learn more about working at cbo and check out the agency’s career opportunities
January 31, 2012
![]()
Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical ServicesNov 2012 - CBO estimates that greater use of prescription drugs by Medicare beneficiaries reduces Medicare’s spending on medical services.
2012 Long-Term Projections for Social SecurityOct 2012 - Over the next 20 years, the population will age and spending on Social Security will increase from about 5 percent of GDP to about 6 percent.
In the past two decades, Medicare has conducted two broad categories of demonstrations aimed at enhancing the quality of health care and improving the efficiency of health care delivery in its fee-for-service program:
CBO reviewed the outcomes of 10 major demonstrations that have been evaluated by independent researchers. The evaluations show that most programs have not reduced Medicare spending. Programs in which care managers had substantial direct interaction with physicians and significant in-person interaction with patients were more likely to reduce Medicare spending than other programs, but on average even those programs did not achieve enough savings to offset their fees. Results from demonstrations of value-based payment systems were mixed. In one of the four demonstrations examined, Medicare made bundled payments that covered all hospital and physician services for heart bypass surgeries; Medicare’s spending for those services was reduced by about 10 percent under the demonstration. Other demonstrations of value-based payment appear to have produced little or no savings for Medicare.
Demonstrations aimed at reducing spending and increasing quality of care face significant challenges in overcoming the incentives inherent in Medicare’s fee-for-service payment system, which rewards providers for delivering more care but does not pay them for coordinating with other providers, and in the nation’s decentralized health care delivery system, which does not facilitate communication or coordination among providers. The results of those Medicare demonstrations suggest that substantial changes to payment and delivery systems will probably be necessary for programs involving disease management and care coordination or value-based payment to significantly reduce spending and either maintain or improve the quality of care provided to patients.

This paper summarizes the results of Medicare demonstrations of disease management and care coordination programs. Such programs seek to improve the health care of people who have chronic conditions or whose health care is expected to be particularly costly, and they seek to reduce the costs of providing health care to those people. In six major demonstrations over the past decade, Medicare’s administrators have paid 34 programs to provide disease management or care coordination services to beneficiaries in Medicare’s fee-for-service sector. All of the programs in those demonstrations sought to reduce hospital admissions by maintaining or improving beneficiaries’ health, and that reduction was a key mechanism through which they expected to reduce Medicare expenditures. On average, the 34 programs had no effect on hospital admissions or regular Medicare expenditures (that is, expenditures before accounting for the programs’ fees). There was considerable variation in the estimated effects among programs, however. Programs in which care managers had substantial direct interaction with physicians and significant in-person interaction with patients were more likely to reduce hospital admissions than programs without those features. After accounting for the fees that Medicare paid to the programs, however, Medicare spending was either unchanged or increased in nearly all of the programs.
This paper summarizes the results of Medicare demonstrations of value-based payment systems, which give providers financial incentives to improve the quality and efficiency of care. Only one of the four demonstrations for which results are available has yielded significant savings for the Medicare program. In that demonstration, Medicare made bundled payments to hospitals and physicians to cover all services connected with heart bypass surgeries, and Medicare spending for those services declined by about 10 percent. The other demonstrations appear to have resulted in little or no savings for Medicare. One, the Physician Group Practice Demonstration, allowed large multispecialty physician groups to share in estimated savings if they reduced total Medicare expenditures for their patients. Another offered hospitals bonuses if they met certain criteria regarding the quality of care. The last (for which results are available only on a preliminary basis for the first year) allowed home health agencies to share in estimated savings if they reduced total Medicare expenditures for their patients and met certain targets for quality of care.