Patient Zero

This article appears in the August 2023 issue of The American Prospect magazine. Subscribe here.

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.”

More from David Dayen

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.

SCULLY, 65, WAS BORN IN PHILADELPHIA. After graduating from the University of Virginia, he came to Washington, getting hired in 1981 as a staffer for Sen. Slade Gorton (R-WA) while earning his law degree at night from Catholic University. He eventually moved on to BigLaw giant Akin Gump, working as a telecom lawyer. But he was friends with one of George Herbert Walker Bush’s sons, and that pulled him into the 1988 presidential campaign, where he ran the press operation (he worked briefly on Bush’s 1980 campaign as well).

“I didn’t know the difference between Medicare and Medicaid, even after the campaign,” Scully told me, in typical self-effacing style. But a position running legislative affairs at OMB came open, and Scully’s first two big projects there were health care–related: trying to save the Medicare Catastrophic Coverage Act of 1988, and devising a better method for Medicare to pay physicians, which had seen 14 percent annual inflation the previous year.

Both ended in failure. The catastrophic coverage law, which provided a limited prescription drug benefit, capped out-of-pocket costs, and allowed longer clinical stays, sparked outrage because it forced wealthier Medicare beneficiaries to pay higher premiums for other people’s benefits. After House Ways and Means Committee chair Dan Rostenkowski (D-IL) had his car surrounded by angry constituents after a town hall, Congress repealed the law. The Medicare physician payment reform, called the resource-based relative value scale (RBRVS), uses a complex process to pay doctors for each procedure. It failed to alter the cost trends.

Scully soon became associate director of OMB for health, education, and welfare, simultaneously taking a health care policy role in the White House. Within a few years, Scully was writing the long-forgotten 1992 Bush health care proposal. “We think a market-driven delivery mechanism is the best,” he said when presenting the plan at the conservative American Enterprise Institute (AEI).

A decade earlier, Arizona, the last state to adopt Medicaid, was the first to create a statewide Medicaid managed care system. Building on successes from Southern California’s Kaiser Permanente, whose insurance limited patients to Kaiser doctors and hospitals, Arizona paid private insurers a per capita rate approximating annual health expenditures, and the insurers used narrow networks and strong case management to keep within that budget. Health inflation in Arizona was lower than the national average. Scully drew the lesson that private insurers can eliminate waste, because it’s their money at stake. “If you say here’s $16,000 a year, call me next year, they’re going to work like crazy to put a 10 percent margin on that,” Scully told me.

The Bush health plan adopted the Arizona managed-care model for Medicare and Medicaid, and added a tax credit for uninsured Americans outside those programs to help purchase basic private health insurance. Rules were put in place so nobody could be denied for a pre-existing condition and everyone in a region would pay the same rate. A risk-adjustment mechanism would give companies with sicker patients in its risk pool payments from healthier pools, to guard against cherry-picking.

Being a Republican plan, there was malpractice reform in it. But in form, the 1992 Bush health plan at least rhymes with what passed 18 years later as Obamacare: premium support for basic coverage, and insurance market reforms to prevent adverse selection. The reliance on competition and case management to “bend the cost curve” was a selling point of the Affordable Care Act. While Scully ended up mildly opposing the ACA because he thought the subsidies were too high, he said at a 2018 policy forum that it resembled the Federal Employees Health Benefits Program, a private insurance exchange that has been his model reform for 30 years. “Exchanges are the right thing, what Obama did was the right thing,” Scully told me.

THE BUSH HEALTH CARE PLAN would not get adopted, as he lost the 1992 election. Scully decamped first to law/lobby shop Patton Boggs—Sen. Jay Rockefeller (D-WV) teased him at a 1994 panel that “he is now very close to poverty … but was able to afford cab fare for this”—and then to run the Federation of American Hospitals, which represented around 1,700 private providers. He had now been an inside player in every major part of the health care system, public and private.

A dutiful partisan, Scully opposed the Clinton health care plan as packed with unfunded liabilities and fuzzy math. But as he was documenting the evils of out-of-control health spending, he was representing hospitals, the biggest cost drivers in Medicare and Medicaid, and it’s doubtful he was lobbying for less money for them. In our call, Scully told me about his frustrations with match rates in Medicaid, and how states can use other pockets of funds to eliminate their share. “The Massachusetts miracle that Mitt Romney did? There wasn’t one penny of Massachusetts money in there, it was all a provider tax scam,” he said. “I actually coached the Massachusetts Hospital Association a little bit on how to do it as a lawyer.” He quickly followed up with, “That doesn’t mean it’s right!”

