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The Efficiency of Fee-for-Service Medicare for the US Health System

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Executive Summary

The topic of this document is, “Efficiency of Medicare”. Whether the program is efficient will be explained based on the cost-benefits that the different services of Medicare provides. The Medicare program will be described from an economic perspective. The Medicare system regarding reimbursements and payments must be modified in order to encourage health care providers to want to work with Medicare, for the sake of consumers, while helping to reduce U.S. health care costs. U.S. Medicare is a federal program that entitles health insurance coverage to individuals aged 65 and older. Certain disabled individuals qualify as well. The traditional Medicare plan is fee-for-service.

Medicare also features a Medicare Advantage plan that resembles managed care plans. It is believed that private plans give Medicare beneficiaries more choices and make the system more efficient (Maruyama, 2011). A recent study by Dowd, et al (2011), that takes into account possible confounding factors, shows that the mortality rates between Medicare HMO beneficiaries and traditional fee-for-service beneficiaries is of very little to no significance (Dowd, Maciejewski, O’Connor, Riley, & Geng, 2011).

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In order for the Medicare program to continue to survive, it has been recognized that changes must be made. Many modifications must take place, such as, creating more wellness programs, making improvements in operational efficiencies, and introducing reimbursement methods that discourage wasteful practices (Hultman, 2012). Value-Based Purchasing and Episode-Based Payment Bundling are potential reimbursement plans to help Medicare cut costs and increase quality of care.

The Congressional Budget Office has proposed another idea in order to save Medicare money. This idea entails increasing the current qualification age from 65 years to 67 years. The CBO states that this could save the Medicare system over $148 billion dollars over the next decade. If this age increase is implemented, then cuts would not need to be made to physician fees, and Medicare beneficiaries would not have to fear for the future sustainibility of the program (Hultman, 2012).

Skilled nursing facilities have been shown to suffer financially as a result of Medicare Prospective Payment System implementation (Zhang, Unruh, & Wan, 2008). Some more inefficient facilities have had to shut down (Bowblis, 2011). The relationship between Medicare and skilled nursing facilities should continue to be analyzed and assessed to ensure progress.

Introduction

The topic of this document is, “Efficiency of Medicare”. Research and studies will be used to describe the details of Medicare, policy changes that have been made to the program, and changes that are suggested to be made in the near future. How the Medicare program affects the consumer as well as the healthcare provider, its limitations, and assumptions will be explained. The efficiency of the Medicare system will be addressed. The Merriam-Webster Dictionary defines the word “efficient” as, productive of desired effects; especially; productive without waste. Whether the program is efficient and how will be explained based on the cost-benefits that the different services of Medicare provides. The Medicare program will be described from an economic perspective.

Thesis Statement

The Medicare program can be analyzed for it’s efficiency and shown to have an overall positive impact in the area of improved health for the consumer enrollees. However, the effects that the Medicare program, regarding reimbursements and payments, has on the health care provider may not be as positive. The Medicare system regarding reimbursements and payments must be modified in order to encourage health care providers to want to work with Medicare, for the sake of consumers, while helping to reduce U.S. health care costs.

Medicare

U.S. Medicare is a federal program that entitles health insurance coverage to individuals aged 65 and older. Certain disabled individuals qualify as well. The traditional Medicare plan is fee-for-service. Medicare also features a Medicare Advantage plan that resembles managed care plans. It is believed that private plans give Medicare beneficiaries more choices and make the system more efficient (Maruyama, 2011).

Economics of Medicare

Without policy changes, Medicare physician reimbursements stand to be cut by a significant percentage in order to save Medicare money. Medicare beneficiaries fear that physicians will no longer provide care to them. The cuts would make it difficult for health care providers to serve Medicare patients. In order for the Medicare program to continue to survive, it has been recognized that changes must be made. Many physicians will also reach the age of Medicare qualification and will need to view the issue from both the sides of the consumer and the provider. Many modifications must take place, such as, creating more wellness programs, making improvements in operational efficiencies, and introducing reimbursement methods that discourage wasteful practices (Hultman, 2012).

The Congressional Budget Office has proposed another idea in order to save Medicare money. This idea entails increasing the current qualification age from 65 years to 67 years. The CBO states that this could save the Medicare system over $148 billion dollars over the next decade. If this age increase is implemented, then cuts would not need to be made to physician fees, and Medicare beneficiaries would not have to fear for the future sustainibility of the program (Hultman, 2012).

The argument is that, in 1940, individuals were expected to live 14 more years after the age of 65. Today, it has increased to 20 years. People are living longer and healthier lives. Social Security has already increased their retirement age to 67 years. People are working well into their 70s. Seniors are reporting healthier and more active lifestyles which allows them to continue working years after their expected retirement age. Combining the proposed modifications stated earlier with the increased benefits age requirement by two years, both doctors and patients can be confident of the future of the Medicare program (Hultman, 2012).

