
TS: It’s never going to get fixed. I remember when I first started working in the Senate in 1981 and my boss—a great moderate Republican from Washington State who has passed away since—went out on my first day and said, health care is completely out of control. It’s 5.5 percent of the GDP. It’s out of control. We have to do something about it. Obviously, it’s now 20 percent of GDP.
And probably the most famous health care academic in the last 50 years, a guy named Uwe Reinhardt, who died a couple years ago, was a good friend of mine. And Uwe, who was pretty liberal, but a very smart guy, would just say, look, health care is what people want. It’s the number one service people want. It’s good health care. It’s in demand. There are a lot of things we can do. We shouldn’t spend a lot of time worrying about what percentage of the GDP it is, we should be worried about the quality of it. If it works, it works. If you want more, and the system can afford to pay for it, and they choose that over other stuff, great. I mean, we have the best health care in the world, and the health care system provides spectacular health care, even though it’s unbelievably expensive.
*This interview has been edited for length and clarity.