When George W. Bush took office in 2001, Scully was recruited to run what was then called the Health Care Financing Administration; he and Health and Human Services (HHS) Secretary Tommy Thompson changed the name to the Centers for Medicare & Medicaid Services to emphasize a “new culture of responsiveness,” Thompson said. Rebranding was part of the agenda: Scully spent big to market a 1-800-Medicare customer service line, with silly commercials featuring Leslie Nielsen and even a blimp that flew over college football games.

When you hear that the government is nothing more than an insurance company with an army, CMS is that insurance company. (Well, sort of; since its inception, the government has contracted Medicare billing to private insurers, mostly Blue Cross plans, in exchange for a 1.4 percent fee.) Today, CMS enforces the rules and manages approximately $1.4 trillion in payments for Medicare and Medicaid; in Scully’s day, it was around $560 billion. Even the Pentagon is smaller.

Scully didn’t love the system. He lamented how fee-for-service Medicare paid doctors the same whether the procedure was successful or not. He hated supplemental Medigap insurance policies, which wrapped around traditional Medicare to cover co-payments, giving seniors first-dollar coverage and making them insensitive to price. He once claimed that seniors in Florida went to the doctor too much because they were bored, but usually he was more careful in saying that public insurance made it impossible to manage utilization.

Overpayments in Medicare Advantage are as high as $75 billion per year, according to a USC Schaeffer Center analysis.

At CMS, Scully started publishing objective quality information on nursing homes and home health agencies, and instituted a small pilot for paying select hospitals more based on their success rates. But Scully said repeatedly that he re-entered government to get a Medicare prescription drug benefit done, to avenge the ghosts of the catastrophic coverage defeat. His talking point was that seniors paid the highest prices in the drugstore, because without a prescription plan, they couldn’t negotiate group rates for medications.

Legislation dragged on for years. Supporters envisioned a separate drug benefit run entirely by private insurers, not CMS. The poorest seniors would have no premium and small co-pays, but above 135 percent of the poverty line—roughly two-thirds of seniors at the time—costs went up, with a $420 annual premium, a $250 initial deductible, and more if beneficiaries hit the “doughnut hole” at higher drug spending levels.

Despite the rhetoric about bulk purchasing, critics said the bill failed to take advantage of it. “They wrote into the law itself that Medicare couldn’t pay a better price for drugs,” recalled former Rep. Henry Waxman (D-CA), a senior member of the House Energy and Commerce Committee at the time. Scully countered this by saying that private pharmacy benefit managers (PBMs) would negotiate Medicare’s prices. But that fragmented the system, since each plan would bargain separately.

The Medicare Modernization Act, which included the drug benefit, finally passed Congress in November 2003, after two marathon House sessions where the Republican leadership strong-armed members to support the bill, including with alleged offers of bribery. According to Public Citizen, over 1,000 lobbyists for drug companies and other firms worked for the MMA’s passage. A year later, Rep. Billy Tauzin (R-LA), who chaired the Energy and Commerce Committee and was responsible for the provision barring Medicare from direct price negotiations, left to lead the top trade association for the pharmaceutical industry for a reported $2 million per year. The private insurance industry had succeeded in appropriating the trusted Medicare brand to market an entirely private plan for drug coverage, complete with the label: Medicare Part D.

When Scully visited AEI days after congressional passage, he touted the drug benefit. But he gave just as much attention to another program authorized in the law. It was “going to revolutionize the Medicare program, and I also think it’s going to revolutionize the health care system,” he told AEI. It was called Medicare Advantage.

LIKE MEDICAID MANAGED CARE, private health maintenance organizations (HMOs) could receive capitated per-enrollee payments from Medicare and cover seniors within sharply limited provider networks. (In the 1990s, Scully was on the board of Oxford Health Plans, which ran the largest Medicare HMO in New York City.) The program, then called Medicare+Choice, rose to become 14 percent of Medicare by 1997. But a budget deal that year changed the payment formula, so funding no longer kept up with health inflation. HMOs started dropping out, and Scully spent much of his time at CMS begging them to return.

The MMA changed that formula, changed the name to Medicare Advantage (MA), and allowed in more lenient preferred provider organizations (PPOs), which didn’t ban out-of-network care but just made it more expensive. PPOs could offer basic insurance, a Part D drug benefit, and catastrophic coverage all in one, rather than three separate premiums with traditional Medicare and Medigap. They had become popular in the private market, and Scully wanted to give Americans over 65 what Americans 64 and under were moving toward. Many of the lobbyists on the bill that Public Citizen revealed were managed-care insurers.

