The_Medicare_Program_June_2014_FINAL_1

The Medicare Program An Instrument for ChangeJune 2014



The Medicare ProgramAn Instrument for ChangePrepared by:BostromandOld Creekside ConsultingPrepared on Behalf ofTHE PHYSICIANS FOUNDATIONPhysicians Committed to a Better Health Care System for All AmericansAbout the Physicians FoundationThe Physicians Foundation is a nonprofit 501(c)(3) organization that seeks to advance the workof practicing physicians and to help facilitate the delivery of healthcare for all Americans. Itpursues its mission through a variety of activities including grant-making, research and policyimpact studies. Since 2005, The Foundation has awarded numerous multi-year grants totalingmore than $28 million. In addition, The Foundation focuses on the following core areas: healthsystem reform, health information technology, physician leadership, workforce needs and pilotprojects. As the health system in America continues to evolve, The Physicians Foundation issteadfast in its determination to foster the physician/patient relationship and assist physiciansin sustaining their medical practices during this evolution.Copyright 2014, The Physicians Foundation 

Physicians Foundation AcknowledgementResearch Committee  The authors want to thank Lou Goodman, PhD, President; Walker Ray,Walker Ray, MD, Chair MD, Vice President; and Tim Norbeck, Chief Executive Officer of theKarl Altenburger, MD Physicians Foundation who provided support throughout this project.William Guertin More information about the Physicians Foundation can be found at www.physiciansfoundation.org.Paul HarringtonRipley Hollister, MDGerald McKenna, MDGary Price, MDPhil SchuhPalmer JonesSignatory Medical Societies of the Kathy Means, Lead AuthorPhysicians Foundation include:  Ms. Means is a nationally recognized expert on Medicare, Medicaid andAlaska State Medical Association health care reform, having served in senior positions in Washington, D.C. on Capitol Hill, the Department of Health and Human Services andCalifornia Medical Association in law firm-based consulting. Kathy manages Old Creekside Consulting, an independent health care consultancy located in Fredericksburg, VA.Connecticut State Medical Society For more information on Old Creekside Consulting you may contactDenton County Medical Society (Texas) Kathy Means at [email protected] Paso County Medical Society (Colorado)  Florida Medical AssociationHawaii Medical Association Ken Monroe, Author/EditorLouisiana State Medical SocietyMedical Association of Georgia Ken Monroe is a recognized expert in the management of not-for-Medical Society of New Jersey profit associations including the American Medical Association whereMedical Society of Northern Virginia he was COO for ten years. He now serves as the Chairman and CEO ofMedical Society of the State of New York Bostrom, a leading association management and professional servicesNebraska Medical Association company providing comprehensive management, consulting andNew Hampshire Medical Society outsourcing services to professional societies, trade associations and charitable organizations. For more information about Bostrom visitNorth Carolina Medical Society www.bostrom.com.South Carolina Medical AssociationTennessee Medical AssociationTexas Medical AssociationVermont Medical SocietyWashington State Medical Association

ContentsExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4CHAPTER I: The Medicare Program—An Instrument for Change . . . . . . . . . . . . . . . . . . . . . . . . . 7 Part I.  Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Part II. Politics: The Harnessing of Medicare’s Market Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Part III:  The Allure of Competition in the Private Health Insurance Market to Meet Medicare Program Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Appendix A: Key Milestones in CMS Programs An Overview: 1965 – 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11CHAPTER II: A Primer on Medicare’s Origins and Current Characteristics . . . . . . . . . . . . . . . . . 15 Part I.   A Primer on Medicare’s Origins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Part II.  The Origins and Powers of CMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Part III.  Contracting Support of the Traditional Medicare Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Part IV.  Medicare Today – A Data Primer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23CHAPTER III: Perspectives on Medicare as an Instrument of Health Care Reform . . . . . . . . . 34 The “Complexification” of Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 The Slowly Shifting Paradigm in Medicare Policy Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Leveraging Medicare to Achieve Health Care System Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 CMS Strategic Plan 2013–2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 An Author's Note on CMS Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 CMS Reach in the U.S. and International Health Policy Apparatus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 The Medicare Policy Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Case-Study: Site-Neutral Payment Policy for Ambulatory Care Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Case-Study: Public data releases of physicians’ identifiable Medicare billing information. . . . . . . . . . . . . . . . 44 Appendix B: CMS Strategic Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Appendix C: Executive Summary – Medicare and the Health Care Delivery System Medicare Payment Advisory Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60CHAPTER IV: Medicare Modernization and Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 CMS Operational Imperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Medicare Advantage Contracting and Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 “What-If?” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Medicare Part D Contracting and Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 “What-If?” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Political Cross Currents Over Health Care Competition Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Final “What-Ifs?” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Who “Owns” Competition Theory? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Federal Learning on the ACA’s Dime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 House of Representatives 2015 Budget Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

The Medicare ProgramAn Instrument for Change Executive Summary The Physicians Foundation’s mission is to help educate physicians on the important systemic4 THE PHYSICIANS FOUNDATION changes that impact upon the private practice of medicine. In this report, we examine the Medicare program as a recent instrument of systemic reform, and then consider reforms that might be ahead for the Medicare program, itself. In so doing, we consider implications for physicians and the larger health care system. CHAPTER I The Medicare Program: An Instrument for Change—We open with a brief examination of two themes. First, we introduce the concept of the Medicare program as an instrument for reforms in the health care system. A summary of past major legislative actions affecting the Medicare program highlights the continual reshaping of the program in its nearly 50 years of existence. Second, we discuss the allure of competition as a future means to foster efficiencies in Medicare. We suggest more neutral terminology that may better capture the distinction between the administration of traditional Medicare and proposals that would rely exclusively upon competing health plans to provide Medicare benefits. We highlight the Patient Protection and Affordable Care Act (ACA) plan competition model, and the confused (and confusing) political party cross-signals over private plan competition. Why is it good sometimes and not others—for both parties? Specifically for physicians, we highlight emerging issues on Medicare billing data releases, site-neutral payment policy recommendations and a new Inspector General’s report on evaluation and management codes. In addition, we highlight a new release from

the Medicare Payment Advisory Commission These data focus on the larger parameters ofconcerning how Medicare risk-adjustment the program and beneficiary characteristics,methods’ inaccuracies affect equity among including education and income levels, healthMedicare Advantage plans, Fee-For-Service services utilization, disability prevalence andMedicare and Accountable Care Organizations. end-of-life care. These realities are especiallyThese issues have potential implications for important to consider in crafting not just aphysician payment and practice models. cost-effective, but a practical and humanely structured Medicare program for the future.CHAPTER II A Primer on Medicare’s Origins CHAPTER III An Update on Medicare as anand Current Characteristics—To set the stage for Instrument of Health Care Reform—In Chapterreform discussions, we visit the Social Security III, we take a brief look at key interventionsAdministration’s historical archives to bring in Medicare over the years and leading intoreaders a brief history of the Medicare program’s the ACA. (The latter were covered at length inorigins and its private health insurance building the Physicians Foundation’s first ACA-relatedblocks. We touch on the early role of organized report titled A Roadmap to Health Care Reform,medicine and an alternative plan advocated released in May 2012, and tracked in severalby the American Medical Association, and subsequent reports.)characterize the program that was enacted Separately, we invite attention to the recentlyinstead. An awareness of Medicare’s history is updated CMS Strategic Plan, which providesindeed surprisingly interesting and relevant to striking insight into how the Agency perceivesconsideration of the program’s future. its role in reforming the U.S. health care system. We also detail the broad policy reach of theWe highlight the Centers for Medicare and Agency in the public and private sectors, andMedicaid Services’ (CMS’s) many responsibilities provide a personal author’s note on the culturetoday and provide a current organizational of the Agency.chart. We examine the sheer scale and centrality For physicians, we focus on importantof Medicare contracting to operation of the new developments such as the recent,program, and the evolving roles of private health major, physician billing data release andplans in supporting the Medicare program from recommendations to the Congress for site-its inception. This extends to all current Medicare neutral payments for select medical services.models: traditional, Part C-Medicare Advantageand Part D-drug benefit plans. We prepared CHAPTER IV Looking to the Future—Medicarean abstract of recent General Accountability Modernization and Competition—In our closingOffice testimony on major contracting changes chapter, we first summarize the major elementsoccurring in traditional Medicare today—it’s a of the Medicare Advantage and Part D plandifferent form of competition and accountability. contracting models functioning in MedicareThe second part of Chapter II provides what wethink are essential data, mainly in chart form, tobe aware of in considering Medicare’s future. The Medicare Program: An Instrument and Target of Health Care Reform 5

today, both of which are voluntary enrollment models. Then we look “around the corner” and consider total replacement of today’s direct federal administration of the traditional Medicare program and Parts C and D, by a single “supervised private plan administration” model in which private health plans compete within a federal framework to provide coverage and benefits to the entire Medicare population. The key switch is to a compulsory private plan enrollment model in Medicare. Is that feasible given the characteristics of the Medicare population? We ask whether this is a de facto “Medicare Exchange” concept (raised by economist Alice Rivlin and colleagues in 2011) and ask “What If?” That is, what if the basic plan competition and marketplace design elements of the ACA prove to be successful and adaptable to Medicare? What might be different? What changes might such an approach imply, and what basic issues must be addressed to help decide such a strategy? In closing, we trust you will find this report to be informative and thought provoking as we consider what the future of Medicare might hold. As always, The Physicians Foundation thanks you for your time and attention.6 THE PHYSICIANS FOUNDATION

Chapter IThe Medicare Program—An Instrument for ChangePart I: Introduction copays, and other standard parameters of any health insurance plan.Overview—In this report, the Physicians By administration, we refer to “direct feder-Foundation is pleased to provide an al administration,” i.e. traditional Medicare,examination of two broad themes of reform as compared to “supervised private plan ad-with respect to the Medicare program. The ministration,” as occurs under the Medicarefirst relates to Medicare as a channel or Advantage and Part D drug benefit programsinstrument for changes policymakers seek in today. Under the latter two models, privatethe organization, delivery, quality and cost of plans bid to provide benefits in Medicare,services rendered to patients system-wide. and assume program responsibilities andThe Patient Protection and Affordable Care financial risk, all under federal supervision.Act of 2010 (ACA) is a major recent example Over the last fifteen years, numerousof provisions added to Medicare that have an organizations and individuals have proposedimpact on the broader health system. restructuring Medicare by relying upon competing private plans to deliver all benefitsThe second relates to current and future to all beneficiaries. The term “premiumreforms in the benefit design and administration support” has become familiar, but we findof Medicare, itself. These are linked—due to it has been degraded as though it meant anMedicare’s size and economic power, changes abdication of federal responsibilities towardto Medicare’s benefits and the means by which Medicare and its beneficiaries.the benefits are administered reverberate While not advocating one model over another,throughout the nation’s health care system. we think it is useful to dial-down the temperature in order to have a more careful consideration ofWe need to establish terms and clear the real issues facing Medicare’s sustainabilitydistinctions right up front. By benefits, we refer in the future. We suggest more neutralto the structure of the benefit package itself:defined benefits, covered services, premiums, The Medicare Program: An Instrument and Target of Health Care Reform 7

Medicare support terminology that reflects what such models beneficiaries will be enrolled in original FFSoperations across fundamentally are—a different policy and Medicare and more than 1.2 billion claims willthe entire Medicare contracting approach for delivering Medicare be processed and paid for those beneficiaries bybenefit spectrum benefits to beneficiaries, and one that could and claims administration contractors. In February(Parts A, B, C, should be properly shaped and supervised by 2014, Medicare had 571 contracts with MAand D) are largely the federal government. We examine the scale organizations to provide medical benefitsperformed not by and centrality of contracting for administration and offer prescription drug benefits to overfederal employees, of the Medicare program in all its incarnations 15.3 million beneficiaries, and an additionalbut by private throughout this report. 85 contracts with organizations that providecontractors. prescription drug benefits outside of the MA CMS: The Nation’s Largest Health Insurer— program. (Source: Medicare: Contractors and In carrying out this select review of near- Private Plans Play a Major Role in Administering term reforms, and reforms in the future, we Benefits. GAO-14-417T. March 2014). take a close look at the Centers for Medicare Federal contract authorities are central whether and Medicaid Services (CMS), its history, one is discussing the federal government’s direct responsibilities, strategic plan, organization, administration of the traditional fee-for-service and critically important contracting roles used program or its’ oversight of the largest private to support the traditional Medicare program, health plan competition models in traditional and separately, the competition models under Medicare, the Medicare Advantage (Part C) and Part C and Part D of Medicare. Medicare Part D drug benefit programs. Correspondingly, authorizing legislation The future of Medicare reform is inextricably shapes the competition models and contracting linked to the nuts and bolts of how benefits terms under Parts C and D, which in turn may get delivered to beneficiaries, and to be shaping the future of the Medicare program. the authorities granted to the federal These models, their legislative and regulatory government to carry out these enormous parameters, design issues, successes and tasks. Medicare support operations across perceived shortcomings, are the practical the entire Medicare benefit spectrum (Parts stepping-stones to future competition models A, B, C, and D) are largely performed not by for Medicare. We will explore the nexus of such federal employees, but by private contractors. contracting authorities and ideas for Medicare Private contractors not only must carry out reform later in this report. Medicare program regulations, as applicable, but also must comply with federal contracting Part II: The Harnessing of requirements and policies. It is difficult to Medicare’s Market Power overstate how important flexible, highly competitive, performance-based contracting Overview—Returning to our opening theme of authorities are to Medicare’s future. We find this Medicare as an instrument of reform, since to be a critical, yet rarely analyzed or discussed enactment in 1965, the Medicare program has feature of reform discussions in the past. driven major changes in health care in America. These changes include financing and coverage, Lest contracting tools sound distinctly health care services organization and delivery, unexciting, consider the following synopsis quality, technological innovations and, of from the General Accountability Office. course, health care costs. The dynamism of the health care system has been so profound over “In fiscal year 2014 the Medicare program will the 49 years since Medicare’s enactment that cover more than 50 million elderly and disabled there no longer is a counter-factual state—what beneficiaries at an estimated cost of $595 once was is no more. The future starts from billion [est./benefit payments only]. In order to where we are now. administer benefits to Medicare beneficiaries, Since the program’s enactment, numerous CMS relies extensively on contractors to assist legislative and regulatory changes have in carrying out its responsibilities, including program administration, management, oversight, and benefit delivery. In fiscal year 2014, approximately 38 million Medicare8 THE PHYSICIANS FOUNDATION

