Medicare Demonstration Programs Come Under Close Scrutiny

Since almost the beginning of the Medicare and Medicaid programs in the late 1960s, the agency in charge of administering the program has been empowered to test out new ways of providing services or paying providers  in limited parts of the country and for limited time periods.

The Centers for Medicare and Medicaid Services (CMS) undertake projects and demonstrations to determine whether, through additional incentives, changes in the methods of payment or reimbursement would increase the efficiency and economy of the health services covered under Medicare and Medicaid without adversely affecting the quality of the services.

These demonstration programs have come under close scrutiny this year – a January 2012 report from the Congressional Budget Office concluded that none of 10 programs it examined had led to a reduction in overall Medicare spending for those services. An April 2012 report from the Government Accountability Office (GAO) recommended that CMS cancel a quality bonus payment program for health insurers participating in the Medicare Advantage program.

CBO Report

The CBO examined 10 major Medicare demonstration programs, six involving disease management and care coordination and four involving value-based payments. The CBO concluded that “the evaluations show that most programs have not reduced Medicare spending: In nearly every program involving disease management and care coordination, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program, when the fees paid to the participating organizations were considered.”

The CBO also concluded that because Medicare continues to reimburse most providers based on the services provided – which awards providers for providing more care but provides no incentive to coordinate care among providers as a way to increase quality and reduce cost – substantial changes to the existing payment and delivery systems will be necessary before any demonstration program could have a significant impact.

GAO Report

In April 2012 the GAO recommended that the Secretary of HHS cancel the Medicare Advantage (MA) Quality Bonus Payment (QBP) Demonstration scheduled to run from 2012 to 2014, and let the MA quality bonus payment system established under the Patient Protection and Affordable Care Act (PPACA) to take effect.

CMS determines the amount to pay an MA plan by comparing its bid to provide coverage to beneficiaries to a benchmark derived from the average amount of Medicare fee-for-service (FFS) spending in the plan’s service area. PPACA aligned MA benchmarks more closely with Medicare FFS spending and provided incentives for plans to achieve high star ratings. PPACA’s quality bonus payment system tied the new benchmarks to a percentage of average FFS spending in each county and caps them at the pre-PPACA level.

The new benchmarks would be phased in from 2012 to 2017. CMS’ Office of the Actuary (OACT) estimated that PPACA’s payment reforms would reduce Medicare payments to MA plans by $145 billion over 9 years and would cause plans to offer less generous benefit packages. OACT also projected that MA enrollment in 2017 would be half as much as it would have been in PPACA’s absence.

However, rather than implement PPACA’s quality bonus payment structure, CMS announced in November 2010 that it would conduct a nationwide demonstration from 2012 through 2014 to test an alternative method for calculating and awarding bonuses–the QBP demonstration.

The GAO looked the cost of the demonstration program and compared it to demonstrations that CMS has implemented in the past. The GAO noted that the OACT has estimated that the demonstration will cost $8.35 billion over 10 years, most of which will be paid to 3-star and 3.5-star plans. About $5.34 billion of OACT’s cost estimate is attributed to quality bonus payments more generous than those prescribed in PPACA. Most of the remaining projected demonstration spending stems from higher MA enrollment because the bonuses enable MA plans to offer beneficiaries more benefits or lower premiums.

The GAO also determined that the demonstration does not conform to the principles of budget neutrality. The estimated budgetary impact of the demonstration, adjusted for inflation, is at least seven times larger than that of any other Medicare demonstration conducted since 1995 and is greater than the combined budgetary impact of all of those demonstrations.

HHS/CMS did not concur with GAO’s recommendation to cancel the QBP demonstration or with GAO’s finding regarding the design and evaluation of the demonstration.

On April 23, 2012, Sen. Orrin Hatch (R-Utah), ranking member of the senate Finance Committee, noted that  “the Obama Administration launched this demonstration program to divert attention away from cuts to the popular Medicare Advantage program. The problem is, as GAO makes clear, that HHS appears to have abused its authority by creating what isn’t really a demonstration program at all. Furthermore, it’s unclear whether the Obama Administration even had the legal authority to undertake it in the first place. The Obama Administration seems to be using a technicality to side step Congress and write itself a blank check to spend more money for political purposes leading into this year’s elections.”

At a hearing of the House Education and the Workforce Committee on April 27, 2012, HHS Secretary Kathleen Sebelius said the Obama administration has “no intention of canceling the project.”