Medicare and Medicaid are trying to cut program costs; other federal agencies are working on disease prevention and improving the nation’s medical care – includes related information on automating Medicare and the Agency for Health Care

Medicare and Medicaid are trying to cut program costs; other federal agencies are working on disease prevention and improving the nation’s medical care – includes related information on automating Medicare and the Agency for Health Care Policy & Research’s support of patient outcome research – Special Issue: The State of Health Care In America

Geoffrey Leavenworth

At the beginning of 1994, the federal government finds itself in the same position as always: trying to do more with less. During a time of severe budgetary constraints, the U.S. Department of Health and Human Services (HHS), Washington, through the federal Medicare and Medicaid programs, is struggling to provide better care for the nation’s elderly, poor, and disabled.

At the same time, other agencies within HHS, though not necessarily immersed in the day-to-day problems of administering huge entitlement programs, are also dealing with complex heakh care issues. One of them, the Centers for Disease Control and Prevention (CDC), Atlanta, has begun a high-profile campaign to help Americans avoid illness and injury. Mother, the Agency for Health Care Policy and Research (AHCPR) in Rockville, Md., is overseeing extensive work to determine the best ways to treat a variety of medical problems.

Federal programs for the aged and the poor account for about onefourth of the nation’s total health care bill. Together, they are the leviathans of public sector spending-enormous, and to some degree, uncontrollable.


According to the Health Care Financing Administration (HCFA), Washington, which oversees Medicare and Medicaid, the federal government spent $221.3 billion on the two programs last year. HCFA expects that figure to increase to $251.3 billion this year.

When Medicare began in 1967, as a safety net for the elderly and the disabled, about 19.5 million people received benefits totaling $5.1 billion. By mid-1993, there were almost twice as many: about 36.1 million.

In 1994, 32.8 million elderly and 4.2 million disabled men and women are expected to receive Medicare benefits, bringing the total number of beneficiaries to 37 million. Expenditures for the program are estimated to reach $163.9 billion this year, up from $144.6 billion in 1993.

While providing benefits for a burgeoning elderly population is difficult today, doing so in the future will be even tougher. A 1993 report issued by the trustees of the Medicare Hospital Insurance Trust Fund, the tax-supported fund that provides most of the money for Medicare’s hospital benefits, estimated that the fund is likely to run out of money by no later than 1999.

Even if Medicare officials keep the program solvent for the next few years, they will face even greater pressures from the Baby Boom. By the end of this century, the over-65 population will have grown to 35.2 million people. By the year 2025, it will swell to a staggering 60.6 million.

Like Medicare, the Medicaid program, which provides federal funds to states for medical assistance to underserved individuals, will see an increase in the number of people eligible to receive benefits. This year, program beneficiaries are expected to number 34 million; 32.6 million participated in 1993. Unlike Medicare, however, Medicaid should be spared a sudden explosion in the number of people it serves.

Another difference between the two programs is that Medicaid shares at least some of its costs with state governments. State contributions are determined according to state per capita income formulas. For example, the federal government pays 79% of the Medicaid total in Mississippi, but only 50% in Connecticut.

Bruce C. Vladeck, administrator of HCFA, is hoping that health care reform will bring much-needed relief to each program. In fact, he says, the future of Medicare hinges on health care reform. “The solvency of the trust fund depends on long-term cost containment of the Medicare program, for which health care reform is absolutely the central pre-condition,” Viadeck emphasizes.


In the meantime, “There are two priorities facing HCFA in 1994,” says Vladeck. “The first is gearing up for implementation of health care reform. The second is trying to make major improvements in the quality of customer service.”

To some extent, he says, information technology has helped. “Technology makes it possible to do more with less. We already have taken a number of steps to make Medicare more user-friendly to beneficiaries and providers. We are achieving considerable economies of scale by automating bill payment and other financial activities associated with the Medicare program.” (See “Medicare’s Plan to Automate Operations,” page 38.)

Until late last year, HCFA seemed to be betting that, like automating claims processing, moving more Medicare and Medicaid beneficiaries into managed care arrangements would produce savings that the administration could use to improve services. To that end, both programs encouraged beneficiaries to enroll in HMOs and other types of managed care organizations (MCOs).