occurred to address Medicare-specific to physician-oriented policies and issues. The The dynamism ofconcerns in benefits, coverage and provider most recent was released in April 2014, and the health carepayment policies (see Appendix A for a modest titled “The Patient Protection and Affordable system has beencompilation of legislative changes). Medicare’s Care Act, Beyond the Horizon into 2015: ACA so profound overregulatory and purchasing powers in the health Critical Issues—Part II. In the physician section, the 49 years sincecare marketplace have also been harnessed to we provided important details on new Network Medicare’s enactmentdrive more systemic reforms in health care. Adequacy guidelines issued for exchange plans that there no longer by CMS and the Office of Personnel Management is a counter-factualThe ACA is the most recent example of federal (OPM), and new law passed this spring affecting state—what once waspolicymakers’ drive to effect changes in the the fee schedule, radiology services, codes and is no more. The futurehealth care system. The ACA’s private health other matters. (The entire series is available at starts from where weinsurance market and Medicaid coverage www.thephysiciansfoundation.org). are now.expansions have temporarily dominated public In this report, we consider emerging policydiscourse, especially during the initial 2013- discussions of import to physicians and to2014 implementation of those provisions. how they practice in Chapter III: An Update on Medicare as an Instrument for Change. InHowever, the ACA also initiated or extended addition to a broad examination of CMS as another reform concepts that strike at the heart of Agency and its policy and operational reach,the practice of medicine in this country, and at we examine emerging Medicare developmentshow care is organized and delivered to patients relating to:by the full array of health care providers. Thesereforms range across physicians’ practices,  Implications of Medicare’s national releasehospital systems, outpatient clinics, skilled of identifiable physician billing information,nursing facilities, rehabilitation facilities,  Site-neutral payment concepts for physicianhome health agencies, end-stage renal disease services advocated by the Medicare Paymentfacilities, federal health centers and hospice Advisory Commission,care organizations.  The Health and Human Services Inspector Generals’ report on large excess costs toIt is important to note that ongoing changes Medicare due to over-billing involvingto Medicaid, the State Children’s Health evaluation and management codes.Insurance Program (S-CHIP), and other Controversy in the U.S. Congress over the ACA’shealth programs are also material in their private insurance and Medicaid coverageimpact. However, our focus in this report is provisions, and the pending 2014 mid-termon Medicare as the federal government’s most elections, has impeded action on many fronts,centralized, and most economically powerful including the more typical array of Medicarehealth care financing program. program policies that need further action. Few are as central to physicians as reformsPhysician-Oriented Issues—The ACA’s to the Medicare physician fee schedule that“programmatic” changes to Medicare’s have been left unresolved, thus far. When thattraditional program broadly support the deadlock breaks, we expect these issues to getgoal of “value-based purchasing” of health legislative attention.care services. To policymakers, this conceptsimultaneously links evidence-based Part III: The Allure of Competitionimprovements in quality of care for patients in the Private Health Insurance Marketto parallel strategies to bend the cost curve to Meet Medicare Program Goalsdownward. Medicare Competition Models—Competition,The Physicians Foundation highlighted over as a major tool by which to foster systemictwo dozen major such changes wrought by the efficiencies and improvements in healthACA in a major report released in May 2011 andtitled “A Roadmap for Physicians to Health CareReform.” That was followed by a series of severalreports on the unfolding implementation of theACA. Each report contained a chapter devoted The Medicare Program: An Instrument and Target of Health Care Reform 9

care services, has had a challenging history challenging technical website enrollment in Medicare. In many quarters, competition and other issues. We expect these early among private health insurance plans is viewed implementation issues to gradually resolve as a means to achieving patient care and cost and stabilize. Regardless of where one stands management improvements for Medicare on the merits of the ACA as social policy, the law beneficiaries. Private plan competition to lower provides a competition model that offers ideas costs and improve benefits is an active principle for Medicare in the future. guiding the competitive private plan design of both the Medicare Advantage Part C program Conclusion—Competition and benefit package and the Medicare Part D drug benefits program. reforms in Medicare are complicated issues However, these two models differ in significant and we attempt to clarify the basic concepts ways that we consider later in this report. in Chapter IV: A Look to the Future—Medicare Modernization and Competition. In thatMany Americans and While Medicare’s future modernization chapter, we provide an overview of the Part Ccurrent health policy continues to be debated, Medicare’s and Part D contracting models, and ask whetherleaders are steeped traditional fee-for-service (FFS) program is benefit package modernization should precedein the ideals and currently being modified selectively through additional other reforms. We conclude bydesign of today’s various tools such as public disclosure raising other fundamental questions that wouldMedicare program of provider data, bundled payments and need to be considered regarding new Medicareand are deeply accountable care organizations (ACOs). competition models going forward.concerned about Also, within the FFS program, a third andpossible changes. different competitive bidding model is Finally, many Americans and current healthFuture changes must employed by CMS in establishing approved policy leaders are steeped in the ideals andevolve from this suppliers and payment levels for durable design of today’s Medicare program and arehistory. medical equipment (DME). In May 2014, CMS deeply concerned about possible changes. announced it is adding a prior authorization Future changes must evolve from this history. initiative relating to DME. The provider and In order to discuss Medicare’s future, it is supplier communities are both affected by essential to first understand key elements of the such initiatives in the present. program’s origins, history and characteristics today. Our next chapter provides a thumbnail The Affordable Care Act Private Insurance history of Medicare and CMS, and spending and Competition Model—The ACA extends health demographic parameters of Medicare today. insurance coverage to individuals and small To set the stage, we turn now to Chapter II: businesses nationwide through competing A Primer on Medicare’s Origins and Current private health insurance plans that are Characteristics. regulated under federal and state regulations. The ACA’s federal and state regulatory frameworks encompass the operation of publicly administered health insurance exchanges under which plans offer their pre- approved products to consumers. Common requirements are set for benefit design and plan offerings, plans’ market conduct and the means by which exchanges operate and enrollment shall occur. A legislated set of income-related subsidies to help defray some of the premium cost of securing a plan is also administered through this framework. Some elements of the ACA have been rescinded, delayed or subject to legal challenges; some of the latter are not yet fully resolved in the federal courts. The initial private plan coverage rollout beginning in October 2013 suffered famously10 THE PHYSICIANS FOUNDATION

Appendix A: Key Milestones in CMS Programs An Overview: 1965 – 2010Overview—The following material was sourced from 1966: Medicare was implemented and more than 19two major documents, cited at the conclusion of this million individuals enrolled on July 1.Appendix. The period 1965 to 2000 was developed 1967: An Early and Periodic Screening, Diagnosis, andby CMS as part of its Medicare history archives. The Treatment (EPSDT) comprehensive health servicesconcluding entries, 2003-2010, were adapted from benefit for all Medicaid children under age 21 wasmaterial developed by the Congressional Research established.Service. 1972: Medicare eligibility was extended to individuals under age 65 with long-term disabilities and toWhile not exhaustive (relatively less significant individuals with end-stage renal disease (ESRD).legislative changes have occurred since 2010), this list Medicare was given the authority to conductillustrates the continual attention that Medicare and demonstration programs. Medicaid eligibility forassociated major programs, such as Medicaid and the elderly, blind and disabled residents of a state couldState Children’s Health Insurance program (SCHIP), be linked to eligibility for the newly enacted Federalamong others, receive on an ongoing basis by the U.S. Supplemental Security Income program (SSI).Congress. Such legislative changes, to varying degrees, 1973:  The HMO Act provided for start-up grants andnot only change programs, but also: loans for the development of health maintenance organizations (HMOs); HMOs meeting Federal standards 1) require beneficiary education and outreach, relating to comprehensive benefits and quality were given preferential treatment in the marketplace. 2) repeatedly affect the responsibilities, workload 1977:  The Health Care Financing Administration and organization of CMS, and other agencies, (HCFA) was established to administer the Medicare and Medicaid programs. 3) require extensive new regulations and educational 1980: Coverage of Medicare home health services was documents, many with significant impact upon broadened. Medicare supplemental insurance, also providers of health services, and called “Medigap,” was brought under Federal oversight. 1981:  Freedom of choice waivers (1915b) and 4) repeatedly impact upon States and private home and community-based care waivers (1915c) contractors that are carrying out diverse actions were established in Medicaid; states were required to support the affected programs. to provide additional payments to hospitals treating a disproportionate share of low-income patients (i.e.,Of particular significance to physicians, earlier in 2014, DSH hospitals).the Congress again passed a temporary patch to the 1982:  The Tax Equity and Fiscal ResponsibilityMedicare physician fee schedule update, deferring Act made it easier and more attractive for healthaction on deeper reform of the fee schedule. maintenance organizations to contract with the Medicare program. In addition, the Act expanded theFrom CMS: Agency's quality oversight efforts through Peer Review Organizations (PROs).Below are some of the key legislative milestones that 1983:  An inpatient acute hospital prospective paymenthave shaped our programs—Medicare, Medicaid, CLIA, system for the Medicare program, based on patients'HIPAA and SCHIP diagnoses, was adopted to replace cost-based payments. 1985:  The Emergency Medical Treatment and Labor1965:  Medicare and Medicaid were enacted as Title Act (EMTALA) required hospitals participating inXVIII and Title XIX of the Social Security Act, extending Medicare that operated active emergency roomshealth coverage to almost all Americans aged 65 orolder (e.g., those receiving retirement benefits fromSocial Security or the Railroad Retirement Board), andproviding health care services to low-income childrendeprived of parental support, their caretaker relatives,the elderly, the blind, and individuals with disabilities.Seniors were the population group most likely to beliving in poverty; about half had insurance coverage.The Medicare Program: An Instrument and Target of Health Care Reform 11

to provide appropriate medical screenings and 1991:  Medicaid Disproportionate Share Hospital (DSH)stabilizing treatments. spending controls were established, and provider-1986:  Medicaid coverage for pregnant women and specific taxes and donations to states were capped.infants (up to 1 year of age) to 100 percent of the FederalPoverty Level (FPL) was established as a state option. 1996:  Welfare Reform—The Aid to Families with1987:  The Omnibus Budget Reconciliation Act of 1987 Dependent Children (AFDC) entitlement program(OBRA87) strengthened the protections for residents was replaced by the Temporary Assistance forof nursing homes. Needy Families (TANF) block grant; the welfare1988:  The Medicare Catastrophic Coverage Act, which link to Medicaid was severed; a new mandatory lowincluded the most significant changes since enactment income group not linked to welfare was added; andof the Medicare program, improved hospital and skilled enrollment/termination of Medicaid was no longernursing facility benefits, covered mammography, and automatic with receipt/loss of welfare cash assistance.included an outpatient prescription drug benefit and acap on patient liability. The Health Insurance Portability and AccountabilityMedicaid coverage for pregnant women and infants to Act of 1996 (HIPAA) had several provisions. First, it100 percent FPL was mandated; special eligibility rules amended the Public Health Service Act, the Employeewere established for institutionalized persons whose Retirement Income Security Act of 1974 (ERISA), andspouses remained in the community to prevent \"spousal the Internal Revenue Code of 1986 to provide for newimpoverishment\"; Qualified Medicare Beneficiary Federal rules improving continuity or \"portability\" of(QMBs) program was established to pay Medicare coverage in the large group, small group and individualpremiums and cost sharing charges for beneficiaries with health insurance markets. CMS implements HIPAAincomes and resources below established thresholds. provisions affecting the small group and individualThe Clinical Laboratory Improvement Amendments markets. Second, it created the Medicare Integrity(CLIA) strengthened quality performance requirements Program which dedicated funding to program integrityfor clinical laboratories in order to assure accurate and activities and allowed CMS to competitively contractreliable laboratory tests and procedures. for program integrity work. Third, it created national1989:  The Medicare Catastrophic Coverage Act administrative simplification standards for electronicof 1988 was repealed after higher-income elderly health care transactions. Fourth, it required HHS toprotested new premiums. A new Medicare fee schedule issue privacy regulations if Congress failed to enactfor physician and other professional services, a substantive privacy legislation.resource- based relative value scale, replaced charge-based payments. Limits were placed on physician 1997:  Balanced Budget Act of 1997 (BBA)—Statebalance billing above the new fee schedule. Physicians Children's Health Insurance Program (SCHIP)were prohibited from referring Medicare patients was created; limits on Medicaid payments toto clinical laboratories in which their physicians, or disproportionate share hospitals were revised; newphysicians' family members, have a financial interest. Medicaid managed care options and requirements forMedicaid coverage of pregnant women and children states were established.under age 6 to 133 percent FPL was mandated;expanded EPSDT requirements were established. Medicare changes included:1990:  Phased in Medicaid coverage of children ages  Establishing an array of new Medicare managed6 through 18 under 100 percent FPL was established; care and other private health plan choices forMedicaid prescription drug rebate program was beneficiaries, offered through a coordinated openestablished; Specified Low-Income Medicare beneficiary enrollment process;eligibility group was established (SLMBs) for Medicaid  Expanding education and information to helpprograms to pay Medicare premiums for beneficiaries beneficiaries make informed choices about theirwith incomes at least 100 percent but not more than health care;120 percent of the FPL and limited financial resources.  Requiring CMS to develop and implement fiveAdditional federal standards for Medicare sup- new prospective payment systems for Medicareplemental insurance were enacted. services (for inpatient rehabilitation hospital or unit services, skilled nursing facility services, home health services, hospital outpatient department services, and outpatient rehabilitation services);  Slowing the rate of growth in Medicare spending and extending the life of the trust fund for 10 years;  Providing a broad range of beneficiary protections;12 THE PHYSICIANS FOUNDATION

