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Medicare’s Role in Health-Care Payment Reform

This was published as a Wall Street Journal Think Tank column on January 29, 2015.

Health and Human Services Secretary Sylvia Mathews Burwell announced a bold initiative Monday aimed at moving half of all Medicare payments away from traditional fee-for-service reimbursement by 2018 and replacing it with incentive-based payments encouraging higher quality and lower costs. The plan also establishes a network to accelerate adoption of payment reforms in the private sector. As the secretary herself suggested, accelerating payment reform is more easily said than done. Time will tell how rapidly changes are adopted, which reimbursement models work best, and payment reform’s overall impact on quality and health spending. Of broader significance than this initiative, potentially, is a shift in Medicare’s role from a bill payer to a more proactive force, with the program using its purchasing power and leverage to drive positive change not only through Medicare but also in the private sector.

The public sector’s role driving innovation in health payment and delivery has been underappreciated. That’s partly because there is a presumption that the private sector, not government, is the engine of innovation in most things. The scandal in veterans health care and early missteps at HealthCare.gov no doubt gave some people the impression that government can’t make the trains run on time, let alone spur innovation. But Medicare and even Medicaid are driving innovation and change in health-care delivery and payment on a broad scale.

Through the Affordable Care Act, Medicare has launched pilot projects involving thousands of hospitals and physician practices to test out new payment and delivery models, with an eye toward improving quality and lowering costs. The concept is to scale up the models that succeed and learn from the models that fail. Among the many Medicare demonstrations, accountable care organizations (ACOs) have received the most attention. ACOs test whether the prospect of sharing savings with Medicare would encourage providers to collaborate across settings to lower costs without adversely affecting the quality of patient care.  Other ongoing Medicare pilots include “bundled payments” for hospitals and post-acute care, medical home initiatives to promote better primary care, programs designed to improve care transitions from hospitals to other settings for high-risk Medicare beneficiaries, and payment incentives to reduce avoidable hospitalizations among nursing-home residents.

Monday’s announcement focused on Medicare, but Medicaid is part of the action, too. Risk-based managed care has become the predominant mode of coverage for low-income families. State initiatives to coordinate physical and behavioral health care, as well as acute and long-term care, and programs of care management targeted to individuals with multiple chronic conditions, are also widespread. More than half the states recently reported that they have new or expanded initiatives for delivery system reform underway in Medicaid to strengthen primary care and establish greater accountability among providers and plans.

Many ideas emerge first in the private sector–but don’t short-change the public sector when it comes to accelerating innovation in health-care payment and delivery. With this week’s announcement, the public sector may become more of the engine of payment and delivery reform, rather than the caboose.

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Filling the need for trusted information on national health issues, the Kaiser Family Foundation is a nonprofit organization based in Menlo Park, California.