“Those Blue Cross plans and UnitedHealth plans and all the other plans are going to have leverage to go into hospitals and say what are your outcomes, how are you performing,” Scully said at AEI. “We’re shifting back to a little bit of a consumer-driven health care system where people are more responsive.”

Critics saw it as a bid to destroy Medicare, recalling then-House Speaker Newt Gingrich (R-GA) saying in 1995 that if Medicare were exposed to competition from private insurance, it would “wither on the vine.” Appearing on C-SPAN in 2001, Scully took a call from a woman who “advise[d] all seniors to read an article in The American Prospect” about how proposed Medicare Advantage plans “will not give seniors the health care they have now.” Scully chuckled before replying. “I would say don’t let people spook you, because that article is not accurate and not true.”

The vine for traditional fee-for-service Medicare is indeed withering. Because MA plans are paid by the government up front, premiums are low or even nonexistent, and money is poured into additional benefits and heavy advertising. Medicare Advantage is now the choice of 48 percent of the Medicare-eligible population. To Scully and his ideological confreres, this should have led to significant cost savings, as private insurers outperform the government. But payments to MA plans are higher per enrollee than if they were covered by traditional Medicare. Overpayments are as high as $75 billion per year, according to a University of Southern California Schaeffer Center analysis. “People refer to it as an arbitrage game,” said Paul Ginsburg, a professor of health policy at USC, who co-authored the study.

Medicare Advantage plans maximize profits in a few ways. First, there’s risk selection. Patients with chronic illnesses worry about limitations on doctors, and can’t use the gym memberships that MA plans offer. Because Medicare prescription drug plans are bundled with MA, insurers can make available drugs that healthy seniors take, like statins or blood pressure medication. And they can be strict on cutting-edge cancer treatments, weeding out high-cost patients. MA patients typically cost $1,253 less than someone in traditional Medicare, according to the Kaiser Family Foundation. But because the plans are paid based on the average cost of a senior throughout Medicare, cherry-picking healthy enrollees becomes pure profit.

Risk adjustment, which Scully instituted at CMS in the 2000s, is supposed to balance insurance pools. But private insurers learned how to game it. Physicians who submit claims on patients enter codes with the diagnosis, which determines the pay rate. But MA plans began to encourage doctors in their networks to upcode, adding diagnoses that make their customers look sicker and shift more money to them in risk adjustment. The government has alleged in an ongoing lawsuit that Kaiser Permanente’s MA plans systematically “add diagnoses that either [1] did not exist or [2] were unrelated to the patient’s visit with the Kaiser physician.” The Biden administration tried to fix upcoding this year, but attack ads from large insurance companies delayed the reform.

When all that fails, insurers simply deny care, according to published reports, congressional hearings, and the HHS inspector general. The IG’s findings of “inappropriate denials of services and payment” translated into around 85,000 rejected requests for care that should have been covered. In this sense, Medicare Advantage is fine until you have to use it. “Insurers have two powerful incentives,” said health care activist and ALS sufferer Ady Barkan. “They want their customers to look as sick as possible, to juice their revenues. And they want to approve as little health care as possible, to keep costs down.”

The linchpin for all of this, experts claim, is precisely what Scully thought would revolutionize health care: the advance per capita payment to insurers. “The money is in the bank, and they don’t want to take money out of the bank,” said Rick Gilfillan, former CEO of nonprofit hospital Trinity Health and director of the Center for Medicare and Medicaid Innovation under President Obama. “It creates a whole new mindset about how to manage costs.”

When I talked to Scully, who sits on the board of a small MA plan out of the University of Massachusetts, he was pretty candid about the program’s failings, including the gaming of risk adjustment, which was “completely out of control.” He still feels like private plans are more efficient. “But if you give them a long leash and let them make unlimited margins then they’re going to do it, because that’s what their shareholders are going to want to do,” he said. “So my attitude, you gotta set good rules.”

SCULLY LEFT GOVERNMENT after the Medicare bill passed, immediately joining the law and lobbying practice at Alston & Bird. A few months later, Richard Foster, Medicare’s chief actuary, alleged in an interview that Scully had threatened to fire him in 2003 if he revealed his cost estimates for the Medicare Modernization Act to Congress. While the Bush administration insisted throughout the debate that the bill would only cost $400 billion over a decade, Foster’s calculations showed a range between $500 and $600 billion. Indeed, the White House admitted, after the MMA was signed into law, that the total would be $534.1 billion.

Scully denied to the press that he had threatened Foster, but admitted that he had asked him to withhold the estimates. The HHS inspector general corroborated Foster’s claims, and a Government Accountability Office report later recommended that seven months of Scully’s 2003 salary be given back, because the federal budget prohibited paying any official who blocked a subordinate from communicating with Congress. Scully responded that he wouldn’t be returning the money, saying, “I never did anything wrong.”

