The Long-Term Financial Outlook for Healthcare and CMS’ Research Agenda:

1. The Long-Term Financial Outlook for Healthcare and CMS’ Research Agenda: Searching for Magic Bullets Bill Saunders, Deputy Director Office of Research, Development, and Information Centers for Medicare & Medicaid Services February 24, 2006

2. It’s Important to Be Clear About Objectives… Today’s Objective • The Context – today’s health financing trends and issues • Overview of the CMS research program • Suggested health financing solutions and related CMS research

3. The Magic Bullet - A Philosopher’sStone for Health Financing? • “Health Care Purchase Coalitions were touted by some as a magic bullet …” • “…the preconceived idea that long term care insurance is the magic bullet…” • “The Magic Bullet: How to Achieve Universal Access to High Quality Long-Term Care” • “Searching for the Next Magic Bullet: Examining New Approaches” (June 2003, AcademyHealth conference roundtable) • “Plans for health service reform are no magic bullet fix…” (from Gr. Britain)

4. The Context • Medicare provides health insurance to 42 million elderly and disabled beneficiaries. More than 43 million low-income persons are enrolled in Medicaid (6 million duals) and 6 million in SCHIP. • The Medicare program spent about $300 billion in 2004 – about 13 percent of the federal budget and about 2.6 percent of GDP. • The Medicaid and SCHIP programs spent about $274 billion – about $162 billion of that in federal dollars.

5. CMS Programs Account for 1/3 of All U.S. Health Spending. Total 2003 National Health Spending = $1.7 Trillion 1 Other public includes programs such as workers’ compensation, public health activity, Department of Defense, Department of Veterans Affairs, Indian Health Service, and State and local hospital subsidies and school health. 2 Other private includes industrial in-plant, privately funded construction, and non-patient revenues, including philanthropy. Note: Calendar Year 2000. Numbers shown may not sum due to rounding. Source: CMS, Office of the Actuary, National Health Statistics Group.

6. Medicaid is the (Second?) Largest Category of State Expenditures … Medicaid Source: National Association of State Budget Officers, 2003 State Expenditure Report.

7. Overall Health Expenditures are Consuming an Increasing Share of GDP

8. The Number of People Medicare Serves Will Nearly Double by 2030

9. And Long-Range Medicare Projections are for Continuing Growth Long-range projection: Medicare Spending as a percent of GDP Financial “train wreck?” Source: Congressional Budget Office

10. Role of Health Services Research • A microscope and a telescope. • Looks backward and forward. • Identifies problems, and develops and tests solutions. • Translates findings into useful information for clinical, management and policy decisions.

11. The CMS Research Program The CMS research program sponsors: • Research studies to design, monitor and refine programs and to foster innovations • Development, implementation and evaluation of demonstrations • Program evaluations of various aspects of current CMS programs • The Medicare Current Beneficiary Survey • Grant programs to foster capacity-building, or innovation in State programs. • Support for external health researchers who use CMS data through the Research Data Assistance Center (ResDAC)

12. Suggested “Magic Bullets” to Improve Health Care and Reduce Expenditures • Disease management for chronically ill beneficiaries • Improving the quality of health care – e.g., pay for performance systems • Health information technology and electronic health records

13. 1) DISEASE MANAGEMENT FOR HIGH COST BENEFICIARIES

14. Most Medicare Costs in Any Year are Usedby a Small % of All Beneficiaries Concentration of Medicare Expenditures Among Beneficiaries, 2001

15. Characteristics of Medicare High Cost Beneficiaries (2000) Of the 5% of beneficiaries with the highest expenditures: • 36% were 80+ years of age (compared to 24% of other beneficiaries) • 24% died during the year (compared to 4%) • 94% had a hospital stay (compared to 16%) • 36% had a Medicare SNF stay (compared to 3%) • 34% are Medicare/Medicaid dual eligible (compared to 19%) • 24% were disabled in 4 – 6 ADLs (compared to 6%) • 28% reported 5+ chronic conditions (compared to 12%) Source: CMS, ORDI: Analysis of 2000 Medicare Current Beneficiary Survey Cost and Use file

16. Medicare Spending for Beneficiaries with Chronic Conditions The 20 percent of beneficiaries with 5+ chronic conditions incur 66 percent of Medicare spending Source: Partnership for Solutions

17. But: Challenges to Cost-Effective Chronic Care Management • Predictive Sensitivity: Can we accurately identify in advance which beneficiaries will be high-cost in the future? • Effectiveness: Can a care management program reduce beneficiaries’ health costs? Will the cost of disease management be less than the savings? • Regression to the Mean: Are high-cost beneficiaries in one year also high-cost in subsequent years? • Mortality: If many of the high-cost beneficiaries die during the year, can disease management reduce these beneficiaries costs? • Health Outcomes: Will health outcomes and health status be maintained or improved?

