1 Controlling Costs in Medicare Jack Hoadley Research Professor Georgetown University Health Policy Institute Citizens’ Health Care Working Group Public Sector Initiatives to Control Costs May 13, 2005

2 Spending Growth Per Enrollee, Medicare versus Private Health Insurance Source: Centers for Medicare & Medicaid Services, Office of the Actuary

3 What Makes Medicare Different? Legal context –Statutory prohibition on Medicare’s practicing medicine –Requirements for an open, public process Administrative resources available Program size Potential for market-wide effect of policy changes

4 What Makes Medicare Different? (2) Political environment Beneficiary freedom of choice Unique patient population –Disabled and elderly patients –Different expectations of the health system Benefit structure

5 How Medicare Seeks to Control Costs Constrain payment rates Increase beneficiary cost sharing Modify the volume of services –Financial incentives to providers or patients –Information-based incentives Influence prices or costs of services Limit which providers participate in Medicare

6 Principles of Medicare Payment Ensure beneficiary access to high quality care in an appropriate setting Give providers an incentive to supply care efficiently Pay similarly for services, irrespective of setting Control program spending

7 Medicare’s Payment Systems Traditional cost-based reimbursement –Mostly phased out –Still used in a few sectors Prospective payment –Hospital DRGs –Others (hospital outpatient, SNFs, home health) Medicare Fee Schedule (physicians)

8 Constraints on Payment Rates Hospitals and other institutional providers –Formula for market-basket increases –Congressional adjustments Physicians –Formula based on the “sustainable growth rate” –Congressional adjustments

9 Constraints on Payment Rates (2) Medicare Advantage –Formula in law (2004 = 107% of fee-for-service) –Move to bidding system Medicare Part D –Bidding system –Fixed government share of total costs

10 Increased Cost Sharing Beneficiaries pay a share of their health costs –First-day Part A hospital deductible ($912) –Part B deductible ($110) –20% coinsurance for Part B services Reduces government costs Encourages cost-conscious purchasing, reducing use of discretionary services But could impede the use of appropriate services

11 Modifying the Volume of Services Identifying efficient providers and promoting efficient care patterns –Provider profiling –Disseminating information to enrollees and providers –Creating payment incentives (“pay for performance”) –Disease management, care coordination

12 Modifying the Volume of Services (2) Pay only for appropriate care, regardless of efficiency –Prior authorization of services –Coding edits

13 Influence Price or Costs of Services Bundled payments Pay differentially, e.g., based on site Make more use of hospitalists, intensivists Competitive bidding to establish price –Durable medical equipment

14 Limit Provider Participation Competitive bidding to designate winners –Durable medical equipment Selective contracting Centers of excellence –Demonstration: coronary artery bypass grafts ( )

15 Medicare’s Future Continued adjustment of payment systems Innovative approaches to purchasing services in the fee-for-service environment Increased enrollment in managed care “Comparative Cost Adjustment Program” –Demonstration of premium support system, starting in 2010 (MMA) MMA provision to trigger review of spending if Medicare spending exceeds 45% general revenue