With the release of the Medicare Trustees’ report for 2009, the worsening economy, and the continued high and rising cost of health care, many are anxiously awaiting a credible plan to reform the Medicare program and the health system as a whole. As Peter Orszag and others have argued persuasively, the ever-growing cost of health care is the largest threat to our nation’s long-term fiscal future. One smart way to address this problem is by using Medicare—the nation’s largest purchaser of health care—as a catalyst for improving quality, value, and efficiency throughout our heterogeneous delivery system.

What is really wrong with Medicare?

Until we have thoroughly used current and expanded tools to reduce waste and inefficiency in the delivery system, it is not necessary to increase taxes or arbitrarily cut benefits. Rather, we must bring down health care cost growth system-wide to make the Medicare Program affordable – for beneficiaries and taxpayers – over the long-term. We should also address Medicare-specific problems related to the Program’s spending growth.

In addition to the mounting financing crisis created by rising health care costs, Medicare is also burdened by its failure to become a value-based purchaser of health care services. As such, we assert that there are four over-arching answers to the question of what is really wrong with Medicare.

1. Medicare is overly reliant on fee-for-service payment mechanisms.
2. Medicare has been unable to promote accountability among providers for their results.
3. Medicare has been hamstrung by congressional micro-management and lack of support for evidence-based policy making.
4. Medicare cannot be an effective value-based purchaser at present because the program and its congressional overseers have multiple agendas that often conflict.

To best address these problems, we must find a way to encourage Medicare to improve the value of care. In short, Medicare must buy health care services “better.”

What do we mean by buying health care services “better”?

Medicare needs to become a “value-based purchaser.” What do we mean by this? In its current usage, VBP (value-based purchasing) focuses relatively narrowly on things like pay-for-performance, a single disease, or fraction of the population. To truly reduce low-value spending in the Medicare program, we must expand our definition of VBP.

Our preferred definition illustrates VBP in the following way: “Value-based purchasing uses a variety of tools to try to obtain the right kind and mix of services, of desired quality, at a reasonable cost.” By expanding our notion of VBP, we will be able to pay attention to important, but overlooked improvement opportunities like benefit design and program initiatives targeted more carefully to specific needs of the population. In Medicare, that might mean an annual limit on out-of-pocket spending and providing value-based care for beneficiaries with multiple chronic conditions. By expanding VBP to have a population focus, Medicare can improve care for its beneficiaries, while obtaining better value for patients and taxpayers outside the program.

How can we change Medicare?

Medicare’s governance structure hinders its ability to become a value-based purchaser. Therefore, we must reform the way Medicare is governed to achieve our goals.

To do this, we suggest creating a new entity to insulate Congress and the Centers for Medicare and Medicaid Services from day-to-day stakeholder lobbying, free CMS and Medicare to make more decisions based on evidence and value, and assure Americans that Medicare decisions are being made in the public’s best interest. (Several lawmakers, including Finance Committee chairman Baucus, have similar motivations and proposals). This entity must have the authority to accept responsibility for strategic and tactical decisions and the integrity to gain public and congressional confidence that it will maintain and enhance the performance of the Medicare program.

The members of this new entity (the “Guardians”) would be responsible for establishing which policy decisions—on coverage, pricing, and administrative matters—should be made by CMS officials and what choices should be left to Congress. It would also report to Congress on the performance of CMS.

This body would be politically insulated. Yet we believe safeguards like term-limits and Senate confirmation requirements, as well as procedures for adjudicating disagreements, are necessary to ensure that the new body, while independent, is accountable to the public.

Moving forward

As we are confronted with the reality of rising Medicare costs and their impact on our long-term fiscal future, it is imperative that we act decisively and soon. Yet, we believe it would be self-defeating to embark on a Medicare-only reform effort. Medicare buys health care from the broader delivery system. Therefore, if we fail to address our system as a whole, we will have failed to solve the Medicare program’s underlying problems. Delivery system reform must eventually include and benefit all payers, patients, and providers who are willing to excel, but Medicare should and can lead the way

For more information, see Making Medicare Sustainable:

Understanding The Medicare Financing Problem
Richard Kronick, Ph.D., University of California at San Diego
Kronick introduces the Medicare program, enumerates the growing crisis in financing, and contrasts these costs as well as utilization patterns with those in the private sector.

Reforming Medicare’s Governance to Enhance Value-Based Purchasing
Robert A. Berenson, M.D., Urban Institute
Len M. Nichols, Ph.D., New America Foundation
Tom Emswiler, New America Foundation
Nichols, Berenson, and Emswiler argue for an expanded definition of value-based purchasing in Medicare that focuses more on the population as a whole rather than specific interventions or diseases. They also propose a new, politically-isolated governance body to help move the program toward a more value-based purchasing design.

Balancing Incentives: Value-Based Purchasing Opportunities in Traditional Medicare
Lawrence P. Casalino, M.D., Ph.D., Weill Cornell Medical College
Casalino presents nine goals to move Medicare toward a more value-based purchasing design and offers 20 distinct policy suggestions to help Medicare achieve success

Value-Based Purchasing in Traditional Medicare: Legal Issues
Timothy Stoltzfus Jost, J.D., Washington and Lee University, School of Law
Jost evaluates the legal changes necessary to implement Casalino’s 20 recommendations and considers the legal impediments presented by various statutes from the Constitution to state regulations.

Protecting Medically Vulnerable Older Americans
Chad Boult, M.D., M.PH., M.BA., Johns Hopkins University, Bloomberg School of Public Health
Boult highlights past research on models of care for the chronically ill and examines which models of care should be “diffused” throughout the health care system.