1. THE COMMONWEALTH FUND Medicare Payment Reform Stuart Guterman Assistant Vice President and Director, Program on Medicare’s Future The Commonwealth Fund University of St. Thomas Health Policy Seminar Washington, DC April 21, 2009

2. THE COMMONWEALTH FUND Medicare Spending Growth

3. THE COMMONWEALTH FUND Sources of Growth in Projected Federal Spending on Medicare and Medicaid, 2007 to 2082 Source: Congressional Budget Office (2007). The Long-Term Outlook for Health Care Spending. Washington, DC, as presented by P. Orzag at the New America Foundation, November 2007, accessible at: http://www.newamerica.net/files/Orzag%20PPT%20111307.pdf

4. THE COMMONWEALTH FUND Federal Spending on Medicare and Medicaid and Total Federal Spending as a Percentage of GDP, 1962-2082 Percentage of GDP *Total includes all federal non-interest spending. Note: Figures for 2007-2082 are projections. SOURCE: Congressional Budget Office. Budget Outlook.

5. THE COMMONWEALTH FUND How Medicare Pays for Health Care

6. THE COMMONWEALTH FUND Medicare Payment Methods Hospital Inpatient—Fixed rate for each type of patient Hospital Outpatient—Fixed payment for each type of services Physician—Fixed payment for each type of service Skilled Nursing—Fixed payment per day for each type of patient Home Health—Fixed payment per episode (60 days) for each type of patient Medicare Advantage plans—Fixed payment per enrollee per month Prescription drugs—Fixed payment per enrollee per month At least 11 other payment methods for various types of providers and services

7. THE COMMONWEALTH FUND Initiatives to Change How Medicare Pays

8. THE COMMONWEALTH FUND Selected Medicare Bundled Payment Initiatives Inpatient Hospital Prospective Payment (1983) Prospective payment for other providers (1983-2000) Medicare Participating Heart Bypass Center Demonstration (1991) Medicare Physician Group Practice Demonstration (2005) Medicare Health Care Quality Demonstration Programs (2009?) Medicare Acute Care Episode Demonstration (2009?)

9. THE COMMONWEALTH FUND How Can We Reform Medicare Payment to Elicit Effective Health Care Delivery?

10. THE COMMONWEALTH FUND Approaches to Making Medicare More Sustainable Paying providers and plans –Physicians –Hospitals –Post-acute care providers –Medicare Advantage plans Managing chronic illness Increasing value for the Medicare dollar –Quality –Efficiency –Care coordination Protecting beneficiaries (particularly those who are most vulnerable) Improving the program—both for its own viability and as a model for the entire health system

11. THE COMMONWEALTH FUND Medicare: Payment Reform Move from fee-for-service toward more bundled payment Physicians –Blended fee-for-service, patient-centered medical home fee –Primary care per patient global fee –Ambulatory care per patient global fee Hospitals –Global DRG fee for hospitalization—extend to discharge plus 30 days Inpatient hospital and emergency room Include post-acute care Include physician inpatient care (Actual or virtual) Integrated delivery systems –Global episode payment for chronic and other specified conditions –Full capitation for all patients

12. THE COMMONWEALTH FUND Interrelation of Organization and Payment Integrated system capitation Global DRG fee: hospital, post- acute, and physician inpatient Global DRG fee: hospital only Global ambulatory care fees Global primary care fees Blended FFS and medical home fees FFS and DRGs Continuum of Payment Bundling Small MD practice; unrelated hospitals Hospital system Integrated delivery system Continuum of P4P Design Outcome measures; large % of total payment Preventive care; management of chronic conditions measures; small % of total payment Care coordination and intermediate outcome measures; moderate % of total payment Less Feasible More Feasible Source: A. Shih, K. Davis, S. Schoenbaum, A. Gauthier, R. Nuzum, and D. McCarthy, Organizing the U.S. Health Care Delivery System for High Performance (New York: The Commonwealth Fund, Aug. 2008). Primary care MD group practice Multi- specialty MD group practice

13. THE COMMONWEALTH FUND What Drives Variation in Spending? Average risk-adjusted standardized spending for chronic obstructive pulmonary disease episode Difference between high and average Type of serviceLowAverageHigh%$ Total episode63727871974823.81877 Initial hospital stay440844144406-0.2-8 Physician5475695761.27 Readmissions6711543255065.31007 Post-acute care466998178078.4782 Other28034743625.689 Source: G. Hackbarth, R. Reischauer, and A. Mutti. “Collective Accountability for Medical Care—Toward Bundled Medicare Payments” New England Journal of Medicine July 3, 2008 359(1):3-5.

14. THE COMMONWEALTH FUND Medicare: System Reform Quality standards and quality reporting –Physicians, hospitals, integrated delivery systems electing global payment must be accredited/certified as capable of assuming accountability for bundled services and meeting quality standards –All providers must report quality measures, with more comprehensive outcome and care coordination metrics for providers assuming accountability for bundled services –Payment rewards for quality and outcome results Transparency – Medicare publishes quality, accountability, and provider profile information Information technology – electronic medical records within five years; 1% assessment of private insurers and Medicare outlays to finance information exchange networks and safety net providers; personal health records accessible to beneficiaries Comparative effectiveness – center to evaluate comparative effectiveness of drugs, devices, procedures; benefit design tied to recommendations

15. THE COMMONWEALTH FUND Where Do We Go From Here?