A ROADMAP TO MEDICARE SUSTAINABILITY DENIS A. CORTESE, MD

A ROADMAP
TO MEDICARE
SUSTAINABILITY
DENIS A. CORTESE, MD
NATALIE LANDMAN, PHD
ROBERT K. SMOLDT, MBA
Preface
Established in 1965, the Medicare program is the primary health insurance program for adults ages 65 and
over and non-elderly people with permanent disabilities. Although Medicare has made a significant
contribution to the lives of beneficiaries by improving their economic and health security, unfavorable
demographic trends and rapidly increasing costs threaten its long term sustainability. Medicare is also a major
contributor to the rise in U.S. federal debt, while the program’s complex rules and regulations stifle innovation,
adversely affecting the cost and quality of care.
It is of interest to note that some of the problems we currently face, e.g., rapidly rising costs and overwhelming
complexity, were already present in the first year of the Medicare program. Thus, we believe that we will not
solve the problem by relying on continuing piece-meal “tinkering” with various program components. Medicare
must be fundamentally reformed and made sustainable in a manner that is fair to seniors, to their children and
their grandchildren, who are or will be paying the taxes for the Medicare program. If no action is taken, the
costs of Medicare will burden the nation’s finances; the complexity of its rules will continue to stifle innovation;
while the price-control approach to reimbursement will continue to decrease access and lead to poor
outcomes for patients. As this book shows, bold action and consistent leadership on several fronts are
required.
In this publication we highlight the pros and cons of the program and provide a set of recommendations that
would allow our country to both contain the rapid growth in federal spending, as well as to ensure that the
program remains affordable to individual citizens and is sustainable long term. Specifically, we propose to:
•
Raise the age of Medicare eligibility to 69 years, with the option of entering the program at age 65.
•
Move Medicare to a premium support model.
•
Establish true Pay-for-Value for medical providers.
•
Carry out tort reform.
We hope that this report will stimulate further public discussions around Medicare and the challenges it
presents to our nation, and drive real legislative actions to help move us forward in a sustainable way. This
publication is a follow up to our “A Roadmap to High Value Healthcare Delivery” report that focuses on
improving the U.S. healthcare delivery system. You can view both publications online at:
http://healthcare.asu.edu/.
Denis A. Cortese, MD
Foundation Professor and Director, Healthcare Delivery and Policy Program, Arizona State University
President, Healthcare Transformation Institute
Emeritus President and CEO, Mayo Clinic
Natalie Landman, PhD
Associate Director for Projects, Healthcare Delivery and Policy Program, Arizona State University
Director, Project Management, Healthcare Transformation Institute
Robert K. Smoldt, MBA
Associate Director, Healthcare Delivery and Policy Program, Arizona State University
Senior Policy Advisor, Healthcare Transformation Institute
Emeritus Vice President and CAO, Mayo Clinic
February 2013
iii
Table of contents
Preface
iii
Introduction
2
Medicare program overview
9
The pros and cons of Medicare
25
Solving the Medicare problem
75
Additional recommendations to ensure Medicare affordability
117
Reforming Medicare: Summary recommendations
153
v
A ROADMAP TO
MEDICARE SUSTAINABILITY
February 2013
Introduction
“If we solve our healthcare spending
[Medicare], practically all of our fiscal
problems go away. If we don’t? Then
almost anything else we do will not solve
our fiscal problems.”
– Dr. Victor Fuchs, Emeritus Professor of Economics,
Stanford University
Source: Kolata, Gina. 2012. “Knotty Challenges in Health Care Costs.” New York Times, March 5.
2
Medicare: a success…
“No longer will older Americans be denied the healing of modern medicine. No longer will illness crush and destroy the savings they
have so carefully put away over a lifetime so they might enjoy dignity in their later years. No longer will young families see their own
incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations.”
Source: Department of Health & Human Services: Health Care Financing Administration. 2000. “Medicare 2000: 35 Years of Improving Americans’ Health and Security.”
3
...and a problem: Medicare, as it currently
exists is not sustainable
“The U.S. government is not going to be able to afford Medicare and Medicaid on its current
trajectory.... The notion that somehow we can just keep on doing what we're doing and
that's OK, that's just not true.“
– President Barack Obama1
“We're going to have to recognize that Social Security and Medicare are unsustainable, not
for the current group of retirees, but for coming generations. And we can't afford to avoid
these entitlement challenges any longer.”
– Governor Mitt Romney2
“Absent a bipartisan effort to fix Medicare and protect this guarantee - if nothing is done what the years ahead ensure is that seniors and health care providers will be getting a
steady diet of cost-shifting and arbitrary cuts until the Medicare guarantee is kaput.”
– Senator Ron Wyden3
Source: 1) “Obama's Reputation on Medicare is Unsustainable.” The Examiner, April 14, 2011. http://washingtonexaminer.com/article/112902;
2) http://www.politicalruminations.com/2012/02/morning-quote-mitt-romney-on-social-security-medicare.html; 3) Dobias, Matthew. 2012. “Wyden: Time to End the Medicare ‘Street Fight’,”
Politico Pro, March 6.
4
We are now eating away at our
children's and grandchildren's futures.
This is why it is time to look at how to fix
Medicare.
5
Some of the issues we face have been
around since Medicare’s inception
A Saturday Evening Post article from 1967 included a
review of the first year of the Medicare program:
• First year cost significantly exceeded President
Johnson’s forecast.
• Medicare was more complex and confusing to operate
than its sponsors predicted.
• Medicare’s intricate billing procedures added millions to
hospital overhead expenses.
It may be time for us to tackle Medicare with
fundamental reforms.
6
Main Topics of This Book
•
•
•
•
Medicare program overview.
The pros and cons of Medicare.
Solving the Medicare problem.
Additional recommendations to ensure
Medicare affordability.
• Reforming Medicare: Summary
recommendations.
7
This slide is intentionally left blank.
8
MEDICARE PROGRAM
OVERVIEW
9
Medicare: What is it?
• A Federal social insurance program.
• Started in 1965.
• Provides government health insurance for all
Americans age 65 and older, the disabled,
and those with end-stage renal disease.
Source: cms.gov; Kaiser Family Foundation. 2012. “Talking About Medicare: Your Guide to Understanding the Program, 2012.”
http://www.kff.org/medicare/talkingaboutmedicare/ataglance.cfm
10
The ABCs (and D) of Medicare
•
•
•
•
Part A – Inpatient hospital care.
Part B – Physician and outpatient care.
Part C – Private insurance options.
Part D – Prescription drug benefits.
Source: cms.gov.
11
Medicare Part A – Inpatient Hospital care
• Provides basic coverage to all who meet beneficiary criteria and
includes:
– Hospital stays in a semi-private room.
– Brief nursing home stays (provided certain criteria are met).
– Home health.
– Hospice care.
• If you/your spouse have worked for at least 10 years and paid
Medicare payroll taxes, you qualify for premium-free Part A
coverage.
• If you are not entitled to premium-free Medicare Part A, you may
still qualify for Part A but you will have to pay a monthly premium.
Source: cms.gov; Kaiser Family Foundation. 2012. “Talking About Medicare: Your Guide to Understanding the Program, 2012.”
http://www.kff.org/medicare/talkingaboutmedicare/ataglance.cfm
12
Medicare Part B – Physician and outpatient care
• Medicare Supplementary Medical Insurance.
• Provides optional coverage for all Medicare-eligible
beneficiaries.
• Helps pay for:
– Medically necessary outpatient services (e.g.,
lab tests, surgeries, physician visits) and
supplies (e.g., wheelchairs, walkers).
– Preventative services (e.g., annual wellness
exam, screening for obesity, HIV, prostate
cancer).
Source: cms.gov.
13
Medicare Part C – Private insurance options
(Medicare Advantage)
• Since 1997, all Medicare-eligible beneficiaries can
receive Medicare benefits through private insurance
health plans (Medicare+Choice).
• With the passage of the Medicare Modernization Act in
2003, Medicare+Choice became Medicare Advantage
Plan (MAP).
• These private insurance health plans must offer benefits
equal to or greater than traditional Medicare.
• MAPs often combine parts A, B and D benefits into a
single insurance offering.
Source: cms.gov; Gold, M. et al. 2004. “Monitoring Medicare+Choice: What Have We Learned? Findings and Operational Lessons for Medicare Advantage.” Mathematica Policy Research,
Inc.
14
Medicare Advantage plans have become
more popular in recent years
• In return for limiting access to a more restrictive
network of providers, MAP enrollees can benefit
from:
– Lower premiums.
– Reduced cost sharing.
– Additional benefits (e.g., dental, vision, health club
memberships).
• One in four Medicare beneficiaries now belongs to a
MAP, a proportion that has been steadily rising.
Source: “Medicare Advantage Plans. One in Four Medicare Beneficiaries Belongs. How Will Scheduled Changes in Payment Affect Future Enrollment?” Health Affairs Health Policy Brief.
June 15, 2011.
15
Medicare Part D – Prescription drug
benefits
• Since 2006 anyone with Medicare Part A and
Part B coverage is also eligible for drug
coverage.
• Beneficiaries receive coverage by either
enrolling in a stand-alone private prescription
drug plan (PDP) or in a private MAP plan with
prescription drug coverage.
Source: cms.gov.
16
Sources of Medicare funding
• Part A – Funded from payroll tax (Trust Fund
model).
• Part B – Funded ~75% from Federal general tax
revenue and ~25% from beneficiary premiums.
• Part C – Combination of funds that would have
been used for parts A and B.
• Part D – Funded ~80% from Federal general tax
revenues, ~10% from beneficiary premiums, and
~10% from state and other sources.
Source: 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
17
Status of the Medicare Part A Trust Fund
• The 2012 Medicare Trustees report states
that the Hospital Insurance (HI) Trust
Fund will be exhausted by 2024.
• Since there are currently no funds, only
IOUs, in the HI Trust Fund, this is a
hypothetical issue.
Source: 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
18
Part A Trust Fund is a “pay-as-you-go” system
• Money put into the trust fund is used to pay for current
Medicare beneficiaries.
• Moreover, “Any cash generated when annual receipts exceed
annual spending is not retained by a trust fund. Rather, the
money is turned over to the Treasury, which gives the trust
fund government bonds in exchange and uses the cash to
finance the government’s ongoing activities…. The resources
used to redeem a trust fund’s government bonds—and thus
pay for benefits—in some future year will have to be generated
from taxes, other government income, or government
borrowing in that year.”
Source: Congressional Budget Office. 2011. “Reducing the Deficit: Spending and Revenue Options.”
19
“Workers have been repeatedly told that their payroll taxes are
being securely held in trust funds. But they are actually spent
the very minute they arrive in the Treasury’s bank account.
No money has been saved. No investments have been made.
No cash has been stashed in bank vaults. Today’s payroll tax
payments are being spent to pay medical bills for today’s
retirees. And if any surplus materializes, it is spent on other
government programs. As a result, when today’s workers
reach the eligibility age of 65, they will be able to receive
benefits only if future taxpayers pay (even higher) taxes to
support them.”
Source: Goodman, John C. 2012. “Social Security Trustees: We’re Going Broke.” Politico, April 25, http://www.politico.com/news/stories/0412/75603.html.
