PRESIDENTíS PLAN TO STRENGTHEN AND MODERNIZE MEDICARE
FOR THE 21st CENTURY
I. MAKING MEDICARE MORE COMPETITIVE AND EFFICIENT
1. Private Sector Purchasing & Quality Improvement Tools for Traditional Medicare
Overview. This proposal would build on the Presidentís commitment to modernize Medicare by allowing it to adopt
best practices from the private sector to improve quality and constrain cost growth. In the past decade, private
purchasers of health care have developed effective techniques that target both beneficiaries with special health care
needs (recognizing that they account for a large share of costs and could benefit from care management) and
high-quality, efficient providers (to provide an incentive to improve care and reduce costs). Such practices
include: reducing beneficiary cost sharing in return for using high quality/cost-effective providers; improving
and coordinating care for beneficiaries through management of specific diseases and/or all of beneficiariesí care;
and purchasing through competition, selective contracting, and negotiated payment rates.
Currently, Medicare has little statutory authority to implement these types of strategies, notably to reward providers
of high-quality, cost-effective care. The National Academy for Social Insurance has called for Health Care Financing
Administration (HCFA) to be given greater flexibility to use these types of private sector tools in Medicare. In
addition, HCFA, through demonstrations, has been exploring for several years more flexible arrangements for paying
providers and health plans to encourage high-quality care. This proposal would build on this work and would authorize
a broader use of these best practices from the private sector where applicable and feasible. This authority would
include safeguards for beneficiaries (e.g., programs would be voluntary; have quality assurance measures) and
providers, to assure a process that new processes are accountable, transparent, clear and certain. The management
reforms included in this proposal, including having an outside panel of private sector management experts advise HCFA,
are also integral to this initiativeís success (note: the reforms outlined below would not apply to the prescription
drug benefit which has built-in a flexible management authority since it is new).
a. Promoting use of high-quality, cost-effective health care providers
Policy: This proposal would allow Medicare to adopt the private-sector practice of giving
high-quality, cost-effective providers special designations, and giving beneficiaries incentives to use these
providers while maintaining beneficiary freedom of choice. It would do so through two proposals.
The first part of this proposal is to create a new Medicare Preferred Provider Option (PPO), allowing Medicare
to use one of the most common private-sector purchasing tools. PPOs are the predominant type of managed care plan for
people under the age of 65. Unlike HMOs which typically restrict access to providers not in their network, insurers
that sponsor PPOs typically pay all providers for care for their enrollees. However, beneficiaries pay less when
providers in the PPOís network are used. In the Medicare option, beneficiaries would pay lower cost sharing when
using preferred providers. The quality standards of the Medicare PPO would assure that beneficiaries would be treated
by high-quality health care providers.
Rather than developing her own networks, the Secretary would contract with existing organizations with PPOs that
demonstrate their ability to meet quality and utilization management standards. To become a Medicare preferred
provider, practitionersí and providersí claims history and quality information would be assessed. Only those
applicants with a demonstrated history of cost-effective medical practice patterns would be selected as preferred
providers. PPO arrangements would be in areas where they are common in the private sector already, so provider
familiarity will make it easier to implement. PPO participants would be given administrative advantages, such as
faster claims payment and alternative administrative and related procedures.
Beneficiaries would gain by choosing preferred providers, since they would pay less in cost sharing and have a strong
assurance about the quality of the provider. Beneficiaries could have less need to buy private supplemental Medigap
insurance to reduce cost sharing, since cost sharing could be somewhat reduced by using Medicare preferred providers.
Those with continued interest in Medigap could purchase a new special policy (discussed in section II-3-c) that
complements the PPO, which should be less expensive than the typical Medigap policy.
The second proposal would expand the current "Centers of Excellence" demonstration to make it a
permanent part of Medicare. The purpose of the Centers of Excellence designation is to: (1) recognize and reward
providers who deliver complex medical care with exceptional quality and (2) provide incentives for
beneficiaries to use these providers. Competitively-selected facilities would be paid a single rate for some or all
services related to a surgical procedure or medical condition. Beginning in 2001, the Secretary would establish
Centers of Excellence throughout the nation for coronary artery bypass grafts (CABG) and other heart procedures, knee
replacement surgery, and hip replacement surgery. The Secretary would also specify other appropriate procedures and
conditions for which it is appropriate to designate selected exceptional providers as Centers of Excellence.