 Expanding preventive benefits; and covered preventive services; and (6) created a specific  Testing other innovative approaches to payment process for overall program review if general revenue and service delivery through research and spending exceeded a specified threshold. demonstrations. 2005-08:  During the 109th Congress, two laws1998:  The internet site www.medicare.gov was were enacted that incorporated minor modificationslaunched to provide updated information about Medicare. to Medicare’s payment rules. These were the Deficit Reduction Act of 2005 (DRA, P.L. 109-171) and the Tax1999:  The toll-free number, 1-800-MEDICARE (1- Relief and Health Care Act of 2006 (TRHCA, P.L. 109-800-633-4227), became available nationwide. The 432). In the 110th Congress, additional changes werefirst annual Medicare & You handbook was mailed to incorporated in the Medicare, Medicaid, and SCHIPall Medicare beneficiary households. Extension Act of 2007 (MMSEA, P.L. 110-173) and the Medicare Improvements for Patients and Providers Act1999:  The Ticket to Work and Work Incentives of 2008 (MIPPA, P.L. 110-275).Improvements Act of 1999 (TWWIIA) expanded theavailability of Medicare and Medicaid for certain 2010: Comprehensive health reform legislation wasdisabled beneficiaries that return to work. Established enacted that, among other things, made statutoryoptional Medicaid eligibility groups and allowed changes to the Medicare program. The Patientstates to offer a buy-in to Medicaid for working-age Protection and Affordable Care Act (ACA; P.L. 111-individuals with disabilities. 148), enacted on March 23, 2010, included numerous provisions affecting Medicare payments, paymentThe Balanced Budget Refinement Act of 1999 (BBRA) rules, covered benefits, and the delivery of care. Theincreased payments for some Medicare providers and Health Care and Education Affordability Reconciliationincreased the amount of Medicaid DSH funds available Act of 2010 (the Reconciliation Act, or HCERA; P.L.to hospitals in certain States and the District of 111-152), enacted on March 30, 2010, made changesColumbia. Other related legislation improved Medicaid to a number of Medicare- related provisions in the ACAcoverage of certain women's health services. and added several new provisions.2000:  The Benefits Improvement and Protection Included in the ACA, as amended, are provisions thatAct (BIPA) further increased Medicare payments to (1) constrain Medicare’s annual payment increasesproviders and managed health care organizations, for certain providers; (2) change payment rates inreduced certain Medicare beneficiary co-payments, and the Medicare Advantage program so that they moreimproved Medicare's coverage of preventive services. closely resemble those in fee-for-service; (3) reduce payments to hospitals that serve a large numberBIPA created a new Medicaid prospective payment of low-income patients; (4) create an Independentsystem for Federally Qualified Health Centers and Rural Payment Advisory Board (IPAB) that will makeHealth Clinics and it modified the amount of Medicaid recommendations to adjust Medicare payment rates;DSH funds available to hospitals, while it provided a (5) phase out the Part D prescription drug benefitone-year extension on the sunset of transitional medical “doughnut hole”; (6) increase resources and enhanceassistance provided to families eligible for welfare. activities to prevent fraud and abuse; and (7) provide incentives to increase the quality and efficiency of care,From CRS: such as creating value-based purchasing programs for certain types of providers, allowing accountable care2003:  Congress enacted the Medicare Prescription organizations (ACOs) that meet certain quality andDrug, Improvement, and Modernization Act of 2003 efficiency standards to share in the savings, creating(MMA, P.L. 108-173), which included a major benefit a voluntary pilot program that bundles payments forexpansion and placed increasing emphasis on the pri- physician, hospital, and post-acute care services, andvate sector to deliver and manage benefits. The MMA in- adjusting payments to hospitals for readmissionscluded provisions that (1) created a new voluntary out- related to certain potentially preventable conditions.patient prescription drug benefit to be administered byprivate entities; (2) replaced the Medicare+Choice pro- Sources:gram with the Medicare Advantage (MA) program and 1) Centers for Medicare and Medicaid Services. CMS: Our History.raised payments to plans in order to increase their avail- Prepared for a major anniversary of the Medicare program.ability for beneficiaries; (3) introduced the concept of in-come testing into Medicare, with higher-income persons 2) Congressional Research Service, A Medicare Primer (R40425), pagespaying larger Part B premiums beginning in 2007; (4) 4-5. February 7, 2014.modified some provider payment rules; (5) expandedThe Medicare Program: An Instrument and Target of Health Care Reform 13

Who Makes Social Welfare Policy? “Democracy is expensive—but it is a time-tested way of resolving conflicts.” In American society, as in most others, a delicate balance always exists between conflict and consensus. Without a relatively high degree of agreement on fundamentals, no orderly social and political life is possible. On the other hand, our diverse interests and ways of pursuing happiness—as individuals and as organizations—frequently come into conflict with one another. “…Conflict was an important and highly visible aspect of the Medicare debate. Yet the contending parties also displayed a high degree of consensus. Both sides agreed to \"play by the rules of the game\" and accepted the decisions of the legislative process as binding. This is often taken for granted in our society, but it is no small achievement.” [Among President Johnson’s Medicare signing ceremony remarks]…“The final victory of Medicare, he had said, was not attributable to the efforts of any one [person]. It was attributable to the joint efforts of many— to at least a score of Congressmen and Senators (some of whom had died before seeing the fruit of their work), to dozens of departmental officials and technicians, to congressional staff people, to the leaders and staffs of the many interest groups and organizations which supported the measure, to newspaper and magazine editors who had endorsed it, to philanthropists, courageous physicians, committed intellectuals, dedicated pamphleteers, and self-effacing political organizers. All of these people and more contributed their ideas, their money, their labor, and their influence to the cause.” (Source: Abstract from Evolution of Medicare, Chapter 5, Peter A. Carney, 1969)14 THE PHYSICIANS FOUNDATION

Chapter II A Primer on Medicare’s Originsand Current CharacteristicsPart I. A Primer on Medicare’s Origins Corning. Mr. Corning’s report, titled Evolution of Medicare, is an extensive documentation of theFormer U.S. Senator “Hubert H. Humphrey social, political and legislative history and earlyonce calculated that a bill might have to implementation of the Medicare program devel-surmount as many as 28 separate obstacles oped under contract to the Social Security Ad-before becoming the law of the land. “At each ministration, the Agency that first administeredstage of the legislative highway,” he noted, the new law (www.socialsecurity.org/history/“a few legislators lurk, like the pirates of corning.html. Accessed April 26, 2014.)Tripoli, and take toll of the passing traffic…” The report was originally published in 1969, (Source: Peter A. Corning) later archived, and then re-issued more recently by SSA as a foundational document regarding theA Little History—Sometimes in social policy, as in origins and initial implementation challenges oflife, it’s important to check your premises andrevisit what you think you know. In that spirit, A Digression on Implementation Failureswe paid a (virtual) visit to the Social SecurityAdministration’s (SSA) History Archives to We were very interested in Peter Corning’s descriptions of Medicare’s initialhighlight facets of Medicare’s origins. We implementation challenges in light of the recent upheavals over the ACA coveragediscovered a treasure trove of American rollout. In Medicare’s initial implementation, enrollment wasn’t the problem sincecultural, political and social programs history. SSA already had the retirement benefit database to draw upon for enrollment.We highlight how inextricably linked private Rather, contractors (private health plans) were initially overwhelmed in 1966-health plans (PHPs) have been to Medicare’s 67 and unable to handle the onslaught of provider claims, leading to mountingstructure and functioning, right from the piles of unpaid claims. Their technology and staffing were inadequate to thebeginning. We also note some interesting sheer scale of the Medicare start-up of about 19 million enrollees. The problemsaspects of the role of organized medicine, most became so severe that a number of Social Security Administration district officeprominently represented at the time by the workers (federal employees), were deployed on-site to private contractors toAmerican Medical Association’s “Eldercare” help process claims and handle other tasks until the initial crisis was resolved.proposal.In visiting the history archives, we drawparticularly upon the extensive work of Peter A. The Medicare Program: An Instrument and Target of Health Care Reform 15

the Medicare program. A professional journalist “If there were still any lingering doubtsat the time, Mr. Corning began the project while about the prospects for Medicare, theyworking with the Oral History Research Office were dispelled by the outcome of theat Columbia University on the early history of 1964 election. President Johnson wasSocial Security. We commend his richly detailed returned to office by the largest pluralityand fascinating account of Medicare’s inception in history, carrying in on his coattailsand early implementation to any student of the biggest congressional majoritiessocial or health care history in the United since New Deal days. In the House, theStates. The following is drawn from Chapter 4 Democrats picked up 38 seats, to give theof his document. Any faults of omission in the Party a margin of 295-140. In the Senate,interest of focusing on highlights are our own. where the Democrats already had held a lopsided 66-34 majority, the party gainedEarly Days in the U.S. Health Insurance Debate— two more seats.”Beginning in the early 1900’s, Americansconsidered numerous ideas relating to financial AMA Role and “Eldercare” Private Plan Approach—protection against the cost of illness or injury. Notably, however:The debate ranged across national healthinsurance, to smaller scale proposals such as “Just after the [1964] election, in fact,government-sponsored health insurance for the AMA (American Medical Association,veterans, for the indigent and/or disabled, supplied) held a high level strategy meetingand for the aged, and many other smaller- at its Chicago headquarters, at which it wasscale private options. The debates were rich decided to fight on to the very end. Anotherin cultural, social and political nuances and publicity campaign was mapped. Then, inspanned several Presidents’ Administrations. early January, AMA leaders announced they would support an alternative toThe debate over health insurance for the Medicare based on the principle of theaged surged during the Kennedy/Nixon 1960 original Taft-Smith-Ball bill and its manyPresidential election debates leading to the successors—that is, a program operatedelection of Senator John F. Kennedy. The health through private insurance carriers (andcare community was divided, with the American the States), with premiums for the low-Medical Association and many insurers and income elderly subsidized out of Federalbusiness organizations actively campaigning and State revenues. \"Eldercare,\" as theagainst a federal government program, and AMA's proposal was called, was promptlyfor alternatives. The American Hospital introduced by two Ways and MeansAssociation campaigned in favor of a federal Committee members, A. S. Herlong, Jr. ofprogram, along with, in general, many unions, Florida and Thomas B. Curtis of Missourichurch organizations and representatives for (H.R. 3727 and H.R. 3728), and giventhe aged. wide publicity.” Perspectives—We draw attention to theInitial “Medicare” Defeat—After years of intense AMA’s role for two reasons. First, it’s usefulnational debate and episodic Congressional for physicians today to be aware of thedebate and unsuccessful legislative activity, historic role of medicine’s most prominenta major, initial “Medicare” bill was defeated organization, at that time, in landmark socialin 1962 in the U.S. Senate. It was a signal efforts to address the financing of health carelegislative defeat for President Kennedy, services for Americans. That historical role isfor whom health care for the aged had been infinitely more extensive and nuanced than wea major priority before and after the 1960 can do justice to in this report. We note thatelection. The issue came to the fore again after after enactment of the Medicare program, thePresident Kennedy’s tragic death, led by former AMA’s position evolved into strong defenseVice-President Lyndon B. Johnson. Public of the program’s importance, even whenopinion shifted slowly in favor, but significant the AMA has strongly critiqued certain featuresopposition remained. Yet, as summarized by or shortcomings.Peter Corning:16 THE PHYSICIANS FOUNDATION

More important for our purposes are some racial crisis, the war on poverty and theof the ideas encapsulated in the “Eldercare” war in Vietnam. Nonetheless, approval ofproposal. Conceptually, at a top-tier level, it Medicare by the House of Representativesresembles certain elements of the ACA model was a momentous occasion, and President(i.e., income-related premium subsidies Johnson paused briefly to hail it: \"This is ato support the purchase of private health landmark day in the historic evolution ofinsurance plans.) Keep in mind that under the our social security system.\"ACA, state health insurance exchanges wereexpected to be primary, and the current federal The Mills bill then went to the Senate, The failure in 1965exchange model (Healthcare.gov), was intended where the Finance Committee held of the AMA’s state-to be a default option to be relied upon by few hearings in late April and early May, based, private healthstates, if any. The failure in 1965 of the AMA’s followed by extended executive sessions. plan, Eldercarestate-based, private health plan, Eldercare The bill was finally reported out—with 75 proposal for the aged,proposal for the aged, begs a hypothetical committee amendments—on June 24 (by begs a hypotheticalquestion: What would have happened to aged a vote of 12-5). During 3 days of debate question: What wouldpersons in the targeted Medicare population on the Senate floor, some 250 additional have happened tounder an Eldercare-type model had it been amendments were considered. aged persons in theenacted assuming state participation, and their targeted Medicarestate of residence declined to participate? Then, on July 9, the Senate passed the population under measure by a 68-21 vote. A Senate-House an Eldercare-typeCertain of the Eldercare elements also resemble conference committee labored for over a model had it beencertain top-level aspects of “premium support” week in mid-July to reconcile a total of 513 enacted assumingideas for private plan coverage as a reform differences between the two chambers, state participation,approach to the current Medicare program. It after which the final bill was approved in and their state ofsuggests a strong persistence in certain ideas the House and Senate, on July 27 and 28, residence declined toregarding approaches to equitable health respectively. Thus, America finally joined participate?care financing in this country, at least for the many other nations that providedpublic programs. health insurance protection for the aged— in Winston Churchill's phrase, bringing \"theEnactment of Medicare—Long-time observers of magic of averages to the rescue of millions.”the workings of the U.S. Congress are acutelyaware of the labyrinthine politics and processes The final Medicare act (officially partthat lead more often to defeat than success of of the \"Social Security Amendments oflegislative bills. Congressional watchers can 1965\") established a two-part insuranceread between the lines of the following excerpt program. The \"basic\" (Part A) program ofand imagine both the fierce politics, public and hospital and related benefits was financedprivate, and the enormous effort conveyed by through social security taxes. Benefitsthe span of time, and the roster of amendments included 90 days of hospital care, 100and votes, required to bring the Medicare days of nursing-home care, 100 home-legislation to successful completion. nursing \"visits\" in each \"spell\" of illness, and hospital outpatient service—all subject “Finally, on March 23, 1965, the Ways and to \"deductibles,\" \"coinsurance,\" and other Means Committee voted 17-8 to substitute features, as well as certain other conditions. a drastically revised committee bill for The second part (Part B) consisted of a King-Anderson. (The committee bill, 296 voluntary program of \"supplementary\" pages long, had 102 separate sections.) benefits, covering 80 percent (above an The next day, Chairman {Wilbur} Mills annual deductible of $50) of physicians' introduced this \"Mills bill\" (H.R. 6675) fees, additional home-nursing services, on the House floor, and on April 8, after 1 in-hospital diagnostic and laboratory day of floor debate, the Mills bill passed— work, certain kinds of therapy, ambulance without amendment-by 313-l15. It was services, surgical dressings, and so forth. all very anti-climatic—indeed, almost This supplementary plan would be financed perfunctory. By mid-1965 public attention initially through a $3 monthly premium had shifted to other issues—the growing from each beneficiary, with a matching The Medicare Program: An Instrument and Target of Health Care Reform 17