20
Affordable Care Act (ACA) provisions are
increasing payroll taxes for Part A
• A payroll tax of 2.9% is dedicated to the Part A trust
fund.*
• As a result of the ACA, starting in 2013, this tax
increased by 0.9% for couples making more than
$250,000 (or individuals making more than $200,000)
on any wages that exceed the above thresholds.**
• An additional Medicare tax of 3.8% will be levied
against all taxpayer investment income (which has not
been subject to Medicare payroll tax) for couples
making more than $250,000 (or individuals making
$200,000).**
* If the person is not self-employed, the tax is split between employee and employer.
** There is no employer match for this increase. This additional tax revenue is intended to be used to fund ACA provisions, and therefore, according to the Congressional Budget Office
(CBO) would not be available to extend the solvency of the Medicare program.
Source: cms.gov; Kaiser Family Foundation. 2011. “Focus on Health Reform: Summary of New Health Reform Law.” http://www.kff.org/healthreform/upload/8061.pdf.
21
Will these new taxes extend Medicare
solvency?
• These new taxes were designed to support the viability of
Medicare. But, government administrative accounting will
in fact use them to offset the costs of subsidies to help
non-Medicare citizens purchase health insurance.
• This has raised a debate over whether these new
Medicare tax dollars can be counted on to both pay for
the non-Medicare subsidies AND to reduce Medicare
Trust Fund obligations.
• The Congressional Budget Office and the Medicare
Actuary have indicated that using the new taxes in this
way would not extend the solvency of Medicare.
22
The ACA provisions will not effectively extend
the solvency of the Medicare Trust Fund
• Congressional Budget Office (CBO) Opinion, December 23, 2009
– “The key point is that the savings to the HI [Medicare] Trust
Fund under [ACA] would be received by the government only
once, so they cannot be set aside to pay for future Medicare
spending and, at the same time, pay for current spending on
other parts of the legislation or on other programs.”1
• Medicare Actuary, April 22, 2010
– “In practice the improved HI [Medicare Trust Fund] financing
cannot be simultaneously used to finance other Federal
outlays (such as the coverage expansions) and to extend the
trust fund, despite the appearance of this result from the
respective accounting conventions.”2
Source: 1) Congressional Budget Office. 2009. “Effects of the Patient Protection and Affordable Care Act on the Federal Budget and the Balance in the Hospital Insurance Trust Fund.”; 2)
Foster, Richard S. 2010. “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended.” Memorandum to CMS from Office of the Actuary.
23
Medicare Governance
• U.S. Congress is a 535 member “governing board”
for Medicare:
– Allows for political logrolling, earmarks, and other
political meddling.
• Centers for Medicare and Medicaid Services (CMS)
manages and operates Medicare and Medicaid:
– Federal agency with wide regulatory authority.
– Functions as the insurance company that writes
all the rules, sets the prices, regulates the
providers, issues a myriad of advisories and
updates, and pays the bills.
24
THE PROS AND CONS OF
MEDICARE
25
Medicare Pros
• Guarantees some insurance coverage for the
elderly and the disabled.
• Allows seniors with limited financial means to
access health services.
• Helps protect the financial health of seniors.
26
Lack of insurance is a contributing factor to poor
health outcomes
Mortality amenable to healthcare vs. uninsured population by state
(Mortality data, 2004-2005; Uninsured data, 2008-2009)
Deaths per 100,000 population
160
140
120
100
80
60
40
20
0
0%
5%
10%
15%
20%
25%
30%
Uninsured (percent)
Source: The Commonwealth Fund Commission on a High Performance Health System. 2009. “Aiming Higher: Results from a State Scorecard on Health System Performance.”; Kaiser
State Health Facts: Health Coverage & Uninsured (accessed July 1, 2011), http://statehealthfacts.org.
27
Being insured contributes to better management
of chronic disease
Percentage of patients 18 years and older with these two chronic diseases under control
by their insurance status (1999-2004)*
0
10
20
30
40
50
60
70
80
90
Diabetes under control
Insured
Uninsured
Blood pressure under control
* Diabetes: HbA1C <9.0; Blood pressure: <140/90.
Source: The Commonwealth Fund Commission on a High Performance Health System. 2008. “Why Not the Best? Results from the National Scorecard on U.S. Health System
Performance, 2008.”
28
Seniors now have a higher rate of health insurance
coverage than people under age 65 years
People without health insurance coverage by age (1962-1963, 2010)
Percent
0%
10%
20%
30%
30%
Under 65 years
18%
11%
40%
50%
60%
Pre-Medicare (1962-1963)
2010
2016E**
48%
65 years and older*
2%
* Those without insurance were more likely to be foreign-born and less likely to hold U.S. citizenship.
** CBO estimates that under the ACA the percent of non-elderly uninsured will be 11% in 2016. E = estimate.
Source: U.S. Census Bureau. 2010. “Income, Poverty and Health Insurance Coverage in the United States: 2010.”; “Health Insurance: Type of Insuring Organization and Multiple Coverage
United States in July 1962 - June 1963.” National Center for Health Statistics, Series 10, Number 16; CBO Coverage Update. July 2012. “Estimates for the Insurance Coverage Provisions
of the Affordable Care Act Updated for the Recent Supreme Court Decision.”
29
• Prior to the Medicare program nearly half of the
senior citizens were without health insurance; today
this number is only 2%.
• In contrast, while there has been an improvement in
the percent of the under 65 population that is
insured, the younger U.S. citizens are much more
likely to be uninsured, with the most recent figure
being 18% of the population. Even with the
provisions of the ACA, the CBO estimates that 11%
of the under 65 population will remain uninsured.
30
Medicare has increased seniors’ access to
health services
Hospital discharges pre- and post-Medicare implementation
Per 1,000 elderly
352
350
194
Pre-Medicare (1964) Post-Medicare (1973) Post-Medicare (2009)
Source: Department of Health & Human Services: Health Care Financing Administration. 2000. “Medicare 2000: 35 Years of Improving Americans’ Health and Security.”; National Hospital
Discharge Survey 2009.
31
Older people use more healthcare services because
they have more medical problems as they age
Share of population vs. healthcare spending by age group (2004)
Percent share of total
70%
63%
60%
53%
50%
40%
30%
34%
25%
20%
13%
12%
10%
0%
0-18
Share of Population
19-64
65+
Share of Healthcare Spending
Source: Department of Health & Human Services, U.S. Census Bureau; Meeker, Mary. 2011. USA Inc.: A Basic Summary of America’s Financial Statements. KPCB.
32
Poverty rates in the 65+ population declined
substantially since the introduction of Medicare
Poverty rates by age (1966-2010)
Percent
35.0%
<18
18-64
30.0%
65+
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Department of Health & Human Services: Health Care Financing Administration. 2000. “Medicare 2000: 35 Years of Improving Americans’ Health and Security.”;
U.S. Census Bureau. 2010. “Income, Poverty and Health Insurance Coverage in the United States: 2010.”
33
• In the mid-60s, before Medicare was enacted, senior
citizens (people over age 65) had the highest poverty
rate in the U.S. – nearly 30% – even though Social
Security had been available to senior citizens for
many years.
• Senior citizens now have the lowest poverty rate in
the U.S., while poverty rates for people under age 65
are rising.
• In fact, those under the age of 18 have the highest
poverty rate, with more than 1 of 5 living in poverty.
34
Medicare Cons
•
•
•
•
•
•
Unfavorable demographic trends bring into question the sustainability of
the current Medicare “pay-as-you-go” scheme.
Rapidly increasing costs have contributed significantly to a higher than
desired level of U.S. federal debt.
Medicare is a bigger factor than Social Security in the future expected
expansion of U.S. federal debt.
Medicare is a complex program with rules that are hard for both patients
and providers to understand.
Medicare’s rigid regulations make it more difficult to introduce new models
of more efficient healthcare delivery.
Medicare’s past cost control efforts (through line item price controls) have
not solved the problems of cost growth and quality; continuation of this
cost cutting strategy will lead to decreased access and quality problems
for Medicare beneficiaries.
35
The U.S. population will age rapidly over the
next two decades
The aging of the U.S. population (1970-2030)
Age 65+ as percent of total U.S. population
25.0%
By 2030, as more
baby boomers enter
the over age 65
population, that group
will represent nearly 1
of 5 U.S. citizens.
20.0%
15.0%
10.0%
5.0%
0.0%
1970
1990
2010
2030
Source: Administration on Aging, Department of Health & Human Services. "Projected Future Growth of the Older Population.“ Accessed August 2, 2012.
http://www.aoa.gov/aoaroot/aging_statistics/future_growth/future_growth.aspx.
36
The number of Medicare beneficiaries is projected to nearly
double by 2030, but fewer workers will be paying in
Number of beneficiaries (1970-2030)
Millions
Number of workers per beneficiary (1970-2030)
80
4.6
4.0
64
40
3.4
2.8
47
2.3
20
1970
2000
2010
2020
2030
1970
2000
2010
2020
2030
Source: 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds; Kaiser Family Foundation Medicare
Chartbook, 2010. Medicare Policy Project Publication Number: 8103.
37
• The number of Medicare beneficiaries is expected to
almost double between 2010 and 2030.
• Since Medicare has no cash in the Medicare trust fund,
its expenses will need to be paid from taxes on the
workforce.
• In 1970, when Medicare was a relatively new program,
there were just under five workers for every Medicare
beneficiary.
• By 2030, when the last baby boomers enter Medicare,
there will only be slightly more than two workers per
beneficiary. This will put a significant burden on our
children and grandchildren.
38
To correct underfunding of just part A Medicare would require more
than doubling the base Medicare payroll tax from 2.9% to 6.8%
8
6.8%
7
Payroll Tax Rate (%)
6
5
4
3
2.9%
2
1
0
2009
2010&Beyond
Note: These calculations are merely mechanical illustrations and are not meant to portray realistic solutions.
Source: Dept. of Health & Human Services forecast in “2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance
Trust Funds,” 5/09; Meeker, Mary. 2011. USA Inc.: A Basic Summary of America’s Financial Statements. KPCB.
39
• To correct the underfunding of Medicare would require
increasing the Medicare tax by 3.9% to 6.8% for all tax
payers. Thus, a self employed person making $100,000
would see her or his Medicare tax increase from $2,900
to $6,800 – all in addition to federal income taxes. This
increase in Medicare taxes would still be paying for
someone else’s healthcare.
• Data presented here are limited to Medicare Part A
Hospital Insurance Trust Fund. Medicare Part B Medical
Insurance and Part D Prescription Drug Benefits are
primarily funded via insurance premiums and general tax
revenue transfers.
40
Medicare spending grew rapidly over the past
decade; growth in spending is projected to continue
Medicare spending as a % of gross domestic product (1970-2020E*)
Percent
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1970
1980
1990
2000
2010
2020E
* E = estimate.
Source: Congressional Budget Office, Budget and Economic Outlook, January 2010 (for 1970 data) and January 2011 (for 1980-2020 data); Kaiser Family Foundation Medicare Chartbook,
2010. Medicare Policy Project Publication Number: 8103.
41
This slide is intentionally left blank.
42
Medicare costs are driven by two components,
number of beneficiaries and cost per beneficiary
Real annual Medicare payments per beneficiary and enrollment (1966-2009)*
50
Enrollment
Annual per capita benefits (in 2005 dollars)
$8,000
40
$6,000
30
$4,000
20
$2,000
10
$0
Enrollment (MM)
Medicare Payments per Beneficiary ($/year)
$10,000
0
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
* Data are inflation adjusted using BEA’s GDP price index; MM = million.
