In Brief: Cost Containment in Medicare: A Review of What Works and What Doesn't

Bundling fee-for-service payments and competitive bidding: These two approaches to cost containment have been the focus of demonstration projects. In the 1990s, several hospitals were selected to bundle facility and physician payments for heart bypass surgery. Evaluation of seven sites showed a savings of 10 percent. Two competitive bidding demonstrations for durable medical equipment (DME) estimated savings of 20 percent. Ten urban areas were selected in 2007 for a phased-in competitive bidding program for selected DME items. While these approaches hold promise for cost containment, they require a large administrative effort.

Benefit design and coverage of new technology: Three features of Medicare benefit design examined from a cost containment perspective are increasing beneficiary cost-sharing – deductibles and coinsurance – on certain services and limiting the scope of benefits through the Medicare coverage process. Numerous studies show that use of medical services declines as prices paid by patients increase. Studies also show that limiting Medicare to a single deductible, 20 percent coinsurance and an annual out-of-pocket spending cap would generate substantial savings. Decisions to deny or limit Medicare coverage or impose conditions on coverage could be expected to produce savings in the short term. But the long term effect is less clear because it's impossible to know how the use of a treatment would have evolved in the absence of coverage limitations or calculate the long run costs or savings of new treatments based on clinical trials.

Chronic care management: A disproportionate share of Medicare spending is for older adults, who are frail with multiple chronic conditions. Numerous Medicare demonstrations to coordinate care over two decades have not yet shown they reduce program costs significantly although they have shown positive impacts on quality and satisfaction. Care coordination approaches that better use primary physicians and establish a patient-centered medical home are promising and will be tested over the next few years.

Private plan contracts: Twenty-five years of experience with private plans contracts has shown no significant cost savings. In fact, studies show Medicare has paid private plans more than their costs and more than it would have paid for beneficiaries had they remained in the traditional Medicare program. Where private plans have excelled is in delivering enhanced benefits and lower out-of-pocket costs for beneficiaries compared with what they would get under traditional Medicare. Starting in 2010, Medicare will test a “premium support” approach in which private plans compete head-to-head with traditional Medicare for beneficiaries on the basis of bid premiums.