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Medicare Program

This information appears as published in the 2017 High Risk Report.

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Current State of the Medicare Program

Overview of Medicare’s Challenges

We designated Medicare as a high-risk program in 1990 due to its size, complexity, and susceptibility to mismanagement and improper payments. Addressing Medicare’s short-term and long-term challenges is vitally important, not only for the millions of aged and disabled individuals who depend upon the program for health care coverage, but also for the families of these individuals who might otherwise bear the cost of their health care, the taxpayers who finance the program, and the health care providers who depend upon receiving fair compensation for their services. The aging of the population, coupled with the growth in per capita health care costs, will magnify these challenges over time. Therefore, continued close attention will be necessary to ensure that Medicare is sustainable for generations to come.

Ongoing Challenges

Medicare continues to pose challenges to the federal government for many of the same reasons we designated it a high-risk program. Specifically, Medicare’s substantial size and scope result in the current program having wide ranging effects on beneficiaries, the health care sector, and the overall U.S. economy. In 2016, Medicare was projected to spend $696 billion and provide health care coverage to over 57 million beneficiaries. Medicare pays about 60 percent of the health care costs of beneficiaries enrolled in fee-for-service (FFS) who do not reside in institutions.[1] Over 1 million health care providers, contractors, and suppliers—including private health plans, physicians, hospitals, skilled nursing facilities, durable medical equipment (DME) suppliers, ambulance providers, and many others—receive payments from Medicare. Every year, Medicare pays over a billion claims submitted by these health care providers. Consequently, Medicare must be closely monitored because even relatively small changes can have large short-term effects in the aggregate. For example, Medicare provider payment rates that are set too high unnecessarily financially burden beneficiaries—through higher premiums and cost sharing—taxpayers, and the federal budget. Payment rates that are set too low may diminish providers’ willingness to treat Medicare beneficiaries and adversely affect their access to appropriate, high-quality health care.

Medicare also has an outsize effect on the federal budget, which creates challenges when the federal government is determining how to prioritize its spending. The program’s expenditures currently account for about 3.6 percent of the country’s gross domestic product (GDP).The Congressional Budget Office (CBO) projects that in fiscal year 2016, Medicare outlays will total more than is projected to be spent on defense ($579 billion) and almost double federal spending on Medicaid ($365 billion). Medicare spending will account for approximately 17.8 percent of the approximately $3.9 trillion in federal outlays.

Long-Term Challenges

Medicare also poses substantial long-term financial challenges for the federal government. Program spending is expected to increase significantly over time as the number of beneficiaries grows and per capita health care costs increase. CBO projects that, in just 10 years (in 2026) under current law, Medicare spending will reach almost $1.3 trillion. The Medicare Trustees 2016 report stated that, under current law, Medicare’s share of GDP would rise to 5.6 percent by 2040. As Medicare spending grows disproportionately to other federal spending and the economy, it will put increasing pressure on the federal budget and tend to squeeze out spending for other programs.

However, the Trustees have stated that Medicare spending projections, especially those stretching out over decades, are highly uncertain and cautioned that future Medicare spending could be substantially higher than projected. In their 2016 report, they noted that some Medicare cost-reduction provisions may be difficult to sustain.[2] For example, one set of Medicare provisions affecting many types of health care providers reduces the annual payment rate updates to account for economy-wide productivity growth. However, the productivity growth rates historically achieved by health care providers have been lower than the economy-wide rates. If health care providers do not realize sufficiently high productivity growth and these cost-reduction measures are not sustained, Medicare projected spending could rise to 6.2 percent of GDP in 2040 and 9.1 percent in 2090, according to the Trustees.

Another uncertainty is whether advances in medical technology will tend to slow or accelerate Medicare spending growth. Technological advances may enhance the ability of providers to diagnose, treat, or prevent health problems. Examples include new drugs, devices, procedures, and therapies, as well as new applications of existing technologies. Although new technologies may decrease or increase health care costs, in 2013 we reported that technological change had likely been the dominant cause (accounting for 36 to 55 percent) of the increases in overall U.S. health care per capita spending over the past several decades.[3] It should be noted, however, that a complete assessment of health care spending for new technologies should also consider the associated value for individuals, often measured by improved health functioning, increased life expectancy, or improved economic productivity.