Source: Department of Health and Human Services; Meeker, Mary. 2011. USA Inc.: A Basic Summary of America’s Financial Statements. KPCB.
43
• An increase in Medicare’s total costs has
occurred as a result of both a rise in the number
of beneficiaries, as well as an increase in the
level of Medicare payments per beneficiary.
• However, the increase in cost per beneficiary (in
constant 2005 dollars) has been much greater
than the increase in enrollment.
44
The average Medicare beneficiary receives benefits
worth three times what he or she paid in taxes
Lifetime expected Medicare benefits and taxes for average wage earner couples turning 65 in 2030
$ thousands
600
527
500
400
300
200
175
100
0
Lifetime Medicare benefits
Lifetime Medicare taxes
NOTE: Amounts are in 2011 constant dollars, adjusted to present value at age 65 using a 2% real interest rate and assume that workers retire at age 65.
Source: Steuerle, C. Eugene and Stephanie Rennane. 2011. “Social Security and Medicare Taxes and Benefits Over a Lifetime.” Urban Institute; Munnell, Alicia H. 2011. “What is the
Average Retirement Age?” Center for Retirement Coverage at Boston College.
45
• A recent study by the Urban Institute has shown that Medicare
benefits received greatly exceed taxes paid in.
• The data shown on the previous slide are for a family of 2 where
both individuals worked and both individuals did not retire until age
65 in the year 2030. With those assumptions, this couple would
have paid $175,000 in Medicare taxes, but will receive over
$500,000 in benefits.
• This discrepancy is likely even greater because the model may
overstate the amount of lifetime Medicare tax contributions. The
model assumes that Medicare taxes had been invested at 2%+
inflation. However, in reality these taxes were spent by the
government on Medicare or other expenses as soon as they came
in. Moreover, many people are retiring before age 65 and thus
would not contribute taxes for as many years.
46
• All of this leads to confusion for Medicare
beneficiaries because most believe that
since they paid Medicare taxes throughout
their lifetime, they have already paid for the
Medicare benefits they will receive upon
retirement.
• The confusion is perpetuated further by
specific interest groups that tend to imply
that what the beneficiaries believe is true,
when in fact it is not the case.
47
Social insurance programs (Medicare, Medicaid, Social
Security) are major contributors to the rise in federal debt
U.S. real federal expenses, entitlement spending, real GDP (1965-2010)
Percent change from 1965
1200%
Social Insurance
Expenses
+10.6x
Total Federal Expenses
1000%
Social Insurance Programs
Real GDP
800%
600%
Total
Federal Expenses
+3.3x
Real GDP
+2.7x
400%
200%
0%
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Data adjusted for inflation.
Source: White House Office of Management and Budget; Meeker, Mary. 2011. USA Inc.: A Basic Summary of America’s Financial Statements, KPCB.
48
Spending on social insurance programs + interest
payments may exceed U.S. total revenue by 2025
Social insurance spending + interest payments vs. revenue as % of GDP (1980-2050E)*
Percent
40%
Revenue
Social Insurance Spending + Net
Interest Payments
30%
20%
10%
0%
1980
1990
2000
2010E
2020E
2030E
2040E
2050E
* E = estimate.
Source: Congressional Budget Office (CBO) Long-Term Budget Outlook (6/10). Note that Social insurance spending includes federal government expenditures on Social Security,
Medicare and Medicaid. Data in this chart is based on CBO’s ‘alternative fiscal scenario’ forecast, which assumes a continuation of today’s underlying fiscal policy. Note that CBO also
maintains an ‘extended-baseline’ scenario, which adheres closely to current law. The alternative fiscal scenario deviates from CBO’s baseline because it incorporates some policy changes
that are widely expected to occur (such as extending the 2001-2003 tax cuts rather than letting them expire as scheduled by current law and adjusting physician payment rates to be in line
with the Medicare economic index rather than at lower scheduled rates) and that policymakers have regularly made in the past; Meeker, Mary. 2011. USA Inc.: A Basic Summary of
America’s Financial Statements. KPCB.
49
“Over
the next 20-30 years, the rising health costs
and retirement of the baby boomers are projected to
cause deficits that make the current one look puny.
At the rate we are going, the U.S. would almost
surely default on its debt one day.”
Dr. Christina Romer, former Chair of President
Obama’s Council of Economic Advisers
Source: Mankiw et al. 2011. “From 6 Economists, 6 Ways to Face 2012 – Economic View.” New York Times, December 31.
50
Healthcare has become the largest component of
Federal spending
Composition of Federal spending (1970-2010)
As a Percent of total Federal spending
100%
90%
Other discretionary
20%
19%
Net interest
80%
20%
70%
60%
42%
50%
40%
30%
20%
Defense
6%
12%
7%
Other mandatory
Social security
Healthcare
20%
11%
10%
15%
0%
5%
1970
23%
2010
* Healthcare spending includes Medicare, Medicaid + other health programs; Other mandatory spending includes, Income Security programs, Federal Civilian and Military Retirement,
Veterans Programs, etc.; Other discretionary spending incudes Education, Training, Employment and Social Services, Transportation, Income Security programs, Veterans Benefits and
Services, International Affairs, etc.
Source: Congressional Budget Office. 2011. “The Budget and Economic Outlook: Fiscal years 2011 to 2021.” http://www.cbo.gov/publication/21999.
51
• Another way of looking at the growth in social insurance
expenditures is by comparing the distribution of federal
spending in 1970 vs. 2010.
• Non-military discretionary spending has remained
relatively the same, 20% vs. 19% of total federal
spending.
• While overall defense spending increased between 1970
and 2010, its contribution as a percent of total federal
spending has been cut in half.
• In contrast, federal healthcare spending grew from 5% of
total federal expenditures to 23% over this time period.
52
And the trend is projected to continue: Going forward, Medicare
is a much bigger financial problem than Social Security
Net Present Value of unfunded entitlements through 2085E (F2010)*
$ trillions
0
5
10
15
20
25
Social Security
Medicare
* E = estimate; F = Fiscal year.
Source: Department of the Treasury, Department of Health and Human Services, Center for Medicare and Medicaid Services; Meeker, Mary. 2011. USA Inc.: A Basic Summary of
America’s Financial Statements. KPCB.
53
• Of the major social insurance programs for the
elderly population, Social Security and
Medicare, the unfunded liability is much
greater for Medicare than Social Security.
• Both are important, but Medicare is a much
bigger problem that needs to be resolved.
54
Medicare is a complex program with rules that are
hard for both patients and providers to understand
According to a 2001 MedPac report, “…by one widely used estimate, over
125,000 pages of regulations – more than the Internal Revenue Service
regulations for the entire tax system – control the program.”
“There can be no doubt but that the statutes and provisions in question,
involving the financing of Medicare and Medicaid, are among the most
completely impenetrable texts within the human experience. Indeed, one
approaches them at the level of specificity herein demanded with dread, for
not only are they dense reading of the most tortuous kind, but Congress also
revisits the area frequently, generously cutting and pruning and making any
solid grasp of the matters addressed merely a passing phase.”
Chief Justice Samuel James Ervin, III, U.S. 4th Circuit Court
Rehabilitation Association of Virginia v. Kozlowski
Source: Medicare Payment Advisory Commission. 2001. “Reducing Medicare Complexity and Regulatory Burden.” Report to Congress, December; Mayo Clinic, personal communication to
authors.
55
Further complexity is created by the fact that Medicare
program rules are updated on a continuous basis
• The Federal Register provides new regulations affecting
government healthcare programs almost weekly.
• In addition, CMS and its Medicare administrative
contractors (private insurance companies who pay
providers on behalf of Medicare), and the Office of
Inspector General (OIG) issue documents, alerts,
instructions, bulletins, educational materials, manual
revisions, and other guidance almost every day.
• Open forums are also held regularly by CMS and
contractors to present information and guidance in an
informal manner which is not documented.
Source: Mayo Clinic, personal communication to authors.
56
Just the annual pricing updates to providers are nearing the
20,000 page mark. How does anyone keep track?
Publication
Number of Federal
Register pages
Hospital
•
Proposed 2012 Prospective Payment System rule
•
Hospital Value-Based Purchasing Final Rule (7/1/11)
•
Hospital Outpatient 2011 Final Rule
1,852
Physician Fee Schedule 2011 Final
1,562
1,032
194
Physician
•
Subtotal
4,643
Other estimated pages from CMS and contractors (2010)
•
Contractor bulletins
•
CMS communications
Total
3,599
11,177
19,419
Source: Mayo Clinic, personal communication to authors.
57
Over regulation can lead to unintended
consequences
“…the vast and confusing array of federal laws, rules,
regulations, interpretive manuals, guidelines and audits…makes
it much more difficult...for hospitals to respond to the concerns of
patients of limited means who are unable to pay their hospital
bills.” 1
“Fear
of unfounded prosecution and the formidable array of
enforcement tools available to the Medicare program have
created fear among providers. Well-intentioned providers are
cowed from appropriate behavior or even from participating in
the program....”2
Source: 1) American Hospital Association. 2003. “Federal Regulations Hamper Hospitals’ Efforts to Assist Patients of Limited Means.”; 2) Medicare Payment Advisory Commission. 2001.
“Reducing Medicare Complexity and Regulatory Burden.” Report to Congress, December.
58
Over regulation can stifle healthcare delivery
innovation
•
•
•
•
Park Nicollet, a large medical group based in St. Louis Park, Minnesota,
carried out a “virtual” exercise to redesign primary care delivery.
In the new concept clinic, patients with routine complaints (such as a sinus
infection) would be treated by non-physician caregivers, sometimes
remotely.
Despite the need to expand office hours and hire additional clinical staff,
Park Nicollet estimated that the model would lead to 10-15% cost savings.
However, given that Medicare pays less or nothing for new delivery
models, Park Nicollet discovered that the new concept clinic would run at
a 40% loss.
59
Price controls do not result in lower total
spending: Physician fees example
8
7.4%
7.4%
7
Physician
expenditures per
Medicare
beneficiary*
Annual % change in
Medicare spending
6
5
4
Physician fees
3.4%
3
2
1
-0.7%
0
-1
1997-2001
2001-2005
-2
* Fee for service Medicare beneficiaries.
Source: Guterman, Stuart. 2006. “Medicare Physician Payment: Are We Getting What We Pay For? Are We Paying for What We Want?” Invited testimony Energy and Commerce
Committee Subcommittee on Health U.S. House of Representatives, July 25.
60
Why don’t price controls work in
healthcare? The same reason they don’t
work elsewhere in the economy.
61
Grayson’s maxim
“Add [price] controls and you will see ‘new’
services appear. Expect ‘unbundling’ of
services with the price of individual units,
when added together, totaling more than
the original services.”
C. Jackson Grayson, Jr.
Chair, U.S. Price Commission (1971-1973)
Source: Grayson Jr., C. Jackson. 1993. “Experience Talks: Shun Price Controls.” Wall Street Journal, 29 March.
62
The Medicare price control cycle
Exhibit 1: The Medicare Price Control Cycle
Cost too high
Reduce
payment
rate
Reduce
line item
payment
rate to
toproviders
providers
Providers
Order more
tests, images
See more
patients per day
Costs go up
anyway
63
This slide is intentionally left blank.
