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What’s in the New Health Care Law? Part 3: Medicare

Lyndon Johnson signs the original Medicare bill

Medicare- this part of the bill was an easy target for anyone who wanted to attack.  In the months of debate leading up to final passage, it was the most misstated and misunderstood part of health care reform, and opponents spread all sorts of crazy rumors:  Massive cuts to Medicare!  The bill would bankrupt the government!  Death panels for seniors!

It was easy to get people riled up:

  1. Medicare is an extremely popular program; and
  2. This section of the bill is long and complicated and it looks like they’re making a ton of changes.

But really, it’s nothing that drastic.  Here’s how Medicare will change under the new law…

Linking Hospital Payments to Quality
The new law establishes a “value-based purchasing program”: hospitals that perform better will get bonus payments from Medicare.   Health and Human Services (HSS) will determine how exactly to measure performance for each hospital, but it will be things like how well hospitals do at reducing complications, infections, and unnecessary deaths from surgery.  There are also plans to expand these quality bonus payments to long term care facilities and individual physicians.

Reducing payments for potentially avoidable hospital readmissions
Right now hospital readmissions are out of control- 1 in 5 Medicare patients ends up back in the hospital within a month of being discharged. This costs billions of dollars a year.

Many of these readmissions are avoidable, but hospitals that readmit patients actually get paid more money than hospitals that do it right the first time.  Bad hospitals get paid to treat both the original sickness AND the complications.  Under the new law, hospitals will get paid less for these avoidable admissions.

Developing a National Strategy for Improving Health Care Quality
The law instructs HSS to identify areas of our health care system that have the most potential for improvement and develop a strategy for addressing them.   So, for example, yesterday we talked about how the United States has an extremely high infant mortality rate compared to other industrialized countries, and it’s especially high for minorities.  HSS might decide that addressing this disparity is a national priority, and develop a plan for reducing infant deaths.

Encouraging the Development of New Patient Care Models
You know how patient care works now.  You get sick, you go to the doctor, the doctor sends you to a specialist or, if it’s a complicated chronic condition, a bunch of specialists.  And each doctor gets paid for every test and procedure they order- often there’s not much coordination of care, and the doctors have an incentive to do more than you actually need.  It’s expensive, and in medicine more is not necessarily better– these extra procedures can sometimes end up making your health worse.

In the bill there are a bunch of trial programs to test different ways of paying doctors and coordinating care.  For example, instead of getting paid for every procedure, some of the test programs will give doctors one big payment for everything they do in treating an illness.  Health policy experts are really excited by these trial programs– if they work it would go a long way in reducing medicine costs.

Reducing Medicare Payments to Certain Health Care Providers
There are a few ways the bill will reduce payments to the providers of certain types of medical services, although it’s buried under some technical language:

  • Market Basket Updates: This sounds complicated, but it’s really not that bad.  Medicare automatically increases the amount it pays hospitals, nursing facilities, etc. every year by a certain percentage to account for inflation.  The new law reduces this automatic update for certain types of providers, such as hospitals, nursing homes, and hospices.
  • Potentially Misvalued Codes: This one makes way more sense if you replace the word “code” with “services.”  This part of the bill would give the Secretary of Health and Human Services the authority to review how much Medicare pays for certain services to determine if it’s overpaying or underpaying for those services. So if, for example, some new technology came out that made x-rays way cheaper, the HHS Secretary could review how much Medicare is paying for x-rays to make sure it’s not getting overcharged.

Ending  Overpayments to Insurance Companies for Medicare Advantage
An article in the Cleveland Plain Dealer explains why Medicare Advantage was created:

Medicare Advantage allows seniors to enroll in private health plans, usually through insurers or health maintenance organizations, as an alternative to traditional fee-for-service Medicare. Advantage plans were supposed to operate more efficiently and curtail the explosive growth of Medicare spending because, the thinking went, the private sector could do anything better than federal bureaucrats, and for less money.

