Academic journal article Health Care Financing Review

Bringing Managed Care Incentives to Medicare's Fee-for-Service Sector

Academic journal article Health Care Financing Review

Bringing Managed Care Incentives to Medicare's Fee-for-Service Sector

Article excerpt


There is pressure to reform the Medicare program and to devise ways of controlling the growth rate in spending. Consequently, Federal policymakers face a basic question: Can the Government retain the insurance function (i.e., pooling financial risk) and actively manage the delivery of services, or should it transfer both functions to other organizations (e.g., health maintenance organizations [HMOs])? In this article, we propose a new approach to managing care for Medicare beneficiaries in the fee-for-service (FFS) sector, called GYPS, which could stand alongside enrollment options like HMOs. The Government would select and monitor providers on the basis of quality and other criteria, and would continue to reimburse providers on a FFS basis. In addition, Medicare would give incentive payments for efficiency to these selected providers by comparing actual reimbursement rates per patient with target reimbursement rates.

In the traditional Medicare program, HCFA reimburses providers largely on a FFS basis. Like most health care payers, HCFA is working hard to improve performance by lowering costs and increasing accountability and value. Many of the Medicare payment reforms have been rate-setting mechanisms within the provider sectors: Diagnosis-related groups (DRGs) for hospitals, the fee schedule for physicians, etc. However, physicians are the key decisionmakers for most of the health care system. HCFA needs to create opportunities for physicians to make efficient substitutions across a full range of services, and hold them accountable for the total health service needs of their patients.

In both the FFS and capitated sectors, HCFA and providers can work at cross-purposes because expenditures for Medicare translate into revenues for providers. Under FFS, providers can foil attempts to control Medicare costs through ratesetting by increasing the volume and intensity of services provided. Under capitation, health plans can drive up Medicare costs by enrolling (and selectively retaining) beneficiaries whose average expected costs in the FFS sector would have been less than 95 percent of the average adjusted per capita cost (AAPCC).

In order to control aggregate Medicare spending, innovations must involve beneficiaries accounting for most of the dollars. Over two-thirds of Medicare reimbursements are spent on behalf of about 10 percent of beneficiaries (Health Care Financing Administration, 1995). Unfortunately, when Medicare gives financial risk to HMOs as an incentive to control costs, it also gives them financial incentives to avoid having unhealthy members in the plan. The FFS sector has the opposite incentives: treat the beneficiaries with the greatest health care needs, and produce more services in order to get more revenues.

Fortunately, many large physician organizations are acquiring experience in managed care through arrangements with other payers. Hence, they are building expertise that can be transferable to Medicare FFS patients. Many providers in the FFS sector could be "natural" managed care organizations, if financial incentives from Medicare were aligned with those of other payers. Examples include physician groups with compensation systems that reward high quality and efficiency, and integrated health systems that give physicians critical supports such as information systems and quick access to subacute facilities.

In research sponsored by HCFA, we have developed such an approach, based on GYPS, whereby Medicare could work with eligible physician organizations to manage their patients' care. In planning a demonstration of GYPS, we have worked with an advisory committee comprised of physicians and other managers at several physician groups located in different parts of the country. In addition, we have gathered Medicare claims data for patients seen by these groups in order to analyze resource consumption at the provider level. Groups were defined at the corporate level, encompassing all of a group's physicians and their patients' Medicare claims. …

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