64
Providers are already paid below their cost by
the government
U.S. community hospital profit and loss margins by payer class (2007)
Percent profit or loss
32 %
4.5 %
-9%
Employer
Sponsored
Insurance
-12%
-45%
Medicare
Medicaid
Uninsured
and SelfPay
Total
Profit margins from patients
with employer sponsored
insurance are sufficient to
leave the hospital industry
with an overall positive
margin, despite being only
36% of inpatient volume.
Further reimbursement cuts
by Medicare and/or
Medicaid would pose
significant challenges to
hospitals.
Source: Avalere Health Analysis of American Hospital Association Annual Survey Data for Community Hospitals. 2007. Morgan Stanley Healthcare Research; Meeker, Mary. 2011. USA
Inc.: A Basic Summary of America’s Financial Statements, KPCB.
65
• An indication of why across-the-board payment reductions by the
Medicare and Medicaid programs are not a viable long term strategy is
illustrated by the previous slide.
• In 2007, the Medicare and Medicaid government programs were
already paying hospitals 9% below the actual cost of care delivery.
• This loss is offset by positive profit margins coming from employer
sponsored insurance.
• In essence, individuals in the employer sponsored insurance category
are paying an undeclared tax to fund the low reimbursement rates from
government programs.
• With the laws that are in place now, the across-the-board payment
reductions by Medicare and Medicaid will become even greater – likely
leading to even more undeclared tax on individuals under age 65.
66
And stand to lose more if present legislation is
not changed
• Providers face a 27-30% reduction in payment
rates in 2014, if no changes are made to the
current legislation.
• Thereafter, the rates are expected to have
further cuts in each of the next six years. By
2021, the rate that Medicare pays physicians
would be 35% less than it paid physicians 20
years earlier in 2001.
Source: 2012 Medicare Trustee Report and CMS Actuary Report, March, 2012, Table 6.
67
Low reimbursement and projected cuts are
reducing physician access for Medicare patients
•
•
•
•
In North Carolina, a team of “mystery shoppers” posing as Medicare
beneficiaries looking for a new doctor, called 200 family physicians. Nearly
half of the physicians contacted no longer accepted new Medicare patients.
A 2010 survey of 9,000+ physicians by the American Medical Association
(AMA) showed that 17% of all physicians (and 31% of primary care
physicians) restrict the number of Medicare patients in their practice.
Almost two-thirds (60%) of physicians surveyed by the AMA looked into opting
out of Medicare and treating patients through a private contracting option
(where neither the patient nor the provider can request payment from
Medicare).
Nearly 13% of physician respondents to a 2010 survey by the American
Academy of Family Physicians would consider no longer seeing any Medicare
patients; 62% said they may be forced to stop accepting new Medicare
patients; and 73% said they would have to limit the number of Medicare
appointments.
Source: Roy, Avik. 2012. “How Obamacare's $716 Billion in Cuts Will Drive Doctors Out of Medicare.” Forbes, August 20; AMA Online Survey of Physicians. 2010. “The Impact of Medicare
Physician Payment on Seniors’ Access to Care.” http://www.ama-assn.org/ama1/pub/upload/mm/399/medicare-survey-results-0510.pdf; AAFP survey. 2010. “Where Will Seniors Get
Health Care? More Than One in 10 Family Medicine Practices Consider Closing with Continued Threats to Medicare Payment.”
http://www.aafp.org/online/en/home/media/releases/2010b/medicare-cuts-2010.html
68
The impact of limited access as seen through the
eyes of Medicare beneficiaries
• “I moved into this nice apartment complex, big medical
complex across the street, I thought, ‘How lucky am I?’
And I went there and was told in the waiting room, well
they just don’t take Medicare patients. One of the
receptionists said to me, ‘Well honey, it’s just going to get
worse.’”1
• “His knee doctor no longer takes Medicare patients. And
he has to pay two other doctors directly and wait for
Medicare to reimburse him. He sees those doctors’
policies as warnings that Medicare’s reliability may be
growing shakier.”2
Source: 1) Roy, Avik. 2012. “How Obamacare's $716 Billion in Cuts Will Drive Doctors Out of Medicare.” Forbes, August 20; 2) “How Health Care Overhaul Could Change Medicare.”
cbsnews.com, October 2, 2009.
69
Medicare Actuary’s take
“…the prices paid by Medicare for health services are very likely to fall
increasingly short of the costs of providing these services. By the end
of the long-range projection period, Medicare prices for hospital,
skilled nursing facility, home health, hospice, ambulatory surgical
center, diagnostic laboratory, and many other services would be LESS
THAN HALF of their level under the prior law. Medicare prices would
be considerably below the current levels paid by private health
insurance. Well before that point, Congress would have to intervene to
prevent the withdrawal of providers from the Medicare market and the
severe problems with beneficiary access to care that would result.”
Source: Foster, Richard S. Statement of Actuarial Opinion. Annual report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance
Trust Funds, 2011.
70
The reliance of the Affordable Care Act on
across-the-board reductions in Medicare
payments has severe implications for
providers in declining reimbursements and
for patients in declining access.
71
The Congressional Budget Office’s take: Financial viability
of the ACA is contingent on proposed Medicare pay cuts
• “The bill would put into effect a number of
policies difficult to sustain…[and if sustained,]
whether it would be accomplished through
reductions in access to care or the quality of
care.”
• “The long term budgeting could be quite
different if key provisions were ultimately
changed or not fully implemented.”
Source: CBO Letter. March 20, 2010.
72
Conclusions about the current state of
Medicare
• The costs of Medicare are unsustainable and
will burden the nation’s finances.
• The complexity of its rules will continue to
stifle innovation.
• The price-control approach to reimbursement
will almost certainly lead to decreased access
for patients.
As a country, we need to do something!
73
This slide is intentionally left blank.
74
SOLVING THE MEDICARE
PROBLEM
75
Lester Thurow Dictum*
“Intractable problems are usually not
intractable because there are not
solutions, but because there are not
solutions without side effects…. It is only
when we demand a solution with no cost
that there are no solutions.”
* Lester Thurow is the former dean of the MIT Sloan School of Management
Source: Thurow, Lester C. 2001. The Zero-sum Society Distribution And The Possibilities For Economic Change. Basic Books.
76
Medicare reform principles or what do the
authors want Medicare to be
• Financially sound: Self-sustaining in the long
term.
• Patient-centered: Empowers individuals to select
providers and make healthcare decisions.
• Provides choice: Private market with multiple
options.
• Promotes competition around quality and cost.
• Establishes government role: Coordinate
competition and provide targeted financial
support.
77
Solving the Medicare problem:
Summary Recommendations
1. Increase age of eligibility to 69 years, with the
option to enter the program at 65 years, and link
it to life expectancy thereafter.
2. Move to a premium support model with a
national insurance exchange that includes a
variety of insurance products.
78
The rise in Medicare costs is driven by two
key factors
1. Number of eligible beneficiaries
2. Cost per beneficiary
79
We recommend raising the Medicare eligibility age
to 69, with option to enter the program at 65
• Gradually raise the Medicare eligibility age to 69 years in the
following manner: raise the age of eligibility by two months every six
months beginning in 2014, until the eligibility age reaches 69 years.
• Eligibility thereafter should be indexed to life expectancy.
• We recognize that some individuals below age 69 may not be able
to work for medical reasons or may not be eligible for healthcare
benefits through their employers. To address this problem we
propose to allow beneficiaries to enroll in the program at age 65,
but at a reduced government contribution (actuarially equivalent to
entering the program at age 69).
• Because Medicare and Social Security are interrelated, the most
viable course of action would be to address the age of eligibility in
both programs simultaneously.
80
Key point: while some will view this position as too
harsh, we strongly feel that a country can only offer
entitlement programs that it is willing to pay for with
real dollars, rather than with Washington, D.C. smoke
and mirrors. We do not feel the U.S. is willing to
increase taxes to the point required by just part A of the
present Medicare program (e.g., more than double the
current tax rate, see slide 39). If that assessment is
correct, raising the eligibility age to align with life
expectancy gains is just common sense.
81
Increase the age of eligibility: Life expectancy at
age 65 is increasing
Life expectancy at age 65 (1960-2009)
Years
25
•
19.2
20
•
15
14.3
•
10
5
•
0
1960
2009
When Medicare was started, life
expectancy for an individual who
reached age 65 was a little more
than 14 years.
By 2009, that life expectancy had
grown to over 19 years.
As a result of this rise in life
expectancy, Medicare now needs to
provide nearly an additional 5 years
of medical coverage, compared with
the 1960s when the program was
first established.
And now there are fewer workers
per beneficiary to provide the taxes
to fund the program.
Source: Health, United States. 2011. http://www.cdc.gov/nchs/data/hus/2011/022.pdf.
82
In 2009 Americans exceeded the life expectancy at
age 65 that Medicare projected for 2025
Life expectancy at age 65
Years
25
20.0
20
17.5
20.3
17.6
15
Projected life expectancy in 2025*
Actual life expectancy in 2009
10
5
0
Males
Females
* Medicare Trust Fund projections in 2005.
Source: Shrestha, Laura B. 2006. “Life Expectancy in the U.S.” CRS Report for Congress. http://aging.senate.gov/crs/aging1.pdf; Health, United States. 2011.
http://www.cdc.gov/nchs/data/hus/2011/022.pdf
83
• The actual gains in life expectancy have
historically been greater than those projected
by the Medicare Trustees.
• In 2005 Medicare Trustees made a projection
of life expectancy at age 65 for 2025. But just
4 years later, the actual life expectancy had
already exceeded the 2025 estimate.
84
Rising life expectancy and lower retirement age result
in higher need for social support – Can we afford it?
Year
1950
2005
Gain/loss
Life
expectancy
at birth
68.2
77.8
Average
retirement
age*
+9.6
-5.7
68.3
62.6
15.3 year increase in living beyond retirement
* Weighted average of “by gender” Social Security data for 1950-1955 and 2000-2005 based on labor force composition – rounded.
Sources: OECD; National Center for Health Statistics; Bureau of Labor Statistics, Monthly Labor Review (2002, 2008).
85
There are multiple benefits to increasing the age
of eligibility
• Encourages seniors to build up adequate
retirement savings.
• Boosts overall GDP.
• Helps close Medicare funding gap.
86
Working longer is good for Boomers: It will help
their financial security in retirement
The number of work years beyond age 65 necessary for a household to be sufficiently prepared for
retirement by percentage of households (2007)
60%
50%
48%
40%
30%
23%
20%
17%
9%
10%
0%
Zero additional years
1-3 years
4-6 years
7+ years
Source: Munnel et al. 2012. “National Retirement Risk Index: How Much Longer Do We Need to Work?” Center for Retirement Research at Boston College. June: Number 12-12.
87
• At age 65 only about half of the households are
financially prepared for retirement.
• Working an additional 1-3 years reduces the
percentage of households that are not prepared
for retirement almost in half.
• The idea of working longer before being eligible
for Medicare benefits can potentially help
households.
88
Working longer is good for the economy
• The McKinsey Global Institute estimates that
the economic impact of Boomers retiring two
years later is $12.9 Trillion in GDP over 20072025.
• If individuals work longer they also tend to
spend more and the economy grows.
Source: McKinsey Global Institute. 2008. “Talkin’ ‘Bout My Generation: The Economic Impact of Aging US Baby Boomers.”