As in the demonstration, selected facilities would have to meet special quality standards and would be required to
implement a quality improvement plan. Facilities would retain the Center of Excellence designation for a three-year
period so long as they continue to meet these quality standards. The single rate paid to a Center for a particular
procedure or admission could not exceed the aggregate amount that would otherwise be made for beneficiaries in order
to produce overall savings to the Medicare program. In addition, experience with the demonstration suggests that the
designation as a Center gives the facility a bargaining tool to use with their private purchasers. Beneficiaries
would not be required to receive services at Centers, but Centers would be allowed to provide incentives such as
reducing or waiving cost sharing, offering private rooms, or paying for travel and lodging expenses to attract
Background/rationale: In the private sector, PPOs and point-of-service (POS) plans have become the
predominant form of managed care. For example, most Federal workers and their families are enrolled in the Blue
Cross/Blue Shield Preferred Provider Organization in the Federal Employees Health Benefits System (FEHBP). These
arrangements enable plans to work more effectively with participating providers to achieve quality and cost goals.
Enrollees of these kinds of plans face lower cost sharing and may have other advantages in using participating
physicians or other providers. By selecting providers for special designation and providing beneficiaries incentives
to use these providers, Medicare would be able to purchase high-quality services and items at more competitive rates,
as private plans are able to do now. Providers would compete to be selected based on their performance and price and
they would actively seek out the designation as a preferred Medicare provider.
The Centers of Excellence proposal stems both from private sector practices and a recent Medicare demonstration
project. From 1991-1998, HCFA conducted a demonstration through which high-quality facilities were paid a single
fee to provide all of the facility, diagnostic and physician services associated with coronary artery bypass graft
(CABG) surgery. The Centers of Excellence were selected on the basis of their outstanding experience, outcomes, and
efficiency in performing these procedures. Medicare achieved an average of 12 percent savings for CABG procedures
performed through the demonstration while most facilities experienced increased market share. Studies have shown
that average costs and length of stay for by-pass surgery, for example, fall with increases in patient volume while
quality improves. Most experts agree that Centers of Excellence is a proven success that could improve quality and
reduce costs if used nationwide by Medicare.
b. Primary care case management and disease management
Policy: This proposal would give Medicare the flexibility to structure payments and systems of care
focused on the specific health needs of beneficiaries, which should both improve quality of care and reduce costs.
The two major tools Medicare would adopt are primary care case management and disease management.
Primary care case management (PCCM) refers to a set of activities performed by primary care physicians to
coordinate the full range of health care services used by participating beneficiaries. Medicare would be given the
authority to develop PCCMs in areas or for beneficiary groups where there is evidence of lack of coordination of
care or a pattern of inappropriate utilization, such as a high rate of hospitalization for conditions that could
be treated in outpatient settings. Under this system, Medicare would selectively contract with high-quality
physicians for PCCM services. Physicians would be paid in the usual way (fee-for-service) but would receive case
management fees that could incorporate physician education and training. Primary care physicians would have an
incentive to become a PCCM, since the designation would be exclusively for physicians who meet certain performance
standards and other criteria. Further, the PCCMs would be marketed to encourage beneficiary enrollment, guaranteeing
To encourage beneficiaries to voluntarily enroll with a primary care case manager, Medicare could offer additional
benefits or lower cost sharing. The additional program costs from lower cost sharing or extra benefits would be
offset by the reduction in costly services such as avoidable hospitalizations. Beneficiaries who meet the criteria
for a PCCM would volunteer to remain with a PCCM for a period of time, and would receive all their health care either
directly from, or through referral by, their primary care case manager.
Disease management authority would permit Medicare to take advantage of the recent development of special
coordinated delivery systems for targeting certain high-cost health conditions. Private-sector organizations
have developed models of care coordination for conditions like congestive heart failure and diabetes, by providing
physician-directed, nurse-mediated disease management services. The Secretary would have the authority to
competitively pay qualified entities who provide (or subcontract to provide) services including patient screening
and assessment, review of medications, patient education, telephone consultations, physician interaction, home nursing
visits, surveillance and reporting. To minimize fragmentation of care, Medicare could require single vendors to
provide disease management for related conditions (e.g., congestive heart failure, hypertension, coronary artery
disease, and diabetes). Medicare would set up the payment arrangements to achieve savings for the given diagnoses
for participating beneficiaries. Beneficiaries would voluntarily choose to get their care from these providers,
benefiting from the expertise and care coordination that is the hallmark of these disease management systems.
Background/rationale: Private health insurance plans are increasingly choosing to coordinate a range
of health services, either for beneficiary needs or for a specific disease. Since a small fraction of beneficiaries
(5 percent) account for 45 percent of Medicare spending, targeting their entire range of services or disease-specific
services can improve quality as well as reduce costs. Primary care case managers (PCCMs) have been used by Medicaid
and private health plans to improve access to quality care while reducing costs. For example, a study of Medicaid in
Kentucky and Maryland found that PCCMs can reduce use of ancillary services and increase use of preventive services
and primary care. This care management can be especially important for older and sicker beneficiaries, who may have
diminished capacity to navigate the health care system.
