Medicare Privatization Scheme Faced Legal Questions About Profiteering

In the final stretch of the Trump administration, government attorneys expressed ethics concerns about a Medicare privatization scheme being set up by Adam Boehler, a former dorm-mate of Jared Kushner’s who was made director of the Center for Medicare and Medicaid Innovation, also known as CMMI or the Innovation Center.

In January 2019, ahead of the launch of a new direct contracting model, the Office of the General Counsel for the Health and Human Services Department warned, in comments on a draft of the proposal, that it appeared as if the new project was being set up to benefit specific companies.

“We are concerned based on [Centers for Medicare and Medicaid Services]’s regular references to organizations like Chen Med, Oak Street Health, and Verily in the comments and otherwise, that this model has been designed with specific private sector entities in mind. If accurate, this could create ethics concerns, as the creation of this model would give those entities a leg up in the market,” read the guidance, a copy of which was obtained by The Intercept.

The direct contracting model was announced publicly in April 2019 and began its implementation phase in October 2020. The project pays private companies a predetermined but individualized amount per year, per patient, regardless of what the company spends on care, and has persisted and grown under the Biden administration.

Boehler, prior to working in the Trump administration, ran a startup called Landmark Health, which was backed by venture capital money, including the firm Oxeon. Multiple Oxeon-funded health companies, such as Oak Street Health, were directly referenced in the documents setting up the new project, which drew scrutiny from the Office of the General Counsel. Under Boehler, CMMI contracted with Oxeon to recruit the noncareer staff for CMMI, who then went on to design the program. Once the project was set up, Landmark Health announced it would be contracting with CMMI to become a direct contracting entity — meaning Boehler’s model was shoveling money to the firm he had left. Boehler is now CEO of Rubicon Founders, a venture capital and private equity firm operating in the health care industry. (Before taking his position in the administration, he had divested from any Landmark, along with other healthcare-related investments.)

In May 2019, a calendar alert went out to staff reading “discussion with Landmark on the direct contracting model.” Career staff were appalled. “This shit is so fucking gross,” wrote one in a group text with other aides which was shared with The Intercept. “Ugh. What the fuck,” replied another, with a third sending a link to the Office of the Inspector General, suggesting it be reported. (It does not appear to have been reported.)

The payment model is designed to be lucrative for firms contracting with the government: The government pays a set amount of money annually per patient based on a risk score that is easily gamed by the health care company, and there is no requirement that a minimum percentage of the money be spent on care, a requirement known as a “medical loss ratio” that is typically used to constrain insurance firms or providers from eating the bulk of the funding.

Brad Smith, a recruit of Boehler’s who briefly served as director of CMMI after Boehler was appointed to an unrelated position by President Donald Trump, wrote an article for the New England Journal of Medicine in February of this year that was highly critical of similar payment models the organization was rolling out, noting with unusual frankness that “the vast majority of the Center’s models have not saved money, with several on pace to lose billions of dollars. Similarly, the majority of models do not show significant improvements in quality.” Smith identified “inflated benchmarks” — in which providers wildly overestimate what they expect a patient will cost — and providers’ ability to “game” the payment models as key drivers of losses for the government. Smith expressed hope for direct contracting as a fix, though the project’s critics note it has the same elements. 

Smith, able to spot a good business opportunity, launched a health care company, Russell Street Ventures, in June. That company is now directly contracting with Medicare. Smith did not respond to a request for comment. In October 2020, when the direct contracting program was in its early implementation phase, Smith indicated on a panel with Boehler and another former CMMI head, Patrick Conway, that in the program’s early stages the firms that had “come into that space that [were] running the program” were mostly “new and mid-stage companies” — like his firm and those founded by Boehler. Conway noted that he had recruited Boehler to the job, just as Boehler had recruited Smith. As Boehler added during the panel, the trend is bipartisan. Andy Slavitt, Obama’s head of CMS and an outspoken resistance Democrat, has now linked up with Oxeon – the same VC firm that was funding Boehler – for his own direct contracting enterprise.

The latest privatization scheme echoes the Medicare Advantage system, the private-insurer-run version of Medicare currently used by over 40 percent of enrollees.

Direct contracting uses a model that, in theory, pays firms for maintaining the overall health of a patient rather than billing Medicare for individual medical services. Critics argue that the latter model, which is currently used for standard Medicare enrollees, incentivizes unnecessary hospital visits and treatments. But the former model, which is referred to as value-based contracting, requires complex bureaucratic oversight to ensure that providers are not juking the system by unreasonably inflating the cost and difficulty of caring for a patient.

Medicare Advantage also currently uses a version of the value-based contracting model, but the design failures of the program have led to significantly higher costs than under the traditional Medicare fee-for-service model — with little evidence to support the claim that patients are receiving better care. This is because of the insurer payment formula for Medicare Advantage, which largely depends on the number of diagnoses each patient has received, or their “risk score.”

