OVERVIEW OF Medicare payments

1. Thomas A. Gustafson, Ph.D. Senior Policy Advisor March 16, 2008 OVERVIEW OF Medicare payments

2. Total Medicare benefit spending for 2007$428 billion Source: CMS Office of the Actuary, 2008, as reported by MedPAC

3. Medicare spending in selected settings

4. Original Medicare (“FFS”) Benefits • Part A - Hospital Insurance (HI) • Inpatient hospital stays, including • Critical access hospitals • Mental health care • Skilled nursing facilities (not custodial or long-term care). • Hospice care • Some home health care • Part B – Supplemental Medical Insurance (SMI) • Physician services • Hospital outpatient care • Other medical services and supplies not covered by Part A , e.g. • Durable medical equipment • Clinical labs

5. FFS Payment – How Much? • Payment rates set in advance • Based largely on average resource use • Individual providers may win or lose • Rates not set to cover the costs of an individual provider • Twelve different payment systems

6. Generalized Payment Methodology • Each patient or procedure is classified by resource use • Each class is assigned a “relative value” • Used to assign a payment rate for the case: • Multiply the relative value of the case by a dollar multiplier based on average resource consumption ( the “standardized amount” or “conversion factor”). • Apply geographic adjuster (wage index or geographic practice cost index), if any. • Apply any applicable adjustments.

7. Inpatient Hospital PPS (IPPS) • Patients are grouped into Diagnosis Related Groups (DRGs); hospitals report the diagnoses. • Each DRG has a weight, • Multiplied by a standardized amount based on hospital costs, • To yield a fixed payment, varying by DRG, for all services provided during the patient’s stay. • Adjusted for local wages, low income patients, medical education, etc.

8. Physician Fee Schedule • Pays physicians and other practitioners. • About 7000 codes. • Payment amount for each service based on relative value units (RVUs) reflecting • Physician “work”, • Practice expenses, and • Malpractice. • Payment is adjusted for local cost differences.

9. Updating Physician Payment Rates • Use a spending target: the Sustainable Growth Rate (SGR) • Future updates are adjusted to reflect past spending above or below the target • SGR is set to reflect: • Inflation • Change in the number of beneficiaries • Projected growth in the real per capita gross domestic product • Change in expenditures due to changes in laws or regulations • For 2010 • The SGR system is set to yield a negative 20% update for physicians services. • President Obama’s budget contemplates fixing the law

10. DME Competitive Bidding • Delayed by MIPPA, but now expected to proceed • Phased-in implementation beginning with competition in 2009 • To start with 9 of the largest cities • In 2011, 70 more large cities • Additional areas after 2011 • Items with highest cost & volume/greatest savings potential • Follows successful demonstrations

11. Medicare Advantage Payments • “Benchmark” set through combination of county-specific rates based on FFS, other floors, and premium bids under new MA program • If plan bids below benchmark, 25% rebate goes to government, 75% retained for beneficiary premium reduction/benefit enhancement • Payments to plans adjusted for risk associated with particular patients

12. Medicare Advantage Payments Relative to Medicare Advantage Payments Relative to Traditional Fee - for - Service Medicare, 2009 Traditional Fee - for - Service Medicare, 2009 118% 118% 116% 114% 113% 112% 100% Traditional All Local Local PPOs Regional Private Special Fee-for- Medicare HMOs PPOs Fee-For- Needs Service Advantage Service Plans Medicare Plans Plans Medicare Advantage Plan Types NOTE: HMO is health maintenance organization; PPO is preferred p rovider organization. NOTE: HMO is health maintenance organization; PPO is preferred p rovider organization. SOURCE: Medicare Payment Advisory Commission, December 2008. SOURCE: Medicare Payment Advisory Commission, December 2008.

13. Payments to Part D plans • National average bidding, benchmarking process • Medicare subsidizes about 75% of average premium; beneficiary pays about 25% • Beneficiary pays less for plans below average, and more for those above that average • Risk adjusted payments from Medicare • Subsidies for those with low income, so long as they enroll in plans with average or lower premium (with special adjustments) • Special subsidies for employment-based plans that offer prescription drug coverage