Medicare payment policy and its impact on program spending

Medicare payment policy and its impact on program spending James E. Mathews, Ph.D. Deputy Director, Medicare Payment Advisory Commission February 8, 2013

Outline of today s presentation Brief background on MedPAC Growth in Medicare spending by sector Evolution of Medicare s payment systems Fee-for-service (FFS), with emphasis on inpatient hospital and post-acute care (PAC) Medicare Advantage (MA) and Part D (Medicare s prescription drug benefit) Future directions 2

I. MEDPAC BACKGROUND

Medicare Payment Advisory Commission (MedPAC) Independent, nonpartisan legislative branch commission; 17 members representing broad cross-section of health care Appointed by the Comptroller General for 3- year terms; can be reappointed Make recommendations to the Congress and the Secretary of HHS Vote on recommendations in public Two standing reports to Congress; also various mandated reports 4

MedPAC s principles for evaluating Medicare payment policy Beneficiaries: Ensure access to high quality care in an appropriate setting Providers: Give providers an equitable incentive to supply care efficiently Taxpayers: Appropriately control program spending and ensure Medicare obtains the best possible value for its program dollars 5

II. MEDICARE FINANCIALS IN THE BROADER BUDGET CONTEXT

The federal budget picture Federal debt doubled in the past 4 years 36% of GDP in 2007 to 73% in 2012 Social Security, Medicare, Medicaid, other health insurance programs and net interest will be more than 16 percent of GDP in ten years Total federal spending has averaged 19 percent of GDP over the past 40 years Medicare alone = 3.7% of GDP in 2011; will grow to 6% of GDP by 2040 Spending for all other parts of the budget (e.g., defense, education, food safety, transportation and homeland security) are capped by law over the next ten years 7

Medicare faces serious challenges with long-term financing Medicare consumes 17% of all income tax revenue (on top of other revenue sources) 41% of Medicare s funding comes from general revenues An even larger share of general revenues will be required to finance the program in the future (49% in 2030) Medicare also consumes a greater share of beneficiaries Social Security benefits over time Between 1970 and 2010, the average Social Security benefit grew by 1.6 percent annually, while SMI premiums + cost-sharing grew 5.2 percent annually For next three decades, SMI premiums + cost-sharing likely to be 2x that of Social Security benefit 8

Sources of Medicare revenue Share of GDP 7% 6% 5% Total Medicare spending HI deficit 4% 3% 2% General revenue transfers State transfers Premiums 1% 0% Payroll taxes Tax on benefits and drug fee 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058 2062 2066 2070 2074 2078 2082 2086 Source: 2012 Trustees Report. 9

Historical trends in Medicare per beneficiary spending 1.3% faster than GDP per capita 2500% Cumulative percent change 2000% 1500% 1000% 500% 0% Medicare per beneficiary GDP per capita 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Note: Cumulative growth since 1970. Source: Centers for Medicare & Medicaid Services, National Health Expenditures, 2012. 10

Medicare spending growth, by sector Other 12% SNF 5% Inpatient hospital 38% Prescription drugs provided under Part D 12% SNF 6% Inpatient hospital 24% Other hospital 5% DME 2% Other 9% Other hospital 6% Home health 4% Hospice 3% Physician fee schedule 17% Managed care 15% Home health Hospice 3% 1% DME 1% Physician fee schedule 12% Managed care 23% Total spending 2001 = $251 billion Total spending 2011 = $549 billion 11

Medicare spending per-beneficiary Medicare spending per beneficiary was ~$10,200 in 2008 (MCBS C&U 2008) Spending can be substantially higher for subgroups of beneficiaries: Beneficiaries with ESRD: > $65,000 (2008) Beneficiaries dually-eligible for Medicare and Medicaid: > $16,000 (Medicare only) (2008) Beneficiaries in the last year of life: ~$39,000 (2006) 12

Components of Medicare spending Number of beneficiaries Number of Services Payments per service X X = Total program expenditures (population) (utilization) (payment rates) 13

III. MEDICARE PAYMENT POLICY

Examples of Medicare policy levers Beneficiaries (eligibility, premiums, cost-sharing) Payment systems Cost reimbursement Prospective payment systems (PPS) (e.g., hospitals, post-acute care) Market-based systems (ASP for Part B drugs, competitive bidding for DME) Fee schedules (e.g., lab, physician services) Other models (e.g., bundling, accountable care organizations) Private plans Medicare Advantage (MA) Part D (Medicare s prescription drug benefit) 15

Key questions for payment systems What products do we want to buy? How much should we pay? How can we reflect differences in local market conditions? What other adjustments should we make? How should we update the payment rates over time? 16

