Senate panel discusses ways to address Medicare financing — and the consequences of not acting

• The Medicare Hospital Insurance Trust Fund remains on course to reach insolvency in 2026.
• During a hearing on Capitol Hill, a senator and an industry expert called for authorizing the federal government to negotiate drug prices as one way to solidify Medicare’s finances.
• Medicare Advantage coding practices came under scrutiny during the hearing.
• Beneficiary cost-sharing arrangements could be better used to promote high-value care, according to testimony.

Medicare Part D and Medicare Advantage (MA) are being mentioned as prime targets of legislative efforts to shore up the Hospital Insurance Trust Fund, which pays for Medicare Part A care.

The fund is projected to become insolvent in 2026, with a shortfall of $517 billion through 2031, said Sen. Elizabeth Warren (D-Mass.), chair of the Senate Subcommittee on Fiscal Responsibility and Economic Growth, which recently held a hearing on the future of Medicare financing.

The implications of such a deficit for the healthcare industry would be significant. Providers would be looking at a payment cut of 20% to 30% under current law, said Sen. Bill Cassidy (R-La.), the ranking member of the subcommittee. That’s because payments would be limited to whatever came into the fund through taxes and premiums.

Such a cut couldn’t be offset through increases in volume, noted Cassidy, “which means this becomes an issue of access for those who are Medicare beneficiaries.”

“We should be addressing this in a more serious fashion than we are,” he added.

National population trends factor into Medicare financing concerns, Michael Chernew, PhD, chair of the Medicare Payment Advisory Commission (MedPAC), said during the hearing. When the Medicare program was launched in 1965, there were 4.6 workers for every beneficiary. By 2029, that ratio is projected to be down to 2.5.

“This demographic challenge heightens the need to avoid paying more than needed to support beneficiary access to high-quality services and to find ways to alter patterns of utilization to reduce spending while maintaining quality and access,” Chernew said.

MedPAC has found that Part A payments to some types of providers are unnecessarily high and could be reduced without compromising access or quality, he added. Those providers include skilled nursing facilities, home health agencies, inpatient rehabilitation facilities and hospices.

Democrats eye changes to drug spending

Warren cited data showing that Medicare spent $220 billion on prescription drugs in 2019.

“Since Medicare is a very high-volume buyer, you would think that the Medicare program would be getting a great deal on pricing,” she said. “But you would be wrong because Medicare cannot negotiate prices.”

President Joe Biden’s social-infrastructure bill known as the Build Back Better Act would give the U.S. Department of Health and Human Services (HHS) authority to negotiate prices of certain high-priced brand-name drugs, but passage of the bill has stalled in Congress. Warren said the provision would save $297 billion for Medicare.

Amy Kapczynski, JD, professor at Yale Law School, said 7% of drugs drive 60% of spending in Medicare Part D. Between 1980 and 2018, she added, pharmaceutical spending increased by more than 10-fold when discounting inflation.

“The historical argument for these high prices has been R&D, but unfortunately we know prices are not set in relationship to R&D,” she said during the hearing. “They’re set according to what the market can bear — and that’s not about R&D costs, it’s about market power. We see that the largest pharmaceutical companies spend significantly more — in some cases twice as much — on marketing as they do on R&D, even in a global pandemic.”

The solution is for HHS to negotiate drug prices based on factors such as R&D costs, public funding, investment risk and clinical benefits, she said, “and then backing up those negotiations with strong enforcement measures — for example, the ability to allow generic competitors into a market if a company refuses to sell” at the negotiated price.

MA coding practices pose concerns

Warren also criticized Medicare Advantage, saying it has amounted to $143 billion in excess spending over 12 years because insurers “are gaming the program’s rules, including its risk adjustment process, its benchmark policy and its quality bonus program.”

MA’s risk adjustment process came under specific criticism during the hearing, with Warren noting that participating health plans have incentives to diagnose underlying issues that may be unrelated to a given care episode. Even if such conditions never get treated, the plan would be paid more by Medicare the following year.

Chernew said MedPAC has estimated that Medicare would have saved $10 billion in 2021 by better calibrating MA payments with diagnoses. Warren said other projections indicate potential savings of as much as $600 billion over eight years.

Better incentives could enhance care value

James Capretta, senior fellow with the American Enterprise Institute, said the Congressional Budget Office has confirmed that competition among coverage options can significantly lower costs for both the Medicare program and enrollees.

“You have to present to the beneficiaries very clear standardized options for their traditional coverage in Medicare, for their coverage for drugs and for supplemental benefits,” Capretta said. “All of it needs to be standardized so they can identify very clearly that premium differences between the options are strictly based on efficiency of care delivery and not differences in benefits.

“You have to standardize what they’re looking at and then bring competition into it — that is, if they pick a lower-priced option, they get to save some of the premium themselves.”

Katherine Baicker, PhD, professor at the University of Chicago’s Harris School of Public Policy, said it should be feasible to introduce variable cost-sharing for beneficiaries, with out-of-pocket amounts hinging on both income and the value of the care being sought. Such an approach could leverage “data that we now have available through claims databases as well as access to electronic health records,” she said.

“The mechanics of it are no small task, so I wouldn’t want to minimize that,” she added. “But right now, patient cost-sharing is often operating at odds with incentives that are intended to help providers focus on high-value care.”