Health Care Payment Reform and Structural Racism in the United States

By Katherine Ianni

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Ianni K. Health care payment reform and structural racism in the United States. HPHR. 2021; 30.

Health Care Payment Reform and Structural Racism in the United States

Two major priorities for U.S. health care policy are payment reform and the reduction of racial and ethnic disparities. Over the past two decades, federal policies have focused on payment reform and health equity through adjacent but separate initiatives. The most recent and significant advances were implemented through the Affordable Care Act (ACA) in 2010. Related to payment reform, the ACA established The Center for Medicare & Medicaid Innovation and new Medicare payment models, including value-based payment (VBP) arrangements. The objective of VBP is to incentivize high-value care that meets The Center for Medicare and Medicaid Services’ (CMS) three-part aim to improve care experiences for individuals, achieve better population health, and reduce costs (Berwick et al., 2008; CMS’ Value-Based Programs | CMS, 2020). On the equity front, the ACA reauthorized the Department of Health and Human Services Office of Minority Health (OMH) and established offices within other DHHS agencies, including the CMS OMH. The mission of CMS OMH is to conduct research and design interventions that reduce disparities and improve the health of minority populations in the Medicare and Medicaid programs. 


Although health care payment and equity initiatives have largely been siloed, these topics are historically and systemically connected. First, it is critical to acknowledge the role of structural racism in health and health care disparities. Structural racism is a term used in the social science literature to emphasize that racism operates on multiple levels, and that policies, laws, societal norms, and economic systems can embody and perpetuate racism (Groos et al., 2018; Jones, 2002; Reskin, 2012; Rothstein, 2017). Structural racism pervades domains such as housing, education, employment, neighborhood segregation, criminal justice, and medical care and has a significant effect on access to high-quality services and the health of minority groups (Bailey et al., 2017, 2021; Gee, 2002; Gee & Ford, 2011; D. R. Williams et al., 2019; Yearby, 2018). 


Importantly, these widespread inequities that disadvantage racial and ethnic minorities are connected to health care reform. While there is no single definition of health care reform, it broadly refers to political, economic, social, and legal changes made by the government or other stakeholders to improve the health care system (U.S. Department of Health & Human Services, 2015). Narrowing on payment reform, the objective of these changes are to contain and reduce costs, increase insurance coverage, and incentivize high-value care (Cutler, 1994; Meltzer, 2020). Though payment reform is most often related to the cost and efficiency of care, it must also be recognized both as an important piece of an unequal system and also as a policy lever. Thus, payment reform devoid of equity considerations may not only cause unintended consequences (i.e., exacerbate disparities), but also forgo potential opportunities to build disparity-reduction tools into payment. 


The intersection of health care payment policy and health equity is an important and broad topic. Previous literature has focused on VBP and social determinants of health (Report to Congress, 2016), the effect of pay-for-performance on disparities (Alshamsan et al., 2010; Blustein et al., 2011; Weissman et al., 2012), adjustments for social risk (Jaffery & Gelb Safran, 2021; Joynt et al., 2017; Sheingold et al., 2018), and measurement methodologies (Anderson et al., 2018; Braveman, 2006; Groos et al., 2018). This paper aims to provide a historical perspective that illustrates how certain federal policies and formative periods of the U.S. health care system relate to structural racism and the connection of these systemic inequities to modern payment reform. The proceeding sections discuss the evolution of the U.S. health care system and the Civil Rights movement, the intersection of VBP and equity, and a case study of the Medicare Hospital Readmission Reduction Program (HRRP) to highlight how equity has been left out of payment design.

The U.S. Health Care System, Medicare, and Racial Equity

The passage of Medicare is regarded as a transformative step in U.S. health reform, but an often-forgotten story is that of the relationship between Medicare and the Civil Rights movement. Leading up to the creation of Medicare, the late 1800s to mid 1900s marked a formative period in which principals of medical practice and financing set the foundation of the current U.S. health care system (Smith, 2016). This period overlaps with the Jim Crow era as well as the Hill-Burton Hospital Survey and Construction Act, which directed federal funds to the construction of health care infrastructure such as nursing homes, public health centers, and hospitals. Construction lasted from 1947 to 1971—a period that saw both legal and illegal forms of racial segregation (Thomas, 2006). As the U.S. was developing medical practice norms and building the physical base of the health care system, the nation struggled deeply with racism and segregation. 


