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Achieving Payment Reform in Medicare

Glen Hackbarth

Commentary on The Commonwealth Fund/Modern Healthcare Health Care Opinion Leaders Survey on Health Reform by Glenn M. Hackbarth, J.D., M.A., chair of the Medicare Payment Advisory Commission and an independent consultant, and member of The Commonwealth Fund Board of Directors and Commission on a High Performance Health System.

Medicare must change how it pays health care providers. Medicare's payment methods, some of which are followed by private insurers, reward increases in the volume and intensity of service, without regard to quality or cost.

The first step toward reform is a more precise definition of our problems.

Problem #1: Our nation's primary care system is weak—and getting weaker. International and inter-regional comparisons suggest that effective primary care is essential for a high-value system. Unfortunately, a dwindling number of U.S. medical students are choosing a career in primary care. Making matters worse, the U.S. does not make effective use non-physician practitioners such as advanced practice nurses.

Problem #2: Medicare's payment methods do not do enough to encourage efficiency. Medicare purchases brief encounters with the health care system as opposed to buying effective management of care over extended periods. Narrow units of payment—such as an inpatient admission—do not go far enough in encouraging cooperation and coordination among different types of providers. Medicare's administered prices are also often set at levels that allow inefficient providers to persist, even prosper.

Problem #3: Medicare beneficiaries have too little incentive to seek out efficient providers and to forgo services of marginal value. In well-structured markets, inefficient firms lose customers and are squeezed by low prices. It will be difficult to increase value if beneficiaries are not involved in the effort. Cost-sharing at the point of service is one way to encourage patients to shift to efficient providers—but not the best way. It is better to offer beneficiaries a well-designed opportunity to enroll in a private health plan that identifies high-value providers for its members. Regrettably, the Medicare Advantage program often rewards beneficiaries for choosing low-value plans.

Problem #4: Indiscriminate adoption of new technology and procedures drives the relentless increase in health care costs, yet we have too little information about "what works" and for whom. Such information about "what works" is what economists call a "public good." Because private firms cannot achieve an adequate return on their investment in "public goods," they will invest less than society needs. The resulting information void compromises decision-making by providers, patients, and insurers.

Given this array of problems, we need "payment reform" that looks like this:

We must increase payment for primary care services relative to those for sub-specialty care and advanced imaging. We should help primary care practices invest in systems and staff when they care for a disproportionate number of complex patients; award fee-schedule bonuses for practitioners (physicians and non-physicians) who focus on primary care; reform how Medicare calculates "relative values" for its fee schedule; and, perhaps, develop new payment codes that recognize time and effort spent on coordination of care.

We must link Medicare's payment levels more closely to the costs of efficient providers, not average providers. In a competitive market, the "invisible hand" sets prices based on the costs of efficient producers. In administered-price systems, like Medicare's, that discipline must be supplied by policymakers. Too often that discipline is lacking; protecting providers takes precedence over efficiency.

We must expand the units of service used for payment, often referred to as "expanding payment bundles." The ultimate bundle is paying a fixed amount per month or year for all covered services. But there are smaller, useful steps—for example, paying a fixed amount for all providers involved in care during and immediately after a hospital admission. Such a bundle would include hospitals, physicians, and providers of post-acute services. As bundles expand, we must also measure quality; providers should not be rewarded for cost reductions at the expense of quality.

We must increase incentives for Medicare beneficiaries to seek out more efficient care. The Medicare Advantage program is an excellent place to start. As Medicare Advantage is currently structured, beneficiaries are often rewarded for enrolling in private plans that are a poor value compared to traditional Medicare. The technical problem is in how Medicare sets its payments. The fundamental problem, however, is that the goal for private plan participation in Medicare has gradually changed over the last 25 years: It began as a method for importing more efficient delivery methods into Medicare; it has gradually become more focused on expanding benefits for beneficiaries even if that increases Medicare expenditures.

We must invest in better information about the effectiveness of alternative treatments. We need better information to inform physician and patient decisions, as well as insurer decisions about coverage, pricing, benefit structure, and pay-for-performance programs. The investment should be financed by a mandatory assessment on private payers, as well as through government contributions. The research must be overseen by a credible, independent entity. Decisions about how to apply the resulting information should be decentralized, that is, made separately by public and private insurers, providers, and patients.

Reforming Medicare's payment systems would create winners and losers among health care providers, which in turn would spawn political resistance. That resistance may block reform. Some observers have suggested altering the Congress's role in making decisions about Medicare. According to this view, the Congress, with concurrence from the President, should make decisions about how much the nation can afford to spend on Medicare. It does not follow from that, however, that the Congress must be involved in the details of every Medicare policy. Perhaps a new policy process could be devised that would retain a central role for the Congress in setting objectives for Medicare while allowing it to reduce its involvement in individual decisions. Some have proposed a new Medicare Board to make decisions about payment policy and coverage.

The Medicare Payment Advisory Commission (MedPAC) has not discussed such a change; nor does it plan to. I, for one, think it would be a mistake to "give teeth to MedPAC," as some people have suggested. By "giving teeth," they mean giving MedPAC the authority to make changes in Medicare, not just make recommendations. MedPAC Commissioners are part-time and have not experienced the vetting that results from formal nomination and confirmation. By design, moreover, some Commissioners have ties to organizations affected by Medicare. In combination, these traits would deny MedPAC the legitimacy to move beyond its current strictly advisory role—a role that it performs effectively. A new, and very different, entity would be needed if the Congress were to delegate authority for decision- making. One option might be a more independent Centers for Medicare and Medicaid Services (CMS), perhaps overseen by a board. The Federal Reserve, which has full-time governors appointed for long terms and subject to Senate confirmation, might be another model. Under either model, many issues would need to be resolved, including: the proper balance of independence and accountability; the scope of the delegated authority; whether the Congress would retain a veto over decisions; and how the new entity would relate to the Executive Branch.

The views presented in this commentary are those of the author and should not be attributed to The Commonwealth Fund or its directors, officers, or staff, or the Commonwealth Fund Commission on a High Performance Health System.

Publication Details



G. M. Hackbarth, Achieving Payment Reform in Medicare, Modern Healthcare and The Commonwealth Fund, November 2008.