Ongoing concerns about rising health care costs and the looming fiscal insolvency of the Medicare program put increasing pressure on policymakers to rein in health care spending and preserve Medicare for future generations. One policy change could help maintain the program and move the health care system, as well as the way we pay for medical services, in a more sustainable direction. And, unlike most health care reforms, this one is remarkably simple.
There are nearly 64 million Americans on Medicare, the public health insurance program that covers the elderly and younger people with disabilities. For roughly half of them — those enrolled in what’s known as traditional Medicare — the government uses a “fee-for-service” payment system. In this system, the Centers for Medicare and Medicaid Services (CMS) pays physicians a separate fee for more than 10,000 individual services, each of which is assigned a specific code. This is the basis for the annual Medicare Physician Fee Schedule (MPFS).
For the past three decades, these reimbursement rates have been largely determined by the recommendations of the Specialty Society Relative Value Scale Update Committee, or “RUC,” a small committee of doctors appointed by the American Medical Association.
There are multiple problems with this system.
For one, there is a clear conflict of interest: Since doctors get to influence how much CMS pays them for the services they provide (CMS has traditionally accepted the vast majority of the RUC’s recommendations), they have an incentive not to recommend rate cuts. However, since the MPFS needs to be budget-neutral, increases in fees for some services need to be offset by decreases for other services. Over the past several decades, recommendations from the specialist-dominated RUC have resulted in a relative devaluation of primary care services which are, of course, essential.
More importantly, since the reimbursement rates are based solely on estimates of the cost to provide the service, they don’t necessarily reflect the real value of the service to the patient. This results in an incentive to provide more high-priced services, such as tests and procedures, and discourages the provision of low-priced services, like evaluation and care coordination, even when these may be of greater benefit.
This inflationary state of affairs increases costs not only in Medicare but across the entire health care system, given that most private insurers base their rates on the MPFS. If we continue to rely on the fee-for-service payment system and administrative pricing, we will never be able to cut spending and receive better value for our health care dollars. Of course, we could continue with decades-long, unsuccessful efforts to reform the fee-for-service system and expect a different result, but this is not the solution and will not get us much closer to a truly value-based system.
Fortunately, there is another way of paying for medical services that is already a popular part of the Medicare program. In Medicare Advantage, or Medicare Part C, private health insurers compete by submitting bids to CMS based on their assessment of the cost to provide the hospital and physician services included in traditional Medicare. Most such plans also offer additional benefits such as prescription drug coverage, vision and dental services and even a fitness benefit, with no additional cost to the beneficiary. If the bid is accepted, instead of the government paying for each individual service, private insurers receive a fixed amount per year to cover the services included in the plan and no more.
If the private plans are inefficient and spend more than the bid, the burden is on them, and not Medicare or the taxpayer. This incentivizes them to provide high-value care at a good value. In fact, Medicare Advantage outperforms traditional Medicare on many quality measures, particularly those related to preventive care and unnecessary hospital admissions.
It should not come as a surprise that Medicare Advantage has grown in popularity among Medicare beneficiaries in the past decade and by 2025 is projected to include half of all Medicare beneficiaries. However, unless a new enrollee chooses a Medicare Advantage plan, they are enrolled in traditional Medicare by default. Making Medicare Advantage the default enrollment option would accelerate the move away from the inflationary fee-for-service payment system.
In order to reduce unnecessary spending and preserve Medicare for the future, the health care payment system needs to focus on what’s working well. Healthy competition provides incentives for high-value care, and the federal government needs to be relieved of its role in setting prices for thousands of services. Making Medicare Advantage the default enrollment option for new beneficiaries can help accelerate these changes.
John O’Shea is a surgeon and senior fellow in health care policy at The Texas Public Policy Foundation. Kofi Ampaabeng is a senior research fellow and data scientist with the Mercatus Center at George Mason University. They are coauthors (with Elise Amez-Droz) of a new study, “The Medicare Physician Fee Schedule: Overview, Influence on Healthcare Spending, and Policy Options to Fix the Current Payment System.”
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