Looking back, what amount paid by the Government out of the costs of those plans. There were four keyactually occurred the general revenues. In addition, the act elements that have endured:in the passage of provided for a substantially expandedMedicare? First, it Kerr-Mills program extending \"medical   Social Security System Framework—It wasreflected the defeat, indigency\" benefits (Medicaid) to other agreed to rely upon the existing Social Securityat least indirectly, age groups besides those over age 65. Of system to bring a minimum level of basicof the concept of course, many other changes in the social financial security to targeted populations,a national health security system were also included in primarily the elderly and permanently disabled.insurance system the act.” The incorporation of Medicare into the Socialresembling the one The Medicare program today stands on the Security framework reflected the evolvingthat Britain passed shoulders of its founders’ ideas and purposes, view that most retirees’ income and savings,into law in the early on its original design, and on the steady flow including Social Security cash benefits, failed1900’s. Equally, it over nearly fifty years of legislative and to protect the program’s beneficiaries againstrepresented the regulatory alterations. The Social Security their greatest financial vulnerability, the highdefeat of competing Amendments of 1965, which added Medicare economic cost of serious illness.proposals to offer (Title XVIII) and Medicaid (Title XIX) to the“Medicare” benefits Social Security Act, were signed into law on   Federal Oversight and Regulatory Role—directly through July 30, 1965, by President Lyndon B. Johnson Medicare’s enactment reflected acceptance ofprivate health in the presence of former President Harry A. a major new role for the federal governmentplans (PHPs), with Truman in a large ceremony held at the Truman in financing, oversight and regulation of avarious income- Presidential Library (see archival photo). program of health benefits. In retrospect, duerelated government to the increasing enrollment and efforts tosubsidies to defray President Johnson’s trip to the Truman library manage costs, quality and program integrity,the costs of those was a gracious acknowledgement of the the government was drawn even more deeplyplans. material contributions President Truman’s into the specifics of the provision of health administration made in the late 1940’s, care in the U.S. than even early detractors to examining and ultimately advocating may have envisioned. Early on, this occurred health insurance benefits for Social Security primarily through the establishment of beneficiaries and assistance for the indigent. rules for providers governing conditions of participation, program integrity, coverage and The Medicare Compromise—Looking back, what payment for services. Over the years, these actually occurred in the passage of Medicare? and related policies became powerful tools First, it reflected the defeat, at least indirectly, that have impacted significantly upon health of the concept of a national health insurance services delivery in the U.S. system resembling the one that Britain passed into law in the early 1900’s. Equally, it   Political Consensus and Compromises— represented the defeat of competing proposals The program’s ultimate passage and to offer “Medicare” benefits directly through program design reflected important political private health plans (PHPs), with various consensus and compromises, which included income-related government subsidies to defray accommodations to major stakeholders, including organized medicine and PHPs. For medicine, it was the decision to make enrollment in Part B medical insurance benefits “supplementary” and voluntary. Part A “hospital insurance” benefits were mandatory. For all providers, and for PHPs (and in recognition that the government lacked sufficient operational infrastructure), it was decided to rely upon private health plans accustomed to working with providers to serve as the original fiscal agents for the government. (Author’s note: For a period of time, the original Bureau of Health Insurance within SSA created and operated a “direct18 THE PHYSICIANS FOUNDATION

intermediary” option for providers that modernized and grew (see page 20 to view It took the U.S.elected not to interact with Medicare through CMS’s current organizational chart.) Congress 38 yearsprivate health plans—this option was phased CMS Policy and Operational Responsibilities— before it enactedout some years later. In this option, the CMS now has the primary policy and operational fundamental changesgovernment served as its own fiscal agent.) responsibilities at the federal level for Medicare, (in 2003) to the non- Medicaid, and the State Children’s Health competitive Medicare   Key Early, but Evolving, Roles for Private Insurance Program (SCHIP). CMS has significant contracting modelHealth Plans—The Blue Cross and Blue Shield responsibilities relating to implementation of the of 1965, despiteplans were the most dominant, but not the ACA’s Medicare, Medicaid and SCHIP program repeated HCFA/only large private health insurers in the U.S. changes, as well as federal oversight of private CMS requests to putin the early 1960’s. Such plans had a deep insurance market oversight provisions, major operational supporthistory of their own in working with hospitals, coverage expansions, and health insurance of the program on aphysicians, and other providers as the private exchanges and related matters. (Several more competitive,health insurance system developed in the U.S. other federal agencies also have important rigorous footing.Therefore, the government contracted with collaborative roles in implementing the ACA,them from Medicare’s operational beginnings such as the Social Security Administration, theto establish coverage; process claims and for Department of Labor, the Department of thesome provider classes, cost reports; pay claims; Treasury, and Homeland Security.)determine beneficiary cost-sharing liabilities; CMS also carries out other responsibilitiesand, establish oversight controls and provide under laws such as the Clinical Laboratoryassistance to providers and beneficiaries. Improvement Amendments (CLIA) and theIt took many years, as explained later, for the Health Insurance Portability and Accountabilityrole of PHPs to change, both functionally and Act of 1996 (HIPAA), among others. Under CLIA,with respect to the terms under which they CMS regulates all laboratory testing (exceptcould contract with the government. This research) performed on humans in the U.S.relates both to administration in the traditional and covering about 244,000 laboratory entities.program, and to emerging new roles for health CMS currently has about 6,100 employees, theplans such as we see today in the Medicare majority of whom are employed in the Agency’sAdvantage and Medicare Part D programs. national headquarters in Baltimore, Maryland. There are regional locations, as well, organizedPart II: The Origins and Powers of CMS under a management Consortia model.The Evolution of an Agency—Historically, the Part III: Contracting Support of theBureau of Health Insurance (BHI) was created Traditional Medicare Programwithin SSA to implement the Medicare program.Several top managers in the original agency, Introduction—We opened this report withincluding Thomas Tierney, the original Bureau an advisory that any program changes andDirector, and Mildred Tyssowski, an operations reforms must be carried out within a well-Chief, were hired due to their executive skills designed federal contracting framework.and expertise in private health insurance Yet this framework gets minimal attention.operations. BHI later 1) merged with another It is important to understand that it tookfederal agency, and in so doing, 2) added the U.S. Congress 38 years before it enactedresponsibilities for Medicaid administration, fundamental changes (in 2003) to the non-and 3) became a freestanding agency that competitive Medicare contracting model ofseparated from SSA and was re-named 1965, despite repeated HCFA/CMS requests tothe Health Care Financing Administration put operational support of the program on a(HCFA). HCFA was later reorganized as new more competitive, rigorous footing.responsibilities were legislated into being and We drew upon recent Governmentrenamed the Centers for Medicare and Medicaid Accountability Office testimony to the CongressServices (CMS). CMS has also re-organized to prepare an abstract on this topic noting someinternally over time as responsibilities shifted, The Medicare Program: An Instrument and Target of Health Care Reform 19

of the crucial changes in contracting terms and a public policy perspective, it is especiallyorganization that are occurring today in CMS’s problematic when the Congress fails to grantmanagement of the traditional FFS program. authorities needed to correct long-simmering policy or operational problems in Medicare.The traditional Medicare program’s troubling A recent notable example is the failure of thecontracting reform story is an important Congress, over multiple years, to address thecautionary tale to the extent that it highlights well-recognized and costly issues in the currentsome of the hidden costs of the differences in Medicare physician fee schedule’s sustainableperspectives and roles between Executive and growth rate (SGR) formula.Legislative Branches of government. FromDEPARTMENT OF HEALTH AND HUMAN SERVICES, CENTERS FOR MEDICARE & MEDICAID SERVICES Office of Equal Opportunity Administrator Operations and Civil Rights Principal Deputy Administrator Chief Operating Officer Office of Communications Chief Operating Officer Chief of Staff Deputy Chief Operating Officer & CMS Office of Legislation Chief Information Officer Deputy Chief Operating Officer Federal Coordinated Deputy Administrator for Innovation and Quality and Office of Acquisition and Grants Health Care Office Management CMS Chief Medical Officer Office of Minority Health Office of Financial Management **Center for Clinical Standards **Center for Medicare and Office of The Actuary and Quality Medicaid Innovation Office of Information ServicesOffice of Strategic Operations Office of Operations Management and Regulatory Affairs Consortium for Financial Management & Fee-For-Service Operations Consortium for Medicaid And Children’s Health Operations Consortium for Medicare Health Plan Operations Consortium for Quality Improvement and Survey & Certification Operations Offices of Hearings and Inquiries Offices of Enterprise Management * Office of Enterprise Strategy & Performance * Office of E-Health Standards and Services * Office of Enterprise Business * Office of Information Products and Data AnalyticsCenter for Medicare Center for Medicaid and Center for Program Integrity Center for Consumer Chip Services Information and Insurance OversightAPPROVED SOURCE: WWW.CMS.GOV/ORGANIZATION CHART. ACCESSED 06/04/14.* Reports to Offices of Enterprise Management ** Reports to Deputy Admin. for Innovation and Quality20 THE PHYSICIANS FOUNDATION

For purposes of traditional Medicare, or any Today, the original plans that served as Part From a publicfuture competition model reforms, it is crucial to A intermediaries and Part B carriers are policy perspective,ensure that contracting models specified in the referred to as the “legacy” contractors. As the it is especiallylaw and to be utilized by federal managers, in chronology (abbreviated) derived below from problematic whenturn, grant those managers the tools necessary the General Accountability Office (GAO) makes the Congress failsto properly carry out the objectives of the law. clear, in recent years the Congress has become to grant authorities increasingly concerned with the overall needed to correctToday, private health plans and other types growth in Medicare spending and in improper long-simmeringof contractors continue to support major payments to providers. This is reflected both policy or operationalfunctions in the Medicare traditional fee- in the changing authorities granted to CMS problems in Medicare.for-service program. However, many PHPs regarding contracting, and in new types of A recent notablenow compete under the Medicare Advantage contracting focused particularly on addressing example is the failureprogram to attract beneficiaries out of the improper payments to providers. of the Congress,traditional program into their privately over multiple years,managed, Medicare-approved, insurance GAO Summation—As noted recently by the to address the well-products. Other PHPs compete to offer drug GAO in a Report to the Congress (Medicare: recognized and costlybenefits to Medicare beneficiaries under the Contractors and Private Plans Play a Major issues in the currentPart D benefit enacted in 2003. These evolving Role in Administering Benefits. GAO-14-417T. Medicare physicianMedicare options form the foundation for March 2014.): fee schedule’sexamining benefit modernization and new plan sustainable growthcompetition models for the future. “By law, CMS [in 1965, it was actually rate (SGR) formula. the Bureau of Health Insurance] wasMedicare Contracting History required to select carriers from among health insurers or similar companiesMedicare’s Private Health Plan Contracting and to choose fiscal intermediaries fromHistory—Medicare’s private health plan organizations that were first nominatedcontracting history under the traditional by associations representing providers,program (and separately under Part C) is a without the application of competitivecase study in how politics can distort federal procedures [emphasis supplied]. Ingovernment administrative operations and addition, CMS could not terminate thesegoals. In 1965, by law, the government contracts unless the contractors werewas required to select Medicare claims first provided an opportunity for acontractors on a non-competitive basis public hearing, whereas the contractorsfrom among private health insurers that themselves were permitted to terminatewere experienced in processing hospital their contracts, unlike other federaland medical claims in their own lines of contractors. The contractors werebusiness. paid based on their allowable costs and generally did not have financialAs noted in our brief history of Medicare incentives that were aligned with qualitysection, these arrangements were set by the performance (p. 3.)”Congress in order to achieve political andlegislative acceptance of the Medicare program As further described by GAO:in the medical and private health plan (PHP)communities. Such a “favored nation” structure “Beginning in the 1980s, the Departmentwould presumably not even be considered of Health and Human Services (HHS) askedin today’s federal contracting environment. Congress to amend its authority relatedHowever, once these favorable terms were to the selection of claims administrationwritten into the Medicare law, we note that contractors, citing several reasons. HHSit took thirty-eight years for such terms to be wanted greater flexibility to administerabandoned by the Congress in favor of more the program and improve services toflexible, performance-based, competitive beneficiaries and providers. In addition,contracting for Medicare administration. HHS wanted to promote competition by opening up the contracting process to a broader set of contractors, achieve cost The Medicare Program: An Instrument and Target of Health Care Reform 21

savings, and increase CMS’s ability to administration processes. Since the originalreward contractors that performed well. implementation, CMS chose to consolidateCongress included such reform in the the 15 A/B MACs into 10 jurisdictionsMedicare Prescription Drug, Improvement, and is in the process of that consolidation.and Modernization Act of 2003 (MMA). Currently, there are 5 consolidated A/B MACs that are fully operational, 7 A/B MACsSpecifically, the MMA repealed limitations that will eventually be consolidated into 5on the types of contractors CMS could use jurisdictions, and 4 DME MACs that are fullyand required that CMS: operational (p. 3-4.)”  use competitive procedures to select GAO notes new program integrity and audit new contracting entities to process and recovery authorities, functions and modes medical claims; of payment in Medicare contracting:  provide incentives for contractors to provide quality services; “Under the FAR [federal acquisition  develop performance standards regulations], agencies may generally (including standards for customer select from two broad categories of satisfaction); contract types: fixed-price and cost-  comply with the Federal Acquisition reimbursement. When implementing Regulation (FAR), except where contractor reform, CMS chose to structure inconsistent with provisions of the the MAC contracts as cost-plus-award-fee MMA; contracts, a type of cost-reimbursement  implement contractor reform by contract. This type of contract allows CMS October 2011; and to provide a financial incentive—known as an award fee—to contractors if they  recompete the contracts at least once achieve certain performance goals. In every 5 years. addition to reimbursement for allowable costs and a contract base fee (which is fixedCMS implemented the MMA contracting at the inception of the contract), a MACreform requirements by shifting claims can earn the award fee, which is intendedadministration tasks from 51 legacy to incentivize superior performance. Incontracts to new entities called Medicare 2010, we reviewed three MACs that hadAdministrative Contractors (MACs). undergone award fee plan reviews andOriginally, CMS selected 15 MACs to found that all three received a portion ofprocess both Part A and B Medicare the award fee for which they were eligible,claims (known as A/B MACs) and 4 MACs but none of the three received the fullto process durable medical equipment award fee (p. 4.)”(DME) claims (known as DME MACs).CMS also selected 4 A/B MACs to process “The Health Insurance Portability andclaims for home health care and hospice Accountability Act of 1996 established theservices. CMS began awarding the MAC Medicare Integrity Program, authorizingcontracts in 2006; however, bid protests CMS to award separate contracts for programand consolidation of some of the MAC integrity activities such as investigatingjurisdictions delayed some of the MACs suspected fraud. These contracts arefrom being fully operational. By 2009, now handled by Zone Program Integritymost of the legacy contracts had been Contractors and are generally aligned withtransitioned to MACs and by December the same jurisdictions as the MACs. In2013, CMS completed that transition. 2003, the MMA directed CMS to develop a demonstration project testing the use ofCMS is moving toward further consolidation contractors to conduct recovery audits inof MAC contracts in hopes that consolidation Medicare. These contractors, known aswill further improve CMS’s procurement and recovery auditors, conduct data analysis and22 THE PHYSICIANS FOUNDATION

