Reforming Medicare to Better Manage Seniors’ Health Care

May 17, 2017

by Devon M. Herrick, Ph.D.

Chairman Hatch, Ranking Member Wyden, and committee members, thank you for the opportunity to submit comments about Medicare policies that improve care for patients with chronic conditions. I am Devon M. Herrick, Ph.D., a senior fellow at the National Center for Policy Analysis (NCPA). We are a nonprofit, nonpartisan public policy research organization headquartered in Dallas, Texas.

Not long after Medicare was established in 1965, expenditures began to skyrocket. Whereas spending per Medicare beneficiary was $385 in 1970, spending per beneficiary increased to $12,210 annually by 2013.

Nearly one-third of health care spending occurs in a hospital. An additional 20 percent is spent on physician services, while 10 percent is spent on drug therapies. If one considers physician bills while patients are in the hospital, and other associated inpatient costs, a back-of-the envelope calculation suggests nearly half of health spending occurs while patients are hospitalized, about to be hospitalized and while recuperating after an inpatient stay. It is increasingly clear that controlling costs means keeping chronically-ill seniors out of hospitals. 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 medical conditions.

To Reduce Costs, Focus on Big Spenders. It has long been known that a mere 20 percent of patients consume about 80 percent of health care resources. About 5 percent of patients spend half of health care dollars, while the sickest 1 percent consume nearly one-quarter (22 percent).

If the sickest 5 percent of patients spend half of health care dollars that means that 95 percent of patients are responsible for the remaining half. Indeed, the healthiest 50 percent of the population only consumes 3 percent of heath care dollars. Furthermore, one quarter of Medicare spending is on the 5 percent of beneficiaries who are in their last year of life. These figures suggest there are more opportunities to reduce health care spending by carefully managing the sickest 5 percent rather than wasting effort on the 95 percent who are relatively healthy. A significant portion of the big spenders are Medicare beneficiaries ages 65 to 79.

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