Over the past two decades, Medicare has evolved into three separate programs or payment systems: fee-for-service (FFS), sometimes termed traditional Medicare; Medicare Advantage (MA); and the Medicare Shared Savings Program (MSSP), or accountable care organizations (ACOs). Regulations governing these three programs differ substantially. For example, participating plans, physicians, and other eligible clinicians are reimbursed and financially incented in different ways. Under the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015, FFS providers and some ACOs can earn an annual bonus that would increase their reimbursements by a certain percentage. Other ACOs can earn a percentage of shared savings and potentially an additional alternative payment model (APM) 5 percent bonus based on their previous year’s total Part B billing if they meet certain minimum billing and beneficiary thresholds. MA plans are potentially eligible for the same 5 percent MACRA bonus although their financial benchmarks are calculated differently.

Because of this, annual rule making for the Centers for Medicare and Medicaid Services (CMS) has become an increasingly exigent exercise. The agency, tasked with appropriately paying for care and quality for a diverse population of 56 million Medicare beneficiaries in a complex $630 billion market, now publishes 17 annual FFS rules as well as rules for the ACO program, rules for MA, rules to implement MACRA’s Quality Payment Program, and frequently additional rules regarding the agency’s payment demonstration models. Among other complications, as the number of ACO and other APM models grow, CMS must determine who to incent, how to do so, and how to distribute bonus payments. The agency needs to determine which beneficiaries in which program are eligible to participate in which demonstration, and it must also financially account for overlap when a beneficiary receiving care from one payment model is also participating in a payment demonstration.

As for taxpayers, their interest in maximizing Medicare’s value is largely left unaddressed. They are asked to look the other way while financing a Medicare program that is, in sum, under-performing and spending inefficient.

MedPAC’s Analysis

Fielding three Medicare programs might make sense if they were designed to compete against one another. They do not. They exist in silos. Recognizing that these three programs or payment systems are different and inconsistent for no constructive reason, the Medicare Payment and Advisory Committee (MedPAC) in 2014, 2015, and 2016 explored the idea of, using MedPAC’s word, “synchronizing” Medicare payment across the three models. Specifically, this means aligning how these three programs are financially benchmarked, risk adjusted, and rewarded for quality.

Beyond correcting for effect, MedPAC has also been concerned with improving overall program efficiency and equity. Spending efficiency or program savings could be gained by synchronizing financial benchmarks to identify, by market, which is most efficient: FFS, ACOs, or MA. To achieve equity, regardless of which program the beneficiary chooses, MedPAC argues Medicare should pay on average the same on behalf of all beneficiaries.

In testing its idea, MedPAC considered three options to more efficiently price reimbursement and premiums.

  1. CMS could set beneficiary premiums based on national spending.
  2. CMS could set premiums based on a nationally set premium that buys the cheaper of a reference MA plan or FFS Medicare in each market.
  3. CMS could set a local spending-based premium that buys the cheaper of a reference MA plan or FFS Medicare in each market.

While under any scenario the beneficiary would retain choice, Medicare would be spending neutral by paying the lowest benchmark premium. “Competition between FFS [that includes FFS-based MSSP spending] and MA plan bids would,” MedPAC asserted, “determine the reference point for the federal contribution and beneficiary premium.”

In its 78 market simulation, MedPAC found no one of the three models produced the lowest cost in all markets. ACOs were the low cost option in 31 markets, FFS in 28 markets, and MA plans in 19 markets. The variation in FFS versus the median MA bid could be $100 or more per month in beneficiary premium payments in either direction. Therefore, if we assume Medicare is a neutral payer under competitive benchmarking, beneficiaries would have to pay a higher monthly premium to remain in the less cost-efficient program.

Not surprisingly, beneficiaries already do this to a substantial extent. Using its own data set of 1,000 markets, in 2016 the commission identified 51 markets where the median MA bid was higher than FFS spending by $100 or more. Nevertheless, more than one-third of beneficiaries living in those markets were enrolled in an MA plan. Conversely, in 123 markets where FFS spending was higher than the median MA bid by $100 or more, nearly two-thirds of beneficiaries were enrolled in FFS. Overall, about one-third of both FFS and MA beneficiaries in markets included in MedPAC’s data set were paying an additional $50 to $150 in premium costs per month to participate in the more expensive option.

Since MA plans encourage intensive risk coding, in its simulation MedPAC also adjusted for MA risk scores beyond the current statutory negative coding adjustment by an additional 3 percent. This had the effect of narrowing the difference between FFS and MA in markets where FFS is more costly and widening the difference where MA is more costly. Concerning quality measurement and performance, MedPAC has for several years supported synchronizing or aligning quality measurement between programs. MedPAC in 2014 went so far as stating, “Medicare’s current quality measurement approach has gone off the track.” This means MA plans and ACO providers would receive the same quality performance bonuses and only when they outperform FFS. MedPAC left unaddressed how to correlate spending and quality performance. The commission noted only that the lowest-spending program must achieve quality performance that is at least “equal to the ambient level of FFS quality in the market.”

MedPAC was not naïve to the disruption that neutral payments or premium reformulation would cause. MedPAC considered mitigating the effect by implementing competitive pricing over several years. Premium formulas could be weighted over a transition period. Certain beneficiaries also could be grandfathered in, allowing them to continue under the old system, and accommodations for the dually eligible would have to be made. For example, any reform would need to account for instances in which Medicare pays for a portion of a dually eligible individual’s Part B premiums.