“We have seen steady enrollment growth in managed care,” says Gale A. Drapala, designated deputy director of the Office of Managed Care at HCFA. “In Medicare, managed care enrollment has been increasing by 10% per year. In calendar 1993, it grew by 12%,” she says. Some 2.6 million Medicare recipients or 7.2% of all beneficiaries now participate in managed care, Drapala notes.

In December 1993, however, the government admitted that it has more to learn about managed care financing. A study commissioned by HCFA showed that Medicare actually paid more for its HMO enrollees than it would have paid had the same men and women received feefor-service care. However, analysts noted, this result may have had more to do with the way HCFA determined its HMO payment structure than with any lack of efficiency on the part of the HMOs.


The study showed that Medicare’s HMO enrollees tended to be healthier than those who had chosen fee-for-service care. The HMO members were 28% less likely to report that they were in poor health. By comparison, people in fee-for-service plans were more likely to have suffered from cancer, heart disease, or stroke. They chose fee-for-service because they wanted to continue with the doctors they had used in the past.

The reason the government lost money is that for each HMO enrollee, it had paid HMOs 95% of the average adjusted per capita rate estimated for fee-for-service care. As it turned out, the HMO enrollees required less medical treatment than had been anticipated. If these enrollees had used feefor-service care, HCFA would have paid 5% less than it paid in premiums to the HMOs.

When the results of the study were released, HCFA officials said that they planned to re-examine the agency’s payment methodology. Viadeck added that HCFA would not aggressively promote HMOs among Medicare beneficiaries.

The study’s findings suggest that managed care has, indeed, succeeded in providing quality care and reducing costs–even if the government failed to benefit from the savings. Among the findings:

* HMO enrollees treated for colorectal cancer and stroke spent onethird less time in intensive care. They also were significantly less likely than fee-for-service patients to receive multiple CAT scans and other diagnostic tests. These differences in treatments had no adverse effects on outcomes.

* HMOs did not limit access to medical services. They controlled costs by reducing the intensity and frequency of services.

* More than 90% of HMO enrollees rated their care as good or excellent, the same proportion as fee-for-service patients.

To learn more about pricing managed care services, Medicare officials are conducting a one-year study. The Alternative Payment Methodology Demonstration, which began in January, is experimenting with HM0 payment rates in three cities in which the fee-for-service markets are already fairly efficient–Seattle, Minneapolis, and Rochester, N.Y.

In such locations, offering HMOs 5% less than the average per capita fee-for-service rate would not be attractive to the HMOs, Drapala says. “The theory is that if prices have already dropped in the area and you offer HMOs 95% of an already efficient amount, then Medicare is paying MCOs less than what it actually costs to provide care,” she says.

In the demonstration project, Medicare will share risk with the managed care groups. In coop- eration with the HMOs, Medicare will ascertain the average per capita fee-forservice rate for Medicare beneficiaries. It will pay this amount to the HMOs. If the actual cost of care exceeds the amount agreed upon, Medicare will pay half of the additional cost, up to a maximum of 2.5%. Conversely, if the cost of treating the enrollees is less than the amount agreed upon, Medicare will share in the savings.

Since the people who receive Medicare benefits are mostly elderly men and women who suffer from chronic diseases, their medical utilization patterns tend to be predictable. The Medicaid population, however, is more diverse. What unifies Medicaid beneficiaries, besides poverty, is a general lack of dependable primary care.

A 1993 report on health care access, published by the Robert Wood Johnson Foundation (RWJ), a health care philanthropy in Princeton, N.J., points to the desperate need for society to provide stable and predictable medical care for the nation’s disadvantaged. “A disproportionate number of physician visits made by the poor, including both those with Medicaid and the uninsured, takes place in hospital outpatient departments, clinics, or emergency rooms, where care typically lacks continuity and coordination-hallmarks of quality care– and may be considerably more expensive,” RWJ analysts noted.

It makes little sense for parents to bring their children to hospital emergency rooms or overcrowded clinics to wait for hours to be treated for pediatric coughs or ear infections, Medicaid officials say. Primary care delivered in an emergency room is impersonal, inefficient, and expensive, they add.

Moreover, inner cities and many rural communities are drastically underserved by primary care physicians. Therefore, even in the absence of definitive proof of cost savings, Medicaid officials are turning to MCC)s to provide beneficiaries with dependable primary care.