review claims that have been paid to identify key characteristics of the Medicare program improper payments. While other contractors in the most recent periods for which data are that review claims are given a set amount publicly available. This is the foundation upon of funding to conduct reviews, recovery which over 50 million older, and in many cases, auditors are paid contingency fees on claims impoverished, and disabled Americans rely they have identified as improper. To increase upon for their essential health benefits. It is also efforts to identify and recoup improper the foundation upon which any realistic reforms payments, Congress passed the Tax Relief to Medicare in the future must rest. and Health Care Act of 2006, which, among Unless otherwise noted, for the following other things, required CMS to implement material, we draw primarily upon major reports a permanent and national recovery audit from the Congressional Research Service (CRS), contractor program (p. 5 – 6.)” the Congressional Budget Office, the Medicare Board of Trustees and MedPAC. As withConclusion—The GAO’s March 2014 report previous reports in this series, we seek factualprovides a particularly timely and useful information released into the public domainunderpinning for understanding the critical role from highly professional and credible sources.contracting plays in Medicare operations. This These sources and any additional materialssame report also addresses the very different reviewed in preparation of this report appearpurposes contracting serves under the Medicare in the Bibliography.Advantage and Part D drug benefit programs. As described by CRS in “A Medicare Primer”—We draw further on this and other materials in Medicare consists of four distinct parts:highlighting Medicare benefit modernization andcompetition issues in Chapter IV. In particular,   PART A (HOSPITAL INSURANCE, OR HI) coverswe discuss crucial differences in CMS’s role inpatient hospital services, skilled nursing care,in centralization of policy development and hospice care, and some home health services.execution via contractors in the traditional The HI trust fund is mainly funded by a dedicatedprogram, and how CMS’s role and relationship to payroll tax of 2.9% of earnings, shared equallycontractors differs in Parts C and D of Medicare. between employers and workers.Part IV: Medicare Today – A Data Primer   PART B (SUPPLEMENTARY MEDICAL INSURANCE, OR SMI) covers physician services, outpatientPurpose—In this section, we examine briefly the SOURCES OF MEDICARE REVENUE: 2012 38%   Payroll Taxes 85% 72% 75%   General Revenue   Beneficiary Premiums 40%   Payments from States  Taxation of Social Security Benefits   Interest and Other 13% 1% 26% 12%3% 2% 8% 2% 13% Notes: Totals may not add to 100% due 4% 6% to rounding. SMI - TOTAL HI - SMI - PART D SOURCE: 2013 REPORT OF THEMEDICARE REVENUE PART A PART B $67 Billion MEDICARE TRUSTEES, TABLE II.BI. $243 Billion $227 Billion $537 Billion The Medicare Program: An Instrument and Target of Health Care Reform 23

services, and some home health and preventive program (except for a portion of administrative services. The SMI trust fund is funded costs) is considered mandatory spending and is through beneficiary premiums (set at 25% not subject to the appropriations process. of estimated program costs for the aged) and Medicare Program Overview and Spending— general revenues (the remaining amount, According to CRS, in 2014, Medicare will cover approximately 75%). an estimated 54 million persons (45 million aged and 9 million disabled). This represents about   PART C (MEDICARE ADVANTAGE, OR MA) is a one in six Americans and nearly all individuals private plan option for beneficiaries that covers over the age of 65. Under the Congressional all Parts A and B services, except hospice. Budget Office’s April 2014 Medicare Baseline, Individuals choosing to enroll in Part C must it was estimated that total Medicare spending in also enroll in Part B. Part C is funded through 2014 will be about $618 billion, of which about the HI and SMI trust funds. $609 billion will represent benefit payments. About $3 billion will be spent on program   PART D covers outpatient prescription drug administration in 2014. benefits. Funding is included in the SMI trust On page 23 is a graphic depicting the major fund and is financed through beneficiary sources of Medicare program revenues. premiums, general revenues, and state transfer payments. Medicare is required to pay for all covered Separately, it is also useful to understand the services provided to eligible persons, so long distribution of spending across the four distinct as specific criteria are met. Spending under the parts of Medicare. Following is a graphic displaying projected spending by category for 2014.PROJECTED MEDICARE BENEFIT SPENDING, BY CATEGORY, FY 2014 Medicare Spending and Beneficiary ($591 BILLION*) Characteristics—The Medicare patient population has different Outpatient Hospital   Part A health characteristics, utilization Prescription Inpatient   Part A and/or B patterns and health care spending Drugs Services   Part B profiles than is customary in   Part C private health plans (PHPs) in 12% 25%   Part D their private lines of business. In $70 B $146 B general, in their private lines of business, PHPs generally insure 26% 5% Skilled Nursing younger individuals and families $154 B $30 B Facilities (including children) who are healthier, and many adults activelyMedicare 3% $20 B in the labor force. Compared to theAdvantage older and/or disabled and ESRD(includes other 12% Home population covered by Medicare,group health plans) $71 B Health such populations’ per capita levels of and distribution of health care 10% 7% utilization and spending patterns $60 B $39 B are different. Physician Hospital Other Services Separately, Medicare data are Payments Outpatient (includes hospice, durable medical extensive and dense. We opted Services equipment, ambulance and for a carefully selected set of laboratory services, Part B drugs, visual data that convey more outpatient dialysis) than words. Following are certain key characteristics of theNotes: *Numbers may not add due to rounding. The $591 billion in benefit payments does not include CBO’s Medicare program today, startingestimated reductions under sequestration, administration costs or recoveries.SOURCE: FIGURE BY CRS BASED ON DATA FROM THE CONGRESSIONAL BUDGET OFFICE,MAY 2013 MEDICARE BASELINE.24 THE PHYSICIANS FOUNDATION

with long-term financing challenges, followedby select information on beneficiaries andspending. These are essential facts thatwill shape the federal budgetary debate,tempered by the realities of the demographiccharacteristics and health care needs of theaged, disabled and end-stage renal diseasepopulation, including those that are duallyeligible for Medicare and Medicaid.These are drawn from MedPAC’s compendiumtitled “Health Care Spending and the MedicareProgram—Data Book. March 2013. We referinterested readers to that Compendium for anarray of data that are outside the scope of thisreport, including extensive program statisticsby major provider categories. MedPAC hasprovided additional perspectives and data atthe provider category level in its March 2014Report to Congress, as well. All reports areavailable in digital form at Medpac.gov. The Medicare Program: An Instrument and Target of Health Care Reform 25

1. MEDICARE FACES SERIOUS CHALLENGES WITH LONG-TERM FINANCING. 8 Total expenditures 7 Actual ProjectedPercent of GDP 6 Deficit 5 General revenue transfers 4 State transfers and drug fee 3 Premiums 2 1 Tax on benefits Payroll taxes 2066 2076 0 1986 1996 2006 2016 2026 2036 2046 2056 1966 1976 Calendar yearNote: GDP (gross domestic product). These projections are based on the trustees’ intermediate set of assumptions. Tax onbenefits refers to the portion of income taxes that higher income individuals pay on Social Security benefits that is designated forMedicare. State transfers (often called the Part D “clawback”) refer to payments called for within the Medicare Prescription Drug,Improvement, and Modernization Act of 2003 from the states to Medicare for assuming primary responsibility for prescription drugspending. The drug fee refers to the fee imposed in the Patient Protection and Affordable Care Act of 2010 on manufacturersand importers of brand-name prescription drugs. These fees are deposited in the Part B account of the Supplementary MedicalInsurance trust fund.SOURCE: 2013 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE MEDICARE TRUST FUNDS.• In 2012, Medicare expenditures exceeded Medicare revenues due to decreased Hospital Insurance payroll tax income caused by the weak economy. The Medicare trustees project that expenditures will continue to exceed revenues in 2013 and 2014.• From 2015 to 2022, Medicare revenues are expected to exceed Medicare expenditures in part because expenditures are reduced as a result of provisions of the Budget Control Act of 2011 that require a 2 percent sequester of Medicare payments during this period.• After 2022, the Medicare trustees project that Medicare expenditures will exceed Medicare revenues, and general revenues will grow as a share of total Medicare financing, adding significantly to federal budget pressures.26 THE PHYSICIANS FOUNDATION

2. ENROLLMENT IN THE MEDICARE PROGRAM IS PROJECTED TO GROW RAPIDLY IN THE NEXT 20 YEARS. 120 112.1 Historic Projected 105.6 100 98.2 88.5 92.0Beneficiaries (in millions) 81.1 80 63.9 60 47.4 39.3 40 33.7 28.0 20.1 20 0 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080Note: Enrollment numbers are based on Part A enrollment only. Beneficiaries enrolled only in Part B are not included.SOURCE: CMS OFFICE OF THE ACTUARY, 2013.• The total number of people enrolled in the Medicare program is expected to increase from about 50 million in 2012 to about 81 million in 2030.• The rate of increase in Medicare enrollment will accelerate until 2030 as more members of the baby-boom generation become eligible, at which point it will increase more slowly after the entire baby-boom generation has become eligible. The Medicare Program: An Instrument and Target of Health Care Reform 27

3. MEDICARE HI AND SMI BENEFITS AND COST SHARING PER FFS BENEFICIARY IN 2011. Average benefit Average cost sharing (in dollars) (in dollars) HI $5,172 $435 SMI 4,992 1,272 Note: HI (Hospital Insurance), SMI (Supplementary Medical Insurance), FFS (fee-for-service). Dollars are for calendar year 2011 for FFS Medicare only and do not include Part D. Average benefits represent amounts paid for covered services per FFS beneficiary and exclude administrative expenses. Average cost sharing represents the sum of deductibles, coinsurance, and balance billing paid for covered services per FFS beneficiary. SOURCE: CMS OFFICE OF THE ACTUARY; THE 2013 ANNUAL REPORT OF THE BOARDS OF TRUSTEES OF THE MEDICARE TRUST FUNDS; AND THE MEDICARE AND MEDICAID STATISTICAL SUPPLEMENT 2012, CMS OFFICE OF INFORMATION SERVICES.• In calendar year 2011, the Medicare program made $5,172 in HI benefit payments and $4,992 in SMI benefit payments on average per beneficiary.• In the same year, beneficiaries owed an average of $435 in cost sharing for HI; $1,272 in cost sharing for SMI; and a total of $1,567 in cost sharing for both.• Most Medicare beneficiaries have supplemental coverage through former employers, medigap policies, Medicaid, or other sources that fill in much of Medicare’s cost-sharing requirements.28 THE PHYSICIANS FOUNDATION

4. FEE-FOR-SERVICE PROGRAM SPENDING IS HIGHLY CONCENTRATED IN A SMALL GROUP OF BENEFICIARIES, 2009. 100 Next 4% Next 5% 90 Most 15 costly 1% Next 15% 24 80 81 70 18 Second quartile 24 60 14Percent 50 5 Percent of program spending 40 30 Least costly half 20 10 0 Percent of beneficiaries Note: FFS (fee-for-service). All data are for calendar year 2009. Analysis excludes beneficiaries with any group health enrollment during the year. SOURCE: MEDPAC ANALYSIS OF 2009 MEDICARE CURRENT BENEFICIARY SURVEY, COST AND USE FILES.• Medicare FFS spending is concentrated among a small number of beneficiaries. In 2009, the costliest 5 percent of beneficiaries accounted for 39 percent of annual Medicare FFS spending and the costliest quartile accounted for 81 percent. By contrast, the least costly half of beneficiaries accounted for only 5 percent of FFS spending.• Costly beneficiaries tend to include those who have multiple chronic conditions, are using inpatient hospital services, are dually eligible for Medicare and Medicaid, and are in the last year of life. The Medicare Program: An Instrument and Target of Health Care Reform 29

5. AGED BENEFICIARIES ACCOUNT FOR THE GREATEST SHARE OF THE MEDICARE POPULATION AND PROGRAM SPENDING, 2009.Aged Percent of beneficiaries Percent of spending83.4% Aged Disabled Disabled 77% 16.1% 15.5% ESRD ESRD 6.4% 0.9% Note: ESRD (end-stage renal disease). The aged category refers to beneficiaries age 65 or older without ESRD. The disabled category refers to beneficiaries under age 65 without ESRD. The ESRD category refers to beneficiaries with ESRD, regardless of age. Results include fee-for-service, Medicare Advantage, community dwelling, and institutionalized beneficiaries. Totals may not sum to 100 percent due to missing data or to rounding. SOURCE: MEDPAC ANALYSIS OF THE MEDICARE CURRENT BENEFICIARY SURVEY, COST AND USE FILE, 2009.• In 2009, Medicare beneficiaries age 65 or older without ESRD composed 83.4 percent of the beneficiary population and accounted for 77 percent of Medicare spending. Beneficiaries under 65 with a disability and beneficiaries with ESRD accounted for the remaining population and spending.• In 2009, average Medicare spending per beneficiary was $10,499.• A disproportionate share of Medicare expenditures is devoted to Medicare beneficiaries with ESRD. On average, these beneficiaries incur spending that is more than six times greater than spending for aged beneficiaries (65 years or older without ESRD) and for beneficiaries under age 65 with disability (non-ESRD). In 2009, $69,770 was spent per ESRD beneficiary versus $9,690 per aged beneficiary and $10,896 per beneficiary under age 65 enrolled due to disability.30 THE PHYSICIANS FOUNDATION

6. DUAL-ELIGIBLE BENEFICIARIES ACCOUNT FOR A DISPROPORTIONATE SHARE OF MEDICARE SPENDING, 2009. Percent of fee-for-service beneficiaries Percent of fee-for-service spending Dual Dual eligible eligible 18% 31%Non-dual Non-dual eligible eligible 82% 69%Note: Dual-eligible beneficiaries are designated as such if the months they qualify for Medicaid exceed the months theyqualify for supplemental insurance. Spending data reflect 2009 Medicare Current Beneficiary Survey Cost and Use filefrom CMS.SOURCE: MEDPAC ANALYSIS OF THE MEDICARE CURRENT BENEFICIARY SURVEY, COST AND USE FILE, 2009.• Dual-eligible beneficiaries are those who qualify for both Medicare and Medicaid. Medicaid is a joint federal and state program designed to help low-income persons obtain needed health care.• Dual-eligible beneficiaries account for a disproportionate share of Medicare expenditures. As 18 percent of the Medicare fee-for-service population, they represented 31 percent of aggregate Medicare fee-for-service spending in 2009.• On average, dual-eligible beneficiaries incur twice as much annual fee-for-service Medicare spending as non-dual-eligible beneficiaries: In 2009, $17,888 was spent per dual-eligible beneficiary, and $8,336 was spent per non-dual-eligible beneficiary.• In 2009, average total spending which includes Medicare, Medicaid, supplemental insurance, and out-of-pocket spending across all payers for dual-eligible beneficiaries was about $29,100 per beneficiary, nearly twice the amount for other Medicare beneficiaries. The Medicare Program: An Instrument and Target of Health Care Reform 31