Similar results have been emerging from disease management models. Private sector disease management vendors indicate
they are achieving savings of 20 to 50 percent (before fees) for selected high-cost, chronic diseases, and have begun
to guarantee improvement in patient satisfaction and clinical outcomes as well as cost savings.
c. Information and care coordination for Medicare-Medicaid dual eligibles
Policy: About six million Medicare beneficiaries also receive some benefits from Medicaid. These dual
eligibles represent 17 percent of the Medicare beneficiary population (19 percent of the Medicaid population), and
account for 28 percent of total Medicare expenditures (35 percent of Medicaid expenditures). On average, dual
eligibles are sicker, older and poorer (by definition) than other Medicare beneficiaries. In addition, the dual
eligible population is more likely to suffer from cognitive impairment, mental disorders, and limitations in their
ability to perform daily activities. The health frailties of dual eligibles often require comprehensive acute and
long-term care services. However, these services are provided by two separate public insurance programs. This
complex arrangement of services can be difficult to understand and navigate. In addition, providers for one program
may be unaware of the actions of providers for another program, unintentionally duplicating or contradicting each
other. This is exacerbated by the incentives to cost-shift between payers. This initiative assists these
beneficiaries to better understand their benefits, tests models for coordinating and improving care, and evaluates
whether Medicare and Medicaid savings can be achieved.
Information to all new Medicare-Medicaid beneficiaries on coverage. Under this proposal, all beneficiaries who
become dually eligible (full Medicaid, Qualified Medicare Beneficiaries (QMBs) or Specified Low-Income Medicare
Beneficiaries (SLMBs)) would be provided with an orientation package containing information on dual eligible benefits
and the programs that serve them. The purpose of the orientation package would be to inform all dual eligibles about
their special status, the Medicare and Medicaid programs, and how to obtain further information from HCFA, the states
and other relevant offices. This package would educate beneficiaries on the benefits, rights and responsibilities that
accompany dual eligible status. Specific information would include:
- Basic information on benefits available to each category of dual eligibles i.e., additional services beyond
the Medicare benefit package, premium assistance and cost-sharing assistance.
- Where to get additional information about Medicare and Medicaid and the services available to dual eligibles,
including key phone numbers: Medicare contacts; Medicaid Office; State Health Insurance Assistance Program; Office
on Aging; and the Social Security Administration (SSA).
- Information on beneficiariesí rights under each program regarding grievances, appeals, and choice of provider
(e.g., fee-for-service, managed care, etc.).
HCFA would work with states to design and distribute this orientation package nationwide. It would complement efforts
underway by HCFA, states and local governments to expand enrollment through outreach campaigns.
Care coordination demonstration. This proposal would authorize a demonstration program to test care
coordination models for Medicare beneficiaries who are also eligible for Medicaid and who remain in fee-for-service
Medicare. Dual eligible beneficiaries who participate would receive a one-time, special clinical assessment,
developed by geriatricians, of their acute and long-term care needs. Those with significant health care needs would
qualify for a care coordination benefit that would include primary care services and advice from a team of providers.
This team would include a geriatrician, a social worker and a nurse who would provide general primary care services
and would advise the beneficiary about Medicare and Medicaid care options. The team would suggest the best type of
specialty acute care and make suggestions about when other long-term care and support are necessary such as personal
care, nursing home care, or home health. Other models of care coordination could also be tested. Up to 25,000
beneficiaries would be eligible for this demonstration intended to test both whether outcomes are improved and whether
savings can be achieved.
Provider groups would apply for the demonstration, and could include grass-roots organizations as well as larger
health care organizations. HCFA would carefully screen provider applicants and monitor the demonstration to ensure
that the providers were not using the demonstration as a way to maximize Medicare payments. The demonstration would
require that providers have an agreement with their state for full cooperation.
Background/rationale: Confusion regarding Medicare and Medicaid benefits is common, and many low-income
beneficiaries who are dually eligible are not aware of the benefits and programs that exist under Medicare and Medicaid
to assist them. The orientation package would provide dual eligible beneficiaries with the information they need to
better access the complex arrangement of health care services available to them and to take full advantage of the
benefits they are entitled to as dual eligibles.
