Medicare Should Put Its Dollars on Value, Says McClellan

The critical issue for Medicare is not financing, but quality and value: “How do we get more for the money that we’re spending?” That’s the core question for the nation’s federal health insurance program covering elderly and some disabled Americans, according to Mark McClellan, a visiting senior fellow at the AEI–Brookings Joint Center for Regulatory Studies in Washington, D.C. He is a faculty member on leave from Stanford, who was the administrator of the Center for Medicare and Medicaid Services (CMS) from 2004 to 2006. Prior to that, he was commissioner of the Food and Drug Administration, a member of the President’s Council of Economic Advisers, a resident in internal medicine at Brigham and Women’s Hospital, and a 1992 graduate of the Harvard–MIT Division of Health Sciences and Technology.

In introducing him as the keynote speaker at the seventh annual Marshall J. Seidman Lecture on Health Policy, Health Care Policy Department head Barbara McNeil rued that HMS had let him get away.

“Our government is on track for spending what could be an unsustainable amount of money on health care entitlement programs,” McClellan said. He observed that health care policy is now dominated by public anxiety and frustration about the overall rise in health care costs, which stand at 16 percent of GDP and are on track to reach 20 percent in 10 years if current trends continue.

McClellan said that there are three main approaches to improving the outlook for Medicare, whose operations influence all other health care programs in the country: limiting subsidies, raising taxes, or limiting benefits. Under his leadership at CMS, he said, Medicare began tying some benefits to income levels, and he believes that the program should expand the portions of its coverage that incorporate means testing. He cited the current example of the graduated copayments in the Medicare drug benefit program.

Raising taxes to support growth in health care spending is problematic, he said. The long-term story on taxes is that over the last 40 years as Medicare outlays have grown, overall federal tax rates have not risen as a percentage of GDP. What has changed is that spending on everything else has dropped. “So the historical precedent is that we need to be careful about just spending more on Medicaid and Medicare and expecting someone to pay for it.”

A challenge that concerns benefit levels and the long-term health of Medicare, McClellan argued, is that the program’s reimbursement structure is not designed to support increased efficiency in care delivery. One example is the adoption of electronic medical records, which tends not to be cost-effective from the physician’s perspective. “It’s hard to improve quality and still make ends meet in your practice,” he said.

According to McClellan, “The biggest challenge for Medicare now and in the future is that it must support and promote up-to-date, efficient health care. The future of our health system, the health of baby boomers, really the health of all of our citizens is riding on whether Medicare can do a better job of spending the money.” He added that “trying to make Medicare sustainable by limiting benefits, particularly benefits that reflect the newest innovations in sustaining and improving health, can’t succeed in creating a high-value health system. Conversely, simply adding to the existing fee-for-service structure of Medicare can’t do it either. We need to pay for and support what we really want, higher quality, higher value care.”

Both market-based and government-based approaches will be necessary to achieve this kind of change. “Medicare should have both a range of health plan options, I think, and a vibrant and up-to-date traditional Medicare plan,” he said.

One of the keys to Medicare improvement is effective oversight. Competitive plans participating in Medicare, for example, should not be able to profit substantially from trying to attract healthier subscribers. Another aspect of increasing efficiency is offering beneficiaries personalized information support like the broad-based information campaigns conducted to implement the Medicare drug benefit.

McClellan pointed to the Medicare Advantage program, which seeks to expand the availability of private health plan options for beneficiaries, as something that is working well. “Altogether, beneficiary out-of-pocket costs are now much lower in the Medicare Advantage program,” he said, and as a result, enrollment has taken off.

He explained that even though the traditional Medicare program is essential, its fee-for-service benefits do not support improved care. “There needs to be a much more fundamental change in payment based on results and value delivered. It will be a gradual process to get there, but we need to have these fundamental changes as a goal, and Medicare needs to help lead the way in collaboration with the private sector.”

The HMS Department of Health Care Policy launched the lecture series in 2001 through a gift from Marshall Seidman.