Issues and Challenges Facing Medicare Mark L. Hayes

Solvency Source: OACT Analysis, “Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers (August 5, 2010).

Mandated Payment Reductions In OACT’s April 22, 2010 memorandum on the estimated financial effects of the Affordable Care Act, we noted that by 2019 the update reductions would result in negative total facility margins for about 15 percent of hospitals, skilled nursing facilities, and home health agencies.15 This estimated percentage would continue to increase, reaching roughly 25 percent in 2030 and 40 percent by 2050. In practice, providers could not sustain continuing negative margins and, absent legislative changes, would have to withdraw from providing services to Medicare beneficiaries, merge with other provider groups, or shift substantial portions of Medicare costs to their non-Medicare, non-Medicaid payers. In practice, Congress would presumably act to adjust Medicare payment rates as necessary before such a situation developed.

Projected Spending

Benefit Design From 1965 Medicare pays less than half (45%) of beneficiaries’ total health and long-term care spending Medicare does not cover all medical benefits No coverage for hearing aids, eyeglasses, or dental care Generally does not pay for long-term care Medicare has high cost-sharing requirements Monthly premiums for Part B, Part C, and Part D Deductibles for Part A, Part B, and Part D Part D coverage gap (“doughnut hole”) No limit on out-of-pocket spending for benefits Median out-of-pocket spending as a share of income rose from 11.9% in 1997 to 16.1% in 2005

Most Have Supplemental Coverage Most beneficiaries have some form of supplemental coverage – but sources of supplemental coverage vary significantly by beneficiaries’ income. Medicaid is critical source of supplemental coverage for half (52 percent) of Medicare beneficiaries with the lowest incomes ($10,000 or less), while employer-sponsored coverage is the primary source of supplemental coverage for beneficiaries with the highest incomes (more than $40,000), covering 59 percent of this group. Overall, nearly 10 percent of Medicare beneficiaries lack supplemental coverage from any source. This group is at greatest risk for going without needed care due to high-cost-sharing requirements, or bearing a signficiant financial burden paying for their medical care. $10,000 or less $10,001- 20,000 $20,001- 30,000 $30,001- 40,000 $40,001 or more SOURCE: Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Access to Care File, 2006. 6

Broken Physician Payment System Actual updates in physician payment relative to SGR formula, 2007 through May 2010

Independent Payment Advisory Board Unprecedented authority to recommend reductions in Medicare spending Creates new board with 15 full-time members, appointed by President, confirmed by U.S. Senate Requires the board to recommend specific Medicare savings proposals if Medicare spending exceeds target growth rates Requires the HHS Secretary to implement board’s recommended proposals, unless Congress enacts an alternative with equivalent savings Prohibits board from recommending proposals that would ration care, reduce benefits, increase cost-sharing, or modify benefits, eligibility, premiums, or raise taxes, or reduce payments for certain providers (before 2018) Concerns about the potential effect of the overall health reform law on national health care spending and the federal budget was a hot-button issue leading up to enactment. To help address this concern, the law includes a new Independent Payment Advisory Board with unprecedented authority to recommend changes in Medicare spending to achieve specified spending targets that are defined in the law, with 15 full-time members, appointed by President, confirmed by U.S. Senate, with unprecedented authority to recommend reductions in Medicare spending. The board is required to recommend specific Medicare savings proposals if Medicare spending exceeds target growth rates – based on inflation initially and then on the growth in the economy. The Secretary of the Department of Health and Human Services is required to implement the board’s recommendations, unless Congress enacts an alternative with equivalent savings. The board is prohibited from recommending proposals that would ration care, reduce benefits, increase cost-sharing, or modify benefits, eligibility, premiums, or raise taxes, or reduce payments for certain providers (before 2018) CBO projects the Board will achieve Medicare savings of $15.5 b (2015-2019)

Spending Distortions Caused By Payments Sytems Source: Congressional Budget Office, Geographic Variation in Health Care Spending, February 2008. People living in high spending areas receive about 60% more in services than those in low spending areas. Average costs ranged from about $5,200 in the areas with the lowest spending to nearly $14,000 in high spending areas. (2005 data after adjusting for differences in the age, sex, and race) Spending Varies Considerably Across the U.S.

The Need for Delivery System Reforms General Spectrum of Payment Systems Today FFS Bundled Payments Fully Capitated Do as little as possible in as many different settings as possible Do as much as possible for as many patients as possible Do as little as possible for as many patients as possible

Delivery System and Payment Reforms Federal Coordinated Health Care Office in CMS for dual eligibles (2010) New Center for Medicare and Medicaid Innovations (2011) Shared Savings/Accountable Health Organizations (2012) Reduced payment for preventable hospitalizations (2012) Independents at Home demonstration project with shared savings (2012) Value-based purchasing for hospitals (2012) National pilot to bundle payments for hospital and post-acute care (2013) Reduced payments for hospital-acquired conditions (2015) Mandatory physician quality reporting program (2015) CBO estimates that these initiatives will reduce Medicare spending by $12 billion over ten years As the health reform legislation was being debated, policy makers expressed considerable interest in reforms that would improve the delivery of care under Medicare – addressing long-standing concerns about the fragmentation of care, excess costs due to preventable hospital readmissions and a strong interest in improving the coordination of care for high cost , chronically ill beneficiaries, and for low-income beneficiaries who are covered under both Medicare and Medicaid, known as dual eligibles. To achieve these goals, the health reform law includes a new Federal Coordinated Health Care Office in CMS for dual eligibles and A New Center for Medicare and Medicaid Innovations to move forward with delivery system and payment reforms. The law also launches several new initatives – some of which are listed on this slide - to improve the quality of care for patients discharged from the hospital – including for example, provisions to reduce payments for preventable hospitalizations, create a national pilot program to bundle post acute care, and reduce payments for hospital-acquired conditions. The Congressional Budget Office estimates these initiatives will reduce Medicare spending by $12 billion over ten years.

Medicare Distortions Impact Employer Sponsored Coverage Employers cover 170 million people in the same markets with Medicare Payment systems drive cost shifting to employer plans Inefficient payment models drive up costs and lack sufficient incentives for quality and efficiency improvements How do employer sponsored plans interface with payment systems that are outdated