Medicaid enrollment in MCOs has more than doubled in the past three years, says Mary DeWayne, director of the Medicaid Managed Care Office at HCFA. By the end of 1993, some 4.8 million Medicaid beneficiaries were enrolled in managed care plans; 3.6 million were enrolled in 1992. Today, 43 state Medicaid programs use some form of managed care.

“We’re seeing phenomenal growth in managed care,” Drapala says. She isn’t yet sure about cost savings. “Some studies say managed care saves a lot of money and others say we don’t save money,” she says. “It depends on how an MCO administers the plan and the kinds of people who join. We need better measures of quality and better data from MCOs so we can get a fix on what we’re getting for our money.”

Trish Riley, executive director of the National Academy for State Health Policy in Portland, Maine, believes that MCOs have improved care for Medicaid patients. “I think Medicaid managed care programs do a lot of the right things. They look at primary care and they eliminate a lot of the fragmentation of benefits,” she says. “And there is evidence that they provide modest cost savings.”


Riley is unsure, however, about the ability of MCOs to produce more than small savings. “Some people argue that managed care will have a long-term cost impact because it makes people healthier. Who knows? But the data do suggest that managed care brings modest savings–about 5%–to the Medicaid program. I remain optimistic about managed care programs.”

One program that has generated impressive savings is the Medicaid managed care plan in Wisconsin. In 1984, when the program began, state Medicaid officials needed an independent evaluation of how much they were paying for health care services for the state’s poor. They asked the Wisconsin Department of Health and Human Services to figure the average cost of fee-forservice care for people receiving public assistance benefits under the Aid to Families with Dependent Children program. More than 325,000 residents currently receive these benefits. Every two years, the state’s department of health and human services updates the figure. When the new amount is calculated, HMOs are invited to bid on providing matching services.

About 154,600 Medicaid recipients are currently enrolled in HMOs within the state, says Peggy Barrels, deputy director of the Wisconsin Medicaid program. The HMOs serving them receive 9.5% less than the average fee-for-service rate. That discount saved the state $17 million in 1993, Bartels says.

While Medicaid officials everywhere hope that managed care cuts costs as dramatically as it has in Wisconsin, most are looking to health care reform to rescue–or at least improve the current system.

Those concerned with Medicaid at the state level are anticipating major changes. “It’s abundantly clear that something’s going to happen this year,” says Riley. “The states need to gear up as much as they can. They need to think about their Medicaid programs and how they’ll be impacted by reform. They need to know more about how they currently spend their Medicaid money. They’ve got to analyze alternative plans and debate about what kind of system they want: Do they want to go with a single-payer method or do they want go with managed competition?”

Changes have already been made in HCFA, says Vladeck. “We developed a new set of relationships with state Medicaid agencies and governors,” he says.

Riley agrees. After a series of Medicaid cutbacks, accompanied by higher expenditures and more government mandates, many states developed creative programs to increase access and reduce costs, Riley notes. (See “State Governments,” page 54.) Federal Medicaid waivers–exemptions from certain rules–have allowed some states to proceed with their costcutting plans. States usually need many different waivers to address the various components of their Medicaid programs, she explains. HCFA has been forthcoming in granting these exemptions. “I think HCFA has made some major strides,” Riley says.

While Medicare and Medicaid seek ways to provide cost effective medical care for some 70 million Americans, other federal agencies are also dealing with complex health care-related problems.

The CDC, in Atlanta, is one of them. Once quietly working behind the scenes to control epidemics and outbreaks of disease, the agency has taken on a higher profile lately. Operating with a budget of $2.08 billion, the CDC seeks to promote environmental health and occupational safety, among its other public health activities.

The agency’s new director, David Satcher, feels there is much his agency can do to improve the state of health in America. “There are three major challenges we’re facing in 1994,” says Satcher. “The first is what I call urgent threats to health such as an outbreak of a new virus or the emergence of drug-resistant tuberculosis. The Hantavirus in the Southwest, the Milwaukee outbreak of triptospirosis, and the Seattle E. coli food poisoning incident are all examples. We have to make sure CDC has the infrastructure to deal rapidly with those kinds of threats.