It was contemporaneously revealed that Scully was negotiating with lobbying firms while still in office, receiving a waiver from HHS to do so. The legislation he was helping to finalize had implications for clients of the employers he was hitting up for a job. Scully even charged the government for travel expenses incurred during the job search. He said that he mixed official business with personal meetings, and was therefore entitled to submit receipts.

The Justice Department investigated and then settled the matter in 2006, with Scully returning $9,782 in expenses. Sen. Chuck Grassley (R-IA), who ran the Senate Finance Committee at the time, called the settlement “an insult to civil servants and taxpayers for a high-level official to look for a job on government time, seek false reimbursement for job search expenses, and to misrepresent what he was doing and why he was doing it.”

Welsh Carson has funded 100 health care investments, unlocking parts of the industry rivals initially shied away from.

In our interview, Scully chalked up the controversies to political silly season: “George W. [Bush] was running for re-election as a scoundrel.” The intense spotlight might have derailed other bureaucrats’ exit into private life, but it seemed to just make Scully stronger. At Alston & Bird, he landed $3 million in business within a few months, signing clients like the trade groups for nursing homes and home health care, along with Abbott Laboratories, Aventis Pharmaceuticals, and Caremark Rx, businesses with a deep interest in the Medicare drug benefit. The ethics requirements of the time only prohibited Scully from lobbying HHS for a year after leaving government; he could lobby Congress and provide “strategic advice” to companies right away.

Maybe Scully weathered the storm because he was that special breed of “Washington guy,” the gregarious types who use their charm and ability to flourish in a relationship-driven town. Everyone Scully mentioned in our conversation, from senators to CEOs, was an old friend and a spectacular human being. Nobody I talked to who had interactions with Scully over the years had much bad to say about him, praising his knowledge and straight-shooting demeanor. “I knew him well and kind of liked him,” said Ginsburg. “Even though he was a political appointee, he really was strong on the substance.”

K Street couldn’t satisfy Scully, however. He had met Russ Carson when he ran the Federation of American Hospitals. Carson’s private equity firm—Welsh, Carson, Anderson & Stowe—was dabbling in hospital chains at the time, including Select Medical. Scully didn’t know much about investing, but Welsh Carson offered him a general partnership, and he became a lobbyist with a well-paid side hustle. One of the first things Scully did was join the board of Select Medical, where he still sits today.

Private equity’s recent charge through the medical system has taken many forms, from hospitals and physician groups to hospice, home health, and autism services. Critics say that the business model’s penchant for cash extraction, while lucrative, endangers patient care and access. “They run it like a financial machine,” said Rosemary Batt, a private equity expert and professor at Cornell University. “CEOs who do not go along with the playbook get fired.”

Welsh Carson has attempted to set itself apart from the industry’s bottom-feeders. Founded by two Citicorp venture capitalists and an executive from Automatic Data Processing in 1979, the firm historically focused solely on technology and health care. It has funded 100 health care investments, unlocking parts of the industry that rivals initially shied away from. It bought a behavioral health company called Springstone before a flood of investment into that business line; it scooped up U.S. Anesthesia Partners and United Surgical Partners International before the market saw potential in clinician groups.

“Other firms see them and their choices as safe bets,” said Eileen O’Grady with the Private Equity Stakeholder Project. “The way Welsh Carson would say it is that they understand the business of health care.” One way to do that is through recruiting people with deep expertise and connections. Current employees include the former CEOs and presidents of Baylor Scott & White Health, Presbyterian Healthcare Services, Yale Medicine, and Providence Health provider networks, along with top executives from insurers Centene and UnitedHealth. Operating Partner Adaeze Enekwechi had Scully’s old job as OMB’s head of health programs under President Obama; Dan Mendelson, another operating partner, had it under Clinton.

“The Welsh Carson thing was kind of like a flier,” Scully told me. “I had a bunch of ideas that were kind of unorthodox, that were not standard, and they let me do a whole bunch of them and they worked out … to be honest with you it’s more fun than being a health care lawyer.”

SCULLY’S FIRST WELSH CARSON INVESTMENT was MemberHealth, which would combine two big policies of the Medicare Modernization Act. As Medicare Part D kicked off in 2006, MemberHealth was one of ten national stand-alone prescription drug plan (PDP) sponsors, a designation that required CMS approval. Through a partnership with the National Community Pharmacists Association, MemberHealth became the preferred sponsor for 25,000 small pharmacies, setting it up to compete with regional and local plans. By fall 2007, 1.1 million beneficiaries had enrolled.

