Health Policy Center, independent research for better health policy: The Urban Institute

The Medicare program has become a dominant component of the health care system, providing health and income security to more than 40 million elderly and disabled citizens. The program is the single largest payer in U.S. health care and has a record of program innovation, particularly in the development of prospective payment approaches, many of which have been adopted by private sector payers.

However, the future of the program is in doubt. Indeed, many believe the cost projections for Medicare, particularly as “baby boomers” begin reaching Medicare eligibility in 2011, suggest an unsustainable program structure; yet, there is no consensus on needed changes.

The Medicare population will be affected in a number of ways by the Patient Protection and Affordable Care Act (PPACA) even though the law is primarily aimed at the non-elderly population. There will be increases in premiums for high-income people, cutbacks in the advantages some seniors gain from Medicare Advantage (MA) plans, and reductions in cost-sharing in the prescription drug benefit and for preventive services. Roughly half the costs of PPACA over the next decade will be offset by reductions in Medicare payments to MA plans, hospitals, skilled nursing facilities and home health agencies.  These payment reductions should not adversely affect access for Medicare beneficiaries, though having them in place for several years could lead to significant differences between private and Medicare rates.

PPACA also has provisions to test new organizational and payment models in Medicare, with the view that testing in Medicare (and in multi-payer pilots and demonstrations) could lead to overall health system performance improvement. Successful models can be expanded without obtaining new legislative authority, and pilots and demonstrations need not be budget neutral as currently required.  Policy analysts think positively of the potential of new delivery and payment approaches to improve care, first, for Medicare beneficiaries, and, subsequently, for all patients if successful.

Prior to PPACA, the Medicare Modernization Act of 2003 (MMA) was the last major piece of Medicare legislation and moved the program decisively in the direction of relying much more on private health insurance plans to organize and even deliver Medicare services. For example, the prescription drug provisions in Medicare - Part D require beneficiaries to choose among a broad array of private insurers to provide the benefit rather than on administration by traditional Medicare itself.

The MMA also made "extra" payments to private MA plans, giving incentives for beneficiaries to opt out of traditional Medicare.  The law increased enrollment of Medicare beneficiaries in private MA plans 13 to 25 percent, with these enrollment trends continuing. Unfortunately, by expanding plan choices for beneficiaries and partly privatizing Medicare, the program spends 12 percent more, on average, for a beneficiary selecting care in a private plan than one staying in the traditional program.

In short, the financial sustainability of Medicare, how Medicare will influence and interact with health care reform and the relative performances of traditional Medicare and private MA plans currently are critical policy issues. Urban Institute researchers and policy analysts have been involved in a number of the inquiries that help policy makers sort out conflicting political values and wade through the welter of evidence and assertions on how best to structure and operate Medicare into the future. In addition, UI researchers have continued to perform technical projects that permit Medicare to adopt and implement improved payment systems that provide beneficiary access while promoting better provider incentives for efficiency. Specifically, UI researchers have made important contributions in recent years on a range of topics:

• Determining the reasons for the large geographic variations in Medicare program spending per beneficiary and whether high individual spending reflects inefficient care;
• Exploring new policies aimed at improving Medicare performance as it relates to low-income and high-cost beneficiaries;
• Reforming Medicare cost sharing so that it would offer benefits, particularly stop-loss protection, more like private plans;
• Considering policies to create "level-playing field" competition between private plan and traditional Medicare;
• Comparing the performance over 30 years of private health plans and Medicare in controlling health care spending;
• Synthesizing the literature describing the success of previous efforts to introduce cost containment features in Medicare, while preserving access and quality;
• Providing technical advice to the Centers for Medicare and Medicaid Services (CMS) on a range of administrative payment approaches, especially those applying to post-acute care providers, including skilled nursing facilities and rehabilitation hospitals, and to acute care providers, including hospitals and physicians. In some cases, Congress and the CMS have relied upon UI analysis and recommendations in restructuring payment approaches;
• Developing policy options for improving the care and reducing the costs of Medicare patients with multiple chronic conditions, who in aggregate account for highly disproportionate spending.