Issues and Challenges Facing Medicare

Mark L. Hayes

Solvency

Source: OACT Analysis, “Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers (August 5, 2010).

Mandated Payment Reductions

Projected Spending

Benefit Design From 1965 Medicare pays less than half (45%) of beneficiaries’

total health and long-term care spending Medicare does not cover all medical benefits

– No coverage for hearing aids, eyeglasses, or dental care– Generally does not pay for long-term care

Medicare has high cost-sharing requirements– Monthly premiums for Part B, Part C, and Part D– Deductibles for Part A, Part B, and Part D– Part D coverage gap (“doughnut hole”)

No limit on out-of-pocket spending for benefits– Median out-of-pocket spending as a share of income rose

from 11.9% in 1997 to 16.1% in 2005

Most Have Supplemental Coverage

SOURCE: Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Access to Care File, 2006.

$10,000 or less

$10,001-20,000

$20,001-30,000

$30,001-40,000

$40,001or more

Broken Physician Payment System

7

2007 2008 2009 2010-25

-20

-15

-10

-5

0

5

Actual updatesSGR formula update

Year and month

Cum

ulati

ve p

erce

nt c

hang

e

Notes: Updates do NOT include other payment increases for physician services (e.g., Quality reporting (PQRI) bonuses, Health IT bonuses, establishment of floors for work and practice expense values.) The 21.3 percentage point difference is the ratio of cumulative SGR formula updates to the cumulative temporary bonuses (0.79946/1.01606 = 0.78682 or −21.3 percent).Source: CMS letter to MedPAC on the update for 2011, Office of Actuary 2010. Slide created by MedPAC.

21.3percentage

pointdifference

inpayment

rates

percentagepoint

differencein

paymentrates

+1.1% (Jan '09)+0.5%

(Jan '08)

Actual updates in physician payment relative to SGR formula, 2007 through May 2010

Independent Payment Advisory Board

Creates new board with 15 full-time members, appointed by President, confirmed by U.S. Senate

Requires the board to recommend specific Medicare savings proposals if Medicare spending exceeds target growth rates

Requires the HHS Secretary to implement board’s recommended proposals, unless Congress enacts an alternative with equivalent savings

Prohibits board from recommending proposals that would ration care, reduce benefits, increase cost-sharing, or modify benefits, eligibility, premiums, or raise taxes, or reduce payments for certain providers (before 2018)

Unprecedented authority to recommend reductions in Medicare spending

Spending Distortions Caused By Payments Sytems

Source: Congressional Budget Office, Geographic Variation in Health Care Spending, February 2008.

People living in high spending areas receive about 60% more in services than those in low spending areas.

Average costs ranged from about $5,200 in the areas with the lowest spending to nearly $14,000 in high spending areas. (2005 data after adjusting for differences in the age, sex, and race)

Spending Varies Considerably Across the U.S.

FFS Bundled Payments

Fully Capitated

The Need for Delivery System Reforms

General Spectrum of Payment Systems Today

Do as little as

possible in as many different settings

as possible

Do as much as possible for as many

patients as

possible

Do as little as possible for as many

patients as

possible

Delivery System and Payment Reforms

Federal Coordinated Health Care Office in CMS for dual eligibles (2010)

New Center for Medicare and Medicaid Innovations (2011)

Shared Savings/Accountable Health Organizations (2012)

Reduced payment for preventable hospitalizations (2012)

Independents at Home demonstration project with shared savings (2012)

Value-based purchasing for hospitals (2012)

National pilot to bundle payments for hospital and post-acute care (2013)

Reduced payments for hospital-acquired conditions (2015)

Mandatory physician quality reporting program (2015)

CBO estimates that these initiatives will reduce Medicare spending by $12 billion over ten years

Medicare Distortions Impact Employer Sponsored Coverage

Employers cover 170 million people in the same markets with Medicare

Payment systems drive cost shifting to employer plans

Inefficient payment models drive up costs and lack sufficient incentives for quality and efficiency improvements

How do employer sponsored plans interface with payment systems that are outdated