“Another challenge is violence and injury among young people. Violence and injury represent the leading cause of years of life lost in this country. We had over 10,000 homicides last year. We at CDC believe that violence is a public health problem and one of the major challenges we face in 1994. One of the major risk factors is guns. Guns in the hands of teenagers represent as much a public health problem in this country as Lyme disease or the Hantavirus,” Satcher contends.

“The third challenge is to develop an effective national prevention strategy,” he says. “How can we better get Americans to modify their behavior and lifestyle to more effectively deal with preventable diseases? Over half of the deaths that occur in this country are preventable. We have to work on tobacco use, diet, and physical activity. We’re seeing an upswing in tobacco use among teenagers and young women.”

One major recent CDC initiative is the National Immunization Program. “We are one of the worst countries in the industrialized world in terms of our immunization status by the age of 2,” Satcher says. The program seeks to increase the rate of immunization of the nation’s children under age 2 from its current level of less than 70% to 90% by 1996.

The CDC is also active in AIDS prevention. Satcher sees signs of progress in this area. “There’s been a significant tapering off in the increase of the spread of AIDS in this country. Many people were surprised when the most recent CDC study showed that only about one million people in the United States are carrying the AIDS virus,” he says.

If the spread of AIDS had continued at the same rate as in the late 1980s, four or five million people would be infected by now, notes Satcher. “We’re going to become more aggressive in our AIDS prevention program and more explicit than we were in the past. That includes talking about condoms.” Giving people the information they need is a scientific issue, not a political one, Satcher emphasizes. “CDC has a responsibility to educate people about how they can protect themselves from the AIDS virus,” he says. In 1993, the CDC bought time for its first televised ads promoting abstinence and condora use to prevent the spread of AIDS.

Like other government health leaders, Satcher is looking forward to health care reform. “I think CDC has a major role to play,” he says. “Health care reform will shift the incentives for providers from treatment to prevention of illness. CDC is the nation’s prevention agency. So I see CDC playing a leadership role in developing the strategies for prevention,” he says. In fact, CDC changed its name in 1993 to the Centers for Disease Control and Prevention.


The AHCPR also has been active in developing strategies to improve the nation’s health. Established in 1989, AHCPR was created to improve the quality of, and access to, health care, and to help reduce health care costs. The agency’s budget for 1994 is $154.4 million.

J. Jarrett Clinton, administrator of the agency since its inception, says that so far, AHCPR’s most important achievements have been in the areas of research and promoting the development of outcomes data and practice guidelines. “Our outcomes research program has taught us a lot, and the clinical practice guidelines movement, which was viewed with some considerable skepticism in some quarters four years ago, is now in a healthy state of development across the country,” he says.

AHCPR has funded research on patient outcomes to aid in the prevention and treatment of diabetes, pneumonia, heart attack, stroke, and low birth weight, among other diseases and medical problems.

The agency also is developing clinical practice guidelines aimed at improving care and reducing inappropriate services. Guidelines have been developed for managing pain and for treating urinary incontinence in adults, benign prostate disease, and depression, among other conditions.

Clinton concedes that although guidelines should improve the quality of care that patients receive, there is no definitive proof yet that using guidelines ultimately lowers health care costs. “It’s difficult to demonstrate with hard data that our practice guidelines are going to make a substantial difference,” he says. However, he continues, “We see anecdotal stories all the time.

For example, pain has been under-managed. Too often, hospital patients have been caused to tolerate pain, which can result in prolonged stays or medical complications.”

He gives an example: Patients recovering from surgery often exhibit shallow breathing due to poorly managed pain, Such breathing can cause patients to develop pneumonia, which definitely adds to length of stay, he says.

In the case of low back pain, adherence to AHCPR’s forthcoming practice guideline should help eliminate unnecessary diagnostic procedures, Clinton says. “If you do the fight work-up for back pain, you reduce the amount of diagnostic imaging needed to manage the patient appropriately. You may reduce the total cost of care by 10%,” he maintains.

Practice guidelines, such as those being developed by AHCPR, will play an even greater role in future medical decision-making, he says. “The more we move toward managed or coordinated care, the more interest there will be in developing guidelines that will increase the value of each dollar spent.”

