Medicare's Big Experiment

The coming changes aim to cut costs while improving care. Sound familiar?

In 16 years of practicing internal medicine, Yul D. Ejnes has learned to cope with the fast-changing world of medical economics. A decade ago, under tremendous cost pressures from big insurance companies, Ejnes merged his tiny practice in Cranston, R.I., into what has since evolved into a 16- office, 50-physician operation. Since lab tests and X-rays can be more profitable than office visits, he and his partners set up an in-house lab and are planning to develop their own medical-imaging business. His practice, Coastal Medical Inc., even leverages its in-house computer system into a lucrative sideline: billing insurers and patients for other docs.

Now, Ejnes is about to get the biggest dose of change yet. Medicare, the giant federal health program that covers the country's 42 million seniors -- and about one-third of Ejnes' patients -- is set to radically overhaul the way seniors get their health care. Washington has already started giving insurance companies billions of dollars in subsidies to encourage seniors to join managed-care plans -- the networks of doctors and hospitals that are now the near-universal model for employer-provided health care.

Washington will also aggressively promote disease management in Medicare, where chronic illnesses are identified and treated early. It will urge doctors to adopt costly new information technology. And it may soon take steps to tie physicians' compensation to the quality of care they provide. Taken together, "this is really about shifting the focus to helping people stay well in the first place," says Mark McClellen, administrator of the federal Centers for Medicare & Medicaid Services, which oversees both programs.

Perhaps. But these changes are also about saving money. Over the next few years they'll not only remake the way medicine is practiced on seniors but also shake up the world for physicians and hospitals and change the way taxpayers pay Medicare's unimaginably huge bill.

In the new world of Medicare, seniors will face the same option workers have confronted for years: Accept limited choices of doctors and hospitals or pay more. Like their younger counterparts, seniors may be getting streamlined care -- more of their surgery will be done in walk-in clinics, for example, rather than in hospitals. And they'll have to become more aggressive consumers of health care. Take Medicare's new drug benefit: With help paying for their prescriptions, seniors should be able to better integrate their medication with other care -- but only if they make sure their drug plan covers the specific pills they take. Says Patricia Neuman, a health economist at Henry J. Kaiser Family Foundation: "This could fundamentally change patient care."

Doctors, meanwhile, may be pushed to provide more preventative care rather than costly treatments for the very ill. And the small medical practice may go the way of the neighborhood pharmacy.

After years of battling reform, Ejnes and many of his colleagues are open to change. Medicare's old fee-for-service system, where doctors are paid a piece rate for each procedure or test they perform, is like "a dog doing a trick and getting a biscuit afterward," Ejnes says. Trouble is, for years doctors have heard that Medicare would pay more for better care, only to see payments slashed. Patients, too, have heard unfulfilled promises of better care for less cost.

Indeed, Medicare has experimented with managed care twice before, but the system imploded when budget pressures forced Washington to cut subsidies to insurers. Without the extra cash, insurers raised premiums, cut benefits, and eventually dumped the no-longer-profitable plans. Doctors and senior advocates wonder if the result this time will be the same: a system that merely pays less.


Budget pressures are only getting worse. The government spends 2.7% of the nation's total economic output on Medicare. In the coming four decades, as baby boomers retire and demand costly new technologies to keep them healthy, Medicare threatens to break the federal bank. Spending for the program will nearly quadruple -- to almost 10% of gross domestic product.

The drive to managed care is nothing new for people who get their health insurance from their employer. Just 3% of working people today are in old-style plans that give them an unlimited choice of doctors and hospitals and do little to restrict their access to costly medicines or procedures. By contrast, nearly 90% of Medicare recipients are treated under that old fee-for-service model.

The new system, established by the same 2003 law that created the Medicare prescription-drug benefit, aims to make managed care -- known as Medicare Advantage -- nearly universal among the elderly. Insurance companies are expected to use Washington's subsidies to provide extra benefits, such as vision or dental care, and lower premiums. Emory University health economist Kenneth E. Thorpe figures those added benefits will be worth an extra $615 a year. In return, however, members will face more limits on their choice of doctors and hospitals.