7. CHARACTERISTICS OF THE MEDICARE POPULATION, 2009. Characteristic Percent of the Characteristic Percent of the Medicare population Medicare population Total (47,176,547) Sex 100% Living arrangement 5 Male Institution 29 45 Alone 49 Female 55 Spouse 18 Race/ethnicity Other White, non-Hispanic 77 Education 24 African American, 30 non-Hispanic 10 No high school diploma 45 8 High school diploma only Hispanic 5 16 Other Some college or more 9 Age 16 Income status 19 <65 44 Below poverty 31 65–74 27 24 75–84 13 100–125% of poverty 85+ 125–200% of poverty 9 42 200–400% of poverty 24 Health status Over 400% of poverty 34 Excellent or very good Supplemental insurance 15 3 Good or fair 50 status 14 Poor 8 Medicare only 1 Managed care Residence 76 Urban 24 Employer Rural Medigap Medigap/employer Medicaid OtherNote: Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living outside MSAs.In 2009, poverty was defined as income of $10,289 for people living alone and $12,982 for married couples. Totals may not sum to100 percent due to missing data or to rounding. Some beneficiaries may have more than one type of supplemental insurance.SOURCE: MEDPAC ANALYSIS OF THE MEDICARE CURRENT BENEFICIARY SURVEY, COST AND USE FILE, 2009.• Most Medicare beneficiaries are female and White.• Close to one-quarter of beneficiaries live in rural areas.• Twenty-nine percent of the Medicare population lives alone.• One-quarter of beneficiaries have no high school diploma.• Most Medicare beneficiaries have some source of supplemental insurance. Employer-sponsored plans are the most common source of supplemental coverage.32 THE PHYSICIANS FOUNDATION



Chapter III Perspectives on Medicare as an Instrumentof Health Care ReformThe “Complexification” of Medicare—Medicare, federal regulations and policies, numerousfrom its inception, has had a major impact on new directives to providers, change orders tothe American system of health care. The federal contractors, new educational materials andgovernment, meaning the American taxpayer outreach to beneficiaries, and more.and all that implies, was now financing thehealth care of millions of Americans principally The DRG and RBRVS Examples—Cost controlthrough a combination of general revenues efforts have often focused on alterations andand premium receipts. Along with that new reforms to Medicare’s payment methods forresponsibility followed development over time provider services, in order to modify incentives.of an ever more extensive system of federal The original intent was to replace provider costpolicies and regulations to manage benefits and charge data, as applicable, as the bases forand costs. These policies introduced conditions Medicare payments, and to substitute moreof participation for providers, benefit and methodologically sophisticated and federallycoverage policies, provider reimbursement pre-determined (prospective) rates forpolicies and systems to pay for health services services. Notable examples include:in an array of care settings, and programintegrity safeguards. The early implementation 1983  Enactment of the Medicare Partapproaches were rapidly deemed inadequate A diagnosis-related group (DRG)to the growing demands of the program and methodology for reimbursement ofunderwent rapid change. inpatient hospital services.As Medicare enrollment expanded and program 1989  Enactment of the Medicare Partcosts grew at higher average rates than did the B Resource-Based, Relative ValueU.S. economy, Congress repeatedly revisited Scale (RB-RVS) methodology forthe legislative contours of the Medicare reimbursement of medical servicesprogram (see Chapter I, Appendix A). Every under the physician fee schedule.round of legislation has led to new or revised These methodological provider payment34 THE PHYSICIANS FOUNDATION

approaches have been exhaustively developed, major new policy paradigm became codified As a hint of theadapted to other care settings, debated, and into law, as did many subsequent changes complexity of justcritiqued. We cite them here simply as examples sought by the bureaucracy or by Members this one thingof traditional Medicare program interventions of Congress. In some cases, the law was in Medicare, wethat have grown beyond the imaginings of their changed in ways that career officials objected note that theearly developers. The original methodologies to or felt were unworkable. Some provisions American Medicalcited above have changed deeply, but their would be subsequently repealed due to Association’sunderlying conceptualization remains. Each poor conceptualization, excessive costs or most recent guidehas arguably better defined the “products” of, operational challenges. entitled Medicarein these examples, medical care and inpatient RBRVS 2014: Thehospital services. This has been accomplished To a certain extent, the Congress and the Physician’s Guidethrough ever more complex algorithms that Executive Branch have slowly acknowledged is a mere 624 pagesintroduce more factors regarding patient and the deep shortcomings of these long-term long!health services characteristics, continually approaches in promoting effective, qualitymodifying payment values. care in Medicare while also “bending the cost curve” downward. (Nonetheless, it is importantSuch payment system(s) algorithms may to grasp how very deeply the government ishave material value in examining care and invested in their continued maintenance andidentifying factors for improvement, as well application.) We would cite two major examplesas for setting payment levels. But it comes at of this recognition, while acknowledging therea cost to the practice of medicine. The impact are others that could have been chosen.of the RB-RVS system upon physicians’ non-medical educational requirements and One major example is the passage of thepractice management has been significant Medicare Part D drug benefit in 2003. The(as have been other design features of the competition model chosen by the Congress toMedicare program as they affect physicians). add outpatient drug coverage to the MedicareAs a hint of the complexity of just this one program was an explicit decision to not followthing in Medicare, we note that the American the traditional, directly administered benefitMedical Association’s most recent guide approach that has defined the Medicareentitled Medicare RBRVS 2014: The Physician’s program since the beginning. We discuss thisGuide is a mere 624 pages long! in our next and final chapter where we explore ideas about Medicare’s future.Medicare laws are frequently modified by theCongress, which in turn requires promulgation The second is an array of ideas that have beenof new or modified implementing regulations. incorporated into more recent laws, especiallyUnderstanding and working with these the ACA. Physicians are actively engagedcomplex systems has changed the level and in the implementation of these provisions,composition of employment in government and e.g. accountable care organizations (ACOs),in the health care sector due to the proliferating bundled payments, conversion to sophisticatedneed for legal and technical advice, requiring electronic health records and healthtrained researchers, clinical support personnel, information technologies (HIT), reporting ofsoftware and hardware engineers and quality measures and Physician Compare.technicians, medical coders, etc., to providesupport for design, management and evaluation Covered in depth by the Physicians Foundationof these intricate policies and systems. upon enactment, and updated regularly in a series of reports available on our website, theThe Slowly Shifting Paradigm in Medicare ACA added over 122 discrete and significantPolicy Approaches—For the past 49 years, the policy provisions just to the MedicareMedicare program has largely followed a direct program. And Medicare was ostensibly not thefederal benefit administration model, where primary purpose of the ACA reforms; thosefederal employees craft most of the policies were private insurance market changes andand arrangements required to shape and coverage expansions. Still, it took the estimablesupport the delivery of the health insurance Congressional Research Service (CRS) ninety-benefits written into the law. Over time, each two pages in small type just to enumerate the The Medicare Program: An Instrument and Target of Health Care Reform 35

The ACA added main elements of these 122-plus Medicare of Medicare into health system dynamicsover 122 discrete provisions (Congressional Research Service. “An represented by many ACA provisions. We joinand significant Overview of Medicare Provisions in the Patient this issue in Chapter IV.policy provisions Protection and Affordable Care Act.” April 2010.)just to the Medicare Today, the most immediate emerging issuesprogram. As a reminder, the issues highlighted in the in Medicare for physicians may have more ACA Select Topics box have received attention to do with the objectives and increasingly in prior reports, along with unfolding ACA sophisticated data tools of the federal executives legal, coverage expansion, Healthcare.gov, and administering the program, as with the law. physician network issues. Our goal throughout We investigate this question and focus on has been to select the most significant issues for illustrative issues in the balance of this chapter. physicians for closer discussion. It is first important to understand the goals Leveraging Medicare to Achieve Health Care and objectives federal officials hold regarding System Goals—If one is an advocate of improvements needed to the American health the public direct administration model for care system. In this case, we are referring Medicare, many of the ACA policy provisions primarily to the goals and activities of the represent important shifts in focus intended Centers for Medicare and Medicaid Services to leverage Medicare to promote deeper (CMS), as the Agency advances proposals to systemic improvements in patient care, while the Congress, and implements changes in or constraining costs. The strongest supporters develops interpretations of federal law. of the Medicare Advantage and Part D private, at-risk benefit management models, however, In particular, we are interested in considering are less likely to support the expanding reach CMS perspectives regarding Medicare as an instrument of health care reform. That is, whatPrevious ACA Select Topics key set of changes is CMS seeking to accomplish through the leverage of the Medicare program? 1 CMS Center for Medicare and Medicaid Innovation In particular, what changes do its leaders most 2 Independent Payment Advisory Board seek in medical practice organization and care 3 Patient-Centered Outcomes Research Institute, Comparative delivery? We examine select issues below and consider in Chapter IV what broader Effectiveness, Quality Reporting, Feedback Programs and Physician Medicare modernization and competition Compare models reform might mean relative to the 4 Value-based Purchasing (Hospitals) federal micromanagement of health care seen 5 Payment Pilots and Reform Initiatives in Medicare today. • Accountable Care Organizations •  Medical Home CMS Strategic Plan 2013 – 2017—Any examination • Bundled Payments and Global Capitation of how the Medicare program has been • Value-Based Modifier on the Physician Fee Schedule deployed by government as an instrument of •  Gainsharing Demonstrations systemic reform benefits from insight into the 6 Physician Fee Schedule Adjustments; Market Basket Update and views, objectives and “policy footprint” of the Productivity Adjustment; Geographic Adjustment; Other Payment federal agency responsible for administering Adjustments it, namely CMS. There are few better places to 7 Workforce Initiatives start than with the Agency’s own strategic plan, 8 Rural Initiatives updated in 2013 (see Appendix B in Chapter III 9 Health Plans and Medical Loss Ratios for a copy of the plan in its entirety.)10 Health Insurance Exchanges CMS’s strategic plan reflects the devolutionSOURCE: PHYSICIANS FOUNDATION, A ROADMAP FOR PHYSICIANS TO HEALTH CARE REFORM, from its parent organization, the DepartmentMAY 2011 of Health and Human Services (DHHS), of key responsibilities over the ACA, adding to the Agency’s existing Medicare, Medicaid and other responsibilities. This was accomplished in part by integration of the Center for Consumer36 THE PHYSICIANS FOUNDATION

Information and Insurance Oversight (CCIIO) traditional Medicare. One thing is clear, the ACA Today, the mostinto the CMS “Centers” structure. As CMS arrived with important new resources for CMS, immediate emergingnotes, this action extended its responsibilities but also with exceptional new responsibilities, issues in Medicareto national private health insurance market accelerating institutional changes in this for physicians mayreforms and consumer protections that established Agency, and broadening its have more to dointersect and in some areas pre-empt state perspectives on the health care system, as well with the objectivesinsurance regulation. More broadly, the as its roles. and increasinglystrategic plan states: sophisticated CMS’s words in its strategic plan and in policy data tools of the “The ACA greatly expanded the Agency’s documents speak for themselves. In turn, federal executives role and responsibilities by effectively readers may judge for themselves whether they administering the tasking CMS to lead the charge to provide agree that the Agency’s stated objectives are program, as with high quality care and better health at lower appropriate and whether the Agency executes the law. costs through improvement in health care well on these objectives. for all Americans. This expansion not only involves growth in CMS’s traditional A full reading of the CMS Strategic Plan base but also includes a greater emphasis makes crystal clear that the Agency takes on its continuing efforts in program a very broad view of its roles and abilities integrity, health care innovation and to influence improvements in the American health disparities reduction, as well as the health care system, as it cross-pollinates establishment of Affordable Insurance ideas and policies across its major spheres Marketplaces (p. 1.)” of influence, especially the ACA’s private health insurance market standards andCMS”s vision statement includes the following: coverage expansions, and the policies and operations of the Medicare and Medicaid “We are focused on measurably programs. improving care and population health by transforming the U.S. health care system The right goals are central, but once defined, into an integrated and accountable execution is key—how CMS pursues its delivery system that continuously objectives in exercising its regulatory improves care, reduces unnecessary costs, authorities and powers, is very important to prevents illness and disease progression, program beneficiaries, but also to physicians, and promotes health (p.2.)” hospitals and others engaged in delivering health care under diverse and taxing “Policies such as establishing Accountable standards. A note: Considering the “How” of Care Organizations, increasing value- Medicare is also one simple way to distinguish based purchasing, coordinating care for the “direct federal” vs. “supervised private” individuals enrolled in both Medicare administration models. At present, we are and Medicaid, and reducing hospital considering activities only under the “direct readmissions will improve the value of federal” administration model. care (p. 1.)” An Author’s Note on CMS Culture—Along withPerspectives—The CMS strategic plan is a its self-definition as an Agency that is implicithighly activist-oriented plan, with broad, in the strategic plan, it’s also important tosocietal health care improvement goals have some insight into the Agency’s origins,within the Agency’s sphere of influence, culture and the larger “policy matrix” in whichwhich is considerable. It also represents a it operates. Speaking as a native of Baltimoregenuine transformation in perspective from and from prior professional experience inan agency that was viewed for many years as the Agency and DHHS through the Agency’sinsular, primarily dominated by the minutiae BHI, HCFA and CMS incarnations, the changesof Medicare provider coverage and payment in CMS over time have been remarkable,policies and claims administration, and a place yet some elements endure. Recall from thewhere Medicaid, SCHIP and even Medicare’s Agency history snapshot in Chapter II thatprivate plan options were “stepchildren” to CMS’s earliest origins were as the Bureau of The Medicare Program: An Instrument and Target of Health Care Reform 37