In the past few years, growth in Medicare spending has slowed, as overall health care spending has also slowed. Analysts debate whether this slowdown can be attributed to transitory effects, such as the recent economic turndown, or broader changes in the health care system that may be longer lasting. Nonetheless, Medicare’s historical trends, the aging of the population, and the uncertainties associated with recent reforms and the effects of advances in medical technology all underscore the need for continued efforts to moderate spending growth while ensuring that beneficiaries have appropriate access to high-quality health care. Achieving these goals will likely remain an important challenge and require a continued focus on the Medicare program.


[1] The remainder of these health care costs are financed by beneficiaries’ direct spending, private supplements—such as Medigap—and other public sources.

[2] In reporting the results of our audit of the U.S. government’s consolidated financial statements for fiscal years 2016 and 2015, we noted that significant uncertainties, primarily related to achieving these projected reductions in Medicare cost growth reflected in the 2016, 2015, 2014, 2013, and 2012 Statements of Social Insurance, prevented us from expressing an opinion on those statements as well as on the 2015 and 2014 Statements of Changes in Social Insurance Amounts. See Financial Audit: U.S. Government’s Fiscal Years 2016 and 2015 Consolidated Financial Statements, GAO-17-283R (Washington, D.C.: Jan. 12, 2017).

[3] In general, a technological change that enables providers to treat a previously untreatable disease will increase health care spending, while expanding disease management or shifting disease management to prevention or cure can lead to either increased or decreased health care spending. However, introducing new treatments and technologies may result in increased health care spending due to the possibility that health complications may arise from a new treatment, or that patients survive one disease long enough and eventually are diagnosed with an additional disease with additional treatment costs. For more information on the effects of technological change on health care spending growth, see GAO, Patient Protection and Affordable Care Act: Effect on Long-Term Federal Budget Outlook Largely Depends on Whether Cost Containment Sustained, GAO-13-281 (Washington, D.C.: Jan. 31, 2013).

Our Work Suggests the Need for Continued Attention in Five Principal Areas

The effects of these recent changes to the Medicare program will continue to emerge in the coming years and may add to the challenges that already confront the federal government as it oversees and manages the program. Our work to date illustrates the challenges facing Medicare and the need for improved federal oversight in five areas.

1. Payments and Provider Incentives in Traditional Medicare
2. Medicare Advantage and Other Medicare Health Plans
3. Program Design Effects on Beneficiaries, Including Those Eligible for Medicaid
4. Program Management
5. Oversight of Patient Care and Safety

Payments and Provider Incentives in Traditional Medicare

Medicare is transitioning from a payment system that largely rewards the volume and complexity of health care services provided to a system that explicitly rewards quality and efficiency. Many of the broad-based reforms being implemented to Medicare’s payment systems in the traditional FFS program have introduced financial incentives into payment structures to explicitly reward quality and efficiency, such as creating the Merit-based Incentive Payment System discussed previously. To help ensure that physicians are able to respond to these new incentives and are able to improve their performance, CMS recently began to provide more frequent feedback to physicians on their performance, as we recommended, to help them identify opportunities to reduce costs and pinpoint high-cost beneficiaries who may benefit from enhanced care coordination. MACRA also required that CMS consider physician and other providers’ improvement and their opportunity for continued improvement when establishing benchmarks for Merit-based Incentive Payment System performance measures. As CMS progresses toward fully implementing its value-based payment system, it will be important for the agency to use reliable quality and cost measures and methodological approaches that maximize the number of physicians for whom value can be determined.

As CMS implements these broad-based payment reforms, we have identified additional areas where continued monitoring of payment methods is warranted to encourage efficiency and reduce the risk of overspending.

Payment methods for cancer hospitals. Currently, 11 cancer hospitals, designated in the 1980s and 1990s, that meet certain statutory criteria are exempt from Medicare’s inpatient prospective payment system (PPS) and are also receiving payment adjustments under the outpatient PPS. The Medicare PPS introduced better control over program spending and provided hospitals with an incentive for efficient resource use. Yet for decades, as required by law, Medicare has paid these cancer hospitals differently than PPS hospitals in recognition of their specialized focus and concerns that reimbursements under PPS would be inadequate to cover costs for the types of care provided at cancer hospitals. This has remained the case even as the inpatient PPS methodology has been refined to better account for variation in the severity and complexity of beneficiaries and the resource intensity of hospital care.