Ten years after Brown v. Board, the Civil Rights Act of 1964 outlawed segregation and discrimination on the basis of race. This legislation did not end discrimination in practice, and one important establishment in which segregation persisted was hospitals. A key component of structural racism in health care was in the unequal distribution of resources in hospitals; hospitals serving predominantly black communities were extremely under-resourced and had worse clinical outcomes. Smith (2016) writes:


Race, and the logic of white supremacy, is hidden in the compromise patchwork solutions, the expansion of private insurance, the creation of producer cooperative solutions in the form of voluntary Blue Cross plans, the creation of the dominant voluntary hospital sector, the ideology of individualism, the opposition to public solutions, and the promotion of freedom of choice and free market solutions that have dominated, and continue to dominate, health care in the United States. (p. 3)


The U.S. health care system embodies structural racism in that each of its many components disproportionately disadvantage Black and other minority groups. Disparate hospital allocation is just one manifestation of the unequal system. More generally, because the U.S. health care system distributes resources based on the ability to pay, access to care is directly affected by structural racism in wealth, wages, and employment opportunity, which are essential for individuals to obtain health insurance and seek high-quality care (Yearby, 2018). 


In 1965, Medicare was instated with the passage of the Social Security Act Amendments. Medicare marked an important advance in government provision of health care, and it also tied federal dollars to compliance with the Civil Rights Act. Specifically, Medicare withheld federal funding from—and delivered actionable consequences to—hospitals that remained segregated. In March of 1966, Surgeon General Stewart sent a letter to every hospital in the nation stating that Title VI of the Civil Rights Act “prohibits discrimination on the basis of race, color or national origin in Federally-assisted programs,” and that to be eligible for any Federal funds (including Medicare payment) hospitals must be in compliance with Title VI. It was only three weeks later that Rev. Dr. Martin Luther King Jr. spoke at the Second National Convention of the Medical Committee for Human Rights in Chicago, proclaiming, “Of all the forms of inequality, injustice in the health care is the most shocking and inhumane” (Smith, pp. 116-118). This speech galvanized government workers to transfer to the Public Health Service office, which oversaw compliance implementation of the Medicare program. Additionally, Civil Rights activists, medical professionals, and community members volunteered to help with the implementation. Over the next months and years, these volunteers and government employees took on the difficult job of enforcing hospital compliance with the Medicare program and Title VI. The process was in no way easy—enforcement officers were often harassed or threatened when visiting hospitals, reflecting the racism still present throughout the country. Hospitals would also try to deceive officers by anticipating visits and desegregating patients for the days when assessments were made (Smith, 2016). Despite the aggression and deception faced, officers made strides in desegregating hospitals.

Value-Based Payment and Racial Equity

Though the history described above is only a brief look into the intertwined evolution of the U.S. health care system and racial equity, it provides a foundation for understanding the pervasive structural factors that influence disparities in health and health care. Acknowledging the unequal origins of the system is a critical step to inform the design and evaluation of payment initiatives that advance health equity.


It is also important to recognize that segregation of care and unequal distribution of resources are not matters of the past but persisting phenomena. Black patient care is still highly segregated (Jha et al., 2007; Vaughan Sarrazin et al., 2009), and Black patients are more likely to receive care from lower quality hospitals (Barnato et al., 2005; Chandra et al., 2020) and providers (Bach et al., 2004). Regarding resources, hospitals serving high shares of people of color are poorer in assets (Himmelstein & Himmelstein, 2020). There is also evidence that hospitals use price discrimination to attract patients with private insurance—and thus higher margins—which diverts Medicaid patients, who are disproportionately Black and Hispanic, to hospitals with fewer resources (Kaplan & O’Neill, 2020). In addition to disparities in care, significant gaps in health outcomes exist across infant mortality, maternal mortality, premature death, and life expectancy for Black and white Americans (Cutler et al., 2008; Krieger et al., 2008).


These persisting trends of care segregation, unequal allocation, worse health outcomes, and lower quality providers serving racial and ethnic minorities is directly related to VBP. For example, successful participation in VBP arrangements requires resources for health information technology, care management, discharge planning, and other tools. These are significant startup costs and of even greater magnitude if a provider’s patient population is more clinically and/or socially complex. The following section describes an example of how equity is often left out of payment policy design. 

Case Study: Medicare Hospital Readmission Reduction Program

The Medicare HRRP financially penalizes hospitals for higher than expected 30-day, risk-adjusted readmissions across six clinical conditions and procedures. Evaluations of HRRP have focused on the primary intent of the program—to reduce readmissions—as well as trends in observational stays and mortality (Dharmarajan et al., 2017; Ody et al., 2019; Wadhera, Maddox, et al., 2019; Zuckerman et al., 2016).


