1. THE COMMONWEALTH FUND Medicares Future: What Does It Hold? Stuart Guterman Assistant Vice President Director, Program on Payment System Reform The Commonwealth Fund Families USA Conference: Health Action 2010 Washington, DC January 28, 2010

2. THE COMMONWEALTH FUND Medicare Policy Challenges

3. THE COMMONWEALTH FUND Medicare Policy Challenges Spending Growth Improving Value Protecting the Most Vulnerable Beneficiaries Physician Payment The Role of Private Plans The Prescription Drug Benefit

4. THE COMMONWEALTH FUND Spending Growth

5. THE COMMONWEALTH FUND Federal Spending on Medicare and Medicaid and Total Federal Spending as a Percentage of GDP, 1962-2082 Percentage of GDP *Total includes all federal non-interest spending. Note: Figures for 2007-2082 are projections. SOURCE: Congressional Budget Office. Budget Outlook.

6. THE COMMONWEALTH FUND Sources of Growth in Projected Federal Spending on Medicare 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

7. THE COMMONWEALTH FUND Percent of Income Spent on Health Care, Selected Groups, 2003 Percent of Income By Income (Percent of Federal Poverty Level) By Health Status SOURCE: P. Neuman, J. Cubanski, K.A. Desmond, and T.H. Rice. How Much Skin in the Game Do Medicare Beneficiaries Have? The Increasing Financial Burden of Health Care Spending Health Affairs Nov./Dec. 2007 26(6):1692-1701.

8. THE COMMONWEALTH FUND Conclusions Medicare cost growth is largely driven by overall growth in health care costs Nonetheless, Medicare is unique in the way it puts pressure on the federal budget However, simply reducing provider payment, or increasing beneficiary cost-sharing, will only shift the burden without addressing the underlying problem

9. THE COMMONWEALTH FUND Improving Value

10. THE COMMONWEALTH FUND Source: G. Anderson and J. Horvath, Chronic Conditions: Making the Case for Ongoing Care (Baltimore, MD: Partnership for Solutions, December 2002) Two-Thirds of Medicare Spending is for People with Five or More Chronic Conditions

11. THE COMMONWEALTH FUND * Indexed to risk-adjusted 1 year survival rate (median = 0.70). ** Risk-adjusted spending on hospital and physician services using standardized national prices, indexed to median. Data: E. Fisher and D. Staiger, Dartmouth College analysis of data from a 20% national sample of Medicare beneficiaries. Quality and Cost of Care for Medicare Patients Hospitalized for Heart Attacks, Colon Cancer, and Hip Fracture, by Hospital Referral Regions, 2000–2002 Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 200611

12. THE COMMONWEALTH FUND Conclusions Need better coordination of care for chronically ill beneficiaries –Traditional Medicare –Medicare Advantage Need better information on quality of care –Post information on performance –Study relation of process to outcomes –Indicate what improvements are needed Need better incentives for coordination, quality improvement, and efficiency –Encourage desired behavior –Counter adverse incentives

13. THE COMMONWEALTH FUND The Role of Private Plans

14. THE COMMONWEALTH FUND Medicare Private Plan Enrollment as a Percentage of All Medicare Beneficiaries, 1995-2009 Source: B. Biles et al. The Continuing Cost of Privatization: Extra Payments to Medicare Advantage Plans Jump to $11.4 Billion in 2009. Commonwealth Fund Issue Brief, May 2009. BBA 1997MMA 2003

15. THE COMMONWEALTH FUND Medicare Advantage Enrollment by Type of Plan, September 2009 Source: Medicare Advantage, Cost, PACE, Demo, and Prescription Drug Plan Contract Report Monthly Summary Report (Data as of September 2009) from CMS web site.

16. THE COMMONWEALTH FUND Growth in Medicare Advantage Enrollment, by Type of Plan, August 2006-September 2009 Source: Medicare Advantage, Cost, ACE, Demo, and Prescription Drug Plan Contract ReportMonthly Summary Report (Data as of August 2006 and Data as of September 2009) from CMS web site.

17. THE COMMONWEALTH FUND Benchmark Rates, Plan Bids, and Payments to Medicare Advantage Plans as a Share of Medicare Fee-for-Service Costs, 2009 Source: Medicare Payment Advisory Commission, Healthcare Spending and the Medicare Program: A Data Book (Washington, DC: MedPAC, June 2009). Percent of fee-for-service costs

18. THE COMMONWEALTH FUND Comparison of Estimated Out-of-Pocket Costs for Individuals in Poor Health in 2005, Selected MA Plans vs. Fee-for-Service Source: B. Biles, L. Hersch Nicholas, and S. Guterman. Medicare Beneficiary Out-of-Pocket Costs: Are Medicare Advantage Plans a Better Deal? The Commonwealth Fund. May 2006. Medicare Advantage Plans

19. THE COMMONWEALTH FUND Conclusions Private plans offer Medicare beneficiaries a wider choice of options and, often, additional benefits However, Medicare currently pays private plans substantially more than their enrollees would cost under the traditional fee-for-service program More information is needed to monitor how well private plans serve their Medicare enrollees

20. THE COMMONWEALTH FUND Impact of Pending Legislation

21. THE COMMONWEALTH FUND Implications for Medicare Spending growth decreased from an estimated 6.6 percent annually to 5.3 percent annually or less The House and Senate bills would restructure payments to Medicare Advantage plans, phasing payment down to bring plans closer to traditional fee-for-service costs. The House and Senate bills incorporate productivity improvement allowances across all Medicare services (other than physician services, which are considered separately) –Reflects proposal by the major hospital associations in July 2009 The Senate bill establishes an Independent Payment Advisory Board with a mandate to make payment decisions within parameters established by Congress and subject to review by the president and Congress. The House bill would eliminate the Rx doughnut hole and require the HHS secretary to negotiate directly with pharmaceutical manufacturers to lower drug prices for Medicare standalone Part D plans and Medicare Advantage Part D plans. The House and Senate bills do not address SGR reform –Companion bill (H.R. 3961, the Medicare Physician Payment Reform Act of 2009) passed by the House on November 19, 2009

22. THE COMMONWEALTH FUND Payment Innovation in Health Reform Legislation Medical home: Expansion of current Medicare demonstration, new Medicare pilots, Medicaid initiatives ACO: Broad responsibility for quality and cost of patient care, rewards for quality, shared savings Bundled payments: Medicare pilots for hospital and post-acute care, Medicaid initiatives Center for Medicare and Medicaid Innovation

23. THE COMMONWEALTH FUND Medicare Spending with System Savings, 2010–2019: Current Projection and Alternative Scenarios Billions * Notes: Compound annual growth rate. Data: Congressional Budget Office (CBO) cost estimates. $422 $797 6.6% annual growth* Total 10-Year Medicare System Savings Compared with Modified Current Projection House bill (CBO)$484 billion Senate bill (CBO)$387 billion House $703 Senate $705 5.3% annual growth* 5.2% annual growth*