And then, that September, MemberHealth was suddenly sold to Universal American Financial Corporation for $650 million. At the time, MemberHealth was the fourth-largest PDP. Welsh Carson praised it as “one of the Firm’s most successful investments in terms of investment multiples and internal rate of return.”

The deal was explicitly a cross-selling play. Universal American hoped it could convince MemberHealth customers to bolt to its Medicare Advantage PPO. Within a few years, Universal American sold off the PDP to CVS Caremark, one of the Big Three pharmacy benefit managers. Universal American was then purchased in 2017 by WellCare, a bigger Medicare Advantage rival, which itself was purchased by Centene in 2020, in a $17.3 billion deal that created one of the biggest private insurers in the country. Centene, which is number 25 on the Fortune 500, earns nearly all its revenue from the government, managing Medicare, Medicaid, Tricare, and Affordable Care Act exchange plans.

One promise of private involvement in health care was that competition would drive down costs and improve system quality. But deal making and domination became more of the norm. In 2007, there were over 1,800 Part D plans; by this year, that number is down to 800. As of 2019, the largest five plans, which had over 36 million sign-ups, roughly 75 percent of the total, were UnitedHealth, CVS (which has merged with Aetna), Humana, Cigna, and WellCare, which is now Centene. In other words, the five biggest insurers took over the vast majority of prescription drug plans. That’s true of Medicare Advantage as well; of its seven largest providers, five of them are the same insurance companies mentioned above, controlling about 63.5 percent of all plans; Blue Cross plans make up another 14 percent.

This is an inevitable outgrowth of health care’s growing financialization. Private equity habitually either rolls up a fragmented industry into one controlling giant, or makes a quick turnaround to a willing buyer. And those buyers are invariably the biggest names in health care. Among Welsh Carson investments, US Oncology was sold to massive supply distributor McKesson; United Surgical Partners International merged with hospital network Tenet; Accredo is now part of Express Scripts; AGA Medical went to Abbott Labs; CenterWell Primary Care was sold off to Humana.

One of Scully’s more recent successes followed this trajectory. While negotiating the 1990 budget deal for OMB, he had helped create Medicaid rebates for prescription drugs. In what Scully calls an “accidental by-product,” drug manufacturers in Medicaid had to participate in the 340B program, which gives safety-net providers that treat high volumes of low-income patients large discounts on prescription drugs. Scully saw it as a transfer payment from drug companies to inner-city teaching hospitals and other clinics, and from his contacts in Congress, he knew it was too important to ever be repealed.

Teaching hospitals weren’t good at retaining prescription drug customers, squandering the 340B benefit. Patients would get their first prescription from the hospital, and then their drug plan would call them and get them to switch over to mail order or a specialty pharmacy. The teaching hospitals didn’t do the outreach to keep the patient in-house.

Enter a former Notre Dame middle linebacker named Jack Shields, who started a company to contract with hospitals to keep patients in their drugstores. “I would say Shields doubled, tripled the net output of most of these hospitals once they get in there,” Scully said.

Scully knew Shields from law school and considered him “one of the greatest guys ever.” The company, Shields Health Solutions, was built in Jack’s relentlessly jovial image; workers loved the atmosphere and turnover was low. Scully and Welsh Carson partnered with Walgreens to make an equity investment in 2019, allowing Shields to expand the business. Within a few years, Walgreens bought the whole company for $1.37 billion.

This was a nimble company that essentially served as a health care Robin Hood, bolstering providers serving the poorest patients in America. And it got sucked up into one of the nation’s Big Three pharmacy chains. Jack Shields is still chairman but no longer president, and stories of startups with great culture getting overrun by a corporate behemoth are legion. “The vicious cycle is that profit-driven behaviors concentrate wealth,” said Don Berwick, a CMS administrator under President Obama who lectures at Harvard Medical School. “Concentrated wealth plays out in lobbying influence and a lack of will on the part of Congress to bring health care under control.”

Scully usually brushes aside consolidation concerns, saying that health care is a local business and that national market share doesn’t much matter. But when you devolve health care into a series of private transactions, you motivate the entities on every side of that transaction, from hospitals to insurers, pharmaceutical firms to PBMs to pharmacies, and everything in between, to get bigger. And when they bulk up and can’t make their margins from each other, doctors and patients take the loss.

OBAMACARE REINFORCED THAT TREND. Ten years ago, a New York Times article quoted Scully reassuring worried investment managers about the moneymaking potential of the new law. “It’s not a government takeover of medicine … It’s the privatization of health care,” he told one gathering.