Scholars have also studied the design and associated equity consequences of HRRP, namely the absence of SES risk-adjustment for financial penalties (Joynt & Jha, 2013; Wadhera et al., 2019). Because there are no adjustments for non-clinical factors, HRRP penalties may disproportionately affect hospitals that serve a large share of low-SES patients (Gilman et al., 2015). One study found that patient characteristics not included in HRRP risk-adjustment account for 48% of the difference in probability of readmission between patients receiving care at hospitals in the highest versus lowest quintile of readmission rates (Barnett et al., 2015). 


It is important to understand the objectives of quality measurement when framing a critique of HRRP and VBP initiatives. Measures may be used for public information, to identify low-performers, to inform quality improvement efforts, or to determine financial incentives (Jha & Zaslavsky, 2014). It is argued that unadjusted measures should be used for quality improvement purposes, to avoid masking variation in quality and potentially exacerbating disparities, while adjusted measures should be used for financial incentives, to avoid disproportionately penalizing hospitals serving higher-need populations (Jha & Zaslavsky, 2014). To address this issue, HRRP implemented stratification by peer groups based on the share of dually eligible Medicare-Medicaid beneficiaries as a proxy for share of low-income patients in 2019. This stratification was associated with a shift in hospital penalties whereby hospitals in the lowest quintile for dual share saw increased penalties while hospitals in the highest quintile (i.e., with more low-income patients), saw reductions in penalties (Joynt Maddox et al., 2019). 


This summary of program design, evaluation, and quality measurement points to fundamental issues in how VBP programs can leave out critical considerations of structural inequities. First, the exclusion of non-clinical measures in the original HRRP design ignores important individual-level factors that may influence readmissions. Second, the design does not factor in historical allocative inequities between hospitals serving difference patient populations, though this issue was somewhat addressed in the 2019 update to include peer group stratification. 


Importantly, the current theory of SES-adjustment for financial penalties focuses on income inequality and does not explicitly address disparities by race and ethnicity. This is both a semantic and technical issue. SES and race are closely related yet can be distinctly separate; when used interchangeably, the importance of race is masked. Technically, the effects of structural racism present an endogeneity problem for causal identification strategies, measurement, and risk-adjustment (Assari, 2018; LaVeist, 2005). 


These issues are reflected in an article written by the HRRP measure designers. The authors note that SES, “is a complex attribute likely moderated by a host of factors. Perhaps even more daunting, we consistently found that race seemed to have a stronger effect on readmission risk than SES, yet it is difficult to suggest that hospitals with more patients of a certain race are expected to have worse outcomes and, with confidence, not attribute it to differences in quality when the nation’s history suggests otherwise” (Krumholz & Bernheim, 2014). While this statement alludes to the history of racial inequity in the U.S., it does not explicitly address the role of structural racism in health and health care, nor is there a proposed path forward for the technical measurement challenges. 


Structural racism and its related terms—systemic racism and institutionalized racism—have been studied in fields such as sociology for years (Jones, 2002; Reskin, 2012). However, these terms and publications on the effect of structural racism on health care are largely missing from the medical and health services literature (Krieger et al., 2021; Ogedegbe, 2020). While literature on performance incentives and equity has been focused on the unintended consequences (Chien, 2007), there is potential to intentionally use payment and quality measurement to advance health equity (Anderson et al., 2018). This reflects an urgent need to explicitly discuss the role of structural racism in health care and develop robust measurement and risk-adjustment methodologies for racial equity. A robust evidence and methodological base are essential for future payment design that intentionally incorporates health equity. 


This paper has provided a brief look into the intertwined history of the U.S. health care system, Medicare, and racial equity, and has provided a modern-day case study to highlight how payment reform efforts can both cause unintended equity consequences and miss opportunities for disparity-reduction. Significant barriers in this domain are the lack of measurement and risk-adjustment methodologies as well as the absence of appropriate terminology to recognize structural racism. Policies to address the effects of structural racism on health and health care must be multi-level, and a large part of these disparities are driven by factors outside of the health care system, such as wealth and housing inequalities. However, in the domain of health policy, payment is a significant lever for making changes at the point of care. Thus, payment policies are essential contributions to larger efforts in reducing racial inequities. Importantly, racial equity should be part of payment policy not just as an ex-post assessment of unintended harm on minority populations, but as an intentional facet of VBP and other initiatives. As we move forward in a new administration eager to make progress in health care reform, it is critical to keep racial equity at the forefront of policy design and evaluation.


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About the Author

Katherine Ianni

Katherine is a first-year PhD student in the Health Policy program.