The Heritage Foundation May 19, 2011

1. “How Should Washington Control Medicare Spending?” The Heritage Foundation May 19, 2011 James C. CaprettaVisiting Fellow email: jcapretta@eppc.org

2. The Key Question Key question: What process (or, if you will, “discipline”) will bring about continual and rapid productivity and quality improvement in the delivery of health care services? Because more productive and efficient health care delivery (“more health bang for the buck”) is the only way to slow the pace of rising costs without sacrificing the quality of care for patients.

3. Surprising Agreement Not only is Medicare Fee-For-Service not the solution (“Medicare for all”), it’s the main problem. Medicare is the dominant payer in most markets; the delivery system has been built up around its incentives (see McAllen, TX). Medicare FFS is the number one reason (but not the only reason) U.S. health care delivery is far too fragmented and uncoordinated. Medicare FFS payments allow autonomous providers to bill the program separately and remain in business with no need for integration or coordination.

4. PPACA’s Medicare-Centric Reforms PPACA’s Delivery System Reforms: • Accountable Care Organizations • Bundled Payments • Center for Medicare and Medicaid Innovation • Independent Payment Advisory Board Goal of these reforms is to make system-wide delivery system improvement by leveraging changes in Medicare FFS.

5. The Lake Wobegon Effect Will it work? Can the political/regulatory administrators of Medicare FFS make distinctions among hospitals, physicians, and others based on quality and cost metrics? Long, four-decade history indicates the answer is very likely no, or at a minimum not sufficiently. Centers of Excellence The key roadblock: Medicare FFS has been incapable of excluding licensed and otherwise qualified providers from “preferred” Medicare FFS payment (the Lake Wobegon effect – everyone’s above average). To hit budget targets, Medicare FFS applies uniform, across-the-board payment rate reductions (see PPACA… and every other budget cutting law of last three decades).

6. An Alternative Vision for Cost Containment Move toward “defined contribution” systems of federal insurance support in Medicare (but also in Medicaid for non-disabled, and in ESI). Program participants drive resource allocation decisions; they must choose insurance structure and delivery system for care. If they select more expensive options, they pay 100% of the extra cost above DC payment from gov’t. Gov’t provides oversight but not does take it upon itself to build and direct the best manner by which doctors and hospitals must organize themselves to deliver care. Partial prototype: Medicare part D.

7. Objection and Response • Primary Objection: Doesn’t this just shift cost escalation risk onto consumers and away from the government? • Response: Not necessarily (see Rick Foster’s HBC Testimony 1/26/11). The whole point of defined contribution health care is to provide consumers with strong financial incentives to enroll in cost effective delivery models. • With strong incentives for beneficiaries to seek value, those providing the services will have strong incentives to re-organize into more efficient arrangements. • If productivity in the health sector rises sufficiently, consumers and the government could both see premium relief. • Moreover, the real alternative, payment rate “cuts,” place even more access risks on beneficiaries (see the CMS cost analysis of the PPACA).