The 11 cancer hospitals currently exempted from the inpatient PPS and receiving payment adjustments under the outpatient PPS are reimbursed largely based on their reported costs and as such have little incentive for containing costs. In 2012, we estimated that PPS-exempt cancer hospitals received, on average, about 42 percent more in Medicare inpatient payments per discharge than what Medicare would have paid a local PPS teaching hospital to treat cancer beneficiaries with the same level of complexity. Similarly, Medicare outpatient payment adjustments to these cancer hospitals resulted in overall payments that were about 37 percent higher, on average, than payments Medicare would have made to PPS teaching hospitals for the same set of services.[1] Had beneficiaries of PPS-exempt cancer hospitals received services at nearby PPS teaching hospitals in 2012, the Medicare program may have saved almost $500 million. We suggested that Congress require Medicare to pay PPS-exempt hospitals as it pays PPS teaching hospitals, or provide the Secretary of Health and Human Services the authority to otherwise modify how Medicare pays these PPS-exempt hospitals. To generate cost savings, we also suggested that Congress provide that all forgone outpatient payment adjustment amounts be returned to the Supplementary Medical Insurance Trust Fund, which funds Medicare Part B services, such as physician visits, and Medicare Part D services, such as prescription drugs. The 21st Century Cures Act, enacted in December 2016, slightly reduces the additional payments cancer hospitals receive for outpatient services and returns savings to the Supplementary Medical Insurance Trust Fund. However, the law keeps in place the payment system for outpatient services that differs from how Medicare pays PPS teaching hospitals. Moreover, the law does not change how PPS-exempt cancer hospitals are paid for inpatient services.[2] Until Medicare pays PPS-exempt cancer hospitals in a way that encourages efficiency, rather than largely on the basis of reported costs, Medicare remains at risk for overspending.

Hospital-physician consolidation. Because Medicare often pays more for services when they are performed in a hospital outpatient department than when they are performed in a physician’s office, hospitals may have an incentive to acquire physician practices, hire physicians as salaried employees, or both—financial arrangements commonly referred to as vertical consolidations. After hospitals and physicians vertically consolidate, the same services that were once reimbursed by Medicare at a lower total payment rate could be classified as hospital outpatient department services and reimbursed at a higher rate. In our work, we found that the number of vertically consolidated hospitals increased by about 20 percent from 2007 through 2013 and the number of physicians in these arrangements nearly doubled.[3] Some have questioned whether or to what extent vertical consolidations have contributed to the rapid rise in Medicare expenditures for hospital outpatient departments, which increased by more than eight percent annually from 2007 through 2013. We found that the percentage of evaluation and management (E/M) office visits performed in hospital outpatient departments was generally higher in counties with higher levels of vertical consolidation.[4]

The rise in vertical consolidation exacerbates a financial vulnerability in Medicare’s payment policy—paying different rates for the same service, depending on where the service is performed. Estimates from entities such as the Bipartisan Policy Center and the Medicare Payment Advisory Commission suggest that equalizing payments rates for E/M office visits could save nearly $1 billion to $2 billion a year for the Medicare program and beneficiaries. We suggested that Congress direct the Secretary of Health and Human Services to equalize payment rates between settings for E/M office visits and other services as appropriate. Until the disparity in payment rates for E/M office visits is addressed, Medicare could be expending more resources than necessary.[5]

Payments for hospital uncompensated care. Hospital uncompensated care costs are a long-standing concern because of their potential to weaken hospitals’ financial stability and thereby hospitals’ abilities to serve their communities. Both Medicare and Medicaid provide funds to help offset hospitals’ uncompensated care costs. In fiscal year 2014, Medicare made over $14 billion in payments to hospitals for uncompensated care through a variety of payment types, including a relatively new type of payment called Medicare Uncompensated Care (UC) payments. We have raised concerns that Medicare UC payments are largely based on hospitals’ Medicaid workload rather than hospitals’ actual uncompensated care costs, which can result in poor alignment between payments and uncompensated care costs.[6] This may be particularly true in states that have expanded Medicaid—that is, coverage expanded through PPACA to nearly all adults with incomes up to 133 percent of the poverty level—and therefore where lower uncompensated care costs are expected.[7]

In an April 2016 proposed rule, CMS announced that it is considering making hospitals’ actual uncompensated care costs the sole basis for making Medicare UC payments by fiscal year 2020. Another concern, however, is that when making Medicare UC payments, CMS does not account for payments hospitals received from Medicaid, even though the bulk of Medicare’s payments are made on the basis of Medicaid workloads, for which hospitals may have also received Medicaid payments. We recommended that CMS improve the alignment of Medicare UC payments with hospital uncompensated care costs and account for Medicaid payments received when making Medicare UC payments to individual hospitals. HHS concurred with these recommendations and in its final rule indicated that it planned to implement them beginning in fiscal year 2021 to allow time for hospitals to collect and report reliable uncompensated care cost data.