Value-Based Purchasing

The effects of value-based purchasing for Medicare were imagined to be considerably positive. If hospitals were to receive incentives for meeting quality and efficiency benchmarks, then quality of care could increase and health care costs could decrease. Outcomes of care would be measured and incentive payments would be based on efficiency. Payments would be linked to value of holistic patient care and increased accountability among health care providers. The obvious attempts of the implementation of the value-based purchasing program is to increase quality of care for beneficiaries (Tompkins, Higgins, & Ritter, 2009).

Medicare defined “value” as improving health care service delivery to patients while in return receiving the same payments or lowered payments. Value-Based Purchasing will focus on outcomes and performance. Mortality rates should decrease, as well as disease progression, and lengths of hospital stay, etc. The Value-Based Purchasing program is not currently widely being used. However, with certain suggestions for modification, purchasers can feel more accepting to the concept. Value and costs have to be well-defined. The cost factor has to be incorporated into the value factor (Tompkins, Higgins, & Ritter, 2009).

Certain hospitals are more high-cost than others and therefore, tax rates should be adjusted. The extended-model approach suggests that hospitals that are high-cost for the Medicare program but that provide the same or even lower quality of care compared with other hospitals will be penalized. Benchmark rates are established for costs to Medicare and overall quality, performance, and efficiency. This makes quality and performance scoring and incentive payments fairer (Tompkins, Higgins, & Ritter, 2009).

Episode-Based Payment Bundling

The Center for Medicare and Medicaid services has considered using bundled payments for hospital and physician services instead of fee-for-service. The motivation behind this is to discourage unnecessary services and treatments being provided to patients and encourage efficiency without sacrificing quality of care. Medicare is attempting to control health care costs and limit payments per service. The Medicare Payment Advisory Commission (MedPAC) has suggested using bundled payments in order to achieve their goals. This entails bundling reimbursements for hospitals, physicians, and health care providers into one single payment per episode. An example of an episode may be, all of the care that a patient receives during their single hospital stay, including nursing care, physician care, surgical care, therapy care, etc (Birkmeyer, Gust, Baser, Dimick, Sutherland, & Skinner, 2010).

In order for payment bundling to work and be fair, the current system has to be analyzed. How payments are distributed currently among providers must be looked at. Also, how payments vary across different hospitals should be analyzed first. In a study done in 2011, it was found that the majority of payments went to the hospital (DRG payments). The next greatest share went to physician payments. Lab, testing, and post acute care accounted for the least share in payments (Birkmeyer, Gust, Baser, Dimick, Sutherland, & Skinner, 2010).

Currently, there are very little penalties for those hospitals that have poor quality. Hospitals and physicians are paid for each unit of service without suffering financial consequences for their quality of care. Bundling payments may increase efficiency. It would encourage health care providers to share accountability and better coordinate their care (Birkmeyer, Gust, Baser, Dimick, Sutherland, & Skinner, 2010).

Medicare Spending and the Elderly

U.S. health care costs are higher than any other industrialized country in the world. Research has been done that demonstrates that Medicare spending per beneficiary varies across geographical areas. The rationale behind this is not necessarily clear because there is no indication of any differences in health care outcomes or quality of care. Over 20%, a large component, of total Medicare spending did not appear to provide any benefits to quality of life improvement (Hadley & Reschovsky, 2012). Due to these findings, policy makers have considered paying bonuses in low-cost areas or limiting Medicare payments in high cost areas (Hadley, Waidmann, Zuckerman, & Berenson, 2011).

The reality is that when consumers become of age (65 yrs) to qualify for Medicare, their health care usage increases, and as a result, their health improves. However, there are no studies that show that spending more per already covered beneficiaries results in improved health. Though, a study was performed in 2010 that showed that increased Medicare spending per beneficiary did result in improved health but only for hospitalized patients with certain medical conditions (Hadley, Waidmann, Zuckerman, & Berenson, 2011).

A recent study was done in 2011 using a sample of 17,438 Medicare beneficiaries. This new study using updated tools suggested there was a significantly positive relationship between greater medical spending and improved health. The more extensive set of measures used in this study compared with older geographical studies makes this study a bit more accurate (Hadley, Waidmann, Zuckerman, & Berenson, 2011).

Analyses from another study done in 2012 suggests that a broad reduction in medical care use for high-cost beneficiaries could essentially have a negative effect on their health status. However, the author did still acknowledge that there are inefficiencies in the system. If the reductions are implemented, the medical care system could respond by shifting more care to those beneficiaries that need it the most (Hadley & Reschovsky, 2012).

Report Card on Medicare Advantage

Medicare Advantage is now widely available in all areas of the country. Every beneficiary has Medicare Advantage (MA) choices available to them. The enrollment in MA has grown rapidly since 2006. Enrollees are attracted to MA because of its administrative simplicity with the integrated Medicare and Medicare supplemental benefits. All is conveniently rolled into one single payment (Gold, 2009).

