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Medicare Becoming a More Demanding Customer at 50-Year Mark

By Kerry Young, CQ Roll Call

July 27, 2015 -- Federal officials and lawmakers are embarking on increasingly bold experiments to try to improve the long-term finances of Medicare, which grew over the past half-century to become the nation's single most influential purchaser of health care.

Medicare officials have accelerated the shift from a fee-for-service model of payment, which has dominated Medicare since the program signed into law on July 30, 1965. Medicare officials are coaxing—and increasingly seeking to compel—doctors and hospitals into participating in test programs that tie reimbursement to the results delivered for patients instead of merely rewarding volume. 

A proposed test program unveiled earlier this month would force many hospitals to participate in a test involving knee and hip replacements, the most common surgeries for people in Medicare. The federal health program for the elderly and disabled covered more than 400,000 of the procedures in 2013 at a cost of more than $7 billion.

Hospitals in 75 selected geographic areas, including New York, Los Angeles, Miami, and Tampa, might have to repay Medicare in the future if hip and knee replacements performed in their facilities show poor results. The Centers for Medicare and Medicaid Service (CMS) already has received criticism from hospital groups for its plan to make participation mandatory.

"They showed a lot of guts doing that. I know people were shocked by that," Tom Scully, who led CMS from 2001 to 2003, said about the hip-and-knee replacement experiment. "They should have done this 20 years ago. It's absolutely a no-brainer. So God bless them for doing it."

Scully, who led CMS for President George W. Bush, also said that the Obama administration is doing well with its overall efforts to move toward a greater use of bundled payments for health services. Congress gave Medicare new tools through the 2010 health law to test new payment models, including through the CMS Center for Medicare and Medicaid Innovation, which received $10 billion over a decade.

This year, Congress set in place incentives through its overhaul (PL 114-10) of physician fees that are expected to drive doctors to reduce their reliance on the fee-for-service approach.

The trustees for the Medicare program assumed that all physicians that accept Medicare patients will participate in alternative payment systems by 2039, up from 60 percent in 2019, according to an annual report released last week. 

If the efforts at tying payments to quality falter and Medicare cost growth is not curbed, the trustees warned that Medicare expenses could consume 9.1 percent of the nation's economy, or gross domestic product, by 2089, up from 3.5 percent of GDP last year.

Such growth "would substantially increase the strain on the nation's workers, the economy, Medicare beneficiaries, and the federal budget," the report said.

The efforts to overhaul Medicare's payments take time to show results, but they appear to be on track, said Keith J. Fontenot, who aided the development and implementation of the 2010 health law while serving in the Office of Management and Budget. The approach in the proposed pilot program for hip and knee replacements could be applied to other procedures and is just an example of the kinds of changes underway for Medicare, he said.

"It's a fundamental reshaping," he said. "But it's more like a glacier than an earthquake" in terms of speed.

Still, it's never clear how any attempts to slow Medicare spending will pan out and whether lawmakers or regulators in the future will change them. 

The trustees noted in their report that they earlier had expected changes made through the Affordable Care Act to cause a drop in the enrollment of insurer-run Medicare Advantage plans. In fact, enrollment continued to increase, with the trustees now projecting that 33 percent of people in Medicare will be in Advantage plans in 2018, up from 30 percent last year. Despite the steps taken in the 2010 law, the program has remained financially attractive to insurance companies, according to the report. Part of the reason is that CMS officials softened some proposed cuts when they finalized the payments. 

"These payments are higher because of various policy decisions that increased payments to health plans" and due to differences in assessing the health of patient populations, the trustees said.

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