MedPAC Annual Report to Congress Looks at Cost Increases, Payment Changes

March 16, 2023
MedPAC has published its annual report to Congress, noting an explosion in costs coming in the next decade because of the aging of the population, and making a variety of payment recommendations

As required by the U.S. Congress, MedPAC, the Medicare Payment Advisory Commission, on March 15 published its annual report to Congress on Medicare payment. The MedPAC commissioners see a significant increase in healthcare inflation emerging in the Medicare program over the next several years, with the Medicare program more than doubling in annual cost (105.7 percent) from 2021 to 2031, driven by an explosion in the number of Baby Boomers qualifying for Medicare in the next decade, and by accelerating inflation overall.

As the report’s executive summary notes, “Medicare spending grew by a relatively modest 3.6  percent in 2020, then by 8.4 percent in 2021 as patients  resumed care; the suspension of a 2 percent payment sequester and a temporary 3.75 percent increase to clinician payment rates (unrelated to the pandemic)  also contributed to spending growth in 2021. CMS actuaries estimate that Medicare spending grew at a  more typical rate in 2022, 7.5 percent, and project that  Medicare spending will grow by about 6 percent to 7 percent per year in 2023 through 2030, resulting in Medicare spending doubling over the next 10 years—rising from $875 billion in 2021 to $1.8 trillion in 2031. Medicare’s projected spending growth is driven by an increasing number of beneficiaries (projected to expand from 63 million to 78 million over this period as the baby-boom generation continues to age into Medicare) and continued growth in the volume and intensity of services delivered per beneficiary (rather than price increases).

Despite this projected growth, the Medicare program finds itself—at least temporarily—in a somewhat better position financially than it was a year ago. After an initial economic slowdown at the start of the pandemic, the U.S. economy subsequently experienced strong growth, yielding higher-than-expected Medicare payroll tax revenues. This economic growth has contributed to a delay in the projected insolvency of Medicare’s Hospital Insurance (HI) Trust Fund by a few years—to 2028, according to CMS’s actuaries. However, to keep the HI Trust Fund solvent over the next 25 years, Medicare’s Trustees estimate that the Medicare payroll tax would need to be raised immediately from its current rate of 2.9 percent to 3.66 percent, or Part A spending (which covers inpatient hospital stays and post-acute care following those hospital stays) would need to be permanently reduced by 16.9 percent. Alternatively, some combination of smaller spending reductions and smaller tax increases could be pursued.”

Among other things, the Commission states that “In considering updates to payment rates, we may make recommendations that redistribute payments within a payment system to correct any biases that may make treating patients with certain conditions financially undesirable, make certain procedures unusually profitable, or otherwise result in access issues for beneficiaries or inequity among providers. We may also recommend changes to improve program integrity. Our goal is to apply consistent criteria across settings, but because conditions at baseline and anticipated changes between baseline and the policy year may vary, the recommended updates may vary across sectors. The Commission also examines payment rates for services that can be provided in multiple settings. Medicare often pays different amounts for similar services across settings. Basing the payment for services that lead to similar health outcomes on the rate in the lowest-cost setting would in many cases save money for Medicare, reduce cost sharing for beneficiaries, and reduce the financial incentive to provide services in the higher-paid setting. However, aligning FFS payment rates across settings is not a simple matter. The definitions of services provided and characteristics of beneficiaries served in the different settings must be sufficiently similar to warrant the same payment, and we must try to anticipate unintended consequences.”

The Commission also stated that “he Congress should enact a non-budget-neutral add-on payment, not subject to beneficiary cost sharing, under the physician fee schedule for services provided to low-income Medicare beneficiaries. These add-on payments should equal a clinician’s allowed charges for these beneficiaries multiplied by 15 percent for primary care clinicians and 5 percent for non–primary care clinicians.”

Meanwhile, with regard to the often-contentious subject of the Medicare Advantage (MA) program, MedPAC stated that “The Commission strongly  supports the inclusion of private plans in the Medicare program. Beneficiaries should be able to choose among Medicare coverage options, as some may prefer to avoid the constraints of provider networks and  utilization management by enrolling in the traditional  FFS Medicare program, while others may prefer to seek  the additional benefits and alternative delivery systems that private plans provide. Because Medicare pays private plans a predetermined rate—risk adjusted per enrollee—rather than a per service rate, plans should have greater incentives than FFS providers to deliver more efficient care.”

That said, “The Commission remains concerned that the benefits from MA’s lower cost relative to FFS spending are shared exclusively by the companies sponsoring MA plans (in the form of increased enrollment and revenues) and MA enrollees (in extra benefits). The taxpayers and FFS Medicare beneficiaries who help fund the MA program through Part B premiums do not realize any savings from MA plan efficiencies. Further, Part B premiums are higher for all beneficiaries than they otherwise would be, and Medicare spends 6 percent more for MA enrollees than it would spend if those beneficiaries were enrolled in FFS Medicare, a difference that translates into a projected $27 billion in 2023. This amount would be even larger if the favorable selection of beneficiaries in MA plans were taken into account because beneficiaries who choose to enroll in an MA plan tend to be more profitable than beneficiaries who remain in FFS Medicare.”

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