The Medicare Crisis: 
How Will It Impact Your
Health Care Organization?

Medicare costs are projected to grow 6 percent per year for the next eight years according to MedPAC, outpacing the rate of growth of the overall U.S. economy. This rapid growth will coincide with a demographic shift that will see an increasingly larger portion of Americans receiving Medicare benefits as the relative number of taxpaying workers declines. The convergence of these two factors will mean trouble for Medicare, which is projected to reach insolvency by 2019.

Medicare also happens to be the largest single payor in the U.S. health care market, accounting for 19 percent of all money spent on personal health care services in 2001. It’s not a comforting thought to know that roughly one-fifth of the funding for the U.S. health care system comes from a payor that is expected to go broke in 15 years.

What about Providers?

The effect of provider cuts is already being felt. The recent reimbursement cuts for some specialty drugs are a good example. As much as 25 percent of drugs used for cancer treatment will cost oncology practices more than what is covered by Medicare, and some providers have threatened to no longer provide drugs that have been targeted for reimbursement cuts. Negotiations between CMS and the cancer industry have softened some reimbursement decreases; however, the consequences of these cuts could be that oncologists will not accept new Medicare patients, and there may be a shift toward providing services in hospitals as it becomes increasingly less profitable for oncologists to treat patients in their offices.

Physician rates will be targeted as well. While last year’s Medicare reform law gave physicians a 1.5 percent payment increase in 2004 and 2005, the General Accounting Office predicted that annual physician pay cuts of roughly 5 percent between 2006 and 2013 are on the horizon.

What Providers Can Do To
Prepare for the Next Four Years

During the presidential campaign, neither candidate outlined a plan to address Medicare’s long-term solvency, but the Bush administration favors the use of market-based principles to control costs. One aspect of this strategy is to increase the number of seniors opting for privately run Medicare plans, which the Bush administration claims will cost less than traditional fee-for-service Medicare. However, it is not clear whether Medicare contracts will be profitable enough to attract insurers, and privately run Medicare plans may actually cost more than traditional Medicare according to a recent GAO report.

If President Bush is to make good on his commitment to cut the deficit in half over the next five years, Medicare cuts will be needed to achieve that goal.  The last major deficit reduction effort—the Balanced Budget Act of 1997—resulted in a $110 billion reduction over five years in Medicare spending.  A recent PricewaterhouseCoopers report concluded that a similar level of reduction today would result in a $450 billion cut over the next 10 years.

No matter which type of Medicare reform is enacted, providers should consider the following strategies for maximizing Medicare reimbursement:

• Position yourself as a quality health care provider.  Medicare and other payors will look for ways to distinguish high quality from low quality and reimburse accordingly.  Effective approaches for measuring patient outcomes and then aggressive efforts to improve those outcomes could lead to higher reimbursement levels.
  
• Focus on evidence-based medicine and disease management (including prevention) to optimize treatment for the sickest patients.  About 20 to 30 percent of health care dollars are spent on tests, treatments, and visits that neither extend lives nor make them any better according to the New American Foundation.  If this type of overuse of the system is limited, Medicare could save $25 billion to $35 billion each year.  Medicare has taken a small step toward a disease prevention focus with the new Welcome to Medicare physical that was included as part of the 2005 payment rules.
  
• Control costs.  Providers should carefully manage costs associated with DRG and APC reimbursements, which are capped per episode.  Also, determine the true cost of providing services and thoroughly evaluate their cost benefit.
  
• Stay informed and involved.  Providers and payors may be forced into making increasingly difficult cost-versus-value health care decisions in the future.  Providers should be at the forefront of deciding what value should be put on different treatments and practices.
  
• Plan accordingly.  Providers should be conservative about revenue projections for programs that rely heavily on Medicare reimbursements.  The dilemma facing many hospitals and systems will be planning for services that are likely to see skyrocketing demand, but only modest increases in reimbursement.