Inpatient hospital prospective payment system (IPPS) Implemented in 1980s, unit of payment is the discharge Patients are classified into 745 payment groups based on diagnosis (MS-DRGs) MS-DRG assignments are based on patient s diagnoses, procedures, sex, age, existence of complications and/or comorbidities Adjustments made for wages, outliers, transfers, etc Special payments for rural hospitals, teaching hospitals, and hospitals that serve more low-income patients 17

(A slight diversion from IPPS) Long-term care hospital Medicare margins, pre- and post-tefra Inpatient rehab facility Medicare margins, pre- and post-tefra 18

Issues with IPPS (some real, some maybe not so much ) Low Medicare margins indicate Medicare isn t paying enough Medicare doesn t even cover most hospitals costs, which are beyond their control Hospitals can t provide high quality care under Medicare s payment rates Until this fiscal year, Medicare paid hospitals without regard to quality - no incentive for efficiency, quality, or coordination across settings of care ( high readmission rates) Non-alignment between hospitals and other providers (physicians, PAC, et cetera) 20

Cost shift argument Negative Medicare margins indicate that Medicare payments are inadequate Providers shift costs to private insurers to make up for the shortfall The cost shift argument assumes that costs are fixed 21

MedPAC hypothesis: costs are associated with revenues Substantial financial resources High cost structure Lower Medicare margins Limited financial resources Low cost structure Higher Medicare margins 22

Hospitals under financial pressure tend to keep their costs down Financial pressure 2004 to 2008 High pressure* Low pressure** Number of hospitals 756 1,747 Relative 2009 standardized cost per discharge 2009 overall Medicare margin 92% 104% 4.7% -10.2% * High pressure hospitals have a non-medicare margin <1% and stagnant or falling net worth. **Low pressure hospitals have a non-medicare margin>5% and growing net worth. 23

Relatively-efficient hospitals Must be in the best third on either riskadjusted mortality or inpatient costs-percase every year (2008, 2009, 2010), and Cannot be in the worst third in any year for risk-adjusted mortality, readmission rates, or costs-per-case Efficient hospital characteristics: higher occupancy, better outpatient margins, variety of hospital types 24

Comparing 2011 performance of relatively efficient hospitals to others Measure Relatively efficient hospitals Other hospitals Number of hospitals 297 1,864 30-day mortality 13% lower 3% above Readmission rates (3M) 5% lower 1% above Standardized costs 10% lower 2% above Overall Medicare margin 2% -6% Share of patients rating the hospital highly Note: medians for each group are compared to the national median Source: Medicare cost reports and claims data 69% 67% 25

Reducing avoidable hospital readmissions is important Avoidable readmissions represent poor outcomes for patients Medicare spending on readmissions is substantial reducing readmissions by 20% could save $2.5 billion in one year While feasible for hospitals to reduce readmissions, FFS incentives impede action to do so MedPAC recommended a hospital readmission reduction program in 2008 In 2010, PPACA mandated a Medicare hospital readmissions program; CMS began to implement the program in the fall of 2012 26

Shift of services from free-standing practices to OPDs Hospitals have been increasing employment of physicians; services likely to shift from freestanding practices to OPDs Problem: OPPS rates typically much higher than physician fee schedule (PFS) rates; mid-level E&M visit 80 percent higher in OPD Result: Increase program spending and beneficiary cost sharing; may not change clinical aspects of care 27

Addressing higher payment rates in OPDs Set OPPS rates so that payment rates are equal whether service is in OPD or freestanding practice For specific services, do OPDs: Have more complex patients? Maintain standby capacity? Have greater packaging of ancillaries than PFS? 28

Standardizing payment rates across sectors: evaluation and management (E&M) visits Patient complexity addressed through CPT codes Cost of standby capacity allocated to other parts of the hospital Level of packaging only slightly higher in OPPS than in PFS Commission recommendation - March 2012 29

Standardizing payment rates across sectors Two groups of services for which payment differences could be eliminated or narrowed Group 1 (equal payments) > 50% in offices < 5% packaging < 10% in EDs Similar patient severity across settings Group 2 (reduce differences) > 50% in offices > 5% packaging < 10% in EDs Similar patient severity across settings 30

Home health PPS Implemented in 2000 Unit of payment is a 60-day episode, with payment made through Home Health Resource Groups (HHRGs) HHRGs based on patient characteristics (conditions, clinical needs, ADLs), plus service utilization Adjustments made for short-stay and highcost outliers 31

