13th annual Municipal Finance Conference


13th annual Municipal Finance Conference



Key Takeaways From The Medicare Trustees’ Report

Keith Fontenot and
Keith Fontenot Managing Director of Government Relations and Public Policy - Hooper, Lundy & Bookman, PC, Former Brookings Expert
Kavita Patel
kavita patel
Kavita Patel Former Brookings Expert

August 15, 2014

Depending on which article you read, either the Medicare Trustees think the program is coming to an end, or the news is great and we don’t need to do anything.

The reality is that the recent Trustees’ report contains both positive and sobering news: while costs have been flat for the last two years and growth is expected to moderate for some years to come, Medicare’s financing is still not in good shape over the long run. Current law benefits exceed financing to pay for them, and the Hospital Insurance Trust Fund will be unable to pay full benefits in 2030.

We cannot assume the problem will resolve itself, and action is needed to ensure the program’s stability. Moreover, health care remains a substantial portion of the national budget – a whopping 25 percent — and addressing federal fiscal imbalances must include health programs.

Below we provide our key takeaways from this year’s Trustees’ report.

1. For the second year in a row, per person costs in Medicare were essentially flat. Of course, we will continue to see an increase in the number of beneficiaries as baby boomers age, and this decline in the growth of costs per capita comes at a propitious time. The central questions are: how much of this decline will endure and for how long? The frank response to both is no one really knows. Costs have declined before, in the late 90s, only to accelerate again. Thus, caution is warranted. Regardless of if and when the spending slowdown ends, future health care spending will grow from a lower starting point moving forward, and that’s the good news.

2. Long-range projections are fraught with uncertainty. It is worth emphasizing that the 75-year estimates in the report should be taken more for what they tell us about dynamics of the program, rather than for the specific numbers. The report includes a set of alternative projections that illustrate the effects of Congress scaling back several Affordable Care Act (ACA) reforms of Medicare payments. The results show a significant decline in Medicare’s financial solvency. At the same time, actuaries caution that achieving the path set by the ACA will be extraordinarily challenging for providers over the long term, unless they can substantially increase productivity.

3. If you look at the first 20 years of the forecast, there is positive news. Twenty years is still a long time in health care, but projections of health spending 20 years out are certainly more likely to be in the range of actual spending than estimates 75 years out. Compared to the 2009 report, before the ACA, the latest projections of Medicare expenditures in 2035 are down from 7.2 percent of GDP to about 5.4 percent, a decline of nearly 1.9 percent of GDP.

4. The report was noteworthy for having a more realistic perspective on physician payments. Namely, the Trustees now assume that the mandated 21 percent reduction in Medicare physician payments, which Congress has overridden for twelve consecutive years, is likely to be overridden on an ongoing basis. This makes the forecast slightly more realistic and highlights several challenges with the sustainable growth rate (SGR) formula.

The Path Forward

It is clear that action is necessary to solidify these gains while also addressing future problems — but what kind of action? An array of changes should be considered, but most importantly we need to pursue promising models for sustainable payment reforms that will require movement away from fee for service.

There are a number of examples:

  • Accountable Care Organizations (ACOs) and Shared Savings Models: The uptake and interest in both the Medicare ACO programs and Medicaid and private ACO contracts have been significant, but programmatic changes still need to be made. It is not clear if these models can be replicated by all providers, or if substantial savings can be achieved nationwide.
  • Bundled Payments: Similarly, there is much public and private interest in bundled payments, with a focus on inpatient efforts and care transitions. This model is much clearer for episodes of care oriented toward discrete procedures or featuring clearly defined start and end points for the bundle. But while unit cost can be contained by a bundle, it does not control volume. Unfortunately, there tends to be very little patient engagement focus within this model.
  • Patient-Centered Medical Home: Built largely on a fee-for-service basis with person-based payments for improved care coordination, this model is often considered a foundational element for other FFS-based reforms or ACOs because of its simplicity. It generally involves a flat fee per patient per month, but often it lacks financial risk as well as robust clinical outcomes measures.

Promising new areas of payment reform that have received bipartisan attention and support from various organizations include:

  • Additional Alternative Payment Models: Particularly significant will be models that can emphasize specialty care and its coordination with primary care. Models for shared savings with two-sided risk in oncology and cardiology are emerging in the private sector with potential for scale in Medicare and other settings. Issues of attribution and outcomes- based metrics are still problematic but can often be easier in specialty environments; for example, most patients, once receiving a diagnosis of cancer, generally see the same medical oncologist during the course of treatment.
  • Post-Acute Payment Reforms: A single bundled payment, determined by a patient’s specific care needs, for the care a beneficiary receives upon hospital discharge could—if implemented in combination with strong quality measures for accountability—bring about substantial efficiencies in this sector.
  • Payment models with direct beneficiary engagement: A critical assumption in movement towards value is an emphasis on patient-centered care, a factor that can be incredibly effective when patients and caregiver are truly engaged. Suggestions for the next model of ACOs include direct enrollment/voluntary assignment, which could be important elements in improving care coordination and managing care transitions across different provider settings.

Above all, the most important thing we can do in the short term is to make sure that Medicare is firmly directed away from paying for each individual service, and towards innovative payment models that focus on better, more accountable care. A strong commitment to that direction now is essential to ensuring that we can increase the efficiency and quality of our health care sector and capitalize on recent declines in health care costs.