THE COMMONWEALTH

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Medicare Payment Reform

Stuart GutermanAssistant Vice President and

Director, Program on Medicare’s FutureThe Commonwealth Fund

University of St. ThomasHealth Policy Seminar

Washington, DCApril 21, 2009

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Medicare Spending Growth

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Sources of Growth in Projected Federal Spending onMedicare and Medicaid, 2007 to 2082

Source: Congressional Budget Office (2007). The Long-Term Outlook for Health Care Spending. Washington, DC, as presented by P. Orzag at the New America Foundation, November 2007, accessible at: http://www.newamerica.net/files/Orzag%20PPT%20111307.pdf

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Federal Spending on Medicare and Medicaid andTotal Federal Spending as a Percentage of GDP, 1962-2082

0

5

10

15

20

25

30

35

1962 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 2072 2082

Medicare and Medicaid Total*

Percentage of GDP

*Total includes all federal non-interest spending.Note: Figures for 2007-2082 are projections.SOURCE: Congressional Budget Office. Budget Outlook.

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How Medicare Pays for Health Care

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Medicare Payment Methods

• Hospital Inpatient—Fixed rate for each type of patient

• Hospital Outpatient—Fixed payment for each type of services

• Physician—Fixed payment for each type of service• Skilled Nursing—Fixed payment per day for each

type of patient• Home Health—Fixed payment per episode (60

days) for each type of patient• Medicare Advantage plans—Fixed payment per

enrollee per month• Prescription drugs—Fixed payment per enrollee

per month• At least 11 other payment methods for various

types of providers and services

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Initiatives to Change How Medicare Pays

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Selected MedicareBundled Payment Initiatives

• Inpatient Hospital Prospective Payment (1983)• Prospective payment for other providers (1983-

2000)• Medicare Participating Heart Bypass Center

Demonstration (1991)• Medicare Physician Group Practice Demonstration

(2005)• Medicare Health Care Quality Demonstration

Programs (2009?)• Medicare Acute Care Episode Demonstration

(2009?)

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How Can We Reform Medicare Payment to Elicit Effective Health Care Delivery?

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Approaches to Making MedicareMore Sustainable

• Paying providers and plans– Physicians– Hospitals– Post-acute care providers– Medicare Advantage plans

• Managing chronic illness• Increasing value for the Medicare dollar

– Quality– Efficiency– Care coordination

• Protecting beneficiaries (particularly those who are most vulnerable)

• Improving the program—both for its own viability and as a model for the entire health system

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Medicare: Payment Reform

• Move from fee-for-service toward more bundled payment• Physicians

– Blended fee-for-service, patient-centered medical home fee– Primary care per patient global fee– Ambulatory care per patient global fee

• Hospitals– Global DRG fee for hospitalization—extend to discharge plus 30 days

• Inpatient hospital and emergency room• Include post-acute care• Include physician inpatient care

• (Actual or virtual) Integrated delivery systems– Global episode payment for chronic and other specified

conditions– Full capitation for all patients

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Interrelation of Organization and Payment

Integrated system capitation

Global DRG fee: hospital, post- acute, and physician inpatient

Global DRG fee: hospital only

Global ambulatory care fees

Global primary care fees

Blended FFS and medical home fees

FFS and DRGs

Conti

nuum

of

Paym

ent

Bund

ling

Small MD practice; unrelated hospitals

Hospital system

Integrated

delivery system

Contin

uum

of P

4P D

esig

n

Outcome measures; large % of total payment

Preventive care; management of chronic conditions measures; small % of total payment

Care coordination

and intermediate outcome measures; moderate % of total payment

Less Feasible

More Feasible

Source: A. Shih, K. Davis, S. Schoenbaum, A. Gauthier, R. Nuzum, and D. McCarthy, Organizing the U.S. Health Care Delivery System for High Performance (New York: The Commonwealth Fund, Aug. 2008).

Primary care MD group practice

Multi-specialty MD group practice

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What Drives Variation in Spending? Average risk-adjusted standardized spending for chronic obstructive pulmonary disease episode

Difference between high and average

Type of service Low Average High % $

Total episode 6372 7871 9748 23.8 1877

Initial hospital stay 4408 4414 4406 -0.2 -8

Physician 547 569 576 1.2 7

Readmissions 671 1543 2550 65.3 1007

Post-acute care 466 998 1780 78.4 782

Other 280 347 436 25.6 89

Source: G. Hackbarth, R. Reischauer, and A. Mutti. “Collective Accountability for Medical Care—Toward Bundled Medicare Payments” New England Journal of Medicine July 3, 2008 359(1):3-5.

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Medicare: System Reform

• Quality standards and quality reporting– Physicians, hospitals, integrated delivery systems electing global

payment must be accredited/certified as capable of assuming accountability for bundled services and meeting quality standards

– All providers must report quality measures, with more comprehensive outcome and care coordination metrics for providers assuming accountability for bundled services

– Payment rewards for quality and outcome results• Transparency – Medicare publishes quality, accountability, and provider

profile information • Information technology – electronic medical records within five years; 1%

assessment of private insurers and Medicare outlays to finance information exchange networks and safety net providers; personal health records accessible to beneficiaries

• Comparative effectiveness – center to evaluate comparative effectiveness of drugs, devices, procedures; benefit design tied to recommendations

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Where Do We Go From Here?