Beyond the insurance reforms and expansions that would flood money into the system, Obamacare was filled with experiments and strategies to improve care and tighten costs. Private firms and consultants could pitch the government to carry out these tests. Scully had his eye on one area in particular, with the unwieldy name of “post-acute care bundling.”

When a senior leaves a hospital after surgery or illness, Medicare will pay for her to stay in a nursing home or rehab facility for 20 days. (Every senior gets better on the 21st day, Scully has joked.) Even if they need physical therapy or supervision, patients often recuperate better in comfortable surroundings among friends. But the providers get paid to hang onto the patients, and they establish relationships with the hospitals to funnel them their way. Scully told me about his late mother, who spent 20 days after a back infection at a church-run rehab that was one story above her residence. “She literally just said, ‘I want to go downstairs and stay in my apartment,’” he explained. “They kept saying no, no, no.”

CMS under Obama was testing post-acute care bundled payments, which offered a lump sum to providers rather than paying separately for each service. Scully’s innovation was, essentially, an app, where patients would answer questions about their health and an algorithm filled with hundreds of thousands of patient outcomes would recommend the right type of care, the right setting, and the right length of time. Then it would monitor the aftermath, to minimize time spent away from home and prevent hospital readmission.

Scully thought he found the right company in Healthways, on whose behalf he was lobbying CMS in 2010 over a failed disease management pilot. Healthways’ CEO wasn’t interested in post-acute care bundling, but told him about another company down the street in Nashville called SeniorMetrix, which had an algorithm and was working with Kaiser on exactly what Scully envisioned. He went to SeniorMetrix the next day, bought the company for $6 million, and convinced Healthways’ general counsel Clay Richards to quit and run the new firm, which they called NaviHealth.

Scully had his eye on post-acute care bundling, which offered a lump sum to providers rather than paying separately for each service.

Scully raised $50 million in an initial funding round, half from Welsh Carson and half from his contacts (including Select Medical, the former Welsh Carson investment; Scully still sat on their board). NaviHealth’s pitch to hospitals and Medicare Advantage plans, as he explained on a 2020 episode of the podcast A Healthy Dose, was this: “The day a patient comes out of the hospital, give us your patient for 60 to 90 days, we’ll take all the risk, we’ll manage all the care, give you a 2 percent return and give you a 50 percent gain share.”

Within a few years of NaviHealth’s launch, it was serving two million MA plan members. In 2015, Cardinal Health, an enormous drug distributor, bought it for $410 million. By 2018, Clayton, Dubilier & Rice, another private equity firm, took it private at a valuation of over twice that. And then in 2020, it sold again to Optum, a division of the medical leviathan UnitedHealth for more than twice that, with a valuation of $2.5 billion. “I wish I didn’t sell it as early as I did,” Scully quipped.

But then the problems began. The NaviHealth algorithm recommended a set number of care days. If that day came and the patient was still in pain or not ready to go home, she could be cut off from coverage. Stat News reported on patients having to spend down their life savings to get Medicaid to pick up nursing home costs when Medicare stopped covering. Families filed legal appeals that took months to resolve, sometimes outliving the patients. Appeals spiked between 2020 and 2022, right when UnitedHealth bought the company.

While the NaviHealth tool was supposed to merely suggest a course of care, MA plans made it more rigid; the consequences of “efficiency” were devastating for infirm seniors. Congress held hearings this spring, and Medicare wrote new rules to prevent AI determinations on post-acute care that don’t account for “the circumstances of the specific individual.”

Scully had nothing to do with NaviHealth by the time these problems emerged. But I asked him whether this really sprung from a profit-driven system that rewards restrictions on care, with the algorithm a convenient scapegoat. He said the business still helped diminish overutilization, and he didn’t believe his friends there would intentionally hurt patients. Ultimately, he said, government had to step in to set boundaries on misconduct: “If you had no limits on regulation, GM would be building V-8 engines that get six miles a gallon still. As I said, I’m a fan of appropriate regulations.”

MAUREEN HEWITT MET SCULLY in 2013 at JPMorgan Chase; not a bank branch, but the corporate headquarters. She was running a small company out of Denver called InnovAge, a local provider for the Program of All-Inclusive Care for the Elderly, or PACE. That program combined two of Scully’s favorite ideas, capitation and bundling.

PACE is a version of what Kendall Roy pitched in the last season of Succession as Living+. It provides comprehensive, 24/7 health and social services, mostly for dual eligibles in Medicare and Medicaid—poor and typically frail seniors, about two-thirds women, with an average age of 77—as a way to keep them at home and active in their communities. PACE providers offer personal home care, physical therapy, medical appointments, prescription drug delivery, transportation services, and a day center with a primary care clinic, meals, and activities.

