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News April 2015

Washington Watch

Medicare Testing, Testing, Testing – For Financial as Well as Healthcare Reforms

By Alan M. Schlein

Since its inception in 1965, Medicare has paid providers on a fee-for-service basis in which doctors, hospitals and other medical providers are paid for each case or service without regard to how the patient fares. That results in medical folks providing more care and medical services, whether or not they are needed.

Medicare is making a major change in how it pays doctors and hospitals – moving toward quality of care and away from the fee-for-service model.

This shift, from “volume to value,” as Health and Human Services Secretary Sylvia Burwell described it recently, has been slowly evolving since 2010 and is being phased in over the course of a decade.

The idea of rewarding doctors, nurses, and hospitals that achieve better outcomes for patients rather than those that just do more, is seen by experts as a crucial shift to improving the quality of care that patients receive, while also restraining costs at a time when millions of baby boomers are beginning to enter the nation’s primary insurance program for the elderly.

Medicare, which serves more than 50 million seniors and disabled Americans, is the nation’s biggest purchaser of medical services. In 2014, the program paid caregivers $362 billion. But while Medicare is viewed as among the most efficient federal government programs, it, nonetheless, has always had problems with waste, fraud, abuse and runaway costs.

Since 2010, the Obama administration has been experimenting with ways to change the system and make it more efficient. But it is hard to transform the way doctors and hospitals get paid. Since its inception in 1965, Medicare has paid providers on a fee-for-service basis in which doctors, hospitals and other medical providers are paid for each case or service without regard to how the patient fares. That results in medical folks providing more care and medical services, whether or not they are needed.

Now, Medicare wants to move to a performance-based system of payments with the hope of getting 50 percent of Medicare payments to fall under that new concept by 2018. The goal is also to get hospitals to 90 percent by 2018. “Not everyone is going to be able to move at the speed we would like, but we want everyone to be moving,” Burwell said.

Traditional Medicare is covered under this policy change, but what isn’t in the equation right now is the money that now goes to private insurers in the Medicare Advantage program, which enrolls about a quarter of all Medicare beneficiaries. Some Medicare Advantage plans are already using alternative payment methods designed to reward better-performing doctors and hospitals. But the vast majority of the elderly are still covered by traditional Medicare’s fee-for-service model, so this new way of doing things will definitely face some speed bumps as it’s being put into place.

The idea is to reward doctors and medical personnel to coordinate their patient care and at the same time stressing quality and frugality by linking quality of care to financial bonuses and penalties for doctors and hospitals. HHS’ Burwell hopes that getting traditional Medicare to make the changes will prompt similar changes by private insurers.

There is almost unanimous agreement among health care folks and politicians of both parties that paying providers by volume contributes to abuse and wasteful spending. This shift has actually been driven by the health care industry itself and has been underway for a few years. But the effort faces a tough long-term battle with potential resistance from health-care providers and skepticism from beneficiaries and lawmakers.


Accountable Care Organizations   

Passage of the controversial Affordable Care Act in 2010 resulted in the creation of alternative payment concepts like Accountable Care Organizations (ACOs), primary care medical homes and “bundled” provider payments. These have all been designed to reward quality of care versus quantity. Since 2011, when no money was spent on alternative methods, Medicare now pays about 20 percent of its payments through these new care delivery methods.

ACOs involve hospitals or doctor groups contracting to care for large pools of patients and if they lower the total cost of their care while meeting quality measures, they get to split the savings with Medicare. They typically emphasize preventive care to reduce hospitalizations and emergency room visits, but doing so requires a significant investment in computer systems and care coordinators that aren’t reimbursed by Medicare.

Last year, about $72 billion, or 20 percent of traditional Medicare spending went to these new models including ACOs. There are now 424 ACOs around the country, covering 7.8 million Medicare beneficiaries. In addition, in the private sector, Leavitt Partners, a consulting firm, counts 317 commercial ACOs and 40 in the Medicaid program.

To encourage non-government medical folks to change their philosophy away from fee-for-service, HHS recently announced the creation of a new Health Care Payment Learning and
Action Network, which will try to expand the alternative payment plan to include private insurers, employers, consumers, state Medicaid programs and other partners.

