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Modernizing Medicare: An important first step

Published by The Hill
Douglas Holtz-Eakin
March 6, 2015

The Medicare program is at a crucial juncture: it is responsible for 25 percent of all federal outstanding debt this century, and the total continues to grow. Every day, 10,000 newly eligible seniors enter a Medicare health insurance program whose budget needs are already escalating out of control. This path is simply unsustainable.

Just as troubling is the fact that all those Medicare dollars are not delivering the top-quality health care that senior citizens deserve. A quick look at how Medicare pays for care makes plain why this is so. Under its antiquated “fee-for-service” approach, Medicare pays for services delivered, rather than for outcomes achieved. We know that prevention and care coordination are essential, for instance, but the current payment system does little to encourage or reward this. Since Medicare is the largest payer of medical bills in the United States, the poor incentives embedded in its fee-for-service approach set a subpar standard for care throughout the American health care system.

It’s past time for Medicare to be modernized. A sensible first step toward this objective is with post-acute care bundling – payment based on the treatment of an entire illness or injury, not each individual service provided.

Over the next 10 years, Medicare is projected to spend nearly $1 trillion on medical treatment for seniors who have been discharged from a hospital. But what are we currently getting for all that money? A study by the Alliance for Home Health Quality and Innovation showed that primary chronic conditions do not explain variation in Medicare payments across setting or clinical conditions. Many seniors are returning to the hospital while millions of others are receiving treatment that is not coordinated, is not of sufficient quality, and is not being delivered in the most clinically-appropriate and cost-effective settings. The fee-for-service approach costs Medicare money and seniors’ their health.

Research suggests that one way to approach reform would be to replace fee-for-service with condition-specific bundled payments modeled on the DRG system that hospitals have been using with great success for three decades. This would allow patients and their families to choose their own providers and networks to coordinate patient care for a period of time, such as 60 or 90 days following discharge from the hospital at a rate determined based on the patient’s clinical condition. If a patient returns to the hospital during that period, or if the cost of her care exceeded the amount of the bundle, the coordinator would bear the loss. If the patient’s needs were met effectively such that she didn’t need to be re-hospitalized and her costs were less than the bundle amount, the resulting savings would be split among the coordinators, physicians, discharging hospital, and the participating post-acute care providers.

This type of approach was effective in the past was the Department of Veterans Affairs’ Home Based Primary Care demonstration program, which used teams of health care providers to provide coordinated care for participating veterans with chronic and disabling conditions who needed more continuous care. This program was able to reduce days spent in hospitals by 62 percent, and overall care costs for this uniquely expensive population dropped by 24 percent.

Applying this type of program to Medicare would modernize it by rewarding participants for the delivery of high-quality, coordinated care in the most clinically appropriate, cost-effective manner possible. Different approaches to this reform have previously been proposed by Reps. David McKinley (R-W.Va.) and Tom Price (R-Ga.) and by Rep. Diane Black (R-Tenn.). Post-acute care bundling would simultaneously keep costs low while preventing risky hospital readmissions for seniors.

Taxpayers and the Medicare Trust Fund would likewise benefit. This type of proposal could limit overall spending on post-acute care to a percentage of what those same services would cost in a fee-for-service setting without the need to make cuts to provider reimbursement.
Modernizing Medicare is no longer an option – it’s an imperative. Bundling post-acute care services is an important first step.

Holtz-Eakin, the former director of the nonpartisan Congressional Budget Office, is currently president of the American Action Forum, a center-right public policy advocacy group.

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