Medicare and Medicaid pay a per-member, per-month (PMPM) rate to PACE providers of about $7,500 on average, which comes out to $90,000 per year. A nursing home costs substantially more, and the PACE provider assumes that risk, so they make their money on keeping patients from being admitted as long as possible. That both cut costs to the system and improved the remaining years of seniors’ lives. But with a population of frail elderly who would otherwise be in nursing homes, at some point there comes a conflict between profit maximization and necessary care.

Scully immediately took a shine to Hewitt. He had loved PACE since first seeing a demonstration in 1990. Hewitt wanted to expand InnovAge beyond Colorado, but there was a problem: PACE operators were required to be nonprofit, by state laws and federal regulations. That barred Welsh Carson from making any equity investments. So Scully set about to change the law.

He called Patrick Conway, a top deputy at CMS, and Marilyn Tavenner, the administrator at the time. There was a regulatory proposal sitting dormant to open PACE up beyond the nonprofit sector. In May 2015, a for-profit PACE pilot showed minimal differences in quality of care, and later the rule was finalized. Simultaneously, Scully stalked the corridors of power in Denver, lobbying state lawmakers to amend Colorado’s nonprofit requirement. InnovAge was technically a state asset, so Scully negotiated with attorney general Cynthia Coffman to sell it to a foundation he created called NextFifty for $216 million, on the condition that the law would change. Once it did in 2016, Welsh Carson bought InnovAge as the first for-profit PACE organization, and Scully joined the board of directors. He installed Tavenner as a director right away.

A nonprofit CEO without contacts at CMS or resources to buy out the state of Colorado probably couldn’t have achieved the same result. I asked Scully whether it was reasonable to say he used his influence to pry open favorable terms. “If somebody followed me around with a camera every day in that three years, I would have zero problem because I know everything I did was totally legit,” he replied. “To me, PACE was like a community co-op grocery store that I was trying to turn into Whole Foods … It’s no different than a hospital conversion.”

Tom Scully is not the only former health policy official to later work for businesses he was regulating; in fact, it’s become more of the norm.

InnovAge immediately started rolling up PACE operators in Virginia and Pennsylvania, and opened programs in California and New Mexico. By 2018, it was the largest PACE provider in the country. Enrollment and revenue more than doubled. But InnovAge’s mission-driven origins sat uncomfortably with an unbending reality as it transitioned into a for-profit company: The more it drove spending under $90,000 PMPM, the more money it got to keep.

Former regional chief operating officer-turned-whistleblower Karen Lapcewich alleged in a lawsuit that InnovAge was “denying [patients] access to thousands of medically necessary services,” including failing to schedule doctor appointments or deliver medications. One patient suffering from “heavy bleeding” wound up in the emergency room after InnovAge never got her to a specialist, the lawsuit states. According to one audit, 87 percent of care orders at one InnovAge center in San Bernardino were outstanding for 30 days or more. Because PACE is all-inclusive, patients who don’t get care can’t go anywhere else but the ER, explained Emma Curchin, a research assistant with the Center for Economic and Policy Research, who has studied InnovAge. “You can’t go in for a regular checkup,” she said. “It limits people who can’t get appointments.”

Lapcewich was told that InnovAge’s provider networks were simply inadequate to cover the patients, that the problems had been going on for years, and that when seniors complained, those grievances were not tracked. She also discovered that InnovAge cherry-picked healthy patients and disenrolled those who were sent to nursing homes, a sanctionable violation of the program. After Lapcewich reported this all to Hewitt, she claimed that she was told to hide the information from CMS. Within a month, Lapcewich alleged she was told to accept termination for “job abandonment” or to resign; she opted for the latter.

The False Claims Act case was dropped because the government didn’t intervene, but contemporaneous media reports detailed the same problems: drives for enrollment (sales employees were given bonuses for exceeding quotas and even signed up homeless individuals with hotel addresses) and declining quality of care (one woman was found in her home suffering from dehydration and a failed bowel; she died in hospice two weeks later). The states of California and Colorado, along with CMS, investigated and sanctioned InnovAge facilities, suspending new enrollment in much of Colorado and Sacramento, California, in 2021, and several other states in 2022.

Hewitt was eventually forced to resign, which Scully called a traumatic experience. But Welsh Carson did fine; InnovAge went public in early 2021, and the IPO raised $350 million, well beyond the initial investment. A dividend recapitalization in 2019 netted $66 million.

