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Enhancing Value in Medicare: Demonstrations and Other Initiatives to Improve the Program

Executive Summary

Medicare was designed to deal primarily with the effects of acute illness, which was seen at the time of the program's inception as the major threat to the health and financial security of the aged. While it has fulfilled this purpose, demographic and other changes pose new challenges to Medicare and the health care system as a whole.

As with many other countries, the population of the United States is aging, and the prevalence of chronic conditions is increasing. Yet our nation's health care delivery and financing system is not set up to care for a population with complex, long-term medical needs. The performance of the U.S. health system, according to many cost and quality indicators, is subpar. Moreover, the Medicare program is faced with insolvency by the end of the next decade. To meet these challenges, Medicare must play a more proactive role in the purchase of appropriate, high-quality, and efficient health care for the elderly and disabled.

In response to these imperatives, the Centers for Medicare and Medicaid Services (CMS) is developing an array of initiatives to address the evolving needs of the Medicare program and its beneficiaries. Many of these initiatives have been developed under CMS's demonstration authority, which allows the agency to waive certain Medicare payment rules that determine what services are covered and how they are paid in order to test potential improvements; others have been specifically mandated by Congress.

Initiatives to Improve Medicare's Effectiveness and Efficiency
Medicare has a number of initiatives, both under way and in development, aimed at improving the quality and coordination of services provided to its beneficiaries. These fall primarily into two categories: improving the availability and coordination of care for beneficiaries with chronic conditions; and improving the alignment between payment (as well as other incentives) and the quality and effectiveness of care.

The majority of Medicare's chronic care initiatives are focused on better ways to coordinate care for beneficiaries in the traditional Medicare fee-for-service program, but several such initiatives address the structural impediments that Medicare managed care plans have faced when it comes to serving beneficiaries with chronic conditions.

CMS has launched several initiatives in recent years to encourage improved quality of care, placing emphasis first on public reporting of quality indicators in a variety of health care settings. The agency also is providing technical assistance to a wide range of providers through its Quality Improvement Organizations (QIOs). In addition, CMS has developed demonstration projects to test ways of using financial incentives to encourage better performance by hospitals, physicians, and other providers.

Moving from Demonstrations and Pilots to Program Improvements
With pressure mounting to find ways to improve quality while also controlling the growth of Medicare spending, it is important to know what these initiatives have to tell us about whether policy should be changed and, if so, how. But resources currently available for that purpose are scarce. The availability of more funding—to help identify potential improvements and assess their likelihood of success, to develop appropriate design and implementation strategies, and to evaluate results in a timely but rigorous manner—would enhance our ability not only to identify and develop more (and more appropriate) initiatives, but also to translate those initiatives into better policy.

In identifying, developing, testing, evaluating, and implementing Medicare improvements, policymakers face a number of hurdles. Suggestions for improving the process include the following:

  • Increase clarity and flexibility in the waiver approval process. The purpose of Medicare demonstrations should be to enhance the program's value, and the process for identifying, developing, approving, and implementing them should be more transparent and explicitly based on criteria consistent with that purpose. One important requirement for approval of Medicare demonstrations is budget neutrality, which rightly was intended to protect the fiscal integrity of the program. However, budget neutrality as currently applied has become a strict and narrowly defined rule that can hinder the development of important new initiatives. The application of this requirement should take into account the fact that some policy changes may involve short-term costs but long-term benefits. Cross-program savings and costs must be considered as well, so that policy changes that reduce overall spending can be tested, even if they require spending increases in some individual programs; the same reasoning should be applied across levels of government. In addition, there should be allowances for considering policy changes that increase value, even if they do not reduce spending per se.
  • Expand the array of methods available for evaluating demonstration results.

    Medicare demonstrations are not conducted in laboratories but in a world in which the policy environment is constantly changing. Consequently, evaluations must deal with imperfect controls and incomplete data with which to account for mitigating factors. Moreover, in many cases some of the major objectives of the policy change being tested are themselves difficult to measure, either because they are qualitative in nature or because no baseline data exist to determine whether the policy in question has had the hoped-for effect. Putting mechanisms in place that allow for continuous monitoring of demonstrations would help indicate directions not only for the development of new policies when the trials are completed but also for changes in the trials themselves as they proceed.

    The importance and time-sensitivity of information on potential policy changes calls attention to the shortcomings of the methodology currently available for evaluating demonstration results. The imperfect controls and incomplete data available in the real world in which policy is implemented and evaluated must be balanced with the need for rigorous testing of potential policy improvements. More resources are needed to develop new ways of providing timely results that meet the needs of policymakers while maintaining research standards that ensure scientific validity.

  • Establish a more explicit and transparent mechanism for moving from pilot to policy. Finally, once the demonstrations are done and evaluated, the process would benefit from a more explicit mechanism for translating what we learn from them into new policy. In some cases—the Medicare Health Support pilot is the most recent example—Congress gives Medicare (through the Secretary of Health and Human Services) the authority to continue or expand a trial, but most often additional action is required to effect the policy changes suggested by demonstration results. Even when independent evaluations of a mandated demonstration's results are required by law, it can take years for the evaluation report to be cleared by the Executive Branch and transmitted to the Congress. Again, making the process transparent would help considerably, allowing more open discussion of policy changes of interest and their potential impacts. The designation of a regular vehicle for reporting the findings from demonstrations and other initiatives would provide a visible source of information and a platform for the open discussion of policy implications. Overall, a strategy for dissemination is needed, so that potential policy improvements can be implemented and their benefits realized in a timely and effective manner.

New initiatives to improve the program should build on the experiences and lessons learned from demonstrations, with the ability to reshape interventions as they are implemented to maximize their effectiveness. These changes will help Medicare improve the quality and effectiveness of care while controlling the cost growth that threatens the program's fiscal viability.

Publication Details



S. Guterman and M. P. Serber, Enhancing Value in Medicare: Demonstrations and Other Initiatives to Improve the Program, The Commonwealth Fund, January 2007