89
CBO estimates that raising the age of eligibility to
67 can generate $113B in savings over 10 years
A recent CBO report discussed the fiscal benefits of
increasing the age of eligibility for Medicare:
• “This option would raise the age of eligibility for Medicare
by two months every year beginning with people who
were born in 1949 (who will turn 65 in 2014) until the
eligibility age reached 67 for people born in 1960 (who
will turn 67 in 2027).”
• CBO projects that net savings in the 2012-2021 time
frame would be $113B.
• Raising the age of eligibility to 69 (in the same time
frame) will produce additional savings, and is more in line
with the financial reality of Medicare.
Source: Congressional Budget Office. 2012. “Raising the Ages of Eligibility for Medicare and Social Security.”
90
The rise in Medicare costs is driven by two
key factors
1. Number of eligible beneficiaries
2. Cost per beneficiary
91
We recommend moving Medicare to a premium
support model
• Individuals should own their insurance and have the freedom to
chose their own insurance plan.
• Premium support provides a mechanism to achieve the above.
• Medicare would no longer be a government insurance company.
• Instead Medicare would function like the Federal Employee
Health Benefits Plan (FEHBP) – coordinate private insurance
options and provide a set dollar amount for each beneficiary to
purchase insurance from a list of government approved
insurance options.
• This is the approach recommended by the Clinton Medicare
Bipartisan Commission in 1995 and by the Bipartisan Policy
Committee Task Force in 2010.
92
• We do not feel that the U.S. population is willing to increase
taxes to the point where the present fee-for-service (FFS)
Medicare program is sustainable.
• Moving Medicare to a premium support model allows the
government to change from an open-ended benefit to a
program where the government can determine the
contribution it can actually afford.
• Individuals who recommend keeping the present FFS
Medicare model should be honest about the tax increases
required to do so. This is especially important because the
alternative approach of just reducing Medicare payments
will result in payment levels that are so low that both
access and quality will be severely impacted.
93
The government’s primary approach to
date, i.e., price controls, has been
unsuccessful in containing Medicare
costs...
94
Price controls do not result in lower total
spending: Physician fees example
8
7.4%
7.4%
7
Physician
expenditures per
Medicare
beneficiary*
Annual % change in
Medicare spending
6
5
4
Physician fees
3.4%
3
2
1
-0.7%
0
-1
1997-2001
2001-2005
-2
* Fee for service Medicare beneficiaries.
Source: Guterman, Stuart. 2006. “Medicare Physician Payment: Are We Getting What We Pay For? Are We Paying for What We Want?” Invited testimony Energy and Commerce
Committee Subcommittee on Health U.S. House of Representatives, July 25.
95
This slide is intentionally left blank.
96
Price controls have been tackling the wrong part
of the equation
• Medicare has also committed significant effort to
figuring out the “ideal” price paid per unit of
service to curb spending, when use rate is
actually the more important variable.
Total Cost =
Price x Use Rate
• The use rate is a direct function of the medical
practice style in the delivery system.
97
It’s all about the use rate and it varies by region
of the country
• "…utilization - not local price differences - drives Medicare
regional payment variation….”1
• “Most of this variation [in Medicare spending] was not due
to differences in the price of care in different parts of the
country, but rather to differences in the volume….”2
• “…there is nearly a twofold difference between the MSA
[Metropolitan Statistical Area] with the greatest service use
(the Miami, FL, MSA) and the MSA with the least service
use (the La Crosse, WI, MSA) [after adjusting for regional
prices, added payments for Graduate Medical Education,
demographics, beneficiary health status, etc.].”3
Source: 1) Gottlieb et al. 2010. "Prices Don't Drive Regional Medicare Spending Variations.” Health Affairs 29(3):537-543; 2) Wennberg et al. 2008. "Tracking the Care of Patients with
Severe Chronic Illnesses.” The Dartmouth Atlas of Health Care. http://www.dartmouthatlas.org/downloads/atlases/2008_Chronic_Care_Atlas.pdf; 3) MedPac Report to Congress. 2011.
“Regional variation in Medicare services use.” http://www.medpac.gov/documents/Jan11_RegionalVariation_report.pdf.
98
Additional services provided in high-cost areas are those
that depend most on individual physician practice style
Risk-adjusted ratio of high-spending vs. low-spending regions’ use rates by service
(>1 = use rates are higher in high-spending areas; <1 = use rates are lower in high-spending areas)
0.5
1.0
1.5
2.0
2.5
Services with existing clinical practice consensus
• Mammogram, women 65-69
• Pneumococcal immunization
• Total hip replacement
• Back surgery
Services where individual clinical practice style
prevails
• Total inpatient days
• Inpatient days in ICU or CCU
• Evaluation and management (visits)
• Imaging
• Diagnostic tests
Source: Orszag, Peter. 2008. “New Ideas About Human Behavior in Economics and Medicine.” Eighth Annual Marshall J. Seidman Lecture, Harvard Medical School, October 16.
99
• Both high-spending areas and low-spending areas do
mammograms, hip and back surgeries at the same rate
per 1,000 population. Thus, these are not factors that
make a high-spending area more costly.
• However, high-spending areas use about twice as many
ICU days per 1,000 population – raising spending.
• Services where clinical judgment prevails (length of stay
in the ICU and CCU, physician visits, imaging tests,
diagnostic testing), are higher as well in high-costs areas
– raising spending.
100
Private insurers may be better at controlling
utilization, and therefore total costs (1/2)
Growth in healthcare expenditures vs. GDP in the United States (1990-2009)
Change in growth, percent
12.0%
10.0%
•
Healthcare expenditures
per capita
GDP per capita
(nominal)
8.0%
6.0%
4.0%
•
2.0%
0.0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
-2.0%
From 1993 through
2000, healthcare
expenditures in the
U.S. grew roughly in
line with GDP, which
has been a goal for
many economists.
This time frame
coincides with the
“HMO” era – when
managed healthcare
plans were controlling
medical utilization.
-4.0%
Source: OECD: Statistics from A to Z (accessed May 26, 2011), http://www.oecd.org/document/0,3746,en_2649_201185_46462759_1_1_1_1,00.html.
101
Private insurers may be better at controlling
utilization, and therefore total costs (2/2)
A 2009 report in The New Yorker by Atul
Gawande reported that Medicare spending for
the elderly in McAllen, Texas is much higher
than in El Paso, Texas despite essentially the
same demographics.
A follow up study on the non-Medicare
commercially-insured population in the same
communities painted a different picture…
Source: Gawande, Atul. 2009. “The Cost Conundrum.” The New Yorker, June 1; Franzini et al. 2010. “McAllen and El Paso Revisited: Medicare Variations Not Always Reflected in the
Under-Sixty-Five Population.” Health Affairs 29(12):2302–2309.
102
Commercial payers in two Texas towns show better
spending and utilization management than Medicare
Indicator
Medicare ratio
McAllen to El Paso
Commercial ratio1
McAllen to El Paso
Inpatient spending per
enrollee
1.63
1.10
Outpatient spending per
enrollee
1.32
0.69
Total spending per
enrollee
1.86
0.93
Inpatient utilization2
1.31
0.84
1
Blue Cross and Blue Shield of Texas; 2 Per 1,000 enrollees, Medicare ratio calculated based on hospital discharges in the last 2 years of life.
Source: Franzini et al. 2010. “McAllen and El Paso Revisited: Medicare Variations Not Always Reflected in the Under-Sixty-Five Population.” Health Affairs 29(12):23022309; The Dartmouth Atlas of Healthcare (accessed July 19, 2011), http://www.dartmouthatlas.org/data/topic/.
103
• The geographic areas of McAllen and El Paso, Texas have received
considerable attention as a result of an initial report on the variability in
Medicare costs and use rates across these demographically similar areas.
• A follow up report looking at the commercial payer population costs and use
rates showed that although the Medicare use rate in McAllen was significantly
higher than that in El Paso, the use rate for commercial patient population
showed little difference. This shows that commercial insurers are likely better
than traditional Medicare at controlling use of resources.
• Since the use rates of services are what differentiates a high-cost area from a
low-cost area (see slides 99-100), it is likely that commercial insurers would be
better positioned to help restrain future Medicare spending.
• A recent comparison of enrollees in Medicare Advantage health maintenance
organization (HMO) plans with beneficiaries enrolled in traditional Medicare,
showed that healthcare utilization rates were ~20–30% lower in the HMO
population.1
Source: 1) Landon, BE et al. 2012. “Analysis Of Medicare Advantage HMOs Compared With Traditional Medicare Shows Lower Use Of Many Services During 2003–09.”
Health Affairs 31(12):2609-2617
104
Total healthcare spending for Medicare beneficiaries
has grown at a faster rate than that of private plans
Average annual growth in spending
per beneficiary (1997-2005)
Percent1
7.7%
• Total spending for privately insured individuals,
non-Medicare (including out of pocket, other
sources)
• Total spending for Medicare beneficiaries
comprises the following sources:
• Federal Medicare spending
10.6%
5.8%
• Out of pocket
15.0%
• Private insurance*
18.7%
• Medicaid**
26.3%
PLUS private insurance in 2006-2007 absorbed a ~15% cost shift by providers who
compensated for the underpayments from government run plans.2
* The proportion of Medicare enrollees with employer-sponsored primary insurance more than doubled.
** Medicare beneficiaries who also received funding under Medicaid.
Source: 1) Robert Book, Heritage Foundation No. 2301, July 24, 2009; 2) Fox, Will and John Pickering. 2008. “Hospital & Physician Cost Shift: Payment Level
Comparison of Medicare, Medicaid and Commercial Payers.” Milliman.
105
• One of the arguments used by proponents of a “public” option based on
Medicare, is that Medicare provides comparable access to healthcare at
costs that grow more slowly than those of the private sector.
• Focusing only on Medicare’s federal per-beneficiary payments, Medicare
costs appear to be growing more slowly than private plan costs.
• However, this apparent slower growth in Medicare spending is primarily the
result of Medicare’s policy of rapidly shrinking its contribution to the
beneficiaries’ total healthcare costs.
• Much of the growth in total costs for Medicare beneficiaries has been offset
by cost shifting to Medicaid and increased reliance on out-of-pocket
spending and other sources of private-sector funding.
• Therefore, if we look at total per beneficiary costs during that period, they
are growing faster for Medicare than for private insurance.
106
A model like the Federal Employee Health Benefits
Program offers patient choice and potential savings
• The Federal Employee Health Benefits Program (FEHBP),
administered by the Office of Personnel Management (OPM), is a
successful model of premium support:
– FEHBP enrollees choose from a variety of health plans, including
managed care, conventional insurance, high-deductible plans, etc.
– Enrollees can buy a plan that is more expensive than the capped
government contribution and pay the difference out of pocket.
– OPM’s regulatory role in FEHBP is light, focusing mainly on
consumer protection and a level playing field for health plans.
– FEHBP is exempt from state mandates.
• In 1999, a bipartisan commission estimated that the movement to
premium support would slow the growth in Medicare spending by 1 to
1.5% annually.*
* National Bipartisan Commission on the Future of Medicare. 1999. “Building a Better Medicare for Today and Tomorrow,” March 16.
Source: Moffit, Robert E., and Kathryn Nix. 2011. “Transforming Medicare Into a Modern Premium Support System: What Americans Should Know.” The Heritage Foundation.
107
The FEHBP-like model has advantages for both
patients and providers…
1.
2.
3.
4.
5.