An entire cottage industry has popped up to help insurers and providers increase a patient’s risk score by scouring for potential diagnoses before patients enroll in Medicare Advantage plans. By finding more diagnoses, whether treatable or not, the annual reimbursement rate under the value-based contracting model increases. Experts have estimated that the resulting overpayments will lead to hundreds of billions of dollars in cost overruns over the next several years. While technocratic fixes to the formula could fix many of the problems plaguing the Medicare Advantage program, Congress and executive branch appointees have so far been unwilling to stomach the political risks posed by large-scale interruptions to the care of Medicare enrollees that would be necessary to combat the wasteful spending generated by privatization.

In a paper published in September, Richard Gilfillan, the head of CMMI from 2010 to 2013, and Donald Berwick, a former head of Centers for Medicare and Medicaid Services, or CMS, during the Obama administration, warned that many of the waste-generating elements of Medicare Advantage programs would carry over to direct contracting. While the direct contracting pilot adjusts the formula for payments to blunt the impact of risk-score gaming, it is unclear whether these adjustments are sufficient to end the practice. Adjusting each firm’s scoring downward by an equal amount punishes firms behaving honestly, they argued, and rewards the firms who hire consultants to game the coding exercise. That puts the government’s thumb on the scale of the most aggressive coders.

“In Direct Contracting, CMS established a stated aim of bringing ‘organizations that currently operate exclusively in Medicare Advantage’ into traditional Medicare, targeting the very MA insurers and investor-controlled provider firms that are driving the MA overpayments,” Gilfillan and Berwick noted, specifically mentioning Oak Street Health and Landmark Health, which Boehler previously ran, as examples of investor-controlled provider firms. (Gilfillan himself is CEO of Trinity Health, a major player in the healthcare industry.)

Diane Archer, founder of Just Care and a health policy expert, described a similar scenario in an email to The Intercept. “The way they make money is by spending as little as possible on patient care, while ensuring as best they can that they have all diagnoses possible for their enrollees in order to maximize government payments. The more diagnoses, the higher the government payments. Government payments are set upfront and unrelated to the cost or number of services people receive.”

“The incentive is to deny as much care as possible.”

“And, yes, the incentive is to deny as much care as possible,” she continued, “it’s also to delay as much care as possible and to create administrative and financial barriers that make it hard for enrollees to get care, even if the DCE does not delay or deny care,” she said, referring to direct contracting entities approved to participate in the program.

Aside from the looting of public funds and the depreciation of care, the shift toward privatization has profound implications for the political economy of health care. Every new private equity or venture capital-backed firm that grabs a bigger piece of the health care market becomes an incumbent corporate stakeholder and a well-funded obstacle to public-minded reform efforts.

Throughout the medical industry, physician practices, hospitals, and groups of specialists are being bought up by investors and consolidated. In the direct contracting space, much of the funding is coming from venture capitalists, but private equity has gotten involved as well.

CanoHealth, a private-equity backed firm, told investors in a presentation that as of April 2021 it had added direct contracting to its existing Medicare Advantage business model. More than half of Medicare recipients have declined to opt in to the privatized Medicare Advantage model, and CanoHealth noted that becoming a direct contracting entity massively expands the company’s potential pool of customers, saying it “triples the addressable market opportunity.” (More recent estimates put the number of Medicare Advantage enrollees higher, at 42 percent.)

The entrance of big private money can be damaging to patient health. A recent study of private equity influence in nursing homes found that residents under the care of a private equity-owned facility were a startling 10 percent more likely to die.

At the center of this privatization project now that Joe Biden is in the White House is Liz Fowler, who was previously the lead health care staffer for former Sen. Max Baucus, D-Mont., who drafted massive chunks of the Affordable Care Act. Fowler was in the trenches battling progressives over the shape and construction of Obamacare, and before that, she had been a top lobbyist for the insurance company WellPoint. After that, she went on to work for Johnson & Johnson. Now she’s back in government, as the deputy administrator and director of CMMI, the innovation agency created by the law she helped write, and people involved in the fight over this project say she’s a strong backer of direct contracting. Fowler did not respond to a request for comment.

In May, four Democrats in Congress — Reps. Bill Pascrell, Mark Pocan, Katie Porter, and Lloyd Doggett — sent a letter to CMMI and to Health and Human Services Secretary Xavier Becerra, who is himself a supporter of Medicare for All, asking for the program to be frozen due to concerns that “funneling people into Medicare Advantage-like plans not only eliminates beneficiary choice, but also erects more barriers and provides fewer consumer protections for beneficiaries.”

In a sign of how big direct contracting has gotten, it has its own lobby now. The Direct Contracting Coalition, which operates as part of America’s Physician Groups, sent a letter in response, arguing that the critics don’t understand how much it can help beneficiaries and cut costs for the government.

The Biden administration paused implementation of two of the three models for direct contracting earlier this year, but there is no indication the administration intends to halt the program altogether. Archer, the health policy expert, said that the path toward a full privatization of Medicare is now apparent if the Biden administration doesn’t change course. “The private equity takeover is short term,” she predicted. “PE will sell their DCEs to insurers. We’ll get fully privatized Medicare, unaccountable and far less cost-effective. Traditional Medicare will wither on the vine.”