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How Tom Scully Scuppered Health Coverage

September 2, 2023

Summary: The man who as a federal policy official drove the privatization of Medicare then jumped to the private sector and profited massively from the changes. Others follow the same pattern. Clever investors make billions of dollars. The rest of us suffer the consequences in higher costs and lower access to care.

Patient Zero
Tom Scully is as responsible as anyone for the way health care in America works today.
The American Prospect
August 1, 2023
By David Dayen

It was late 2002, and Tom Scully, administrator of the Centers for Medicare & Medicaid Services (CMS), was at a U.S. News and World Report forum, relating a tale of hospital skullduggery. Under CMS rules, Medicare reserved 5.1 percent of its budget to compensate hospitals that treated “outlier” high-cost patients. Scully, a youthful-looking man with a pile of slightly graying hair who talked a mile a minute, explained that Tenet and several other hospital systems, without the regulators knowing, had for years randomly jacked up prices on individual patients to access the set-aside. This deprived other hospitals that actually had sick patients from getting a higher share of the funds; the dishonest actors were costing the honest ones money.

Scully didn’t blame hospital deception, but the policy framework he was hired to manage. “I love Medicare, it’s a great program, but as an insurance model, it’s a joke,” he said, explaining that his regulators were outgunned and slow to react. The hospitals falsified patient costs and that was unethical, he conceded, but they were just responding to incentives. “People follow the money,” Scully said, “and they’ll find the little niches in the program and they’ll game it, and that’s what happened here.”

One reading of the history of health care over the past half-century, as the profit motive was gradually introduced into insurance and delivery systems, is that little niches have sprung up, and people with capital have taken advantage. That would include Tom Scully.

At the Office of Management and Budget (OMB) in the first Bush administration and CMS under Bush II, Scully played a major role in many of the defining features of health care today, from Medicare Advantage and the privatized Part D prescription drug benefit to risk adjustment and the physician payment schedule. He wasn’t responsible for Obamacare, but the program closely follows his desire to solve problems through the private sector.

When Scully left CMS in late 2003, he joined Welsh, Carson, Anderson & Stowe, perhaps the leading health care–focused private equity firm, where he used his knowledge and contacts to invest in companies that were poised to capitalize on the incentives the government offered. Welsh Carson helped pave the way for what is now an investor gold rush into the medical system.

The 1992 Bush health plan at least rhymes with what passed 18 years later as Obamacare.

I’ve watched and listened to virtually every scrap of tape of Scully over the last 35 years, and I conducted a long interview with him in June. I think his beliefs are sincere. He thinks government price-setting doesn’t work, and that empowering private insurers that put their own money at risk leads to better and more efficient care. He believes poor people should be covered generously, but all other patients exposed to cost to reduce overutilization. And he wants the best hospitals and nursing homes and clinics to be paid more than the worst, to force advances in quality.

In practice, this set of philosophies has created the monster that is America’s health care system, where most of the money is public, but most of the entities dishing out and getting that money are private. Commercialization has crowded out what was a thriving nonprofit impulse; intensifying mergers and acquisitions have concentrated every aspect of the system; and a plague of middlemen each take their cut. Scully’s fear of big-government price-fixers has led to the triumph of big private profit-takers, at the cost of doctors, nurses, and patient care.

More than anything, the system has become maddeningly complex, with armies of functionaries working every angle, straddling every ethical line, to unlock a big safe full of money. Scully is America’s safecracker-in-chief. He designed so many aspects of this system, with its intricate nooks and crannies, that he’s practically the only person who understands it. That makes him an extremely valuable commodity. It’s almost as if he invented his career outside of government when he was transforming it on the inside.

… [read on for details on the misguided history of privatization of Medicare through Part D and Medicare Advantage, fostering a private equity explosion, and how this financially benefited Scully and other investors]

Comment by: Jim Kahn

Again, The American Prospect series on health care displays for depressing scrutiny the utter failure of our 21st century health insurance morass to work for patients, instead favoring inside-game investors like Tom Scully and legions of others. Medicare Advantage plans game the CMS-created system to overcharge by more than $75 billion per year, and private equity companies reap many billions more.

How can this unsavory reality not lead us to complete disgust with decades of rising privatization of health coverage, especially publicly funded? Our fragmented and exploited system utterly fails, driving up costs and profits while depriving patients of access and financial protection.

That Scully fostered and then prospered from ill-conceived free market theories is galling.

The solution? Place our faith in a universal public health insurance system. Remove profit incentives and opportunities from the task of paying for health care, and rein it in for care provision. As do dozens of other wealthy countries. Single payer.

About the Commentator, Jim Kahn

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Jim (James G.) Kahn, MD, MPH (editor) is an Emeritus Professor of Health Policy, Epidemiology, and Global Health at the University of California, San Francisco. His work focuses on the cost and effectiveness of prevention and treatment interventions in low and middle income countries, and on single payer economics in the U.S. He has studied, advocated, and educated on single payer since the 1994 campaign for Prop 186 in California, including two years as chair of Physicians for a National Health Program California.

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