Yes, We Can Trim Medicare Spending

Giving better care to Medicare beneficiaries who have multiple health problems is the key to increasing the value of Medicare overall.

More than 90 percent of all Medicare spending goes to treating the two-thirds of beneficiaries who suffer from more than one chronic health problem. Giving these people better care for the dollar is the key to increasing the value of the program overall.

This is why new legislation introduced in the Senate by Democrat Ron Wyden and Republican Johnny Isakson and in the House by Democrat Peter Welch and Republican Erik Paulsen is so encouraging. The Better Care, Lower Cost Act of 2014 would increase the odds that the slowdown in Medicare spending, noted in the most recent Congressional Budget Office data, continues to roll on, by nudging the system further from the fee-for-service model.

Fee-for-service reimbursement creates an incentive for hospitals and other providers to give more care rather than better care. Indeed, one possible explanation for the steady slowdown in Medicare spending is that most hospital executives, believing that a fee-for-service payment system will become less dominant in coming years, are already changing their practices.

To realize these expectations, though, policy makers should be more aggressive in moving Medicare away from fee-for-service payments. The new legislation would do this by giving care providers full responsibility for their patients' care, costs and health outcomes. Providers would receive fixed payments for each patient and financial rewards for those with improved outcomes.

In this sense, the Better Care, Lower Cost Act builds on the concept of accountable-care organizations, which have been multiplying rapidly. So far, however, value-based incentives are not a dominant enough component of ACO payments to fully drive their behavior. The Better Care, Lower Cost Act would provide the stronger financial incentives that are so necessary for change in a complex system.

It would also change the way patients are selected for fixed payments by allowing beneficiaries to opt in -- much as they might opt into a Medicare Advantage plan. Once a person decided to join the program, his or her provider would become responsible for all the needed care.

Today's ACOs, in contrast, allow hospitals, but not patients, to opt in. Patients are effectively assigned to a hospital only after care has been provided. That highlights another difficulty with the current ACO model: The organization that's responsible for patient care is not in full control of what treatments patients receive outside the hospital walls. Hospitals "are having difficulty coordinating care because they don't know who their patients are and, if patients see providers outside of your network, it's hard to control cost and quality," as Chet Speed, vice president of public policy with the American Medical Group Association, put it.

This matters because "outside care" accounts for 20 to 40 percent of the total care the average patient receives, according to research by Elliott Fisher, Douglas Staiger, Julie Bynum and Daniel Gottlieb of Dartmouth College.

The Better Care, Lower Cost Act would give providers greater ability to oversee and coordinate all patient treatments.

By the way, if you're wondering what the difference is between a Better Care hospital and an insurance plan, you've noticed something significant. The ACO concept blurs the line between providers and insurers; the Better Care approach destroys it. That is desirable, because it reflects a better alignment of incentives for providers to deliver higher-value care.

The new bill hasn't yet been evaluated by the CBO, and a final analysis should await its score. Nonetheless, the legislation is noteworthy -- and not only because bipartisan legislation is so rare these days. More important, the Better Care, Lower Cost Act would also point Medicare in the right direction.

Let's hope Wyden, who has just become chairman of the Senate Finance Committee, can garner widespread support for it. It could have enormous benefits for Medicare patients and taxpayers.

(Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.