Physician self-referral. Our work has identified opportunities for CMS to introduce additional payment method refinements and controls in Medicare FFS to encourage appropriate use of services. For example, self-referral—when a provider refers patients to entities in which the provider or the provider’s family members have a financial interest—continues to be a concern in relation to the rapid growth of Medicare FFS expenditures. In recent years, we found that certain services—including diagnostic imaging, certain cancer treatments, and diagnostic pathology services—performed by self-referring groups have increased dramatically.[8] For example, from 2004 through 2010, the number of self-referred magnetic resonance imaging (MRI) services increased by more than 80 percent; in comparison, the number of non-self-referred MRI services increased by 12 percent during this time period.[9] We have recommended that CMS determine and implement an approach to ensure providers appropriately self-refer for advanced imaging services. HHS did not concur with this recommendation but is in the process of establishing an appropriate use criteria program for advanced imaging services that would apply to all physicians—including those that self-refer—and which, depending on implementation, could address our recommendation. CMS has yet to take definitive steps to monitor physician self-referral for certain cancer treatment and diagnostic pathology services, and until it does so, the Medicare FFS program and its beneficiaries will continue to be at risk for these rapidly increasing expenditures.

High-expenditure Part B drugs. In 2014, Medicare spent over $24 billion on drugs covered under Part B. Part B drugs are those commonly administered by a physician or under a physician’s close supervision, such as vaccines or some oral cancer drugs. The vast majority of these expenditures ($21 billion) were based on the drug’s average sales price (ASP), the amount physicians and other purchasers pay manufacturers for the drug, which CMS calculates based on sales data reported by drug manufacturers. Ensuring the accuracy of the data on which CMS bases payment rates for part B ASP drugs is important given Medicare’s substantial expenditures for these drugs and given beneficiaries’ general responsibility to cover 20 percent of Medicare’s payment for these drugs via cost-sharing requirements, which amounted to about $4 billion in 2014. We found, however, that CMS is not able to assess the accuracy of all sales price data because not all manufacturers are required to submit these data.[10] Further, while CMS conducts certain checks to assess the completeness of the sales data it does receive, the agency does not verify the accuracy of the data by tracing it to source documents, such as sales invoices. We suggested that Congress require all manufacturers of Part B drugs to submit sales price data to CMS and to ensure CMS has the authority to request source documentation and periodically validate such data.

Additionally, the ASP does not account for drug coupon discounts that manufacturers provide to privately insured patients, which reduce the effective market price for these drugs. In our work, we found that the ASP for several part B drugs with drug coupon discounts exceeded the effective market price that manufacturers ultimately received.[11] As a result, Medicare may be paying more than necessary for these drugs. Regular monitoring of the implications of coupon programs for Medicare’s payment methodology for part B drugs is needed as CMS works to propose an alternative payment system. CMS, however, lacks the authority to collect data from drug manufacturers on coupon discounts to patients because the authority to collect information relating to ASP is based on manufacturer sales to purchasers. We suggested that Congress consider granting CMS authority to collect data from drug manufacturers on coupon discounts for Part B drugs based on ASP and require the agency to periodically collect these data and report on the implications of coupon programs for Part B drug payment rate methodology.

Low-volume payment adjustments. Medicare’s payment adjustment for low-volume dialysis facilities is one of several modifications in Medicare’s payment systems designed to help maintain beneficiaries’ access to care. Low-volume providers in areas where other care options are limited may warrant higher payments, and CMS intended this low-volume payment adjustment (LVPA) to encourage small dialysis facilities to continue operating in areas where beneficiary access might be jeopardized if such facilities closed. However, in 2013 we found that, as designed, the LVPA did not effectively achieve this goal because it did not target all relatively low-volume, high-cost facilities that were in areas where beneficiaries may have lacked other dialysis care options, and it targeted some facilities that appeared unnecessary for ensuring access to dialysis, such as dialysis facilities located in close proximity to other facilities.[12] In response to our report, CMS revised the LVPA, beginning in 2016, to more effectively target low-volume facilities necessary for ensuring access to care; and in 2015, CMS issued clarifying guidance on the LVPA in a final rule and held outreach calls to dialysis facilities and Medicare contractors to ensure their understanding of the guidance. The agency has not acted, however, to implement an improvement we recommended to change the design of LVPA to reduce the incentive for facilities to restrict the services they provide in order to avoid reaching treatment thresholds that determine eligibility for the program.

