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Medicare Payment Reform: Solutions in Brief

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Although Medicare is front and center in the 2020 presidential debate—with plenty of plans to expand coverage—there has been shockingly little discussion as to why health care is so expensive in the first place. Today, The New Center—an organization focused on creating the space for a political center in today’s America—released a new policy paper entitled “Medicare Payment Reform: Shifting the Health Care Debate from Who Pays to How,” with a comprehensive set of solutions to bring down the cost of medical care and make Medicare more fiscally sustainable.

According to a recent Medicare trustees report, the program will be unable to fully fund its services by 2026. While Congress balks at bipartisan health care reform, funding dwindles for the benefits that nearly one in five Americans rely on. To keep Medicare solvent, Congress must address systemic inefficiencies in the way that Medicare pays for medicine and services.

The New Center believes that the following reforms could improve how Medicare pays for services and medications:

Accelerate the transition from volume-centered care to value-centered care by implementing more bundled payments

Medicare currently pays most hospitals and health care providers through a “fee-for-service” payment system, where each “service” received is charged to a patient—often at egregious prices. Fee-for-service encourages hospitals to issue as many tests and services as possible to maximize profits (and minimize liability), even if the services aren’t particularly necessary or beneficial to patient health. The Centers for Medicare & Medicaid Services can improve problems stemming from the fee-for-service system by accelerating the shift to a “bundled payments” model.

Answer the end-of-life question by offering Medicare enrollees Advance Directives

Medicare doesn’t make it easy for elderly Americans to control their care. In a California survey, 70% of people said they would prefer to die at home, yet 68% of people do not. Despite this, only a third of Americans have a written plan for what kind of care they would like to receive, called an “Advance Directive.” Advance Directives can also play a role in curbing government and patient spending. Spending on Medicare beneficiaries in their last year of life accounts for about 25% of Medicare spending on beneficiaries age 65 or older—with many patients receiving unnecessary or unwanted medical treatments.

Allow the Medicare Part D program (prescription drug coverage) to negotiate drug prices

Medicare spends $129 billion annually on Part D prescription drugs. Congress should come together on a solution to allow Medicare to negotiate the price it pays for Part D medications. The challenge for Congress is to design a system for Medicare price negotiations that meaningfully brings down the cost of drugs, while still preserving the incentive for innovation that has made America the source of the most cutting-edge medical treatments in the world. But one way or another, the status quo—in which Medicare essentially pays whatever pharmaceutical companies tell them to pay—has to change.

Look to other countries for pricing references for single-source drugs

Makers of brand-name medicines that are under patent and thus have no generic version, known as “single-source” drugs, have exploited their exclusivity to charge exorbitant prices. Single-source drugs are the largest expense to Medicare Part D, accounting for almost 72% of drug spending in 2017. Medicare can gain reference for single-source drug prices by looking to other countries, instead of solely within the American health care system. Single-source drug costs could be tied in some way to the “International Pricing Index”—an average of what economically similar countries pay.

“Medicare Payment Reform: Shifting the Health Care Debate from Who Pays to How” is available for download here.