18. Can Disease Management Achieve Reductions in Health Costs… Source: Joyce et al, Health Affairs, Sept 05

19. …When Many Persons Only Have High Costs in a Single Year? History of Medicare Beneficiaries in the Top 25% in 1997 Source: CBO, “High Cost Medicare Beneficiaries, 2005

20. CMS Is Testing Disease Management In Multiple Initiatives • CMS is aggressively implementing demonstrations and pilots testing various disease management approaches to improve patient outcomes and reduce expenditures. • Many of these demonstration sites are required to assume financial risks for reducing Medicare costs.

21. Disease Management Demonstrations and Pilot Programs • Balanced Budget Act (BBA) Coordinated Care Demonstrations - operational • Benefits Improvement and Protection Act (BIPA) Disease Management for the Chronically Ill – operational • Care Management for High Cost Beneficiaries – physician-centered model; early stages • ESRD Disease Management Demonstration – recently started • Medicare Health Support pilot program (Medicare Modernization Act) –population-based model; began fall 2006

22. 2) Pay-for-Performance Incentives for Improved Quality and Efficiency

23. Why Pay for Performance? • Rising costs driving focus toward quality, value • Current system rewards quantity, not quality • Private sector initiatives • Public sector interest • Congress • States

24. Payment Incentives for Quality(Pay for Performance) • Physician Group Practice (PGP) Demonstration (BBA) – large physician practices; operating since April 2005 • Demonstration of Payment Incentives for Hospital Quality (Premier) – hospitals; operating for more than one year • Medicare Care Management Performance Demonstration (MMA s. 649 – small / moderate size physician practices; in development • Health Quality Demonstration (MMA s. 646) – site solicitation issued fall 2005 (physician groups, integrated delivery systems, regional consortia) • Nursing home, home health demonstrations being planned

25. Composite Quality Scores in the Premier Hospital P4P Demo Improved in the First year • From 87 percent to 91 percent for patients with acute myocardial infarction (heart attack). • From 65 to 74 percent for patients with heart failure. • From 69 percent to 79 percent for patients with pneumonia. • From 85 percent to 90 percent for patients with coronary artery bypass graft. • From 85 percent to 90 percent for patients with hip and knee replacement.

26. In Short… • Medicare is increasing focus on quality • Widespread support for P4P, expansion seems likely • Early results show some promise for improved quality outcomes using P4P

27. BUT, Beneficiaries’ Lifetime Medicare Costs are Relatively Stable Despite Differences in Lifespan Source: Spillman and Lubitz, NEJM, 2000

28. So: Will Improved Quality / Health Reduce Medicare Costs?

29. Even If Less Disability Means Costs per Beneficiary are Reduced… Source: Goldman et al, Health Affairs, 2005

30. If There Are More Beneficiaries Receiving Care, The Net Medicare Savings May Be Small Source: Goldman et al, Health Affairs, 2005

31. Unless …

32. 3) Adopting Health Information Technology and Electronic Medical Records

33. Goals of HIT It is believed that broad adoption of electronic medical records can lead to: • Reductions in health care costs • Reduced medical errors • Improved health

34. Possible Savings Have Been Estimated to be as High as $371 billion over 15 years Projected possible productivity savings Source: Hillestad, Health Affairs, Sept/Oct 2005

35. BUT… • EMR systems are complex—may lead to new types of errors • Implementation will require substantial resources • IT investment does not always lead to quick productivity growth • Even if HIT produces improved quality, will total health expenditures decrease? (Consistent with previous discussion.)

36. CMS Initiatives to Encourage Use of HIT • DOQ-IT--a coordinated approach to facilitating the adoption of HIT in the physician office setting; expanded to all Quality Improvement Organization (QIOs). • Medicare Care Management Performance Demonstration – P4P model to encourage small physician practices to use HIT to report quality measures and improve quality (in development) • Medicare Healthcare Quality Demonstration – encourages system wide reform within a community to use existing Medicare payments more effectively (site solicitation has been issued).

37. Conclusions • The long-term implications for growth in Medicare and Medicaid expenditures, as well as total health costs, are cause for serious concern. • Many innovative solutions have been proposed. • Given the complexities of the U.S. health systems, the potential of these ideas to achieve savings is uncertain. • CMS is proceeding actively to develop and test new approaches intended to improve health quality and reduce future costs. • Continued development of new ideas is critical.

38. Long Term Planning is Crucial “If we knew what it was we were doing, it would not be called research, would it?” Albert Einstein

39. For More Information • Medicare Demonstrations: http://www.cms.hhs.gov/DemoProjectsEvalRpts/ • CMS Chart books and Chart Series: http://www.cms.hhs.gov/TheChartSeries/ • Research reports and results: http://www.cms.hhs.gov/Reports/ • Medicare and Medicaid statistics: http://www.cms.hhs.gov/home/rsds.asp

40. SUMMARIES OF CMS MEDICARE DEMONSTRATIONS AND PILOTS

41. Coordinated Care Demonstration • Mandated by Balanced Budget Act (BBA). • Testing whether coordinated care programs can improve medical treatment plans, reduce hospital admissions, and promote desirable outcomes among Medicare beneficiaries with complex chronic conditions. • 15 demonstration sites began April 2002. Sites included commercial DM vendors, academic medical centers and other provider based programs that provide case management and disease management services. • To date, sites have enrolled 10,000 Medicare beneficiaries in the intervention and control groups . • Payment is based on a care coordination fee per member per month (PMPM). The applicant is not at risk for any of the Medicare program payments and does not share in any program savings.