Media profiles, legal complaints, federal investigations, settlements, and civil penalties on Welsh Carson portfolio companies over the years documented situations similar to InnovAge: overbilling and under-delivery. The profit motive was working its will, just as Scully thought it would. But whether it benefited the system, or patients, was a bigger question. “When you privatize social goods like health care, you end up getting the worst of both worlds,” said Gilfillan. “Because it’s seen as a public good, you can’t let the marketplace operate as it normally would … you get captured regulatory processes that end up facilitating the extraction of wealth by the private sector.”

Scully conceded that, like a lot of startups, InnovAge grew too fast. He blamed sloppy documentation and, most of all, COVID-19. “When you basically say all of those people will be taken care of at home, and they’re not going to come in on buses and they’re not going to come to the centers and the centers are shut down, the whole model changes,” he said. But the Lapcewich lawsuit details conduct from 2017, which she claims was happening for years.

CMS released InnovAge from sanctions over the last year; the company has a new CEO and is back to adding enrollees. Scully remains bullish. “The last couple years were extremely unpleasant,” he admitted. “But it’s still a great program, and InnovAge is still a great company … there should be way more of them.”

TOM SCULLY IS NOT THE ONLY former health policy official to later work for businesses he was regulating; in fact, it’s become more of the norm. Tavenner left CMS to become the head of America’s Health Insurance Plans, the lead insurer lobby. Patrick Conway, Scully’s other ally in changing the PACE program to for-profit, is now a CEO of care solutions at UnitedHealth subsidiary Optum.

The last four people who had Rick Gilfillan’s job at the Center for Medicare and Medicaid Innovation were Conway; Adam Boehler, who later started a health care venture firm involved with risk coding in Medicare Advantage; former Anthem Blue Cross executive Brad Smith, who’s running a venture fund for rural health; and the current head, Liz Fowler, who went from Anthem (then WellPoint) to a chief Senate counsel job to Johnson & Johnson before CMMI. Andy Slavitt jumped from Goldman Sachs and Optum to CMS and then to a venture fund that has invested in one of the main challengers to InnovAge. “It’s become an honored pathway,” Gilfillan said.

But Scully did lay a path for his successors. He helped turn widely held and even bipartisan ideas about market incentives and private-sector efficiencies into the blueprint for today’s health care system. It may have seemed reasonable at the time to institute some constraints on fee-for-service medicine. But it built a giant opportunity factory for private businesses and people who knew ways around and through the system. Scully said this himself on the Healthy Dose podcast: “People in New York undervalue policy … I am always surprised when people are doing big investments in health care, and they don’t have someone who used to work at OMB.”

Today, Scully says the market for private equity deals is slowing; he estimates that 99 percent of the meetings at Welsh Carson are about AI. “I think it has huge potential, I also think it’s not going to change things overnight,” he said. There’s still room for his quirky ideas. Last year, he bought a majority stake in LIBERTY Dental—which administers dental benefits for Medicaid, MA, and private insurers. That prefigured another private equity gold rush into the dental care sector. Scully joined the LIBERTY board, one of many directorships over the years. Our conversation overlapped with the end of a board meeting.

Under Biden, there has been some pushback on the trajectory of health care privatization. Medicare will begin to directly negotiate with drug companies, and there’s even been some new price-fixing on certain drugs, along with a coming out-of-pocket spending cap for medications. But by and large we have a private delivery system, and a mostly private insurance system, even as half of the $4 trillion in health spending comes from the government.

Scully said that most of the people he encounters in health care are in it for the right reasons. Living in his head for the last couple of months, I think he is too. He’s compulsively likable, whip-smart, and brutally frank, and he has a guiding star for his views on health care. The problem is that the injection of the profit imperative can make good people do things that produce harm, especially if they think it’s for the sake of aid and comfort.

As we closed our conversation, he conceded that the system isn’t anything close to perfection. But if it’s well regulated—“and that’s a big if”—private delivery will outdo government price-fixing, he reiterated. The problem with this is that he was a regulator, and at the time he routinely complained about how private businesses would find ways around that regulation. “The regulated are smarter than the regulators about practices,” said Don Berwick, who ran CMS in the 2010s. “They have full-time lawyers and staff, they know more than the regulators … They control knowledge, not just money.”

Wasn’t that true, I asked Scully? Didn’t the system he helped construct build in a need for people like him, who know the ins and outs? Maybe, he said, and then pivoted to talk about how change happens incrementally. He didn’t want to talk about his role in either making that change, or capitalizing on it.

Scully turned 65 last October. I asked him whether he’d entertain going on traditional Medicare. He said that he’s still in the private market. While he left Alston & Bird in 2017, he picked up another gig at a little law firm. “They pay my premiums,” he said.