Issues with home health PPS Poorly-defined product Growth in number of providers, users, volume-peruser Extreme geographic variation No beneficiary cost sharing for home health care no skin in the game High prevalence of fraud and abuse Incentives to provide therapy have led to more patients getting therapy and more therapy per patient therapy extremely over-valued in the HHA PPS, leading to years of high Medicare margins 32

MedPAC home health recommendations Fix payment system to remove incentives to provide therapy base payments on predicted needs of the patient, not services actually provided Rebase the payment system Medicare is paying too much for home health care Require a beneficiary copayment if HH care is free, beneficiaries likely won t consider its true value to them 33

Similar issues with SNF PPS Therapy services over-valued under the SNF PPS partly responsible for a decade of double-digit Medicare margins Led to patient selection (more therapy patients, and less medically complex patients), and other undesirable provider responses MedPAC recommendations: 2008: revise the SNF PPS to shift dollars from therapy to medically-complex 2012: revise the PPS as we said in 2008, and rebase 34

Private plans: Medicare Advantage Medicare Advantage allows beneficiaries to receive their Medicare benefits through a private plan MA plans paid monthly capitated amount to provide Medicare A & B benefits Payments related to county FFS spending levels Payments risk-adjusted based on diagnoses, patient characteristics 35

MA plan payment policy (pre-ppaca) Based on bids and bidding targets (benchmarks) If bid > benchmark, program pays benchmark, enrollee pays premium If bid < benchmark Medicare keeps 25% of difference, beneficiaries get 75% as extra benefits or lower cost sharing 36

Examples of MA bids in one county Plan A Plan B Benchmark: $800 Benchmark: $800 Bid: $700 Bid: $840 Rebate: $100 (25/75) Rebate: $0 Medicare pays: $775 Beneficiary pays: $0 Extra benefits to enrollee: $75 Medicare pays: $800 Beneficiary pays: $40 Extra benefits to enrollee: $0 37

Issues with Medicare Advantage Few plans bid below FFS costs Medicare pays 4% more for enrollees in MA than if they were in FFS Medicare in 2012, but historically has paid much more Payment systems encourage inefficient plans to enter the program; extra benefits are subsidized Costs of subsidies borne by tax payers and Medicare beneficiaries through Part B premiums Principle: Savings from efficiency allow plans to provide extra benefits and increase enrollment or guarantee plan availability everywhere? 38

Medicare payment policy should not favor MA over FFS, or vice versa MedPAC has been concerned about high payments to MA plans relative to FFS for a long time Recommended MA & FFS payment equity in 2001, and differentiating MA payments based on quality in 2004. PPACA 2010 included provisions consistent with MedPAC recommendations bringing MA benchmarks closer to FFS, and implementing bonus payments to higher-quality plans (through Medicare Star Ratings ) 39

Private plans: Prescription drug benefit Nearly 28 million enrollees (59% of eligible beneficiaries) 36% of Part D enrollees (10 million people) receive low-income subsidy 1,109 prescription drug plans (PDPs) and 1,566 Medicare Advantage prescription drug (MA-PD) plans in 2011 Average premium around $30 per month About $53 billion in program spending 40

Standard Part D drug benefit in 2013 Catastrophic coverage Coverage of 21% for generic drugs and 2.5% for brand name drugs, 50% discount for brand name drugs 5% $6,938.69 $2,970 Coverage of 75% up to limit Deductible 25% $325 Premium Approximately $374 per year Out-of-pocket spending Medicare Part D benefit Discount/ out-of-pocket spending/ Medicare Part D benefit 41

Plan sponsors bids determine enrollee premiums Plan 1 s bid is less than average (No premium) Plan 2 s bid equals the average Plan 2 premium Plan 3 s bid is more than average Plan 3 premium Base premium Direct subsidy Nationwide average bid 42

What plan sponsors get paid Enrollee usually pays premium Medicare pays Direct subsidy per enrollee, risk-adjusted Other protections against risk Individual reinsurance Risk corridors Low-income subsidies 43

Pricing in the Part D benefit Plan sponsors negotiate with: Pharmacies over drug price discounts and dispensing fees Pharmaceutical manufacturers for rebates Noninterference clause: Secretary may not Interfere with negotiations between drug manufacturers, pharmacies, and plan sponsors Require a particular formulary or institute a price structure for Part D drugs 44

Using payment to drive care coordination Bundling Hospital stay with physician visits Hospital stay with post-acute care services Accountable Care Organizations (ACOs) Per capita fee-for-service payments and quality measures against benchmark Providers and program share savings 45

Questions / additional information? www.medpac.gov 202-220-3700 46