In comparing Medicare Advantage and the traditional Medicare, Medicare pays more for each group retiree converted to MA. One negative aspect of MA is that payment policies with the expansion of MA have contributed to growth in Medicare spending. A positive is that there are many options available to beneficiaries with different levels of income and they also do not have to let their preferred physicians go upon enrolling into the program (Gold, 2009).

The structure of Medicare makes it financially appealiing to private companies to compete for enrollees. However, with the way it is currently structured, there is no incentive to improve quality of care and performance for Medicare beneficiaries. For the improvement of the Medicare Advantage program, it can be suggested that Congress should require regular performance reports and encourage accountability among providers. Congress should regularly examine the program’s efficiency and expenditures (Gold, 2009).

Health Plan Enrollment and Mortality in the Medicare Program

Studies show that enrollees in the Medicare health maintenance organization (HMO) program have a lower mortality rate than those in a traditional Medicare fee-for-service program. Whether the rate difference is of significance or not is in question. It is important to acknowledge the cost-benefits of both programs for beneficiaries. Enrollment into the Medicare HMO plans, because of their capitated payments, is increasing rapidly and continuously. Therefore, the benefits and/or consequences must be assessed. Prior studies may have shown biased selection (Dowd, Maciejewski, O’Connor, Riley, & Geng, 2011).

Factors that could have contributed to the results of there being a mortality rate difference between Medicare HMO beneficiaries and traditional fee-for-service beneficiaries may not have been thoroughly investigated. For example, it is possible that the HMO enrollees on average are much younger in age than traditional fee-for-service enrollees. Another example may be that, Medicare HMO beneficiaries just happen to be in better health upon enrollment compared to traditional fee-for-service enrollees. A more recent study by Dowd, et al (2011), that takes into account possible confounding factors, shows that the mortality rates between Medicare HMO beneficiaries and traditional fee-for-service beneficiaries is of very little to no significance (Dowd, Maciejewski, O’Connor, Riley, & Geng, 2011). More accurate studies should be performed in the future however.

Medicare and Effects on Skilled Nursing Facilities

In 1997, with the Balanced Budget Act, the Medicare Prospective Payment System was implemented for skilled nursing facility reimbursements. This was done in hopes to reduce nursing home costs and to create a better alignment with reimbursement and resource intensity. Throughout the process, as a result of the new system, nursing homes were complaining of financial difficulties. This prompted adjustments to the program (Zhang, Unruh, & Wan, 2008).

The reasoning behind implementing the Medicare Prospective Payment System for skilled nursing home care was to encourage nursing homes to be more efficient in operation due to the stricter payments. What actually occurred was that the facilities’ financial stability was compromised. Certain facilities increased efficiency and quality. Others had increased efficiency but quality was sacrificed. Some had no effect at all. A study was done to analyze if the Medicare Prospective Payment System (PPS) actually created better efficiency in nursing homes. The results of the study were that skilled nursing home efficiency continuously decreased after the implementation of PPS (Zhang, Unruh, & Wan, 2008).

Another study was done by Bowblis (2011) analyzing data regarding the types of skilled nursing facilities that suffered most from Medicare PPS reimbursements. It was found that those facilities that had greater exposure to Medicare suffered most financially, as well as those facilities that were already less efficient than others. Exposure to Medicare PPS actually led some for-profit and not-for-profit facilities to close down. The changes in policy led to financial distress especially for those facilities that were less efficient (Bowblis, 2011).

Conclusion

In conclusion, what was discussed in this document was, “Efficiency of Medicare”. Research and studies were used to describe the details of Medicare, policy changes that have been made to the program, and changes that are suggested to be made in the near future. How the Medicare program affects the consumer as well as the healthcare provider, its limitations, and assumptions were explained. The efficiency of the Medicare system was addressed. The Merriam-Webster Dictionary defines the word “efficient” as, productive of desired effects; especially; productive without waste. Whether the program is efficient and how was explained based on the cost-benefits that the different services of Medicare provides. The Medicare program was described from an economic perspective.

The existence of the Medicare program has had a positive effect on the longevity of American citizens. When individuals reach the age of Medicare qualification, with medical care use, the result is improved health conditions. It is proposed however that the minimum age for enrollment into the program should increase from 65 years of age to 67 years in order to save Medicare money and ensure the continued existence of the program. Congress should also maintain regular assessments of the program, tracking its progress in addition to tracking where the money is going and what the money is buying. The efficiency of Medicare should be analyzed to ensure that health care providers do not suffer, especially with concerns of reimbursement rates. The types of services that Medicare provides should be assessed as well to ensure that enrollees get the best cost-benefits out of the program.

The Medicare system can be analyzed for it’s efficiency and shown to have an overall positive impact in the area of improved health for the consumer enrollees. However, the effects that the Medicare program, regarding reimbursements and payments, has on the health care provider may not be as positive. The Medicare system regarding reimbursements and payments must be modified in order to encourage health care providers to want to work with Medicare while helping to reduce U.S. health care costs.

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