1. Issues and Challenges Facing Medicare Mark L. Hayes

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

3. Mandated Payment Reductions

4. Projected Spending

5. 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

6. Most Have Supplemental Coverage SOURCE: Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Access to Care File, 2006. $10,000 or less $10,001- 20,000 $20,001- 30,000 $30,001- 40,000 $40,001 or more

7. Broken Physician Payment System 7 Actual updates in physician payment relative to SGR formula, 2007 through May 2010

8. Independent Payment Advisory Board  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) Unprecedented authority to recommend reductions in Medicare spending

9. 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.

10. FFS Bundled Payments Fully Capitated The Need for Delivery System Reforms General Spectrum of Payment Systems Today 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

11. Delivery System Reforms Payment systems Drive the business model Drives the delivery of care Improving the quality of care requires changes to the payment systems that drive the delivery of care. Rationale for Delivery System Reform

12. 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

13. 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