Reforming Medicare to Better Manage Seniors’ Health Care

Policy Reports | Health

No. 374
Wednesday, October 14, 2015
by Devon M. Herrick

Executive Summary

Medicare reform requires empowering seniors to manage more of their own health care spending using Medicare Health Savings Accounts (HSAs) coupled with high-deductible Medicare plans. A criticism of HSAs is that hospitalized patients have long since exceeded their deductibles.

In addition, patients who are desperately ill are unlikely to forgo a potentially beneficial medical service merely because they bear a portion of the marginal cost. However, these arguments are easily addressed with better incentives and better plan design in the Medicare program.

About 5 percent of patients spend half of all health care dollars, while the sickest 1 percent consume nearly one-quarter (22 percent) of health care expenditures. These figures suggest there are more opportunities to reduce health care spending by carefully managing the sickest 5 percent instead of wasting effort on the 95 percent who are relatively healthy. To be effective, efforts to slow the growth in Medicare spending will have to focus on reducing hospital spending on beneficiaries in poor health by better managing their chronic conditions. Increasingly, controlling costs means keeping people out of hospitals, where nearly one-third of health care spending occurs.

Continuum of Care refers to the diverse settings where medical care is delivered at varying levels of intensity — each with a different cost structure. The purpose of the continuum of care is to exploit efficiencies in one care environment compared to another. Care provided in the wrong setting (for example, a hospital stay when home care would have sufficed) is one way the health care system wastes money. However, a problem with having many different silos of care — each with different attending physicians — is that care coordination among providers is often neglected to the detriment of the patient. Coordinated care not only creates opportunities to improve treatment outcomes, if done properly it also saves money.

Care Transitions refers to changes that occur when a patients’ care shifts from one setting to the next. Poorly managed care transitions are very costly. Often, when seniors are discharged from the hospital they are not provided with appropriate post-discharge care. Without appropriate care after leaving the hospital, many get worse and have to be readmitted within days. Thus:

  • One-in-five seniors who are discharged from a hospital are readmitted within 30 days.
  • More than one-third of Medicare hospital discharges are readmitted within 90 days.
  • More than half of discharged seniors will return within a year; an estimated three-fourths of Medicare readmissions could be prevented with proper transition care.

Integrated Health Plans, such as Medicare Advantage, have the infrastructure to share information across multiple care providers. Health plans that are financially at-risk for the cost of their enrollees’ care also have incentives to track care more closely. Some of these health plans are choosing to become Accountable Care Organizations.

Accountable Care Organizations (ACOs) are voluntary partnerships of doctors, hospitals, health plans and other stakeholders that aim to better manage patient care. Although the concept was not new, the Affordable Care Act created pilot projects with incentives for stakeholders\ to establish Medicare ACOs. A complaint often voiced by ACO administrators is they do not know or exercise any control over who their members are. Nor do they control which providers their members see. The Centers for Medicare and Medicaid Services (CMS) assigns members retrospectively at year-end. This makes it difficult to develop outreach programs to identify at-risk members with chronic diseases. Retrospective assignment also discourages investment in chronic disease management, since the costs are borne by one ACO while the benefits may ultimately accrue to another ACO. This needs to change. Where ACOs are working well, they are partnering with physicians to coordinate care and manage high cost chronic conditions through a patient-centered medical home.

Medical Homes that coordinate Medicare patients’ care are an invaluable resource to seniors. For instance,
a medical home coordinates care before, during and after the critical care transitions between a hospital and
the followup care post-discharge. A coordinator could advise seniors on lower-cost health care settings, evaluate the need for home care and ensure seniors receive posthospital followup care and comply with drug therapy instructions. The setting where care is received matters. Hosptial prices are often many multiples of procedures performed in other settings. An ACO providing a medical home could also advise seniors on where to find costeffective services and whether they need a specialists and which specialists to see. 

Physician Network Management. When Americans access the U.S. health care system, they typically seek
the guidance of a gatekeeper — otherwise known as a licensed physician. Doctors are a necessary partner to improving health and reducing spending. Partnering with a well-managed physician network is the key to
coordinating care, increasing quality and controlling costs. Physician networks can provide medical homes with a strong patient-provider relationship and a system of patient communication, significant training, support and care coordination.

Utilization Management. The term “cookbook medicine” is sometimes used derisively to describe any
system of checks and balances that constrains physicians’ prerogatives when delivering care to their patients. Used correctly, case management is a way to bring together all members of the medical team to discuss specific care plans and treatment goals for each patient. Utilization management is designed to provide the “appropriate” care, not to limit or ration care.

Not long after Medicare was established in 1965, expenditures began to skyrocket. Whereas spending
per Medicare beneficiary was $385 in 1970, spending per beneficiary today is $12,430 annually. This cost is
not spread evenly among all beneficiaries. Spending is especially concentrated among chronically-ill Medicare beneficiaries. There are opportunities to reduce the growth in Medicare spending by carefully managing care for the sickest seniors. Increasingly, Medicare needs to use some of the other tools employed by private health plans. These include medical homes, care coordination and utilization management that rewards Medicare plans when they boost quality and lower costs. Providers who reduce costs and increase quality should also be rewarded. Those who perform poorly need to suffer the consequences.

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