Will Medicare changes be enough to rein in health costs?

The Affordable Care Act (ACA) has changed Medicare for the better, and produced higher quality of care for patients. But whether the new shifts in Medicare policy will lower the total cost of health care, remains unclear. And that could present the program with a major problem in the future.

For the first 40 years of Medicare, most enrollees opted for the traditional fee-for-service Medicare program. The main reason for doing so was to maximize their choice of available physicians and hospitals.

But today, 60 percent of adults who turn 65 choose a Medicare Advantage (MA) plan with its expanded benefits and greater predictability of cost. As a result, the number of enrollees in MA has grown to more than 30 percent of all seniors. No fewer than 4.6 million individuals have chosen this option since enactment of the ACA five years ago — a 40 percent increase, according to the federal government — with most switching from a traditional Medicare plan. Last year alone, the MA program added 1.3 million enrollees.

Recently published research may help explain why MA participation has risen so sharply. The market research firm Morning Consult found in a poll of nearly 4,000 Medicare beneficiaries released in March that seniors are more likely to be satisfied with the benefits of MA plans (86 percent) than with traditional Medicare (77 percent). And they also turned out to be more satisfied with the costs for MA than traditional Medicare (80 percent compared to 68 percent).

In short, Medicare beneficiaries increasingly are willing to trade choice for the higher quality, expanded benefits and lower cost of enrolling in Medicare Advantage. But traditional Medicare is also moving in this direction.

A brief history of Medicare

Medicare was created in 1965 to serve older Americans and the disabled. The program celebrates its 50th anniversary this year, and currently provides health care coverage to 54 million Americans.

Traditional Medicare was and is primarily a “fee-for-service” program. Physicians are reimbursed based on the number and complexity of services — office visits, tests and procedures — they provide, regardless of whether they contributed to achieving a desired health outcome. CMS determines the price for each of those services. Enrollees in traditional Medicare can choose to receive care from the overwhelming majority of doctors and hospitals, but patients often find themselves having to coordinate their own care as they move from physician to physician.

The alternative option, known today as Medicare Advantage, came about in 2003 through the Medicare Modernization Act. Under MA, private health maintenance organizations (HMOs) and PPOs contract with individual medical groups and preferred provider networks to deliver the care that enrolled Medicare beneficiaries need.

Unlike the reimbursement structure in traditional Medicare, participating providers are not paid based on the number of tests ordered or procedures performed. Instead, the Centers for Medicare and Medicaid Services (CMS) — the agency that administers the Medicare program — pays private health plans a “risk-adjusted” flat dollar amount per Medicare-eligible enrollee. The older and sicker the population enrolled in the plan, the higher the payment per beneficiary.

This method of payment rewards MA organizations that provide the highest quality care the first time, focus on preventive services, and help enrollees with chronic illnesses avoid complications. And the most successful organizations are the ones in which the participating physicians and hospitals work together and most effectively coordinate patient care.

Changes ahead for Medicare

How Medicare enrollees receive health care will be markedly different for years to come, thanks to two major changes that accompany the ACA.

First, the ACA created the first-ever quality bonus payment program for MA plans through the Five-Star Quality Rating System. In the traditional Medicare program, enrollees have historically lacked the robust information needed to determine provider quality. But the Five-Star Quality Rating System creates a framework for Medicare enrollees to identify high-quality delivery systems. One star means poor, three stars average and five stars excellent.

The ratings are determined by a broad set of clinical and patient-reported outcome measures, including how effectively participating physicians screen for cancer, reduce risk factors that lead to heart attack and stroke, and address the medical challenges of their patients’ chronic illnesses.

Under this approach, high-quality MA plans are not only paid based on the disease burden of their members, but also receive an additional payment based on quality performance. The Medicare Advantage program pays five percent more to plans that achieve a four-and-a-half or five-star rating and nothing more to those who earn only one to three-and-a-half stars. In an industry where health plan margins average around five percent, this payment design — which gives high-performing plans some ability to protect beneficiaries-creates powerful incentives for all plans to strive for four and a half or five-star status.

Second, the ACA established, or accelerated, numerous “value-based purchasing programs” in traditional Medicare. Physicians and hospitals participating in traditional Medicare now have incentives in the form of quality bonuses for superior outcomes and penalties for the delivery of inappropriate or unsafe care. This carrot-and-stick approach encourages physicians and hospitals to provide “high-value” health care to patients. And as a consequence, these outcomes-based payment programs have improved overall clinical quality.

In addition, to accelerate the movement towards greater coordination, the ACA provided incentives for the creation of accountable care organizations (ACOs) for Medicare beneficiaries.

ACOs are groups of primary-care physicians, specialists, and hospitals that join together to provide care to a population of patients. In general, the participating physicians and hospitals take joint responsibility for the quality and cost of patient care, and function under a variety of risk-sharing arrangements.

Most recently, Sylvia Matthews Burwell, Secretary of the U.S. Department of Health & Human Services, set a target of moving 50 percent of Medicare payments into alternative payment models like ACO’s by 2018. And we have seen over the past decade an evolution of Medicare ACOs from one-sided risk arrangements in the Physician Group Practice Demonstration, to two-sided risk sharing through Pioneer ACOs, to the most recent Next Generation ACO Model that further speed the movement towards full capitation arrangements. Full capitation will bring traditional Medicare and Medicare Advantage closer together in structure, financing and incentives.

The outlook for Medicare costs

We can predict that as traditional Medicare moves from being predominantly fee-for-service to pay-for-value, the quality and coordination of care provided will improve. But what remains uncertain for both traditional Medicare and MA is whether the total cost of providing the care will diminish. The early data is mixed.

As an example, many of the new Medicare ACOs have lowered the direct costs of providing health care, but in most cases, the dollars they had to invest nearly offset all of the savings achieved.

Certainly as a nation we can do better than we do now. As policy experts have long recognized, the U.S. spends more per capita on health care than any other country. Yet clinical outcomes for Americans compared with citizens of other industrialized nations are average at best.

And the challenges are growing. Expensive new drugs, an aging populace and advances in clinical medicine are all driving costs up. Stakeholders, policy experts and elected officials are counting on the rapid shift from fee-for-service to pay-for-value to overcome such hurdles.

Theoretically, by rewarding Medicare programs that produce better results, these changes should lead to healthier populations in the long run. And by furnishing patients with clinical quality outcomes data, individuals should be able to make better-informed choices. And over time, those health care organizations that compete best — matching or exceeding the clinical outcomes of others – will flourish, while others will fade and ultimately disappear.

But only time will tell whether theory and practice align.

Robert Pearl is a physician and CEO, Permanente Medical Groups. This article originally appeared in Forbes.

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