The Future of Medicare

For the past few years, Medicare spending has grown at a slower rate than most policy makers expected. Some attribute the trend to provisions from the Patient Protection and Affordable Care Act (ACA), while others note that poor economic conditions have contributed to beneficiaries delaying medical care because they cannot afford the bills.

Still, the future of Medicare remains in flux, and the program will likely undergo significant changes, according to former heads of the program who gathered on January 30 for a panel discussion at the Kaiser Family Foundation’s headquarters in Washington, DC.

Despite polls showing most people are satisfied with Medicare, the United States faces a budget crisis that has politicians considering all options, including a revamp of Medicare, which, until recently, had not been considered.

According to the American Medical Association, Medicare spending accounted for 15% of the federal government’s $3.5 trillion budget in 2010. The share is expected to increase to 18% in 2020. The number of Medicare beneficiaries is estimated to rise from 50 million in 2010 to 81 million in 2030. People are living longer, and an influx of the generation born between 1946 and 1964 will lead to 60% more enrollees over the next 20 years.

Gail Wilensky, PhD, administrator of the Health Care Financing Administration (HCFA) under President George H. W. Bush,1990-1992, pointed out a dichotomy: data shows people are eager for President Barack Obama and Congress to reduce the deficit, but they are opposed to reducing Medicare. HCFA is now known as the Centers for Medicare & Medicaid Services (CMS).

A Kaiser Family Foundation/Robert Wood Johnson Foundation/Harvard School of Public Health poll released on January 24 found that 58% of people are not willing to see any reductions in Medicare. Further, 75% of people (81% of Democrats and 76% of Republicans) said they believed the deficit could be reduced without making major reductions in Medicare spending. In addition, 60% of respondents and 80% of those ≥65 years of age said Medicare is working well for most seniors.

“That is going to make it quite challenging for Congress [to pass Medicare legislation],” Dr. Wilensky said.

Dr. Wilensky agreed with Bruce Vladeck, PhD, HCFA administrator under President Bill Clinton, 1993-1997, and Mark McClellan, PhD, CMS administrator under President George W. Bush, 2004-2006, that the first step in reforming Medicare is changing how physicians are compensated.

Dr. McClellan expects bipartisan legislation to be passed by the end of 2013 that will tie physician payment to value or quality of care rather than to the traditional volume-based, fee-for-service method currently in place.

The ACA contains a provision stating that by 2015, CMS will begin applying a “value modifier” for physicians working in groups of >100 that will pay them in part based on their performance at keeping costs down and improving quality of care. All physicians participating in the Medicare fee-for-service program will be subject to the changes beginning in 2017.

CMS has introduced pilots for initiatives such as bundled payments, patient-centered medical homes, and accountable care organizations. The ACA also created the CMS Innovation Center to test new payment and service delivery models, evaluate results, and seek input on developing more ideas. Most of the programs are intended to shift financial risks to providers, although they are still in their early stages and are not yet widely used.

“None of these are really going to change how care is organized and delivered by themselves,” Dr. Wilensky said. “All of that could lead somewhere. It is not going to be through voluntary activities only. At some point, the real question is whether Medicare is going to be prepared to reorganize how it is providing and organizing services and how that will sell to the users of the Medicare program.”

A challenge in implementing initiatives throughout the industry is that the Medicare population is older, needs more healthcare services, and is poorer than people who are covered through private insurance. In 2010, half of Medicare beneficiaries had incomes below $22,000, half had less than $2100 in retirement savings, and half had less than $31,000 in other financial assets such as savings accounts, according to a Kaiser Family Foundation report.

Still, Medicare spending growth has slowed. In 2010, Medicare spending per beneficiary increased 1.8% while United States gross domestic product (GDP) per capita grew 2.9%. The increases in 2011 were 3.6% and 3.2%, respectively.

From 2013 through 2022, the Congressional Budget Office (CBO) projects Medicare spending per beneficiary will continue to be similar to GDP per capita. During that same  time period, the CBO projects $716 billion in Medicare savings, thanks to ACA provisions, although some are skeptical.

“I think, as written on the books, the savings that are built into the current law are going to be very hard to actually sustain,” Dr. McClellan said.

Dr. Vladeck suggested that Medicare implement a market-based purchasing model for everything with the exception of hospitals, physicians, and managed care plans, a strategy he said would save $20 billion to $30 billion in the next 10 years. CMS took a step in that direction with its announcement on January 30 that it would replace its existing fee schedule for some durable medical equipment with prices based on competitive bids. The change is expected to save beneficiaries $17.1 billion in the next decade, an insignificant savings considering Medicare spending is expected to top $600 billion this year alone and will continue to increase.

Dire economic projections are contributing to the tension over Medicare’s future. According to a CBO report released on February 5, the federal government will have an $845 billion deficit in 2013 and will have $7 trillion in deficits in the next decade. Dr. Vladeck pointed out that numerous other problems such as lower tax revenues and increased defense spending have contributed to the deficit, although he concurs with Dr. Wilensky and Dr. McClellan that Medicare needs to be transformed.

“There is a lot of directional agreement among people about what needs to happen and a lot of activity starting to bubble up,” Dr. Wilensky said. “The question that I have is: Will we actually be able to capture this and drive it home? Frankly, I am concerned.”

To read a response to this article from John Gorman, click here.