Health plans should be paid to keep patients healthy. That is, when some percentage of patients with a chronic progressive disease may be expected to progress to the next stage of that disease in the course of a year, health plans should be paid if they can keep the percentage of patients progressing significantly below the expected level. Depending on the level of success in preventing disease progression, and the payment required to achieve that level of success, preliminary estimates suggest that annual program savings could range from several hundred million to almost $3 billion from chronic kidney disease alone. This is just the tip of the iceberg, since there are many other chronic progressive conditions that would be amenable to this sort of incentive system. Most important, because the payment for reducing disease progression can be calibrated to be lower than the payment for more severe stages of the diseases, it can be guaranteed that program costs will not increase. In other words, there is great potential benefit, but no downside risk to the taxpayer.
The Medicare Trustees issued their annual report detailing the financial state of America’s entitlement programs. The report echoed past conclusions: Medicare and Social Security are still going bankrupt. At its current pace, Medicare will be bankrupt in 2030 and Social Security will go bankrupt in 2034 (a year later than last year’s projection). Despite what many will herald as good news for Medicare, a deeper look at the data proves just how broken our current entitlement programs are.
Medicare Advantage (MA) is the alternative to traditional Medicare that offers seniors a one-stop option for hospital care, outpatient physician visits, and prescription drug coverage. MA is popular with seniors. Enrollment has increased every year since 2004 and reached 16 million individuals in 2014, which represents 30 percent of the Medicare population.
Medicare Advantage (MA) offers seniors a one-stop option for hospital care, outpatient physician visits, and prescription drug coverage. MA is popular; enrollment has increased every year since 2004 and reached 16 million individuals in 2014, which represents 30 percent of the Medicare population. Since 2008 MA plan performance has been rated on a 5-star scale to inform beneficiaries of the quality of plan options, and since 2012 plans with higher ratings receive bonuses that are in part returned to beneficiaries.
As the nation marks the 50th Anniversary of the creation of Medicare and Medicaid, it is important to both look back at how the programs have evolved, as well as forward at what’s to come. But be careful—the trajectory may alarm you. Between 2010 and 2023, total expenditures on Medicare and Medicaid will more than double to nearly $2 trillion annually, while enrollment during that same period is only expected to increase by 45 percent. Spending on Medicare did not surpass $500 billion until 2009, 44 years after the program began; but it will only take 13 years beyond that to increase by the same amount. In the 10 years between 2014 and 2023, average annual enrollment growth in both Medicare and Medicaid will be approximately 3 percent, while average annual growth in expenditures will be more than double the rate of enrollment for both programs—6.2 percent for Medicaid and 7 percent for Medicare.
The Medicare program was established 50 years ago and, as of 2013, provided health care coverage to 52.3 million beneficiaries at a cost of $583 billion. Serving 19.4 million beneficiaries in 1967, total Medicare expenditures were $4.7 billion. The growth in program expenditures is largely due to growth in the number of beneficiaries. However, growth in health care prices and the availability of more health care services has been a significant factor in the growth of real per-beneficiary spending, which has tripled since 1970. Between 1965 and 2010, average annual growth in health care prices outpaced general price inflation by approximately 2 percent. Average total spending per beneficiary was $12,210 in 2013, and will continue to rise. As the number of beneficiaries will also soon skyrocket—enrollment is expected to grow at an average annual rate of 3 percent over the next decade, this combination will dramatically increase Medicare expenditures, expected to surpass $1 trillion by 2022.
Medicaid, along with Medicare, was created in 1965 as a joint federal-state entitlement program to provide health care coverage to any low-income individual or individual with disabilities who meets the eligibility criteria in his or her state of residence. The Federal government sets minimum eligibility criteria and program requirements which can be expanded by the state, and funds anywhere from 50 percent to 74 percent of a state’s Medicaid expenses, based on the Federal Medical Assistance Percentage (FMAP) formula. Every state has participated in the program since 1982.
Medicare presents the single largest threat to the federal budget and long-term fiscal stability, and as such, requires substantial and immediate reform. Thankfully, the program is slowly acquiring the architecture for a more sustainable future. Through programs like Medicare Advantage (MA) and Medicare Part D, competition among private insurers can create value for beneficiaries and savings for the federal government. Further, the transition from fee-for-service to performance and quality based payments may be instrumental in slowing the rise of health care costs.
In the 50 years since the Medicare program was signed into law, it has become the second-largest expenditure in the federal budget, costing $600 billion in 2014. Policymakers have become increasingly concerned recently with the expected growth of the Medicare-eligible population as the Baby Boomers begin to retire, at a rate of 10,000 per day, and the impact such growth will have on the program’s finances, and the federal budget. That concern is valid: in 20 years, the percent of the total U.S. population age 65 or older is expected to increase to 21 percent—a percentage-point increase more than double the growth among the elderly population in the first 50 years of the program. However, while the retirement of the Baby Boomers will bring a rate of growth unseen thus far, the beneficiary population has been steadily growing as a percent of the population since the program’s inception. In 1966, Medicare beneficiaries equaled 9.7 percent of the U.S. population; by 2013, 16.6 percent of the population was receiving Medicare benefits.
For years, policymakers and health insurers have looked for ways to simultaneously reduce federal health care expenditures and ensure better quality care for patients. For both hospital services (Part A) and physician services (Part B), the Centers for Medicare and Medicaid Services (CMS) has implemented multiple programs to track providers’ performance on various metrics and adjust payments accordingly—similar to efforts being imposed by private insurers. For Medicare Advantage (MA or Part C), CMS operates the Star Rating System. This system provides a relative quality score to Medicare Advantage Organizations (MAOs) on a 5-star scale based on their plans’ performance on selected criteria, and is now used to determine whether or not an MAO will receive bonus payments and/or rebates for their enrollees.
This week several news outlets published stories about the great successes of the Pioneer Accountable Care Organization (ACO) demonstration project, a managed care approach explained in depth here, and the potential positive implications for Medicare. While it is understandable that many are desperate to find any sign of success deriving from the health reform law, wishful thinking doesn’t actually make the Pioneer ACO program a success. The hype surrounding the $400 million savings is overblown, and the stability of the Pioneer model should be seriously questioned before more Medicare funds are committed to a relatively untested and largely unsuccessful program.
Tuesday at midnight doctors seeing Medicare patients face the double-digit consequences of the price-fixing on autopilot of the Sustainable Growth Rate (SGR) mechanism.
At exactly the same time that a bipartisan bill is making a great stride forward for Medicare in the House of Representatives, the Senate is poised to vote on a great step backward. Specifically, Senator Jack Reed is offering an amendment to the Senate budget resolution with the purpose of “making prescription drugs more affordable for seniors and for tax-payers by requiring the Secretary of Health and Human Services to negotiate prescription drug costs under the Medicare program.”
Congress has the chance to eliminate an annual legislative nightmare, fix the reimbursement of doctors under Medicare, introduce substantive, structural changes to an entitlement program, and ensure the continued insurance coverage of needy children – all without raising a dime of taxes. Reports indicate that there is a bipartisan, bicameral leadership agreement for Congress to repeal the Sustainable Growth Rate (SGR) mechanism, as well as extend for two years the Children’s Health Insurance Program (CHIP) and numerous other health provisions. The legislation isn’t perfect – more on that below – but it is an important step forward.