Health Insurance headquartered as part of setting organizations, its regional consortia SSA in Woodlawn, Maryland, a near-western and contractors, and interactions with other suburb of Baltimore City. In the first few federal agencies, including but not limited to Medicare start-up years, due to lack of office the following: space in Woodlawn, small groups of employees FDA—Food and Drug Administration (drug were initially housed in downtown Baltimore and medical device approvals and related warehouses, rode in freight elevators, and clinical information; Medicare coverage policy even came in on one memorable weekend interactions with CMS), (physicians and file clerks), with their own DOL—Department of Labor (employer health supplies to build badly needed bookshelves benefits), for beneficiary case files. NIH—National Institutes of Health (research), HRSA—Health Resources and ServicesThe CMS strategic Today, CMS resides in a fully modern office Administration (health care resources andplan is a highly headquarters of its own only three miles from policy studies),activist-oriented BHI’s original location, but at an unrecognizable PCORI—Patient-Centered Outcomes Researchplan, with broad, remove from its bootstrap beginnings. Aside Institute (patient care services, models andsocietal health from a handful of early leaders recruited research),care improvement nationally, the overwhelming majority ofgoals within the initial employees were drawn locally from the ONC—Office of the National Coordinator forAgency’s sphere of greater Baltimore metropolitan and suburban Health Care Information Technology (electronicinfluence, which is areas. Most of the headquarters employees health information and interoperabilityconsiderable. reside today in the same catchment area, nationwide), despite a national (and international) reach OIG—Office of the Inspector General for the over time in recruiting talent, and the location Department of Health and Human Services in Washington, D.C. of a relatively small number (program integrity and operations oversight), of employees. There has been a concerted effort and in recent years to recruit physicians and other DOJ—Department of Justice (investigation and medical personnel, and individuals with private prosecution of program fraud). insurance industry expertise, in certain areas. The majority of employees are career civil Separately, CMS interacts frequently with servants, led by a relatively small cadre of Congressional advisory bodies on broader career Senior Executive Service employees and health care organization and financing issues, an even smaller number of political leaders, and on specific regulatory responsibilities. which includes the Administrator of CMS. These organizations, all established to directly assist the Congress in its oversight Finally, while CMS’s history and non- responsibilities, include: Washington centric location has led to certain MEDPAC—Medicare Payment Advisory insularity at times, it also has created a cadre of Commission, experienced people who have worked together for a long time, through daunting law changes MACPAC—Medicaid and CHIP Payment and implementation challenges. However, a and Access Commission growing wave of retirements is changing the GAO—General Accountability Office composition and depth of experience in the CBO—Congressional Budget Office, and workforce. [KM.] CRS—Congressional Research Service CMS Reach in the U.S. and International Health CMS also assists Members of Congress and Policy Apparatus—CMS does not work in a their staffs directly regarding multiple program vacuum; quite the contrary. Operationally, matters and inquiries. Extensive technical CMS has a deep reach across the United assistance can occur between CMS staff and States through policy, research or operational House and Senate Committees with jurisdiction interactions with university-based and other over CMS programs, especially when major health services research organizations, hospital, legislation is being considered or is in House medical and other health care associations, think-tanks, accreditation and quality standard38 THE PHYSICIANS FOUNDATION

or Senate Legislative Counsel undergoing legal seeks to inform legislation development in thedrafting. One important CMS objective in the U.S. Congress.latter situation is to ensure new law is crafted in The most recent generation of ideas, sucha manner the Agency can administer effectively. as medical home models, accountable care organizations, bundled payments and others,Pre-ACA, CMS already had extensive share a commonality with the DRG and RB-RVSprofessional interactions across states systems of 20-30 years ago. Prior to enactmentthrough its state-oriented work, primarily into law, each major new concept adopted intounder its CLIA responsibilities, state survey Medicare usually involved a pre-history ofand certification agencies, Medicare local research, public commentary and consensuscontractor administration, and Medicaid stateagencies. Many of these relationships are now The most recent generation of ideas, such as medical homeintensified under the ACA coverage expansion, models, accountable care organizations, bundled payments andinsurance standards and exchange functions. others, share a commonality with the DRG and RB-RVS systemsThese include interactions with Governors, of 20-30 years ago. Prior to enactment into law, each major newstate legislators, health officials and state concept adopted into Medicare usually involved a pre-history ofinsurance regulators. research, public commentary and consensus building before it made its way into legislation and official public policy.Finally, CMS officials have also traveled toother countries to share data and perspectives building before it made its way into legislationwith foreign health officials and to examine and official public policy. That does not meaninternational health systems. In turn, they have every detail was thought through or that everyhosted foreign officials who are interested in ramification was understood. Rather, it meansparticular ideas and tools. In this regard, that enough individuals in the decision-makingthe DRG and RB-RVS systems have been of process were persuaded of the merits ofparticular interest over the years. So have adopting a particular concept into the Medicaredifferences in the U.S.’s approaches to drug and program for the concept to be enacted into law.medical device approvals, and the intersection Finally, statutory language varies in its degreeof these policies with CMS’s approaches to of prescriptiveness, but is generally intended toestablishing coverage policy for Medicare, provide authorization for and general shapingincluding evaluation of medical interventions. of policy or operational requirements. It then becomes the Administration’s responsibilityWorking within an extensive matrix of private to develop and promulgate the regulatoryindustry and public policy venues, CMS: policies and operational details to implement the legislative language. This process can  sponsors and consumes health services lead to conflict with political leaders and research, other stakeholders due to disagreements  formulates coverage, payment, program over interpretation, operational realities, and integrity and contracting policies under impact. In closing, it is a continuous cycle of Medicare, and policy development, application, modification,  seeks to operationalize policies and methods and infrequently, legislative repeal. Despite to achieve continual improvements in value this complex cycle, summarized below, the (cost, quality, effectiveness and efficiency) in Medicare program has been a major, durable how benefits are delivered. and strongly supported benefits program in the U.S. for nearly 50 years.The Medicare Policy Cycle—There are patternsin the evolution of policy ideas and theirtranslation to action in Medicare. Virtuallyevery important change in Medicare developedfirst, and usually slowly, in the matrix ofideas and private and public organizationinteractions described in the preceding section.This includes interactions in the legislativeenvironment, where CMS both proposes and The Medicare Program: An Instrument and Target of Health Care Reform 39

A Snapshot of the Medicare Policy Cycle current law. As we reviewed an array of recent CMS and other federal statements and actions 1 )  Issues or objectives are identified relating to Medicare, three consistent objectives 2 )  Research is undertaken, echo throughout. These were pursuit of 1) 3 )  Solutions are suggested and vetted, transparency, 2) accountability and 3) value in 4 ) Goals firm-up, the health care provided to Medicare beneficiaries. 5 ) Consensus builds (or, in some quarters, We selected two current issue areas to serve resignation), as “case-studies” that illustrate how a specific 6 ) Legislation is passed, policy concern may build to legislative and 7 ) Regulations are written and promulgated, regulatory interventions of some import 8 ) Implementation begins, systemically. The choices are: 1) Site-neutral 9 ) Change occurs, payments for medical services, and 2) Public 10 ) Issues are identified, and the cycle repeats. data releases of physicians’ Medicare billing information. We chose these because of their Emerging Initiatives in Medicare—As noted direct significance to physician payments or to earlier, important emerging issues in traditional the manner in which physicians are organized Medicare for physicians, and other providers, to practice medicine. Before reviewing the may have as much to do with the objectives case studies, we’d like to note that physician of, and increasingly sophisticated data tools participation in Medicare remains high despite available to, federal administrators, as with program challenges. ACROSS ALL STATES, MOST PHYSICIANS ACCEPT NEW MEDICARE PATIENTS 89% 93% 97% 92% 80% 81% 79% 95% 88% 82% 95% 91% 90% 86% 90% 88% 92% 92%89% 93% 94% 90% 79% 90% 94% 92% 90% 91% 84% 94% 94% 84% 87% 97% 92% 94% 84% 94% 93% DC 83% 86% 81% 86% 95% 93% 95% 87% 93%80% 98% 84% 79% - 79.9% 80% - 89.9% 90% - 100% (4 states) (19 states, DC) (27 states) Notes: Pediatricians are excluded from this analysis. Physicians were not asked to distinguish between patients in traditional Medicare and Medicare Advantage plans. SOURCE: NATIONAL AMBULATORY MEDICAL CARE SURVEY – NATIONAL ELECTRONIC HEALTH RECORDS SURVEY, 2012.40 THE PHYSICIANS FOUNDATION

1C ase-Study: Site-Neutral fee schedule (PFS); payment rates for most Payment Policy for Ambulatory hospital outpatient department services Care Services in the outpatient prospective payment system (OPPS); and payment rates for ASCDescription: CMS and the Medicare Payment services in the ASC payment system.Advisory Commission (MedPAC) both havelong-standing concerns over the higher When a service is provided in a practi-amounts the Medicare program pays for tioner’s office, there is a single paymentmedical services performed on an outpatient for the service. However, when a servicebasis, where patients are receiving ambulatory is provided in a facility, such as an OPDcare in multiple settings without being admitted or ASC, Medicare makes a payment to theto a facility or hospital. facility in addition to the payment to the practitioner. For example, if a 15-minuteAlthough such “ambulatory care” is generally evaluation and management (E&M) officecovered and reimbursed through Part B of visit for an established patient is providedMedicare, payments are made using site- in a freestanding practitioner’s office, thespecific payment methodologies. Consequently, program pays the practitioner 80 percentpayment rates can vary considerably for of the PFS (non-facility) payment rate andcomparable medical services due to the the patient is responsible for the remainingartifact of site-specific payment methodologies 20 percent. If the same service is providedauthorized and developed over time in in an OPD, the program pays 80 percentMedicare. One example is the greater cost of the PFS (facility) rate and 80 percent ofassociated with an ambulatory procedure in the rate from the OPPS and the patient isa hospital outpatient department compared responsible for 20 percent of both rates. Asto the same service provided in a physician’s a result, Medicare typically pays much moreoffice. This has led to perceived inequities in when services are performed in an OPD,payment across sites of care and also has a and the beneficiary has higher cost sharing.negative impact upon beneficiaries’ out-of- For example, in 2014 both the program andpocket costs in higher payment settings due to the beneficiary paid 116-percent more intheir liability being based on a percentage of an OPD than in a freestanding office for athe reimbursable amount. level II echocardiogram.MedPAC Testimony: MedPAC has examined this Payment variations across settingsgrowing issue multiple times in recent annual need immediate attention because theReports to Congress. Recently, the Executive billing of many ambulatory servicesDirector of MedPAC, Mark Miller, PhD, testified has been migrating from freestandingon this issue before the Subcommittee on Health offices to the usually higher paid OPDof the Committee on Energy and Commerce, of setting [emphasis supplied]. Amongthe U.S. House of Representatives (MedPAC. E&M office visits, echocardiograms, and“Medicare Fee-For Service Payment Policy nuclear cardiology services, for example,Across Sites of Care.” May 21, 2014.) the volume of services decreased in freestanding offices and increased inFollowing are certain key points abstracted OPDs from 2010 to 2012 (Table 3). Forfrom that testimony, including concern over the example, the volume of echocardiogramsimpact of the phenomenon of rapid growth in in freestanding offices dropped by 9.9hospitals purchasing physician practices: percent from 2010 to 2012, but grew by 33.3 percent in OPDs. “Payment rates often vary for the same ambulatory services provided to similar One of the factors driving this phenomenon patients in different settings. Medicare is the rapid growth in hospital purchases sets payment rates for physician and of physician practices. According to data other practitioner services in the fee from the American Hospital Association schedule for physicians and other health Annual Survey of hospitals, the number professionals, also known as the physician of physicians and dentists employed by The Medicare Program: An Instrument and Target of Health Care Reform 41

E&M OFFICE VISITS AND CARDIAC IMAGING SERVICES ARE MIGRATING FROM FREESTANDING OFFICES TO OPDS, WHERE PAYMENT RATES ARE HIGHER Per beneficiary volume growth, 2010-2012Type of service Share of ambulatory services Freestanding office OPD performed in OPDs, 2011E&M office visits (CPTs 99201 through 99215) 10.7% -2.3% 17.9%Echocardiograms without contrast (APCs 269, 270, 697) 34.6 -9.9 33.3Nuclear cardiology (APCs 377, 398) 39.0 -16.8 24.3Note: E&M (evaluation and management), OPD (outpatient department), CPT (current procedural terminology), APC (ambulatory payment classification).SOURCE: MEDPAC ANALYSIS OF STANDARD ANALYTIC CLAIMS FILES FROM 2010 AND 2012 hospitals grew by 55 percent from 2003 when furnished in an OPD (such services to 2011. As billing of services shifts from are unlikely to have costs that are directly freestanding offices to OPDs, program associated with operating an ED). spending and beneficiary cost sharing  Patient severity is no greater in OPDs than increase without significant changes in freestanding offices. patient care. To limit the incentive to shift  The services do not have a 90-day global cases to higher cost settings, there is a need surgical code (CMS assumes that physicians’ to align OPD rates with freestanding office costs for these codes are higher when rates” [emphasis supplied.](p. 14-15.) performed in a hospital than a freestanding office.)” After examining beneficiary cost-sharing and site variation issues, MedPAC reiterates Within this framework, MedPAC recommends five considerations for action on selective the following changes: site-neutral payment policy (evaluation and management (E&M) office visits): 1 ) Total payment rates for an E&M visit provided in an OPD should be reduced to “In order to account for legitimate the amount paid when the same visit is differences between freestanding offices provided in a freestanding office, which is and OPDs, the Commission developed five the lower cost setting (March 2012 Report criteria to identify services that are good to Congress.) candidates for setting OPD payment rates equal to freestanding office rates: 2 ) The differences in payment rates between OPDs and freestanding offices should  Services are frequently performed in be reduced or eliminated for 66 service freestanding offices (more than 50 percent categories that generally satisfy the criteria of the time). This indicates that these above. (June 2013 and March 2014 Reports services are likely safe and appropriate to to Congress.) provide in a freestanding office. Also, the PFS payment rates for these services are 3 ) Equalizing payment rates between OPDs sufficient to assure access to care. and ASCs for certain ambulatory surgical  Services entail minimal packaging procedures (12 groups of services.) (Same differences across payment systems (i.e., reports as #2 above.) the payment rate includes a similar set of services). 4 ) Limiting Medicare revenue losses for  The services are infrequently provided hospitals that serve a large share of low- with an emergency department (ED) visit income patients, e.g. a stop-loss policy. THE PHYSICIANS FOUNDATION Perspectives—The development of MedPAC’s42