The government could focus limited resources on those who need
help, an imperative as the baby boom generation reaches
Medicare's current eligibility age.
Everyone could choose from among multiple insurance offerings.
Individuals may buy coverage that exceeds the minimum if they
wish.
Patients may be more fully engaged as purchasers and
customers.
A dynamic private market could allow more freedom to provide
innovation and productivity gains to reduce healthcare costs.
The model offers assurance of universal access to a basic level of
affordable, market-based health insurance.
Source: Cortese, Denis A., and Robert K. Smoldt. 2006. “Healing America’s Ailing Health Care System.” Mayo Clinic Proceedings 81(4):492-6.
108
The FEHBP-like model has a lower regulatory burden
• In contrast to the light regulatory role in FEHBP offerings and
administration, the Affordable Care Act (ACA) mandates that every
qualified health plan offer an “essential benefits package” to be
defined by the Department of Health & Human Services.1
• As a national exchange exempt from state mandates, the FEHBP
has fewer administrative burdens and costs. But the ACA leaves
primary implementation to the states, so health insurers must
comply with both the federal requirements and with the varying
mandates of each state they operate in:
– “As we have learned with Medicaid, the Health Insurance
Portability and Accountability Act (HIPAA), and other programs,
state implementation of federally directed programs is at best
awkward and at worst ineffectual.”2
Source: 1) Kaiser Family Foundation. 2011. “Summary of New Health Reform Law.” http://www.kff.org/healthreform/8061.cfm; 2) Jost, Timothy S. 2010. “Health Insurance Exchanges and
the Affordable Care Act: Key Policy Issues.” The Commonwealth Fund. http://www.commonwealthfund.org/Publications/Fund-Reports/2010/Jul/Health-Insurance-Exchanges-and-theAffordable-Care-Act.aspx.
109
To ensure that Medicare is sustainable longterm under the premium support model, we
recommend that the participating health plans
take into consideration the following set of ideas
when designing benefit plans for Medicare
beneficiaries…
110
Although publicized as a great insurance program, Medicare
has fewer benefits than typical private insurance plans
A recent Kaiser Family Foundation study comparing feefor-service Medicare benefits with a typical FEHBP
insurance plan and a typical large employer plan showed
that:
• Medicare has higher cost-sharing requirements for
inpatient care.
• Medicare has less generous drug coverage.
• Medicare has no out-of-pocket limit on inpatient
and outpatient services, and thus lacks truly
catastrophic insurance coverage.
Source: McArdle at al. 2012. “How Does the Benefit Value of Medicare Compare to the Benefit Plan of Typical Large Employer Plans? A 2012 Update.” Kaiser Family Foundation Issue
Brief.
111
Due to lack of truly catastrophic coverage, nearly 90% of
Medicare beneficiaries have supplemental coverage
Medicare beneficiaries by source of supplemental insurance coverage (2008)*
Percent
100%
80%
60%
13%
1%
20%
22%
•
40%
20%
No coverage
Other
Medicaid
Medigap
Employer
43%
0%
Medicare
•
In the under 65 population it is
uncommon to have supplemental
insurance with privately insured plans.
It’s been suggested that the presence
of supplemental coverage leads to
overutilization of services by Medicare
beneficiaries.
* Excludes beneficiaries in MAPs.
Source: Kaiser Family Foundation Medicare Chartbook, 2010. Medicare Policy Project Publication Number: 8103; MedPac. 2010. “Aligning Incentives in Medicare.” Report to Congress.
112
Recommendations for health benefit design
• Eliminate co-pays and co-insurance for visits to coordinating,
primary provider.
• Establish a High Deductible Health Plan option with
preventive care covered at 100%.
• Vary patient premiums and/or deductibles based on
uncontrolled medical conditions such as tobacco use, weight,
blood pressure, and cholesterol. Or, provide rebates for
following condition specific management programs such as
back pain and diabetes.
• Provide a retrospective rebate on beneficiary drug costs for
conditions such as congestive heart failure, hypertension, and
diabetes, if patients fill all prescriptions.
113
Changing consumer incentives: Indiana’s
experience with their employee health plan
• In 2006-2007, Indiana expanded its offerings to include two
High-Deductible Health Plans (HDHPs) with individual Health
Savings Accounts (HSAs):
– The state funds employees’ HSA in the amount of 55% of
the deductible.
– Preventive services are covered 100%.
• Independent, actuarial review by Mercer confirmed that after
adjusting for demographics (age, gender, family size) and
health, HDHPs’ annual costs were 10.7% lower than costs of
other plans:
– Indiana’s savings in 2010 = $17 to $23M.
– Employees’ savings in 2010 = $7 to $8M.
Source: Gusland et al. 2010. “Consumer-Driven Health Plan Effectiveness. Case Study: State of Indiana.” Mercer. http://www.in.gov/spd/files/CDHP_case_study.pdf.
114
Transition to HDHPs in Indiana resulted in better
utilization of healthcare resources
2009 Healthcare utilization
PPO
HDHP2 (% change
from PPO)
HDHP1 (% change
from PPO)
ER visits (per 1,000)
308
-32%
-47%
5,012
-28%
-46%
Hospital admissions (per 1,000)
114
-44%
-68%
Average length of stay (days)
4.9
-16%
-22%
Average cost per prescription
$ 65
-17%
-38%
Physician visits (per 1,000)
Note: HDHP1 has a higher deductible and higher HSA funding than HDHP2.
Source: Gusland et al. 2010. “Consumer-Driven Health Plan Effectiveness. Case Study: State of Indiana.” Mercer. http://www.in.gov/spd/files/CDHP_case_study.pdf.
115
• The reason the high deductible health plans
yielded savings for both the payer and the
beneficiary was because of reductions in
overall utilization in emergency room visits,
physician visits, and hospital use.
• In addition, the increased use of generic drugs
reduced the cost of prescriptions.
116
ADDITIONAL
RECOMMENDATIONS
TO ENSURE MEDICARE
AFFORDABILITY
117
Although the previous recommendations
address Medicare affordability for the U.S.
government, to guarantee affordability for
individual citizens additional steps are required,
namely,
– Establishment of true Pay-for-Value
initiatives.
– Tort reform.
118
Since it will take some time to phase out Medicare as
an insurer, it makes sense to establish true Pay-forValue models that would encourage healthcare
provider integration and the coordination of healthcare
services for patients.
Establishing Pay-for-Value models in Medicare might
also encourage private insurers to change their
payment models, especially as they prepare to take
care of the Medicare population.
119
There is significant variability in the cost of care
across the U.S.
Medicare fee-for-service spending and estimated savings by hospital referral region (2008)
Geographic region
Average standardized
risk-adjusted per capita
costs ($USD)*
Ratio to benchmark
(national average)
Lowest cost 10% of providers
$6,194
0.8
Lowest cost 20% of providers
$6,613
0.9
National average**
$7,500
Benchmark
Highest cost 20% of providers
$8,301
1.1
Highest cost 10% of providers
$8,849
1.2
* Total = National average standardized risk adjusted per capita cost x total Medicare beneficiaries in sample; Total Medicare beneficiaries n = 25,832,920; Standardization of Spending:
To standardize payment rates, examined Medicare’s various FFS payment systems and identified the factors that lead to different payment rates for the same service (e.g., local wages,
input prices, DSH, GME); Estimated what Medicare would have paid for each claim without those adjustments; Risk-Adjustment of Spending: Used total Hierarchical Condition Category
(HCC) risk scores to risk-adjust spending data; Calculated standardized risk-adjusted costs by taking the standardized costs for each beneficiary in a region and dividing them by his/her
actual individual risk score
** Includes VI, PR, DC and unassigned data.
Source: Institute of Medicine. 2011. “New Data on Geographic Variation.” http://iom.edu/Activities/HealthServices/GeographicVariation/Data-Resources.aspx.
120
Higher spending does not correlate with better outcomes,
suggesting system waste and room for improvement
Quality and costs of care for Medicare patients hospitalized for heart attacks, hip fractures, or colon cancer by
hospital referral region (2004)
Quality and costs of care for Medicare patients hospitalized for heart attacks, hip fractures, or colon cancer, by
Hospital Referral Regions, 2004
Quality of Care*
(1-Year Survival Index, Median=70%)
1.20
1.10
Good
Effectiveness
Good
Efficiency
Good
Effectiveness
Poor
Effectiveness
Good
Efficiency
Poor
Effectiveness
Poor
Efficiency
Poor
Efficiency
1.00
0.90
0.80
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Relative Resource Use**
* Indexed to risk-adjusted 1-year survival rate (median=0.70).
** Risk-adjusted spending on hospital and physician services using standardized national prices.
Data: E. Fisher, J. Sutherland, and D. Radley, Dartmouth Medical School analysis of data from a 20% national sample of Medicare beneficiaries.
Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2011.
121
Move to true Pay-for-Value: Reward results and
outcomes
Value =
Patient Outcomes
Total Cost
Patient Outcomes may include mortality, safety, service,
access, fewer complications, less rework, faster return to work
or functionality. It may mean readiness or productivity for
different groups, e.g., individual, employee, workforce, military,
student.
Total Cost is spending per patient over a defined time for a
particular patient, a condition, a population, or a payer.
122
Medicare has come up short with its Pay for
Performance (P4P) initiatives
• Medicare’s current P4P initiatives reward providers
mainly for compliance with process requirements.
• “These current [P4P] efforts…carry some risks.
Most…are not actually about quality results, but
processes. Most ‘pay for performance’ is really pay
for compliance. Compliance to too many process
standards…runs the risk of inhibiting innovation by
the best providers.”
Michael Porter and Elizabeth Teisberg
Note: Pay for performance is a payment scheme in which a portion of the payment is based on performance assessed against a defined measure.
Source: Porter, Michael E., and Elizabeth Olmsted Teisberg. 2006. Redefining Health Care: Creating Value-Based Competition on Results. Boston: Harvard Business School Press.
123
As Porter and Teisberg point out, we should
concentrate on quality, not process
• So take the case of two California
metropolitan teaching hospitals that treat
similar Medicare populations.
• Assume both hospitals complete the P4P
Medicare processes and receive a 5% P4P
bonus for fully complying with the process
requirements.
124
P4P bonus structure can pay more for lower
efficiency… and worse outcomes
Medical Center A
Medical Center B
Care efficiency (utilization & cost)
•
Hospital days per patient
11.1
23.0
•
Physician visits per patient
35.5
81.8
•
Total Medicare reimbursement
per patient ($000)
$37.0
$62.2
1.43
0.88
$1,851
$3,112
Care effectiveness (outcomes)
Mortality ratio
(>1 = better than expected)
5% P4P bonus
* All data are for Medicare beneficiaries, last 6 months of life; data from two prominent teaching hospitals in California.
Source: The Dartmouth Atlas of Health Care (accessed May 25, 2011), http://www.dartmouthatlas.org/data/topic/; Medicare Provider Analysis and Review (MedPar) file 2009 (accessed
July 2011).
•
•
•
•
•
•
125
The typical pay for performance bonus structure rewards medical centers for completing
selected process items, such as, giving a heart attack patient an aspirin on admission.
The example assumes that both medical centers (A and B) complete the required
process items. The data shown are results for two actual teaching hospitals in California
metropolitan areas.
Looking at Medicare patient data and the care patients received in the last 6 months of
life, medical center A uses half as many hospital days per patient and half as many
physician visits per patient, as medical center B.