Well, that turned out to be wrong.  Advantage insurers charge the government more money, not less– the average is 14 percent more per-patient (and sometimes as much as 20%) than what traditional Medicare pays providers.  The new law doesn’t eliminate Medicare Advantage (despite rumors to the contrary)– it just eliminates the subsidy to private insurance companies.

The government will now pay insurance companies roughly the same for Medicare Advantage plans as it pays for traditional Medicare coverage.

Closing the Donut Hole in Medicare’s Prescription Drug Program
The ‘donut hole” is the gap in coverage in Medicare’s prescription drug program.  Medicare stops paying for prescriptions after the plan and beneficiary have spent $2,830 on prescription drugs, and only starts paying again after out-of-pocket spending hits $4,550.  The White House estimates that this ends up costing seniors who fall into the gap an average of $4080 every year, and many can’t afford it.The new law will eliminate the donut hole slowly, starting with a $250 rebate to seniors who hit the gap this year, and phasing it out entirely by 2020.

Create an Independent Payment Advisory Board
This will be a 15-person board made up of doctors and health policy experts, who will make recommendations to Congress on ways to reduce the per capita growth in spending in Medicare.  In itself, this wouldn’t be a big deal- Congress gets recommendations all the time on how to reduce Medicare spending- but then the lobbyists get involved, and Congress usually ends up ignoring the recommendations.

With the Independent Payment Board, however, the recommendations would automatically go into effect, unless Congress votes to block them.  However, if Congress votes to block the recommendations, then they have to come up with their own proposal to save at least as much money as whatever the Board proposed.

The Board is prohibited from submitting proposals that would ration care, increase revenues or change benefits and eligibility.

Other provisions
There are a bunch of other smaller provisions for improving quality and access, but unless you’re working on a PhD in health care policy, you probably don’t need to know (or care) what they are.  But if you’re curious you can read the text of the Senate Bill here– most of these smaller provisions tweaking Medicare made it through to the final version.

Thankfully, that’s it for Medicare.  Next time we’ll look at section four of the bill:  Preventing Chronic Disease and Improving Public Health (you might want to do some pushups and take some vitamins to get ready).

{ 3 comments… add one }
  • John Nagle April 6, 2010, 10:48 am


    I’m puzzled by the average $4050/month that donut hole people have to pay. The other numbers suggest $4550-$2830 for a whole year. Can you easily clarify?

  • Rob Cullen April 7, 2010, 8:35 am

    Sorry, that was a typo– it should have read $4050 per year. I just updated the post to correct it.

    Also, I should explain why the gap isn’t just $4550 minus $2830. Up until the $2830 limit, the government and individual seniors are sharing costs: there’s a $310 deductible that seniors pay, after that they pay 25% of drug costs, and the government pays the other 75%. So when they hit the $2830 limit, their actual out of pocket spending is about $940. Then their coverage doesn’t kick back in until total out of pocket spending hits $4550.

    The $4050 figure is from the White House– they estimate that’s the average amount that people in the coverage gap end up paying out of pocket every year. Most people don’t hit the gap though.

    Another thing to keep in mind is that these figures are for the “standard benefit plan.” Individual insurance companies offer their own variations of the standard benefit plan and some might have a smaller donut hole (but higher premiums).

    Anyways, thanks for pointing out the typo and hopefully this helps clarify!

  • Trish Crawford April 17, 2010, 8:15 pm

    I am constantly confused about all the hubub about medicare. I have heard lawmakers state that billions, or even trillions have been taken from Social Security. We once paid Social Security taxes only and then it was split inito Social Security/Medicare.

    My understanding is that the government took money from the Social Security Fund early in its conception and has been taking money from that fund for years.

    So, instead of telling everyone costs should be cut for Medicare, (which many seniors pay a monthly premium right off the top of their Social Security) why doesn’t the government pay those funds back to the programs for which they were meant.

    I hate the word “entitlement” that is applied to both Medicare and Social Security. To me Social Security was like an annuity that I paid into for years. Medicare is an insurance premium I have paid into for years and am still paying into. “Entitlement” smacks of a freebee. Seniors have paid the premiums for years. It’s an insurance policy they didn’t have a choice of whether or not to pay the premium.

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