Physician payment rates. The accuracy of Medicare’s payment rate for physician services has major implications for the health care system given spending on these services—$70 billion in fiscal year 2015—and the fact that other payers, such as private insurers, base their payment rates at least in part on Medicare rates. Inaccurate payment rates can create distorted incentives for physicians to either over- or underprovide services or to pursue certain specialties. We and others have identified several weaknesses in CMS’s processes for setting physician payment rates.[13] This process involves CMS assigning relative values to each service by taking into account recommendations made by the American Medical Association’s Specialty Society Relative Value Scale Update Committee (RUC).

Some of our concerns with this process include issues with the survey data the RUC uses in part to develop relative value recommendations, including low survey response rates. In 2015, the median survey response rate for over 200 physician services was about 2 percent. Additionally, although CMS officials state that all Medicare services are reviewed every 5 years as required by statute, the agency does not maintain a database to track when services were last valued. CMS officials acknowledge that the agency relies heavily on RUC recommendations. Given the process and data-related weaknesses associated with the RUC’s recommendations, this process could potentially result in inaccurate payment rates. To address these concerns, we recommended that CMS incorporate data and expertise from physicians and other relevant stakeholders into the process for establishing relative values. CMS concurred with this recommendation and has begun to research ways to develop an approach for validating relative values, but until it develops a timeline and a plan for determining its approach, CMS risks continuing to use payment rates that may be inaccurate.

Medicare Advantage and Other Medicare Health Plans

The MA program, an alternative to the traditional Medicare FFS program, provides health care coverage to Medicare beneficiaries through private health plans. The number and percentage of Medicare beneficiaries enrolled in MA has grown steadily over the past several years, increasing from 8.1 million (20 percent of all Medicare beneficiaries) in 2007 to 15.8 million (30 percent of all Medicare beneficiaries) in 2014. Congress has taken a number of steps to introduce financial incentives to explicitly reward quality and efficiency in the MA program. For example, PPACA provided that MA plans with a quality rating of four or more stars—with five stars indicating the highest quality—receive bonus payments, and required MA maximum payment amounts to be adjusted to near or below FFS spending.[14] Moreover, in January 2013, Congress enacted the American Taxpayer Relief Act of 2012 (ATRA), which increased the statutory minimum for the annual MA coding intensity adjustment in order to account for differences in the comprehensiveness with which MA plans and FFS providers code medical diagnoses.[15] CBO estimated that this change alone would save Medicare about $1.4 billion over 5 years. The recently enacted 21st Century Cures Act also includes several changes to the MA risk adjustment model that must be implemented beginning in 2019. For example, the MA risk adjustment model will be required to take into account the number of diseases or conditions of enrollees and allows CMS to use 2 years of diagnosis data when determining the health condition of beneficiaries.[16]

CMS has yet to take action to improve the accuracy of its payments to MA programs or to ensure that MA beneficiaries have sufficient access to providers. We have identified additional opportunities for CMS to improve the accuracy of MA payments, such as adjusting its methodology to account for diagnostic coding differences between MA and FFS, and improve CMS’s oversight of MA network adequacy.

MA plan payment adjustments. Concerns remain about the discrepancy between FFS and MA payments because CMS has yet to improve the accuracy of the adjustment to account for excess payments due to differences in how MA plans and FFS providers code medical diagnoses. We have found that CMS’s risk adjustment model—which uses one year’s diagnoses to predict the following year’s health care costs for each MA enrollee—has led it to overpay MA organizations because of different diagnostic coding patterns between the FFS and MA programs.[17] In 2013, we estimated that these overpayments ranged from at least $3.2 billion to $5.1 billion from 2010 through 2012.[18] We have recommended that CMS take steps to improve the accuracy of its risk score adjustments by, for example, accounting for additional beneficiary characteristics such as sex, health status, and Medicaid enrollment status, as well as including the most recent data available.[19] In April 2016, CMS indicated that after analyzing MA data, the agency planned to implement the statutory minimum for the annual MA coding adjustment mandated in ATRA. However, as of October 2016, CMS had not provided documentation of its analysis to determine, for example, the extent to which the agency’s methodology accounted for additional beneficiary statistics, as we recommended.

