(Medicare for the 21st Century: Section I - Part 1



1.  Private Sector Purchasing & Quality Improvement Tools for Traditional Medicare

Overview. This proposal would build on the President's 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 beneficiaries' 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 initiative's 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 PPO's 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, practitioners' and providers' 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 beneficiaries.

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 patient volume.

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 beneficiaries' 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 organization's 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 President's 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.

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Table of Contents

Section I - Part 1

Section I - Part 2

Section I - Part 3

Section I - Part 4

Section I - Part 5

Section II - Part 1

Section II - Part 2

Section II - Part 3

Section II - Part 4

Section III


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