Having a provider or other professional assist beneficiaries in navigating the system is at least as important as
clearly written, informative documents. Most examinations of options to coordinate care have focused on managed
care models to improve care coordination for this vulnerable population. Yet, the majority of dually eligible
beneficiaries choose to remain in fee-for-service. This new demonstration effort would test models for improving
care coordination for beneficiaries who choose to remain in traditional fee-for-service Medicare.
d. Innovative purchasing tools and contracting reform
Policy: This proposal would give the Medicare the flexibility to promote high-quality, cost-effective
care by using innovative purchasing techniques for current services (separate structure for prescription drug
coverage). These techniques include: competitive pricing and selective contracting, negotiating payment rates in
exchange for flexible administrative arrangements; negotiating bundled payments for related services; and testing and
implementing incentive payments for group practices. It also would reform Medicare contracting.
Competitive pricing. This proposal would authorize use of competitive bidding and price negotiations to set
payment rates for Part B items and services (except for physician services). Medicare would have the authority to
select both the items and services, and the geographic areas, to be included in a bidding or negotiation process based
on the availability of providers and the potential to achieve savings. Bids would be accepted only if providers met
specified quality and customer service standards. Protections would be built in for rural areas where this
competition may be difficult. There would also be protections for bidders (e.g., median bid, not best price; no
winner takes all). Medicare would also have the authority to selectively contract with providers who accept
negotiated or bid prices and other contractual terms. Providers would have an incentive to participate to
potentially secure a larger market share.
Improved negotiating authority would allow the current Medicare to negotiate alternative flexible
administrative arrangements with providers and suppliers who: (1) agree to provide price discounts to Medicare,
and (2) demonstrate better performance and higher quality. The administrative arrangements could include such
incentives as simplifying claims processing, reducing billing payment cycle time, and alternative claims and cost
settlement processing. The use of these special administrative arrangements could be targeted to areas where there
is market competition and discount arrangements are common. In general, before an alternative arrangement would go
into place, Medicare would assure that the arrangement would achieve program savings. These savings would result from
discounts and selecting providers and suppliers who have demonstrated appropriate utilization practices.
Paying a single amount per case for all services at a site of care is another way of simplifying the
traditional service-by-service payment structure and providing incentives for lower cost, high-quality care. This
proposal would authorize Medicare to provide a single payment per case to combinations of practitioners, providers
and suppliers for all care delivered at a specific facility or site of care (e.g., all physician and hospital services
delivered in the hospital setting, or all professional and facility services delivered in a partial hospitalization
program). For example, all payments for the surgeon, anesthesiologist, attending physician, and physician
consultant(s) for each case would be combined with the applicable hospital DRG and paid to one entity. This combined
amount would provide incentives for the physicians and hospital to work together to deliver higher quality, more
efficient care. Those efficiencies would be shared with Medicare. This single payment arrangement would only be
established if overall program savings are anticipated.
This proposal would also explicitly authorize a demonstration of bonus payments for physician group practices,
which would be expanded nationwide if proven to be successful. Qualifying group practices would be offered bonus
payments if they reduce excessive use and demonstrate positive medical outcomes for their patients. To qualify, a
large physician group practice would be required to: meet or exceed certain size and scope criteria, submit acceptable
clinical and administrative management plans, participate in acceptable quality improvement plans, submit required
performance data, and distribute at least a portion of the bonus payments based on quality performance. Qualifying
organizations would be given an annual per capita target based on the organizationís own historic experience (e.g.,
average total Part A and Part B expenditures for the Medicare FFS beneficiaries seen by the practice in a base year).
A bonus could be paid to the organization when actual total per capita expenditures in the performance year are lower
than the target. A portion of Medicare savings separate from the bonus payment could be set aside each year and
paid based on process and outcome improvements.
Contracting reform is a necessary first step in updating the tools HCFA needs to engage in effective oversight
of the Medicare contractors. This proposal, which is also in the Presidentís budget, would allow HHS to use
competition to select Medicare fiscal intermediaries and carriers. It would also allow Medicare to use entities other
than insurance companies as its fiscal agents, and provide HHS greater flexibility in determining which functions
should be performed under the contracts.
Background/rationale: Private and other public sector purchasers of health care have successfully used
competition and negotiation to establish payment rates and assure high quality of health care services. Competitive
pricing is now being tested through Medicare demonstrations and appears to be successful at constraining costs. For
example, HCFA is currently conducting a demonstration of competitive bidding for durable medical equipment. For each
product line, HCFA establishes a competitive range of bids and selects enough quality suppliers in that range to meet
the necessary demand. Transition policies assure that current arrangements phase into the new system. The series of
authorities in this package would allow for broader use of such arrangements that both assure a clear, fair process
for providers as well as Federal savings and improved care for beneficiaries.