NCPA - National Center for Policy Analysis

Reforming Medicare to Better Manage Seniors' Health Care

October 15, 2015

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, says senior fellow Devon M. Herrick of the National Center for Policy Analysis.

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.

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.

Source:  Devon M. Herrick, "Reforming Medicare to Better Manage Seniors' Health Care," National Center for Policy Analysis, October 14, 2015.


Browse more articles on Health Issues