42. BIPA Disease Management Demonstration • Mandated by Benefits Improvement and Protection Act (BIPA). • Testing the the impact on costs and health outcomes of offering DM services and prescription drug coverage to beneficiaries with advanced-stage congestive heart failure, diabetes, or coronary heart disease. • 3 demonstration sites: CorSolutions, Inc. (Louisiana), Diabetex Corporation (Texas); and The HeartPartners Group (California). • Enrollment began in early 2004 and up to 30,000 lives could be covered under the demonstration. • Sites receive a PMPM fee for their services and for the cost of all prescription drugs. The selected organizations must guarantee, either through reinsurance or other means, net savings to the Medicare program.

43. End-Stage Renal Disease (ESRD) Disease Management Demonstration • Will test disease management models to increase quality of care for ESRD patients, reduce costs, and provide ESRD beneficiaries the opportunity to join integrated care systems. • 3 sites • Began January 2006 • A quality incentive payment is included in the demonstration.

44. Care Management for High Cost Beneficiaries Demonstration • First demonstration focused specifically on high-cost beneficiaries. • Consists of six 3-year demonstration programs: • Tests provider-based intensive care management to improve quality and reduce costs. • Supports collaboration among participants’ primary and specialist providers to enhance communication of relevant clinical information, increase adherence to evidence-based care, reduce unnecessary hospital stays and emergency room visits, and avoid complications. • Tests a variety of models such as intensive case management, increased provider availability, structured chronic care programs, restructured physician practices, and expanded flexibility in care settings. • Each site must guarantee a net Medicare savings of 5 percent.

45. Medicare Health Support • Section 721 of MMA authorized voluntary chronic care improvement pilot programs, to help participants adhere to their physicians’ plans of care and obtain the medical care they need to reduce their health risks. • 8(?) health care organizations were chosen through a competitive selection process—some started operations in fall 2005. • Will focus on large fee-for-service populations that are severely impacted by chronic diseases. • The payment is based on a PMPM. Applicants will be at financial risk up to the amount of their DM fee if savings are not achieved. • Phase I of will serve approximately 160,000 Medicare beneficiaries with congestive heart failure and/or complex diabetes. • In Phase II, the Secretary may expand Phase I programs that have proven successful in improving outcomes and meeting Medicare spending targets.

46. Physician Group Practice (PGP) Demonstration • Encourages coordination of Part A and Part B services, reward physicians for improving health outcomes, and promote efficiency through investment in administrative structure and process. • 10 participating sites – large multi-specialty group practices. • Physician groups will continue to be paid on a fee-for-service basis.This demonstration will pay the physician groups a bonus from savings derived from improvements in the management of patient care and services. • Began operations April 2005.

47. Demonstration of Payment Incentives for Hospital Quality (Premier) • Demonstration with Premier Inc. hospitals to improve the quality of inpatient care by giving financial incentives to hospitals for high quality and reporting quality data on the CMS web site. • Quality measures were selected for inpatients with several relevant clinical conditions: AMI, heart failure, pneumonia, and coronary artery bypass graft. The quality measures proposed for the demonstration have an extensive record of validation through research. • Hospitals with highest clinical quality performance (top 10% of hospitals for a given diagnosis) will receive a 2% bonus of their Medicare payments, while hospitals in the second decile will be paid a 1% bonus.

48. Doctors Office Quality – IT(DOQ-IT) • Provides assistance to physician offices to facilitate their adoption of HIT, improve quality of care • Four state (CA, MA, AR, UT) pilot project underway (1000 physicians per state). • Comprehensive program aimed at assisting practitioners with practice redesign issues, pre-implementation guidelines, readiness assessment. • Ultimate goal will be to monitor and improve care using evidence-medicine based clinical measure. • Both collaborative and consultative approaches are used. • Principles are being adopted by all QIOs.

49. Medicare Care Management Performance (MCMP) Demonstration • Authorized by MMA sec. 649 • Focus on smaller offices, 1-10 Drs • Provides incentives to primary care physician practices for quality and IT • Under development • Scope: 4 states, hundreds of physician’s offices, both urban and rural

50. Healthcare Quality Demonstration • MMA s. 646 mandates 5-year demo to test major changes to improve quality of care while increasing efficiency across an entire health care system. • Sites will identify, develop, and test major and multi-faceted improvements to their local health care system. • Physician groups, integrated delivery systems, and regional health care consortia are eligible to apply. • Sites may propose changes to Medicare payment and benefit structure; must be budget neutral. • Encourages sites to adopt HIT to improve efficiency.