The role of Medicare fee-for-service in inefficient health care delivery

Doctor by Shutterstock.com

Article Highlights

  • About 75 percent of Medicare beneficiaries (37 million) were enrolled in the fee-for-service option in 2012.

    Tweet This

  • Medicare’s FFS, no-cost-sharing arrangement drives high costs not just in Medicare, but in the health sector as a whole.

    Tweet This

  • Given Medicare’s influence over all health costs, fixing the program should top the list of reform priorities.

    Tweet This

Subscribe to AEI's health emails
Articles and events on health policy. Published approximately twice a month.

First Name:
Last Name:
Email:
Zip Code:

Medicare is the 800-pound gorilla of American health care. The misaligned incentives embedded in Medicare fee-for-service (FFS) have affected the entire health care delivery system, driving up costs without commensurate increases in quality.

Today, nearly 90 percent of beneficiaries in traditional Medicare have supplementary insurance that pays any costs not covered by the program. Because these beneficiaries pay close to nothing at the point of service, they have strong incentives to utilize as many services as their physicians recommend, even if the expected benefit is negligible or unproven. Those providing services in Medicare FFS are also able to increase their incomes when they perform more tests and procedures on patients. The predictable result has been steady growth in the volume of services—and hence costs—paid for by Medicare FFS.

Medicare’s FFS, no-cost-sharing arrangement drives high costs not just in Medicare, but in the health sector as a whole. Medicare accounts for 23 percent of every dollar spent on health care in the United States, or up to 40 percent if you include Medicare claims paid by private supplemental insurance and the small amount of costs paid by the beneficiaries themselves. Because of Medicare’s dominant size in the marketplace, the FFS model influences the entire health system’s structure and costs. Most private insurers use Medicare FFS’s payment approach to design their payment systems. Moreover, the advent of Medicare FFS, along with the spread of employer-sponsored insurance, was responsible for about half of the real cost increase in all health care spending in America from 1950 to 1990. Areas with more beneficiaries enrolled in Medicare Advantage (MA) experience lower costs for FFS Medicare, implying that the mere presence of (more efficient) MA plans lowers costs for all of Medicare in a given region.

Given Medicare’s influence over all health costs, fixing the program should top the list of reform priorities. Regulatory approaches have failed in the past, largely because of a political dynamic that rewards volume, not quality. In the end, real improvement will almost certainly require a more fundamental change than has been enacted to date: a market-based reform that corrects the flawed incentives that drive unnecessary spending in the current program.

Other papers in this series:

Plan competition and consumer chioce in Medicare: The case for premium support, by Joseph Antos
A competitive bidding approach to Medicare reform, by Roger Feldman, Bryan Dowd, and Roger Coulam

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

James C.
Capretta

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 01
    MON
  • 02
    TUE
  • 03
    WED
  • 04
    THU
  • 05
    FRI
Wednesday, September 03, 2014 | 9:00 a.m. – 10:30 a.m.
From anarchy to Augustus: Lessons on dealing with disorder, from Rome’s first emperor

We invite you to join us for two panel discussions on how Augustus created order from chaos 2,000 years ago, and what makes for durable domestic and international political systems in the 21st century.

Wednesday, September 03, 2014 | 12:00 p.m. – 1:30 p.m.
Multiple choice: Expanding opportunity through innovation in K–12 education

Please join us for a book launch event and panel discussion about how a marketplace of education options can help today's students succeed in tomorrow's economy. Attendees will receive a complimentary copy of the featured book.

Thursday, September 04, 2014 | 12:00 p.m. – 1:30 p.m.
How conservatives can save the safety net

Please join us for a luncheon event in which our panel will discuss what conservatives can learn from how liberals talk and think about the safety net and where free-market economics, federalism, and social responsibility intersect to lift people out of poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.