Several of these experiments have already yielded substantial savings while improving the quality of care. But while some doctors and hospitals have actively embraced the new payment models, it’s probably too early to determine success and failure. While many of the ACOs have successfully met quality standards, their record on cost savings has been mixed, the Wall Street Journal reported recently.

Last fall, Medicare said that the 220 ACOs that started in 2012 and 2013 had generated more than $700 million in savings to date, but only 52 of them cut costs enough to share in those savings and 115 didn’t achieve any savings.

Other medical practices remain wary of the bonus concept, particularly since it could cost them money if they fall short on either saving Medicare money or achieving the many quality benchmarks the government has established. For last year, these ACOs didn’t have to repay the money, but in future years, Medicare intends to require reimbursements from those who fall short. Some doctors and hospitals want Medicare to increase the cut they get from these programs and lessen the financial risks in ACOs and the other programs.

It’s also still too early to assess whether these different payment models are actually improving the health of patients. Studies on the success of these programs have shown mixed results.


Bundling of Payments

Another idea, bundling payments, is being used in 105 hospitals and other care groups, where Medicare gives them a fixed dollar amount for each patient. This is intended to cover not only their initial treatment for a specific ailment but also all the follow-up care. So doctors and hospitals get one overall Medicare price for all services involved in an episode of care, such as hip replacement or heart bypass for as long as 120 days. If providers deliver the care for less money, they get to keep the savings. But if complications occur, they must absorb the extra costs.

As of last July, more than 6,000 doctors, hospitals and nursing homes were candidates for
Medicare bundles covering 48 conditions, but many of them may opt out of the bundling idea because they don’t think the amount of money they are getting from Medicare is worth the financial gamble they are taking. The first analysis of whether the bundled payments model is succeeding provided few definitive findings, according to the Levin Group, which analyzed the results. They said it was too early to draw conclusions after the first year of the three-year experimental program. More than 2,000 providers have applied to take part in the bundling program as of August, 2014.

Medicare has been funding many other pilot projects around the country to test out ideas, including giving doctors bonuses to coordinate patients’ care, and to reward physician’s practices, hospitals and others who deliver the care under budget while also achieving good outcomes for patients. Some of those measures are already in effect. For example, hospitals with high rates of patients re-admitted within a month of being sent home, now face financial penalties.


Medical Homes

Another innovative approach being tried is called medical homes. These are medical practices where nurses monitor patients with chronic conditions like high blood pressure, to make sure they are within acceptable ranges. Teams of medical providers try and meet patients where they are, from the most simple to the most complex conditions.

Several experiments are taking place in the country, but like the bundling, results were inconclusive. After one year, several programs reduced expensive hospital visits in some cases but struggled to show net savings after accounting for their cost.

One program, the comprehensive primary care initiative, a four-year program in Colorado, New Jersey and several other states, cut costs by $168 per participating Medicare beneficiary, in large part, due to declines in hospital admissions and emergency visits, compared with practices not part of the initiative.

The goal was to identify high-risk patients, keep them on the right medicines and diets and steer them to lower-cost treatment. But that wasn’t enough to cover the extra $240 per patient that Health and Human Services paid practices to hire extra nurses, set up 24-hour call lines, improve electronic medical records and other adjustments. Getting medical homes to their full potential will likely require a longer commitment to the principles of coordinated care, a report on the first year program concluded. Medical homes are among dozens of experiments being run by HHS’ innovation center, which has a 10-year, $10 billion budget.

“We still have very little evidence about which payment methods are going to be successful in getting the results we want, which are better quality care and more affordable care,” Suzanne Delbanco, executive director of Catalyst For Payment Reform, a California-based nonprofit that has been tracking the spread of alternative payment models in the private sector, told Kaiser Health News recently.

“We’re just wanting to avoid a situation where a few years from now, where we’ve completely gotten rid of fee-for-service, we don’t want to wake up and say, ‘Oh my gosh, we did it and we’re no better off,’” Delbanco said.


[Also contributing to this story were: Kaiser Health News, McClatchy News, the Los Angeles, Times, the Associated Press, the Wall Street Journal and Modern Healthcare.]

Alan Schlein runs, an internet training and consulting firm. He is the author of the bestselling “Find It Online” books.

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