Consequently, medical center A has significantly lower Medicare costs and its quality
(as defined by case-mix adjusted mortality ratio) is also 43% better than expected.
In contrast, the quality at the more expensive medical center B is 12% worse than
would be expected.
Most people would agree that Medicare should financially reward the medical center
that has better outcomes while using fewer resources. However, under the payment
schemes currently used by Medicare, center B, which is less efficient and has worse
outcomes, will get the largest financial reward – the exact opposite of what is desired if
we truly want to pursue high value healthcare.
126
P4P brings few – if any – gains in patient health
outcomes
• “Among hospitals participating in a voluntary quality-improvement
initiative, the pay-for-performance program was not associated with
a significant incremental improvement in quality of care or
outcomes for acute myocardial infarction.”1
• “We are aware that improvements in process measures do not
necessarily translate into improved clinical outcomes. As illustrated
by our results, it is much easier to make sure a patient with diabetes
received a [cholesterol] order each year, than it is to ensure that the
[cholesterol] is controlled to appropriate levels.”2
• “Our analysis…demonstrates that the current generation of P4P
measures based on process is inadequate. Hospital quality
measures did not correlate with complications or mortality.”3
Source: 1) Glickman et al. 2007. “Pay for Performance, Quality of Care, and Outcomes in Acute Myocardial Infarction.” JAMA 297(21):2373-2380; 2) Weber et al. 2008. “Employing the
Electronic Health Record to Improve Diabetes Care: A Multifaceted Intervention in an Integrated Delivery System.” J Gen Intern Med 23(4):379–382; 3) Bhattacharyya et al. 2009.
”Measuring the Report Card: The Validity of Pay-For-Performance Metrics in Orthopedic Surgery.” Health Affairs 28(2):526-532.
127
Other Medicare programs that focus on process,
have not fared any better.
• A recent Congressional Budget Office report
evaluated 10 major Medicare demonstration
programs over the last twenty years.
• 9 of the 10 did not decrease total costs (and some
actually increased total costs).
• Report conclusion: “The [one] bundled-payment
demonstration achieved savings for the Medicare
program, but the [remaining nine] demonstrations
that paid bonuses to providers on the basis of their
quality scores* produced little or no savings.”
*Quality was defined as compliance with specific care processes.
Source: Congressional Budget Office. 2012. “Lessons from Medicare’s Demonstration Projects on Disease Management, Care Coordination, and Value-Based Payments.”
http://www.cbo.gov/publication/42860.
128
The current Medicare Value-Based Purchasing scheme
will continue to benefit the least efficient providers
• Hospital payments remain on the traditional Medicare
payment structure, with a 1% across-the-board
reduction in payment to finance incentive payments.
• Incentive payments are set by a total performance
score based on meeting specific process measures
(70%) and patient satisfaction scores (30%).
• Since key components of the value equation –
resource utilization and patient outcomes – are not
truly factored into the score, the CMS approach will
continue to benefit the least efficient or effective
providers.
Source: “Administration Implements New Health Reform Provision to Improve Care Quality, Lower Costs.” Accessed October 3, 2011.
http://www.healthcare.gov/news/factsheets/2011/04/valuebasedpurchasing04292011a.html.
129
As a first step in the move toward true
Pay-for-Value we propose to establish
Expanded DRGs…
130
First, some background on DRGs
• In 1984 Medicare introduced a new payment system to curb
the growth of hospital-based healthcare costs called
Diagnosis Related Groups (DRGs).
• The DRG system is a patient classification system that relates
the reason for a hospitalization with the costs that a hospital
incurs for that hospitalization.
• The system is a form of bundled payments by which the
hospital receives a pre-determined lump sum for all services
provided by the hospital for that admission. Physician
services during that hospitalization are not included.
• Over the years, and working with physicians, hospitals have
found ways to manage hospital care within the lump sum
payment.
131
Expanded DRGs (EDRGs) offer a good starting
point in moving to Pay-for-Value (1/2)
• An EDRG is another form of a bundled payment.
• The bundled payment in this case would include the hospital
payment as any DRG, plus all physician payments, and would
cover related care for a period of time, such as 30 to 60 days, after
hospitalization.
• The value of an EDRG lies in the fact that it takes a payment model
providers are familiar with right now and puts both hospitals and
physicians at risk for a patient’s health for an extended time after
discharge (e.g., 30, 60, 90 days).
• EDRGs require that providers and hospitals work together while
monitoring their outcomes and overall costs. The EDRG thus acts
as a forcing function – forcing integration and collaboration among
providers and forces a relentless focus on value.
132
Expanded DRGs (EDRGs) offer a good starting
point in moving to Pay-for-Value (2/2)
• Another advantage is that, as with all bundled payment models,
providers are free to practice in whatever fashion gets the best
results and lowest costs.
• As providers succeed in lowering costs with better outcomes, they
will be able to manage more and larger bundled payment programs
for patients with more complex acute and chronic conditions.
• A 2009 Commonwealth Fund survey of healthcare opinion leaders
showed that provider payment reform, specifically the move toward
bundled payments, was viewed as the primary option for controlling
costs while maintaining quality (with 70% of leaders selecting
bundled payments as an “extremely effective” or “very effective”
option).1
Source: 1) The Commonwealth Fund. 2009. “Modern Healthcare Health Care Opinion Leaders Survey: Views on Slowing the Growth of Health Care Costs.”
http://www.commonwealthfund.org/Surveys/2009/April/Health-Care-Opinion-Leaders-Survey-on-Slowing-the-Growth-of-Health-Care-Costs.aspx
133
“Imagine…a patient who comes to the hospital for a hip replacement.
That patient and his insurer…will be billed separately for the X-rays,
laboratory tests, the surgeon’s fee, the anesthesiologist’s fee, the
rehabilitation services, the hospital bill and the visits to the doctor after
he’s discharged. In a bundled payment system, all the bills are rolled
into one standard hip-replacement charge. The idea is to force all of a
patient’s care providers to work together. They have a strong incentive
to eliminate unnecessary tests and treatments and use less expensive
implants, drugs and devices that don’t compromise quality, and to
prevent infections and other complications that could land the patient
back in the hospital.”
Source: Emanuel, Ezekiel J. 2011. “Saving by the Bundle.” New York Times, November 16.
134
Why EDRGs?
•
•
•
•
The response to EDRG payments will require various providers (doctors,
hospitals, nursing, home health services, pharmacists, scientists,
engineers, financial planning officers, technologists, etc.) to work in a
more integrated fashion.
If these providers are successful they will be in a much better position to
assume increasingly more responsibility, accountability, and authority in
the care of patients required by larger bundled payments and full
capitation.
We recognize many experts strongly support full capitation as the best
way to reward value. We concur. But most providers have to start on the
path somehow and building upon the familiar model of Medicare's current
DRGs is a way to start.
The integration and the infrastructure needed to succeed under EDRG
payments will support the management of patients in more and larger
models of bundled payments and full capitation.
135
Where to start with EDRGs
1. Start with expensive DRGs and create an EDRG for
those conditions or procedures.
2. Use lump-sum (bundled) payments to establish
EDRGs, and thus encourage judicious use rates.
3. Define outcomes, not process metrics
4. Give providers two to three years to self-organize
for EDRGs. Experience with standard DRGs over
the past 25 years shows it can be done.
136
Start with expensive DRGs and create an EDRG
for these conditions or procedures
In a given year, 10% of the population accounts for ~65% of the total healthcare spending
Concentration of healthcare spending in the U.S. population (2009)
100%
100%
65%
90%
22%
10%
1%
% of Total population
% of Total healthcare spending
Source: “Health Care Costs: A Primer - Kaiser Family Foundation.” Accessed May 17, 2012. http://www.kff.org/insurance/7670.cfm.
137
• One of the ways to restrain overall healthcare costs
is to concentrate efforts on the small percent of the
population that drives the majority of the costs –
rather than the vast majority of the population that
accounts for a small share of the overall costs.
• Most of the highest cost Medicare patients are the
sickest patients who end up being hospitalized.
• Payment approaches that provide incentives for
more integrated and coordinated care of these sick
patients, have the potential to reduce the resource
use (and cost) for these patients.
138
Use lump-sum (bundled) payments to establish
EDRGs, and thus encourage judicious use rates
Expanded DRG =
Current DRG + Post-discharge care +
Physician services related to the medical
condition for a specified period of time.
139
Define outcomes, not process metrics
• True pay-for-value means tying payments to
outcomes and costs over time.
• Outcomes should be condition or DRG specific.
• Favor independent or private oversight of outcome
measurements, because:
• Government efforts are often subject to politics
and lobbying.
• Government defined outcomes tend to be watered
down and turned into process measures.
140
Give providers two to three years to self-organize for EDRGs:
Experience with current DRGs shows it can be done
Metric
Pre-DRG
(1980-1985)
Post-DRG
(1988-1992)
Percent
change
Average length of stay
(days)
6.9
6.4
-8%
Hospital admissions
(per 1,000 population)
163
125
-23%
Hospital days
(per 1,000 population)
1,129
800
-29%
Source: Department of Health & Human Services, Centers for Disease Control and Prevention. 1989. “Trends in Hospital Utilization: United States,1965-1986. Data from the National
Health Survey.” Series 13, Number 101; Department of Health & Human Services, Centers for Disease Control and Prevention. 1996. “Trends in Hospital Utilization: United States, 198892. Data From the National Health Survey.” Series 13, number 124. http://www.cdc.gov/nchs/nhds.htm.
141
How to set the payment amount for EDRGs
• Don’t use complex formulas.
• Use reality-based pricing:
• Base amount would be the cost of resources
used by medical centers getting best riskadjusted outcomes.*
• The actual payment would then be the base
amount plus 3% (without a small margin even
a not-for-profit organization cannot stay in
business).
* Concept source: Luft, Harold S. 2008. Total Cure: The Antidote to the Healthcare Crisis. Cambridge: Harvard University Press.
142
Example distribution of outcomes and costs for a
given EDRG for teaching hospitals
Each symbol represents a single medical center; EDRG = Expanded DRG
1.8
Outcomes for EDRG “x”
1.6
Good
Effectiveness
Good
Efficiency
Good
Effectiveness
Poor
Efficiency
Poor
Effectiveness
Good
Efficiency
Poor
Effectiveness
Hospital
1.4
1.2
1.0
0.8
0.6
Poor
Efficiency
0.4
0
10
20
30
40
Cost for EDRG “x” ($000s)
50
60
Concept source: Luft, Harold S. 2008. Total Cure: The Antidote to the Healthcare Crisis. Cambridge: Harvard University Press.
143
• The above slide represents an example of a given Expanded Diagnostic Related
Group (EDRG), where each dot represents a hospital in a given peer group of
hospitals – for instance teaching hospitals.
• The providers who deliver care for that EDRG should determine what would be
good outcomes to measure, for example, orthopedic surgeons would determine
outcomes to track for total joint patients.
• If the EDRG was total hips, the likely outcome measurements would be (riskadjusted) mortality, complications, return to normal activity, and infection rates.
• Each medical center can then be measured on these outcomes and an index
developed.
• In addition, the cost of the resources used to deliver this care could be determined
for each medical center and plotted on a graph as shown above.
• When such analyses are done, the distribution of the data typically follows a
pattern seen in this hypothetical example.
