Medicare payment system faces overhaul

July 1, 2009

Private insurers might need to offer parallel incentives for the accountable care organization model to have critical mass in paying for quality

WASHINGTON, D.C. - The Medicare payment system needs to reward value rather than volume; to encourage coordination of care among providers; and to constrain cost growth, according to the Medicare Payment Advisory Commission (MedPAC). In its June 2009 report to Congress, this advisory panel outlined incentives for establishing accountable care organizations (ACOs) as one way to achieve these goals.

ACOs may provide a middle ground between high-cost FFS and capitated Medicare Advantage plans. Capitation provides similar incentives to constrain volume and coordinate care, but ACOs would not assume risk, negotiate rates or pay claims; these entities would continue to receive FFS payments, along with bonuses for quality and savings.

Other MedPAC proposals aim to improve measurement of physician practice patterns, revise Medicare support for graduate medical education, improve chronic care and discourage doctors from ordering unnecessary, high-cost diagnostic tests.

SHIFT FROM FFS

MedPAC wants to encourage groups of providers, including specialists and hospitals, to form integrated delivery systems able to provide high-quality, coordinated care. The panel seeks to change the structure of the Medicare fee-for-service payment system to be able to benefit from new approaches such as pay for performance, bundled payments, gain sharing and comparative effectiveness research.

With ACOs, providers are accountable for the quality of care they deliver and the resources they use. ACO members receive bonuses for achieving quality and cost targets and may face lower Medicare payments for failing to meet those goals. The expectation is that such financial incentives will prompt ACO providers to "judiciously constrain" inappropriate use of healthcare services.

For the system to succeed in reducing unnecessary care, a large share of the patients in a physician's practice would need to be in an ACO. Achieving this critical mass, MedPAC notes, may require private insurers to also provide ACO-type incentives for providers to limit inappropriate use of services.

The medical home is a variation on the ACO theme, with extra payments to medical practices for coordinating care and meeting quality standards. Another related payment reform is to penalize hospitals with high readmission rates.

REVISING MA RATES

While proposing new strategies for providing more rational care in the Medicare FFS program, MedPAC also reiterates its recommendations for cutting payments to Medicare Advantage plans. CMS will pay MA plans about $12 billion more this year than comparable reimbursement for FFS beneficiaries. MedPAC supports the role of private plans in Medicare, but not the growing number of newer plans which do little to coordinate care.

To create a more level playing field, the report lays out several options for setting MA payment benchmarks.

CMS could set benchmarks administratively, based on 100% of average local FFS spending or various blends of local and national spending levels. Or, Medicare could adopt a competitive bidding system, which has attracted broad support, but is more complex to implement. The resulting benchmarks and rates would depend on the number of bidders, whether there is an upper limit on benchmarks, and how the bidding is structured.

Under all these options, benchmarks will decrease, prompting plans to reduce benefit packages, revise provider networks or even leave the MA program. MedPAC proposes to ease the impact on plans and beneficiaries by phasing in lower benchmarks and rates over time, perhaps three years.

During this transition, Medicare also could reward plans that demonstrate high-quality performance by decreasing payments slowly. Only half of Medicare beneficiaries have access to high-quality MA plans, and MedPAC would like to increase that proportion.