AHCPR Clinical Practice


Federal agency’s recent treatment guides

Benign Prostatic Hyperplasia (enlarged prostate), 1994

Early HIV Intervention, 1994

Sickle Cell Disease, 1993

Depression in Primary Care, 1993

Cataracts in Adults, 1993

Pressure Ulcers in Adults, 1992

Urinary Incontinence in Adults, 1992

Acute Pain Management, 1992

Medicare’s Plan to Automate Operations

Throughout 1993, the Health Care Financing Administration (HCFA), which oversees the federal Medicare and Medicaid programs, worked with representatives of the health care industry to make it easier to submit claims and receive reimbursement electronically.

Currently, more than 90% of hospitals and 65% of physicians use computers to submit Medicare claims, says Fred Wilke, a HCFA program analyst. To encourage other providers to do so, Medicare offers free software.

In January, HCFA took another step toward fully automating Medicare. Bruce C. Viadeck, administrator of HCFA, along with Donna E. Shalala, secretary of the U .S. Department of Health and Human Services (HHS), announced that HHS has awarded a $19 million contract to GTE Government Systems Corp., Chantilly, Va., to develop a national computerized Medicare Transaction System (MTS) that will eventually process more than 1 billion Medicare claims annually. Medicare claims currently are processed by 79 contractors using 14 systems at 62 sites around the country.

The system will simplify all transactions made by providers and patients. Each Medicare recipient will receive medical treatment simply by presenting a card to his or her providers; all paperwork and forms will be eliminated. MTS will give the provider immediate access to data on the patient’s eligibility, other insurance coverage, and prior claims.

After the visit, the doctor will submit the claim via computer and be paid via electronic transfer of funds. Concurrently, MTS will bill the beneficiary’s Medigap insurer, if appropriate, for the remainder of the amount owed. The system will allow HCFA to organize treatment and outcomes data more efficiently and to screen claims for errors and fraud.

Shalala predicts MTS will ultimately save FIHS more than $200 million annually in administrative costs. According to plans, MTS will be installed region by region beginning in 1997 and will be fully operational by late 1998.

“Once MTS is fully implemented, the words hassle, paperwork, and frustration will no longer be part of the Medicare vocabulary,” said Shalala.

Government Agency Supports Outcomes Research

Following are major five-year research studies conducted by Patient Outcomes Research Teams (PORTs), funded by the Agency for Health Care Policy and Research (AHCPR), in Rockville, Md.

* Enlarged prostate; localized prostate cancer

Goal: Assess surgical and non-surgical treatments.

Completion date: August 1994.

* Cataracts

Goal: Evaluate variations in management,

outcomes, and costs.

Completion date: August 1994.

* Back pain

Goal: Assess diagnostic tests, surgical and

non-surgical treatment approaches.

Completion date: August 1994.

* Heart attack (myocardial infarction)

Goal: Compare diagnostic measures and

treatments during and after hospitalization.

Completion date: August 1994.

* Total knee replacement for arthritis patients

Goal: Explain differences in outcomes after the

procedure and examine geographic

variations in surgery performance.

Completion date: March 1995.

* Blocked coronary arteries (ischemic

heart disease)

Goal: Identify reasons for variations in diagnostic

and treatment strategies and compare the

effectiveness of approaches.

Completion date: June 1995.

* Gallbladder disease

Goal: Assess evaluation, treatment, and


Completion date: July 1995.

* Hip fractures and total hip replacement

for arthritis patients

Goal: Assess alternative ways to manage broken

hips, and evaluate hip replacement


Completion date: September 1995.

* Non-insulin-dependent diabetes

Goal: Assess effectiveness of current treatments.

Completion date: September 1995.

* Pneumonia in adults

Goal: Examine variations in and effectiveness of

treatment for community-acquired


Completion date: September 1995.

* Childbirth by Cesarean section

Goal: Examine frequency and outcomes of surgery

as opposed to childbirth alternatives.

Completion date: September 1995.

* Stroke

Goal: Assess prevention strategies in high-risk

patients, including those who have already

had a stroke.

Completion date: August 1996.

* Risk of delivering low-birthweight babies

Goal: Evaluate effectiveness of various prevention


Completion date: September 1997.

* Schizophrenia

Goal: Assess effectiveness of current approaches

to the disease.

Completion date: September 1997.

COPYRIGHT 1994 A Thomson Healthcare Company

COPYRIGHT 2004 Gale Group