This magazine article saved $500M in unnecessary Rx spending

It turns out the pen is mightier than greedy doctors, too—and can lead to "unprecedented" savings for Medicare.

Six years ago, a damning magazine article revealed sky-high levels of unnecessary spending on Medicare patients in a Texas border town, where doctors were ordering excessive amounts of "almost everything—diagnostic testing, hospital admissions, procedures."

The article in The New Yorker exposed how Medicare recipients in McAllen, Texas, "received forty percent more surgery," nearly twice the amount of heart studies, and "five times the per-capita spending on home-health services" than in the comparable border town of El Paso, which had "half the per-capita Medicare costs and the same or better results."

Read MoreWhy more people have healthcoverage

That gross disparity had a national impact: Medicare is a federal program, which mainly serves the elderly, and it was taxpayers who were bearing the costs of over-treatment in reimbursements to providers. It also underscored the potential for abuse of a health-care system that remains predominantly oriented toward "fee for service": doctors and hospitals being paid for each treatment they perform, instead of based on how well a patient does in terms of overall health.

U.S. Highway 83 in McAllen, Texas
Source: Wikimedia Commons
U.S. Highway 83 in McAllen, Texas

McAllen's medical community yowled about the story entitled "The Cost Conundrum" by Dr. Atul Gawande, and shunned a local cardiac surgeon who had gone on the record to tell the magazine that "Medicine has become a pig trough here."

But the harsh light shown on McAllen's massive Medicare expenditures led to federal criminal investigations, a $28 million settlement by seven doctors for taking illegal kickbacks connected to referring patients to specialty services and a serious rethinking by the town's other doctors about they way they were treating patients.

In a new article in the May 11 issue of the The New Yorker, the surgeon and Harvard Medical School professor Gawande revealed a dramatic turnaround in McAllen after his first piece, and after the implementation of the Affordable Care Act, which has encouraged a series of cost-saving initiatives for Medicare.

"E.R. visits, hospital admissions, tests, procedures, all fell from the Texas stratosphere," he wrote.

Read MoreObamacare's 'risk' program underfunded: Report

"Between 2009 and 2012, its [McAllen's] costs have dropped almost three thousand dollars per Medicare recipient," Gawande wrote, citing analysis by Jonathan Skinner, an economist with the Dartmouth Institute for Health Policy and Clinical Practice.

"Skinner projects the total savings to taxpayers to have reached almost a half a billion dollars by the end of 2014," the article said. "The hope of reform had been to simply 'bend the curve.' This was savings on an unprecedented scale."

Gawande quotes a local doctor, Jose Peña, who told him, "We hated you" after the first article appeared.

But an analysis Peña's hospital did afterward "came to the same conclusion that the article did: inappropriate and unnecessary care was a serious problem."

Atul Gawande
Getty Images
Atul Gawande

The new article details several efforts in McAllen to reverse that problem, including the formation of two accountable care organizations, an Obamacare creature that allows groups of medical providers to affiliate with each other to coordinate treatment of a pool of Medicare patients in the hope of improving health outcomes while controlling spending. ACOs also can "receive up to sixty percent of any savings they produce."

The two ACOs ended up saving Medicare $26 million, and "even after overhead doctors in one group took home almost eight hundred thousand dollars each (some of which they shared with their mid-level staff)," Gawande wrote.

Another effort was one led by a medical group called WellMed, which contracted with Medicare health management organization plans "to control their costs." WellMed has offered doctors a deal in which they see "fewer patients, for longer visits," but if they can "show measurable quality improvements" in patient outcomes they will make more money in bonuses.

Read More'Substantial' savings for Obamacare pilot program

Gawande's article comes the same week the Obama Administration revealed that participants in the "Pioneer" ACO program had realized $384 million in savings in the first two years of operation. That translates into savings of $300 per Medicare recipient in the program, which initially had 32 groups of health-care providers when it began in 2012.

Pioneer ACO's are a more ambitious form of the alternative-payment models being promoted by the Health and Human Services Department. Participants in that program, in addition to potentially receiving a share of any savings to Medicare they realize, also agree to pay a penalty if the costs of treating the target population exceeds the lump-sum they receive from Medicare.

HHS earlier this year said it wants to link 30 percent of all Medicare payments to "quality and value through alternative payment models" like ACOs by 2016, and link half of all such 50 percent of payments by 2018.

Read the entire new article by Gawande in The New Yorker here: "Overkill."

Read Gawande's original New Yorker article about McAllen here: "The Cost Conundrum."