Among other limitations in MedPAC’s analysis, the commission recognized its analysis was static, quality was assumed to be constant across programs, and that there were other premium design approaches. For example, within Medicare Part D payments are calculated differently. As opposed to payments under ACOs and MA, the Part D payments are set nationally or do not vary geographically. (The commission also recognized related efforts by the former Obama administration, for example, to achieve savings just within the MA program by setting pricing at the average bid or at a specific percentile level.) MA bids are highly reflective of, or determined by, MA benchmarks in predefined markets or counties. This means plan bids do not necessarily reflect an accurate picture of provider spending. Changing these rules would likely result in different plan pricing and participation. How the policy would account for dually eligible individuals was again unexamined.

MedPAC also recognized the essential or critical need to encourage or motivate beneficiaries to shop for the most efficient care, a process that is inherently difficult due to, among other factors, asymmetric information, numeracy limitations, and cognitive burden. These likely explain the one-third of beneficiaries who, as noted above, pay higher premiums. According to MedPAC, while only 2–3 percent of MA beneficiaries switch to FFS annually (compared to 43 percent of state Marketplace enrollees), between 20 percent and 30 percent of MA beneficiaries switched MA plans when monthly premiums increased by $20 or more.

MedPAC did not provide an estimate of the amount of savings competition would derive. However, Medicare beneficiaries would save $6.5 billion per year if half of the approximately 11 million total beneficiaries in the 51 and 123 markets noted above switched to the less costly alternative.

MedPAC made no formal payment recommendations to Congress. Regardless, the commission’s effort shows promise for several reasons. Assuming, as MedPAC does, neutral payments based on competing benchmarks would expose inefficiencies and drive market share away from the less efficient, Medicare’s financial solvency would be extended. Being a neutral payer also aligns with the Congress’s Improving Medicare Post-Acute Care Transformation Act of 2014 that requires postacute care payments be spending neutral.

Paying For Value And Giving Beneficiaries More Credible Choices

Competing the programs would align with CMS’s goal to pay for value at least to the extent that the agency stops paying the costs of lost or missed opportunities. Neutral payment would enable the agency to achieve comparable business cases: Presently, ACOs and MA do not perform on a level playing field—although CMS has recently taken steps to calculate ACO benchmarks using regional spending that is akin to MA benchmarking. Medicare Advantage is exactly that. Unlike ACOs, MA enjoys an unrestricted share of savings; is less incented to keep high-cost enrollees; and has enrollment, risk adjustment, quality performance, and marketing advantages. In addition, designed as administrative pricing, MA plans, unlike ACOs, are not designed to produce Congressional Budget Office scored savings. Beyond the possibility of incenting service volume and exacerbating disparities, the MACRA Merit-Based Incentive Payment System (MIPS) percent bonuses, structured as per unit rate increases, may actually disincent providers. This would have the opposite effect of what MACRA intends, which is to incent participation in APMs, since the APM pathway pays a less attractive bonus based on the previous year’s reimbursement.

Among other reasons, participating Medicare providers would want to know which program in which market is the most spending efficient. With MA and ACO quality performance measured against FFS, providers in FFS, who are now subject to MACRA MIPS, would be able to use quality performance to compete for market share. Since CMS intends to publish MIPS component scores including quality and cost by individual provider, providers will be able to market their quality and spending efficiency performance. Providers participating in ACOs continue to seek a more level playing field with MA, particularly as it relates to quality performance rewards and risk adjustment. If MA plans had to compete, they would be more motivated to financially incent their providers to provide better, more spending efficient care. This would, in turn, make MA providers more likely eligible for the 5 percent annual Part B bonus under the MACRA APM pathway.

Beneficiaries would enjoy more credible choices. MedPAC is rightly concerned about the disruptive effect on beneficiaries or those in plans proving to be less efficient. The commissioners realized due to loss aversion effects, beneficiaries would be less accepting of losing than gaining premium buying power. Because of considerable regional variation in Medicare spending, beneficiaries, as well as the taxpayer, are still left with the inequity that the beneficiary in a higher (less efficient) spending market has a higher premium than the beneficiary in a lower (more efficient) spending market. Alternatively, beneficiaries who choose the most efficient plan in one market could still pay more in premiums than beneficiaries in the least efficient plan in another. An apparent remedy would be to set national premiums, although this would inappropriately blame the beneficiary for regional variation.

Medicare is not a unified program. There’s no coherent whole. There’s no synergy. Medicare is simply the sum of its parts. In its April 3 notice that set MA payment rates for 2018, CMS solicited Medicare stakeholders to submit reform recommendations that would “transform the MA and Part D program.” Since the US Senate is now engaged in crafting major health care legislation in rewriting the House-passed American Health Care Act, Republican leadership is presented with an opportunity to act on the party’s evident desire to reinvent MA and correspondingly the larger Medicare program. Now is an opportune time to examine carefully competing Medicare programming and payment neutrality. At minimum, Congress should ask MedPAC to further its research and make recommendations to Congress. Should congressional Republican leaders choose to do so, the party could attract bipartisan interest and the savings derived from neutral Medicare payments could also win Democratic support for legitimate improvements to the Affordable Care Act.