The future of Medicare fee-for-service

Mark E. Miller, Ph.D.Executive Director

Medicare Payment Advisory Commission October 16, 2006

Medicare’s balancing act

Be fiscally responsible

Ensure beneficiary access to quality care

Total benefit spending for CY2005=$330.3 billion

Inpatient hospital36%

Outpatient hospital

6%Physician

18%

Skilled nursing facility

6%

DME2%

Other fee-for-service settings

9%

Home health4%

Lab2%

Hospice3%

Managed care14%

Source: 2006 Medicare Trustees’ Report.

Medicare spending in selected settings

* Limited licensed practitioners

Type Number of providers 2005 Medicare program spending

Hospital inpatient PPS: 3,500

CAH: 1,280

$121 billion

Hospital outpatient PPS: 4,000 $20 billion

Physicians/LLP* 620,000 $57 billion

Home health 8,100 $13 billion

SNF 15,600 $18 billion

Medicare Trustees’ findings for 2006

In absence of steps to slow spending: HI trust fund will be exhausted in 2018, will

require major new sources of financing SMI will require increasing shares of resources More rapid growth in beneficiary premiums and

cost sharing than incomes

45% trigger will likely lead to discussion about Medicare financing by spring 2008

0%

2%

4%

6%

8%

10%

12%

1966 1975 1984 1993 2002 2011 2020 2029 2038 2047 2056 2065 2074

Payroll taxes

Premiums

Tax on benefits

State transfers

General revenue transfers

HI deficitProjected point at which general revenues reach 45% of Medicare outlays

Projected

Percent of GDP

Source: 2006 annual report of the Boards of Trustees of the Medicare trust funds.

Medicare faces serious challenges with long-term financing

Total Medicare spending

Financial effect on beneficiaries

Combination of SMI premiums plus cost sharing has grown faster than average Social Security benefit

Trustees project trend will continue, even though Part D lowers out-of-pocket spending on prescription drugs for many enrollees

Federal revenues have averaged 18 percent of GDP

0

5

10

15

20

25

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

Percent of GDP

Total federal revenues

Mandatory outlays net of offsetting receipts

Discretionary outlays

Source: Congressional Budget Office.

“Medicare funding warning”

Percent of funding from general revenue is increasing

2006 and 2007 Trustees Reports will both hit 45% threshold

Variation in healthcare

Fisher and colleagues (2003) found significant regional variation in the amount & type of services beneficiaries receive

Higher spending regions have: More supply-sensitive care: more hospital

stays, visits, specialist use, tests Areas with higher volume and more specialists

do not have better access, quality, or patient satisfaction, and may be worse

Health care spending has grown more rapidly than GDP, with public financing making up nearly half of all funding

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Note: GDP (gross domestic product). Total health spending is the sum of all private and public spending. Medicare spending is one component of all public spending.

Source: CMS, Office of the Actuary, National Health Expenditure Accounts, 2006.

Projected

Total health spending

Health spending as a percent of GDP

All private spending

All public spending

Medicare spending

Factors related to U.S. health spending

Income effect – richer societies spend a larger proportion of income on health

Fragmentation of care, but concentration of provider market power

Technological improvements Lack of free market or other cost-

containment mechanisms

Drivers of growth in health spending

Among all payers: Rate of technology adoption and diffusion

Base of evidence for assessing relative value of new drugs, devices, procedures often lacking

Use of insurance Poor incentives within payment systems Nation’s lifestyle and underlying health status

Additional factors specific to Medicare: Retirement of baby boomers New prescription drug benefit

Broad options for sustainability

Raise revenues Increase eligibility age Increase beneficiary responsibilities Means testing Redefine benefits and coverage policy Control volume Slow provider payment rate growth

Mid-range changes in Medicare fee-for-service

Pricing reforms Changes in incentives Improvements in accountability

Pricing

Making Medicare payments more precise: Inpatient hospital DRG reform Physician payment reform Part B drug payment reforms Competitive bidding

Changes in incentives

Bundling services Care coordination across settings

Episodes/capitation Chronic condition management

Gainsharing

Improvements in accountability

Pay for performance ─ quality Measuring resource use Provider certification: imaging Comparative and cost effectiveness Program integrity