site-neutral payment policy recommendations co-pays in the HOPD or ASC setting may have If we had to predict,to the Congress follows the classic Medicare deterred some patients from relying on such we would expectpolicy development path described earlier. locations for the selected medical services, out- the next time aIssues of questionable payment disparities of-pocket cost “equalization” could encourage Medicare packageand beneficiary out-of-pocket cost burdens some patients to seek care at such locations is acted upon byarise. Evidence is developed and analyzed and rather than the physician office setting. the Congress, it willsolutions are proposed, and then refined into contain some, if notfinal recommendations. Conclusion—For nearly every policy change all, of the proposed enacted in Medicare, there are real effects upon policy changesMedPAC’s process is to consult closely with beneficiaries and providers, not all of which leading to site-CMS and other experts on such matters, hold are foreseen, or even foreseeable. Second, it is neutral paymentsregular public meetings at which such emerging highly unlikely once such a policy is codified for select medicalissues are discussed in front of industry and into law that it will remain unchanged. The services.other stakeholders, and report on details in more typical path would be for the principle oftheir regularly scheduled Reports to Congress. site-neutrality to be expanded to more services,Often, affected stakeholders are granted and possibly more settings, in the future.meetings and may always submit writtenconcerns and information throughout, and also Case in Point: On June 13, 2014, MedPACshare their concerns, support or opposition released its annual mid-year Report to Congresswith other stakeholders, the Administration on Medicare issues. (Due to its brevity and forand the Congress. This is a typically slow, convenience, we provide the Executive Summarylengthy, labor-intensive process at every stage, as an appendix to this chapter. The entire reportinvolving many individuals and entities. Albeit is available on MedPAC.gov.) In addition to whatunwieldy, the traditional Medicare program we have discussed above, MedPAC has examinedpolicy process is essentially a public and site-neutral payments for select conditions acrosssomewhat democratic one. acute care hospital and long-term care hospital settings. In the new report, MedPAC devotesOne important aspect is that the area of concern an entire chapter on site-neutral paymentis larger than the recommended solution. for select conditions for patients treated inThe fact that the latest recommendations are inpatient rehabilitation facilities (IRFs) andcarefully scaled makes them harder for industry skilled nursing facilities (SNFs). Using severalto refute and makes it easier for Congress to criteria, they selected major joint replacement,act. The second aspect is that the policies, if other hip and femur procedures (such as hipadopted, would reduce costs to beneficiaries, a fractures), and stroke cases to examine thereliably important goal. The third is that these feasibility of paying IRFs and SNFs the samepolicies would score federal budget savings, if rates. Stroke data were more variable uponenacted. If we had to predict, we would expect examination, but MedPAC concluded that thethe next time a Medicare package is acted upon other two procedures are a good starting pointby the Congress, it will contain some, if not all, for a site-neutral policy, especially if certainof the proposed policy changes leading to site- regulatory conditions for IRFs could be waivedneutral payments for select medical services. to create a more level playing field.What are some systemic implications? Conclusion—In closing, site-neutral paymentsAdoption of site-neutral payments will likely for selected services is an issue ripening forreduce aggregate payments to hospitals and Congressional action, including debate overambulatory surgery centers for the affected how broadly or narrowly crafted legislativeservices. This could affect employment and language should be governing the scope ofpayment arrangements hospitals and ASCs such policies, and how broadly defined CMS’shave with their physicians. If profitability is authority should be.reduced enough, it might affect the growth inhospitals’ acquisition of physician practices.Interestingly, it could lead to higher beneficiarytraffic to such sites and away from physicianoffices. To the extent that significantly higher The Medicare Program: An Instrument and Target of Health Care Reform 43

2 Case-Study: Public data releases data exchange will power greater innovation, of physicians’ identifiable higher quality, increased productivity and Medicare billing information. lower costs,” and  CMS’s assessment that multiple provisions CMS Strategic Views on Display in a Letter— in the ACA especially support the release of On April 2, 2014, CMS Deputy Administrator meaningful data, such as Physician Compare, Jonathan Blum wrote a letter to Dr. James the Physician Quality Reporting System and Madara, Executive Vice President and CEO provisions allowing certain qualified entities of the American Medical Association. The to receive Medicare claims data for purposes purpose of the letter was to prominently of “creating, reviewing and publishing describe CMS’s purposes, rationale and performance reports about individual procedures for a comprehensive data release provider performance.” about the types of Medicare services provided by physicians, the charges billed and the Magnitude of Physician Billing and Payment Data actual Medicare payment made. In brief, the Release—On the CMS.gov website, under the letter conveyed: Research, Statistics, Data & Systems tab, CMS posted extensive Microsoft Excel spreadsheet  CMS’s interpretation of the Freedom of files, methodological protocols, and summary Information Act required CMS to release tables. CMS also provided a Medicare physician these extensive data; and other supplier “Look-up Tool” and a  CMS was taking steps to safeguard frequently asked question resource. The beneficiaries’ privacy and avoid sharing actual datasets are of a magnitude that many of any personally-identifiable information physicians’ or practices’ systems may lack the about beneficiaries; storage or programming capacity to successfully  CMS weighed the privacy interests of extract useful data from the datasets without physicians against the public’s interest in specialized technical assistance. government operations and determined the public’s interest outweighed the privacy There are two major datasets that summarize interests of physicians; data on the services provided to over 33 million  CMS’s view that the health care system is beneficiaries in Medicare Part B in 2012. changing from a system dominated by “a (These data do not include services provided dearth of usable, actionable information to the over 13 million beneficiaries who were to one where care coordination and enrolled in Medicare Advantage plans.) The dramatically enhanced data availability and first dataset provides Medicare billing and payment data for over 880,000 providers, andViews on CMS Release of includes details by name, address, specialty,Physician Data national provider number, and total Medicare payment, as well as other statistics.The Medicare physician billing and payment public data release, andmore to follow, are game-changing events in the history of Medicare, and The second dataset is what CMS commonlyof the health care system. refers to as an “analytical file,” which in this case, breaks-down common MedicareCMS’s provider data release actions, and carefully constructed legal and procedures and services, the number ofpolicy rationales, serve notice that it intends to permanently alter the providers administering them, the number ofenvironment in which all health care providers practice, in the name of times each was performed, the total numbertransparency and the public interest. of patients that received each service, and the total amount Medicare paid for the service.CMS intends to use its clout to alter the health care environment in waysit believes will lead to improved quality and affordability. Perspectives—The Medicare physician billing and payment public data release, and more to follow, are game-changing events in the history of Medicare, and of the health care system. It has received a storm of media attention, much of it poorly reported due to44 THE PHYSICIANS FOUNDATION

the lack of understanding of Medicare billing research and policy objectives. Note the “policy As CMS welland payment complexities. Much has focused matrix” we described that CMS works in with knows, facts areon multi-million dollar payments to identified the private sector and with federal and state not only “stubbornphysicians without context over what the organizations. things,” they canpayments encompassed, such as inclusion of be surprising andtherapeutic drugs administered in oncology 3   DATA LINKAGES ACROSS CARE SETTINGS: powerful.or ophthalmology in conjunction with the We expect CMS to accelerate, expand-onprofessional service. and refine its provider data releases acrossCMS is justly criticized for failing to live up to multiple provider categories, and also connectits own statement that it intended for such data and analyze cross-cutting data, such as linkingreleases to be done in a way that makes the data physicians’ services to other payments in sites“meaningful” to the public. In fact, the data were of care not captured in the initial data release.released with very little information about how Such data can be used to judge providerto read and interpret the data; nor were clear service patterns and payments more broadlyexplanations offered about the array of situations to inform judgments about care and paymentin which drug payments or other factors, such appropriateness.as practice organization, billing protocols,geographic location, etc., can meaningfully affect 4   PHYSICIAN PERFORMANCE ASSESSMENTS INthe evaluation of the raw data. PRACTICES—We expect physicians will useHowever, in our view, this remains a game- these and similar data over time to judge theirchanging event for at least the following reasons: own performance and that of their colleagues1   CMS SERVES NOTICE—CMS’s provider data in certain circumstances, such as in forming arelease actions, and carefully constructed practice group, or in organizing or operatinglegal and policy rationales, serve notice that it an accountable care organization. As CMS wellintends to permanently alter the environment knows, facts are not only “stubborn things,”in which all health care providers practice, they can be surprising and powerful.in the name of transparency and the public 5   PROGRAM INTEGRITY AND OIG STUDY: Overinterest. In our view, there will be no turning time, these and other more targeted algorithmsback from this action and it will only expand. will be used for program integrity purposes toThis is consistent with the statements we better detect instances of possible billing fraudhighlighted earlier regarding CMS’s strategic or abuse.plan. CMS intends to use its clout to alter thehealth care environment in ways it believes will 6   UNEXPECTED DATA RESULTS AND CMSlead to improved quality and affordability. RESPONSE—Despite expectations about the potential risks and misinterpretation of data2   RESEARCH DATA AGREEMENTS EXPANSION— that can occur, other findings can emerge. AsSecond, the April 2014 data release is only we noted, facts can be surprising. PhysiciansCMS’s “initial shot across the bow.” In its should be aware that in May 2014, the DHHSApril 2 letter to Dr. Madara, CMS served Office of the Inspector General released awarning that it “plans to offer modifications physician billing study with this title: “Improperto its current data use agreements to allow Payments for Evaluation and Managementresearchers to use our data as we are Services Cost Medicare Billions in 2010” (OEI-permitted to do under the applicable routine 04-10-00181).uses in our Privacy Act systems of record The OIG conducted a medical review of Part Buses…this would include the removal of claims for E&M services from 2010, stratifyingthe prohibition on researchers redisclosing so-called “high-coders” and claims from otherphysician-identifiable information.” physicians. The OIG stated that MedicareThere will be substantial opportunities for inappropriately paid $6.7 billion for claims forhealth services researchers to “mine” these E&M services in 2010 that were incorrectlyand other provider data to come, for an array of coded and/or lacked documentation, representing 21 percent of Medicare payments for E&M services in 2010. The Medicare Program: An Instrument and Target of Health Care Reform 45

However, the OIG also determined that fifteen data might be on such major issues as the reformpercent of the E&M claims were downcoded, i.e., a of the Medicare fee schedule and sustainablehigher code would have been appropriate for the growth rate formula (see chart).documented service. This led to a recommendation It has also been noted in some quarters thatthat CMS take steps to better educate physicians these data begin to raise deeper questions abouton correct coding and documentation due to the building blocks and ongoing managementproblems in both directions. Alternatively, CMS of the RB-RVS system, and possible anomalieswas reluctant to pursue additional contractor in Medicare payment results.reviews of high-coding physicians due to previous Conclusion—We opened this chapter with a“negative returns on contractor investment” in a discussion of the growing “complexification” ofsimilar review effort. CMS stated it would assess Medicare since its enactment in 1965. We aresuch a strategy relative to using Comparative witnesses to that phenomenon in the currentBilling Reports. time to a degree barely imagined even ten or fifteen years ago. We proceeded to highlight7   CONGRESSIONAL IMPACT (FEE SCHEDULE ways in which select provisions in the ACAREFORM)—CMS’s data releases will evolve into and CMS’s strategic goals as an agency aretools and information to be presented to and complementary with respect to leveraging themined by the Congress (or its assisting agencies, power of the Medicare program to addresssuch as CBO, GAO and MedPAC) as it considers larger health system goals.Medicare legislation. It is unclear what thelonger-term impact of factual and meaningfulTHE SUSTAINABLE GROWTH RATE (SGR)—MEDICARE’S PAYMENT FORMULA FOR PHYSICIAN SERVICES 24% $115 Billion 16 timesScheduled SGR cut in Medicare 10-year cost of repealing the SGR Number of times Congresspayments to physicians starting and preventing fee cuts; higher has overridden scheduledApril 1, 2014 cost if fees are increased SGR fee cuts since 2003SOURCE: CONGRESSIONAL BUDGET OFFICE, THE BUDGET AND ECONOMIC Legislative actions to override SGR fee cuts:OUTLOOK: 2014 TO 2024, P. 58, FEBRUARY 4, 2014. • Consolidated Appropriations Resolution of 2003 (CAR, P.L. 108-7) • Medicare Modernization Act of 2003 (MMA, P.L. 108-173)Note: CBO estimate of $115 billion reflects the change in estimated Medicare outlays • Deficit Reduction Act of 2005 (DRA, P.L. 109-171)if Medicare payment rates for physician services remained at current levels through • Tax Relief and Health Care Act of 2006 (TRHCA, P.L. 109-432)2024. Any payment increases to fees for physician services during this 10-year period • Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, P.L.would incur higher Medicare spending (all else equal). Subsequent to publication of 110-173)the related JAMA infographic (Vol. 311, No. 8, February 26), CBO released a cost • Medicare Improvement for Patients and Providers Act of 2008 (MIPPA,estimate for the SGR Repeal and Medicare Provider Payment Modernization Act of P.L. 110-275)2014 (H.R. 4015/S. 2000). This cost estimate—$138 billion over 10 years—includes • Department of Defense Appropriations Act (P.L. 111-118)changes in Medicare outlays due to specified payment updates for physician services • Temporary Extension Act (P.L. 111-144)(i.e., no payment cut in 2014; 0.5% increases annually through 2018). Although this • Continuing Extension Act (P.L. 111-157)estimate encompasses other provisions in the Bill, CBO attributes most of the cost to • Preservation of Access to Care for Medicare Beneficiaries and Pensionthe specified fee-schedule updates. Relief Act of 2010 (P.L. 111-192) • Physician Payment and Therapy Relief Act of 2010 (P.L. 111-286)CBO cost estimate, released February 27, 2014: • Medicare and Medicaid Extenders Act (P.L. 111-309)H.R. 4015, SGR Repeal and Medicare Provider Payment Modernization Act of 2014: • Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78)http://www.cbo.gov/publication/45148 • Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96)S. 2000, SGR Repeal and Medicare Provider Payment Modernization Act of 2014: • American Taxpayer Relief Act (P.L. 112-240)http://www.cbo.gov/publication/45149 • Pathway for SGR Reform Act of 2013 (P.L. 113-67)46 THE PHYSICIANS FOUNDATION

Finally, we noted that if one is an advocate of the What wouldtraditional program model for Medicare, many of happen to the bodythe ACA policy provisions represent important of policies andnew tools that enable federal agencies to pursue regulations thatdeeper systemic improvements in patient define the traditionalcare, while constraining costs. The strongest Medicare program ifsupporters of the Medicare Advantage and the entire programPart D private plan benefit management models, was converted overhowever, are less supportive of the expanding to a private planreach of the federal government, especially competition model?through Medicare and the ACA, directly intohealth system dynamics. What would happento the body of policies and regulations thatdefine the traditional Medicare program ifthe entire program was converted over to aprivate plan competition model? We join thisissue in Chapter IV: Medicare Modernizationand Competition. The Medicare Program: An Instrument and Target of Health Care Reform 47

Appendix B: CMS Strategic Plan48 THE PHYSICIANS FOUNDATION