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Medicare just turned 50. Where does it go from here?

February 5, 2015

    Sam Bernstein, The Daily Briefing

    This year marks Medicare's 50th birthday. There's no doubt that the public insurance program has had a profound impact on the industry, but what role will it continue to play in one of the biggest sectors of the U.S. economy?

    To get an idea, I attended the National Academy of Social Insurance's (NASI) annual conference last week to hear the industry's top experts explain how the program has changed health care and where things may be headed in the future.

    For patients, Medicare was a revolution

    Data from the Commonwealth Fund show that the number of Americans over 65 with insurance jumped from 54% in 1963 (before Medicare's creation) to 96% in 1968. Speaking at one of the NASI sessions last week, Stuart Guterman, a vice president at the Commonwealth Fund, said the massive expansion of coverage "changed how care was delivered" by expanding the range of treatments that were economically viable, such as routine screening procedures and specialized drugs.

    But expanding insurance coverage did not easily translate into reducing cost growth by more efficiently paying for care. In fact, the average value of care delivered to patients over age 65 increased to $418 by 1967, up from $229 prior to Medicare's launch. But the average patient paid less out of pocket—with out-of-pocket costs dropping to $196 from $229, according to Guterman.

    Medicare starts paying doctors to coordinate chronic care

    Over the decades, Medicare has steadily expanded and been tweaked. Today, enrollees are some of the most economically secure health care consumers in America. Compared to people covered through employers or commercial plans, Medicare patients are less likely to report problems accessing care or paying for procedures, Guterman said.

    A tool for change in the market

    More broadly, Medicare has been a critical tool in helping policymakers guide the entire U.S. health care system, Gerard Anderson of the Bloomberg School of Public Health told attendees. When Medicare launched, "physicians were paid customary, prevailing, and reasonable charges," Anderson says. But as the system matured, more standardization was needed.

    Innovations such as DRG codes, which standardized payments to doctors based on common diagnoses, have been instrumental in helping private insurers modernize their own payment systems.

    The next 50 years (and the future of ACOs)

    Medicare continues to evolve, with policymakers focused on simplifying its benefits structure, better integrating with the private market, and reforming provider payments to incentivize cost reduction and quality. One of the ways it's working to do that is through accountable care organizations (ACOs).

    Speaking at a keynote presentation, Patrick Conway—CMS's Chief Medical Officer and Deputy Administrator for Innovation & Quality—said ACOs are a vital part of the agency's strategy to move 50% of Medicare payments into value-based contracts by 2016.

    Our experts weigh in: Medicare commits to payment transformation

    Conway told attendees that CMS is constantly reworking its incentive formulas in light of feedback from participating ACOs, and pledged that future versions of the program will provide more guidance to hospitals on the quality metrics that influence the total cost of care.

    CMS proposes three-year delay for ACO risk

    But Anderson was critical of ACOs, arguing that in many cases "a shared savings system [with providers], just makes no sense."

    Specifically, Anderson is concerned that ACOs don't provide the right mix of incentives to providers over the long term. Anderson told the Daily Briefing, "The problem with the ACO financing model is that hospitals do not have the economic incentive to really control spending because if they do not control spending they [still] will get more money." He observed that unless providers "can 'backfill' the savings with patients from somewhere else, [they] have less revenue."

    Moreover, Anderson noted that many hospitals have dropped their participation in ACOs, and "the ones that remain could do even better with the correct financial incentives."

    Hasan: Why yet another Pioneer ACO is dropping out

    Other challenges may be even harder to overcome. For instance, the aging population means policymakers have a limited ability to control absolute expenditures over the long term. "Society has made a decision to produce more elderly people… I don't see anyone opting out of that decision," Anderson said to laughter.

    Overall, an estimated 80 million Americans will be enrolled in Medicare by 2030. "The daily work of clinical medicine will be infinitely more complicated, frustrating, and unsatisfying if Americans and their leaders cannot come to agreement on ways to make Medicare sustainable and effective for the next 50 years," the Commonwealth Fund experts write in NEJM.  

    The takeaway: Medicare has revolutionized health care delivery in the 50 years since it was created, but meeting the challenges of the future will require another revolution as policymakers and clinicians move into the value-based era. For hospitals, this means embracing the care transformation business model.  

    Get the big picture: The field guide to Medicare payment innovation


    The Affordable Care Act brought many types of changes to hospital payments.

    This infographic presents an overview and assessment of the major Medicare programs accelerating the transition to population health, including the Shared Savings Program and Pioneer ACO Model.


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