The carrot of subsidies is accompanied by a stick: sharply rising premiums for traditional Medicare. In 2006 seniors are likely to pay $120 or more a month for basic Medicare plus the new drug insurance. Many can expect to spend $100 to $200 more for a supplemental Medigap plan, which pays deductibles and other fees left over by basic Medicare. That's a lot, especially for a senior living on a small pension and Social Security, which pays an average of roughly $1,200 a month. And with health costs skyrocketing, those premiums will explode in coming years. A 2004 Urban Institute study estimates that Medicare premiums alone will rise to nearly a quarter of total Social Security benefits by 2040. Add Medigap premiums, and many retired baby boomers could be spending 40% of their Social Security on health care.

That will drive a steady shift to the new Medicare managed-care plans offered by insurers and HMOs. Even so, it's likely to be a gradual process because many seniors will hang on to traditional Medicare as long as they can. "The potential for managed care to become dominant is many years off," predicts Paul B. Ginsburg, president of the Center for Studying Health System Change, a Washington research organization.

Backers of managed care hope the real benefit will come in Medicare's ability to coordinate care for the chronically ill. Seniors typically suffer from multiple chronic illnesses, such as arthritis, congestive heart failure, and high blood pressure. If managed-care plans can coordinate all that treatment, there's at least a chance that care can improve at less cost.


Achieving that goal will require a major retooling of physicians' practices. To start the transition, Medicare will demand more information on how doctors care for their patients. It's establishing a series of specific quality measures aimed at encouraging docs to use "best practices" in treating patients. For example, physicians will have to show whether they have performed specific blood tests and foot exams on diabetics to prevent complications that lead to amputations and kidney disease.

Gathering that data, in turn, will require new computer systems that are in use at only a handful of medical practices today. Doctors recognize the need for the technology upgrade but wonder how they'll pay for it. One study suggests that installing the PCs and highly specialized software needed to manage tasks such as writing prescriptions and tracking patient care costs a small practice as much as $44,000 per doctor.

Together, all these changes may mean the demise of the solo practitioner, who probably won't be able to shoulder the new burdens alone. "One-, two-, and three-physician practices are, by definition, undercapitalized and inefficient," says Scott Latimer, regional vice-president for senior products at Humana Inc. (HUM ), a Louisville-based health insurer.

Just as small physician practices will fundamentally change, so will big hospitals. They'll still do intensive, high-tech, high-profit procedures such as heart bypasses. But less complex surgeries and nearly all testing will be done at smaller walk-in centers. That should save money. But will it improve care?

That's where the next step will come in -- and it's a big one. Medicare wants to start tying doctors' payments to results. Backers hope such financial incentives will encourage doctors and hospitals to keep patients healthy. Managed care has made the same promise for 20-plus years -- but has rarely delivered. Instead, the system has tried to slow spending growth by limiting care. Insurance execs say it will be different this time. But the key to managed care's future may depend on how long those big government subsidies continue. And in an era of high deficits, it is a good bet they'll dry up. If it does, the move to managed care may blow away as well.

In that environment, both traditional Medicare and the new managed-care plans will be under tremendous pressure to control costs. Inevitably, they'll be tightening the screws on doctors and hospitals. Just as Wal-Mart demands the best quality at the lowest price from its vendors, those that pay the health-care bills will demand that physicians and hospitals do the same.

But health care is not home electronics. Often, attempts to save money end up costing more -- at least in the short run. For instance, big subsidies to Medicare HMOs will raise the government's costs at first. Similarly, disease management may result in more intensive treatment for the chronically ill. That could improve their health, but at a higher cost.

Experts have never had much luck guessing what the medical system will look like 5 or 10 years down the road. And the results of changes as big as these are even tougher to predict. Says former Congressional Budget Office Director Robert Reischauer: "These are the first steps down very long roads, filled with lots of potholes and overhanging branches."

But with many seniors, doctors, and taxpayers all convinced they were getting a raw deal from the existing system, it's little wonder Congress was willing to roll the dice in a major way. The pols have assured the public that a decade from now health care for seniors will be much different than it is today. The question remains: Will it be better?

By Howard Gleckman in Washington

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