144
Set base amount at the median cost of the top
third of hospitals with the best outcomes
Each symbol represents a single medical center; EDRG = Expanded DRG
1.8
Proposed base amount
Outcomes for EDRG “x”
1.6
Hospital
Top 1/3 of hospitals on outcomes
1.4
1.2
1.0
0.8
0.6
Median cost of top 1/3 of
hospitals on outcomes
Median cost of all hospitals
0.4
0
10
20
30
40
Cost for EDRG “x” ($000s)
50
60
Concept source: Luft, Harold S. 2008. Total Cure: The Antidote to the Healthcare Crisis. Cambridge: Harvard University Press.
145
•
•
•
•
•
•
An important factor is how the payment amount that Medicare would pay for an EDRG would
be determined.
In our view, it should not be done by complex formulas that are often incorrect and tend to
reward medical centers that get the worst outcomes.
Instead, we feel the approach should be one suggested by Dr. Harold Luft* in 2008. That
approach would determine the median cost of medical centers that get the best outcomes.
In our example we have taken the top 1/3 of hospitals on outcomes, then drawn a dotted line
down that represents the median cost for the top 1/3 of hospitals on outcomes. Thus, the cost
paid by the government would actually be less than the current median cost of all the
hospitals.
Therefore, all medical centers that had costs to the right of the dotted line, would now have
incentives to become more efficient.
While setting payment amount per above will encourage better efficiency, we run the risk of
reducing care effectiveness. To ensure that we do not sacrifice quality, a withhold approach
may be warranted.
* Dr. Luft is currently Director, Research Institute at the Palo Alto Medical Foundation (PAMF). He is a senior investigator for PAMF's Department of Health Policy Research, as well as
Caldwell B. Esselstyn Professor Emeritus of Health Policy and Health Economics and former director of the Institute for Health Policy Studies (IHPS) at the University of California, San
Francisco (UCSF).
146
To ensure that we do not sacrifice quality for cost with
EDRGs, a quality withhold approach may be warranted
Each symbol represents a single medical center; EDRG = Expanded DRG
1.8
1.6
Outcomes for EDRG “x”
Hospital
Proposed base amount
Providers receiving
100% of proposed
EDRG base amount
Top 1/3 of hospitals on outcomes
1.4
Providers receiving
95% of proposed
EDRG base amount
1.2
1.0
0.8
0.6
Median cost of top 1/3 of
hospitals on outcomes
Median cost of all hospitals
0.4
0
10
20
30
40
Cost for EDRG “x” ($000s)
50
60
Concept source: Luft, Harold S. 2008. Total Cure: The Antidote to the Healthcare Crisis. Cambridge: Harvard University Press.
147
• A possible way to promote effectiveness is to introduce a “quality
withhold”:
– Instead of receiving 100% of the base payment amount,
providers would initially receive 95% of the EDRG base
payment amount.
– Providers with outcomes in the top 1/3 would receive the full
amount (95% + the 5% quality withhold).
– Payment to providers with outcomes below the top 1/3 would
remain at 95% of the EDRG base payment amount (they lose
the 5% quality withhold).
• The quality withhold could be set at a higher percentage.
Source: Emswiler, Tom and Len M. Nichols. 2009. “Hill Physicians Medical Group: Independent Physicians Working to Improve Quality and Reduce Costs.” The Commonwealth Fund.
148
• If implemented correctly, the move to true
Pay-for-Value will provide incentives for
the high cost providers to become more
effective and efficient.
• These savings will not happen overnight,
but should be realizable and sustainable
long term.
149
In addition to EDRGs we should consider additional
Pay-for-Value approaches suggested by the AMA
Payment model
Description
Partial capitation
An Accountable Care Organization (ACO*) receives a pre-defined, risk-adjusted monthly
payment to cover all costs of services for a defined beneficiary group.
Condition-specific
capitation
A group of physicians receives a fixed amount to cover all services for a specific condition,
such as congestive heart failure.
Accountable medical
home
A group of physicians receives up-front resources to restructure primary care delivery. It
commits, in return, to reducing inappropriate healthcare utilization.
Inpatient care
warranties
Physicians and hospitals set Medicare payment rates and give warranties for inpatient
treatment, agreeing not to charge more for infections and complications.
Mentoring programs
Medicare offers financial and technical support (e.g., patient utilization, cost, and quality
analyses) to small or solo physician practices working with regional health improvement
collaboratives.
Patients and physicians freely contract for services, allowing them to agree on rates for
services without having to forgo Medicare payment.
Private contracting
* ACO = a healthcare delivery model that ties provider reimbursements to quality metrics and reductions in the total cost of care for a given population of patients.
Source: American Medical Association. 2011. “The need to move beyond the SGR.” Statement of the American Medical Association before the
House Energy and Commerce Committee Subcommittee on Health, May 5.
150
The legal environment also contributes to higher
use rate and inefficiency…
• Defensive medicine consists of procedures or tests that a doctor
orders to avoid possible future malpractice lawsuits.
• The practice is prevalent among U.S. physicians. According to a
survey of 824 physicians in 20051:
– 93% said they had engaged in the practice of defensive
medicine.
– 59% said they often ordered more diagnostic tests than
medically necessary.
– 52% said they referred patients to other specialists in
unnecessary circumstances.
– 33% said they often prescribed more medications than
medically necessary.
Source: 1) Studdert et al. 2005. “Defensive Medicine Among High-Risk Specialist Physicians in a Volatile Malpractice Environment.” JAMA 293(21):2609-2617; Meeker, Mary. 2011. USA
Inc.: A Basic Summary of America’s Financial Statements, KPCB.
151
…and leads to higher healthcare delivery costs
• Estimates of annual healthcare costs caused by
unnecessary care related to defensive medicine and
associated legal costs range from ~$50 billion to
$200 billion.1,2
• “The legal environment also should be structured to
encourage the sharing of information, perhaps
through increased transparency and creation of a
‘safe harbor’ to report poor outcomes or errors.”3
Source: 1) PriceWaterhouseCoopers. 2006. “The Factors Fueling Rising Healthcare Costs.”; 2) Mello et al. 2010. “National Costs of the Medical Liability System.” Health Affairs 29(9):15691577; 3) Cortese, Denis A., and Robert K. Smoldt. 2006. “Healing America’s Ailing Health Care System.” Mayo Clinic Proceedings 81(4):492-6.
152
REFORMING MEDICARE:
SUMMARY RECOMMENDATIONS
153
Summary recommendations
• Key recommendations to make Medicare sustainable for the
government:
– Increase the age of eligibility to 69 years, with the option to
enter the program at 65 years, and link it to life expectancy
thereafter.
– Move to a premium support model with a national
insurance exchange that includes a variety of insurance
products – a Medicare Exchange.
• Key recommendations to ensure Medicare affordability for
individual citizens:
– Establish true Pay-for-Value.
– Carry out tort reform.
154
Conclusions: Detailed recommendations (1/3)
•
•
Progressively increase the age of eligibility to 69 years starting in 2014
and link the future eligibility age to changes in future life expectancy:
– We recognize that some individuals below age 69 may not be able to
work for medical reasons or may not be eligible for healthcare benefits
through their employers.
– To address this problem we propose to allow beneficiaries to enroll in
the program at age 65, but at a reduced government contribution
(actuarially equivalent to entering the program at age 69).
Beginning in 2016, all Medicare beneficiaries would be on premium
support for a private health plan through a Medicare Exchange:
– The amount of premium support for the individual beneficiary would be
adjusted by income.
– The Medicare Exchange model would be based on a Federal
Employee Health Benefits Plan (FEHBP) approach with discretion
given to an Office of Personnel Management (OPM)-like group to
manage the Exchange.
155
Conclusions: Detailed recommendations (2/3)
– OPM-like group would have the following responsibilities:
• Determine minimum performance standards for plans.
• Each insurance company should have a basic low cost option.
• There is at least one High Deductible Health Plan (HDHP) as an
option.
• Ensure that insurance plans are solvent.
• Provide information on the plans and their past performance to the
beneficiaries.
• Enforce rules for consumer protection.
• Initiate risk adjustment for plans with a disproportionate share of
high cost patients.
– OPM-like group does not:
• Standardize health benefits.
• Set prices for either the plans or the providers.
156
Conclusions: Detailed recommendations (3/3)
•
•
– In year one, the basic government contribution would be determined
on either what would have been paid per beneficiary under Fee For
Service (FFS) or the 2nd least expensive plan, whichever is lower.
Going forward limit the increase in government premium support to
GDP +1% or the 2nd least expensive plan, whichever is lower. If per
beneficiary costs increase by more than GDP + 1%, the beneficiary
share of the Medicare premium will rise on a financial means tested
basis.
– Provide a medical savings account for low-income beneficiaries from
which they could pay co-pays, deductibles, etc. – thus assuring that
low-income beneficiaries can obtain care.
Move to true Pay-for-Value: Start by changing how FFS Medicare pays for
hospitalized patients by going to Expanded DRGs as described on slides
130-148.
Carry out tort reform.
157
Financial implications of the proposed
Medicare reform
Estimated savings (2013-2022)
$ Billions
Raising the age of eligibility to 69
~3751
Moving Medicare to premium support
~2742
Total savings
~6183
1) Assumes the same timeline as CBO projections of moving age of eligibility to 67 (2014-2027) and the same reduction in savings as a result of “federal spending on Medicaid, exchanges,
federal retirees, and Social Security retirement.” Source: Congressional Budget Office. 2012. “Raising the Ages of Eligibility for Medicare and Social Security.” Issue brief, January; 2)
Senator Pete Domenici and Dr. Alice Rivlin. 2012. “Domenici-Rivlin Debt Reduction Task Force Plan 2.0.” Bipartisan Policy Center, December 3; 3) Savings are not directly additive since
changing the age of eligibility reduces the number of beneficiaries that will be on premium support.
158
Conclusions: Medicare has to change to survive
•
•
Medicare must be made sustainable in a manner that is fair to seniors, to
their children and their grandchildren who are or will be paying the taxes
for the Medicare program. As this book shows, bold action and consistent
leadership on several fronts are required.
If there is no action, Medicare in its current form:
– Will burden the nation’s finances,
– Will stifle innovation due to the complexity of its rules and regulations,
– Will continue to decrease access for Medicare patients,
– Will lead to worse outcomes and higher costs due to its continued use
of price-controls, which have failed to control growth in overall
Medicare spending.
As a country, we need to do something!
159
This slide is intentionally left blank.
160
Established in 1965, the Medicare program is the primary health
insurance program for adults aged 65 and older and people younger than
65 with permanent disabilities. Although Medicare has made a
significant contribution to the lives of beneficiaries by improving their
economic and health security, the program presents a number of
challenges. It is of interest to note that some of the problems we
currently face, e.g., rapidly rising costs and overwhelming complexity,
were already present in the first year of the Medicare program. Thus, we
believe that we will not solve the problem by relying on continuing piecemeal “tinkering” with various program components. Medicare must be
fundamentally reformed and made sustainable in a manner that is fair to
seniors, to their children and their grandchildren, who are or will be
paying the taxes for the Medicare program.
Our key recommendations to make Medicare sustainable for the
government include: Raising the age of Medicare eligibility to 69 years,
with the option of entering the program at 65 years; Moving Medicare to
a premium support model. Moreover, to ensure Medicare affordability
for individual citizens, we also propose: Establishing true Pay-for-Value
for medical providers; Carrying out tort reform.