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Yes, We Can Trim Medicare Spending

Author: Peter R. Orszag, Adjunct Senior Fellow
February 11, 2014


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.

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