The new Medicare: Quality counts as spending slows

HHS Secretary Sylvia Mathews Burwell created some buzz in January when she outlined plans to overhaul Medicare so that 30% of payments for fee-for-service (FFS) beneficiaries are funneled through alternative payment models by next year and 50% by 2018. ( The shift will rely on accountable care organizations (ACOs), bundled payments, and medical homes. What’s more, Burwell promised that 90% of Medicare payments will be tied in some way to value (aka quality) measures by 2018.

Jeff Goldsmith

But Jeff Goldsmith, a member of Managed Care’s Editorial Advisory Board and president of the consulting company Health Futures, is skeptical. “With Medicare per-capita spending growing at zero, it’s difficult to understand the objective of this payment reform initiative, other than to appear as if you’re doing something,” says Goldsmith.

In Goldsmith’s view ACOs haven’t produced significant spending reductions and there are no data yet on the CMS’s bundled payment efforts to go on.

At about the same time as Burwell was making her announcement, the Congressional Budget Office (CBO) issued its 10-year projections for federal government spending and the economy. The CBO’s projections include forecasts for Medicare spending and, not surprisingly, the trend lines inch north. By CBO’s reckoning, net Medicare spending (gross spending less receipts from premiums and recovery of overpayments) will increase from $523 billion this year (2.9% of GDP) to $976 billion (3.6% of GDP) in 2025, an 87% increase.

CBO Medicare spending projections

Amounts in billions. Total=gross spending on Medicare. Net=gross spending less receipts, which include premiums paid by beneficiaries and recovery of overpayments to providers.
Source: “The Budget and Economic Outlook: 2015 to 2025,” Congressional Budget Office, Jan. 26, 2015

That projected increase might have been a lot larger. Millions of baby boomers are aging into Medicare coverage. But as CBO and others have noted, Medicare spending per beneficiary has eased up lately. CBO forecasts that it will increase by at an average annual rate of 1.2% over the next 10 years, compared with the 4% annual growth between 1985 and 2007.

Reasons for the slow down of per-beneficiary spending are a bit mysterious. The influx of baby boomers means the Medicare population is tilting toward the “young old” (people in their 60s and early 70s), and the people in that age group use fewer health services than those in their 80s and 90s. But that isn’t the complete answer.

One caveat: CBO’s estimates are based on legally mandated cuts in payments to providers that, in actuality, keep getting put off. Currently, for example, under the sustainable growth rate mechanism, payments for physicians’ services are supposed to be reduced by 21% next month. But what if that cut doesn’t happen and physician payments were to stay at the current level for the next 10 years? CBO says its estimates of net Medicare outlay through 2025 would need to be adjusted upward by $137 billion.

Target percentage of Medicare FFS payments linked to new payment models

*Includes ACOs, bundled payments, and medical homes.
**Includes alternative payment models and FFS linked in some way to quality.