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In 2018, Medicare was projected to cover nearly 60 million people with estimated expenditures of about $707 billion. Medicare has been designated as a High Risk program because its complexity and susceptibility to improper payments, in addition to its size, have led to serious management challenges. Addressing these challenges requires improvements to payment methods, program management, and program safeguards.

Reforming and refining payment methods to encourage efficient service delivery

• CMS has continued to implement payment reforms in various parts of the program but some payment areas still need attention, including aspects of physician payment, end-stage renal disease such as home dialysis, Medicare Advantage, and preventive services.
• CMS pays for certain services at a higher rate if the service is performed in most hospital outpatient departments than if it were performed in a physician’s office.  CMS is likely paying more than necessary for many of these services, which is inconsistent with Medicare's role as an efficient purchaser of health care services.  While Congress partially addressed this by effectively equalizing the payment rates for some new hospital outpatient departments, Congress has not yet directed the Secretary of Health and Human Services (HHS) to take further steps that can equalize payment rates between settings for evaluation and management office visits—and other services as appropriate—and to return the associated savings to the Medicare program.
• Providers that self-refer certain services, including diagnostic imaging, prostate cancer radiation treatment, and anatomic pathology services, referred beneficiaries for these services at a much higher rate than providers who did not self-refer. Self-referral occurs when providers refer their patients to entities—such as themselves or a group practice—with which they or an immediate family member has a financial relationship. CMS needs to better identify claims from physicians who self-refer patients to receive advanced imaging, anatomic pathology, and prostate cancer treatment services; reduce payments for certain self-referred services; and, for prostate cancer radiation treatment services, disclose physicians’ financial interest to patients to avoid unnecessary increases in these self-referred services.
• CMS pays plans in Medicare Advantage (MA), Medicare’s private plan alternative to traditional Medicare, a predetermined amount per enrolled beneficiary adjusted for health status. For example, CMS determines a risk score for beneficiaries and pays more to MA plans serving beneficiaries in poorer health to compensate for their expected greater use of services. The agency could realize program savings by improving  the accuracy of its MA risk score adjustments, such as by using the most current data available. CMS has taken steps to collect encounter data—information on the services and items furnished to enrollees—that are more comprehensive than the beneficiary diagnosis data the agency currently uses to risk-adjust payments to MA organizations. CMS has started using encounter data in calculating risk adjustments, but has yet to fully validate the data.
• CMS sets payment rates for drugs that are typically administered by a physician based on the average sales price. The payment rates do not account for coupon discounts, which are prohibited in Medicare but are generally available to privately insured patients. Congress could grant CMS authority to collect data on coupon discounts, which could inform CMS’s efforts to design and evaluate alternative payment systems that result in lower Medicare spending for drugs with coupon programs.

Improving program management for efficiency and better service to beneficiaries

• CMS is responsible for overseeing the MA program, including assessing whether an MA plan’s provider network is adequate. To improve these oversight activities, CMS should augment oversight of MA networks to address provider availability, verify provider information submitted by MA organizations, conduct more periodic reviews of network information, and set minimum information requirements for MA enrollee notification letters. Another concern within certain MA plans is that beneficiaries with poorer health tend to disenroll from (that is, voluntarily leave) certain plans at disproportionate rates. CMS should improve oversight of the program by using data on the health status of people who leave Medicare Advantage contracts and the reasons they give for leaving.
• To achieve Medicare savings for durable medical equipment, Congress required that CMS implement a competitive bidding program for equipment suppliers. The program has generated savings for Medicare and available evidence indicates no widespread effects on beneficiary access to equipment. Continued monitoring of the competitive bidding program experience is important to determine the full effects it may have on Medicare beneficiaries and equipment suppliers. For example, CMS could evaluate the potential costs and savings of using disposable devices as substitutes for durable ones. 

Enhancing program integrity to safeguard Medicare from loss

• CMS needs to continue to take action to reduce its payment error rates of $51.9 billion in fiscal year 2017 to better ensure the integrity of the Medicare program.
• CMS needs to improve its processes for selecting MA contracts to include in its risk adjustment data validation audits . These audits determine whether beneficiary health status information that MA organizations used to assess risk was supported by medical records, facilitating the recovery of improper payments.  CMS estimated that it improperly paid $14.1 billion in 2013 to MA organizations. Additionally, CMS should enhance the timeliness of these audits.
• CMS has tested and, in some cases, implemented prior authorization—requiring certain providers and suppliers to obtain Medicare approval before beneficiaries can receive certain services or items like powered wheelchairs—in an effort to reduce improper payments. Prior authorization, which started in 7 states in 2012, reduced spending on these items and services by as much as $1.9 billion. Since most prior authorization programs are scheduled to end in 2018, CMS should take steps to continue prior authorization.
• The Patient Protection and Affordable Care Act (PPACA) provided CMS with certain authorities to combat fraud, waste, and abuse in Medicare. CMS should fully exercise these authorities, including the authority to require a surety bond for certain at-risk providers, which would guarantee that CMS can recover losses from a provider or supplier that does not fulfill its obligation to Medicare.

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