In addition, CMS has taken steps to collect encounter data—information on the services and items furnished to enrollees—which are more comprehensive than the beneficiary diagnosis data the agency currently uses to risk adjust payments to MA organizations, and has reported that it will use these data in calculating risk adjustments. However, CMS has not fully developed plans for validating and using MA encounter data, missing an opportunity to detect potentially inaccurate or unreliable data that is being used to direct billions of federal dollars. We recommended that CMS fully validate the MA encounter data it is collecting before using these data for payment purposes.[20] In 2015, CMS began using encounter data as an additional source of diagnostic data in calculating beneficiary risk scores but acknowledged that the agency had yet to complete all steps to validate the data before using them for payment purposes, as we had recommended. Without fully validating the completeness and accuracy of MA encounter data, CMS and MA organizations would be unable to confidently use the data for risk adjustment or any other program management purpose.

Provider network adequacy. CMS is responsible for ensuring adequate access to care for MA enrollees, but reports that some MA organizations have been narrowing their provider networks raise questions about CMS oversight of MA plans’ network adequacy. In 2015, we reported on shortcomings in CMS’s criteria for determining network adequacy, how the agency oversees MA organizations’ adherence to its requirements, and how it ensures enrollees are properly notified about provider network changes.[21] For example, unlike other managed care programs, CMS’s network adequacy criteria do not consider measures of provider availability, such as appointment wait times and whether providers are accepting new patients. CMS also assesses very few networks (less than one percent) each year against its network adequacy criteria and does little to evaluate the accuracy of the network data MA organizations submit. We made several recommendations, including that CMS augment MA network adequacy criteria to address provider availability. HHS concurred with this recommendation, and in early 2016, officials stated that they will review how to augment the MA network adequacy criteria to address provider availability in future years. However, until this happens, provider networks may appear to regulators and beneficiaries as more robust than they actually are.

Program Design Effects on Beneficiaries, Including Those Eligible for Medicaid

The Medicare Trustees estimate that Medicare spending will grow at a faster rate than workers’ earnings or the economy overall, which will impose a significant burden on Medicare beneficiaries and the U.S. economy over time. Because most Medicare beneficiaries pay their Part B premium by having it withheld from their monthly Social Security benefits, and because growth in Medicare premiums and cost sharing has outpaced growth in Social Security benefits, beneficiaries and their families may increasingly need to draw on other income or resources to help pay for necessary medical care. Moving forward, it will be important to find approaches that help avert or mitigate this growing financial burden, particularly for those beneficiaries with high health care needs and few economic resources. For example, understanding how beneficiaries make medical decisions and what information would help them identify and use providers that efficiently deliver appropriate, high-quality care could lead to savings for both beneficiaries and taxpayers.

Our work has identified additional opportunities to improve how the Medicare program ensures that beneficiaries, including those who are also eligible for Medicaid, receive the appropriate services they need.

Care for dual-eligible beneficiaries. The federal government, states, and others have been focusing on care coordination as a key strategy for improving the quality of care for dual-eligible beneficiaries—individuals who qualify for both Medicare and Medicaid—while also reducing costs. Dual-eligible beneficiaries, who are often in poorer health compared with other Medicare and Medicaid beneficiaries, typically receive benefits through each program separately, which can lead to fragmented care due to different program rules for receiving benefits and reimbursing providers. In 2013, CMS began implementing the Financial Alignment Demonstration to integrate Medicare and Medicaid services and financing, and to improve coordination for dual-eligible beneficiaries. While CMS established a framework of monitoring activities to oversee the demonstration, the extent of care coordination is not entirely clear from the information being collected. For example, CMS monitors two core measures related to care coordination, but because these are being used in only one of two models being tested in the demonstration, CMS cannot compare the two demonstration models using these measures. Similarly, demonstration states had state-specific measures that explored aspects of care coordination, but they were not comparable across states. We recommended, among other things, that CMS align existing state-specific measures of the extent to which individualized care plans are being developed to make them comparable.[22] The agency agreed with this recommendation, and CMS officials said they plan to develop a care plan measure that more closely aligns specifications across demonstrations, but data collection is not expected to begin until January 2018.

Dual-eligible special needs plans. Special needs plans are MA private plans designed to address the unique needs of certain Medicare populations, and among these plans are those targeted specifically to dual-eligible beneficiaries. CMS and Congress have taken steps to coordinate care for those enrolled in dual-eligible special needs plans to increase benefit integration and care coordination. For example, PPACA established a type of plan referred to as a fully integrated dual-eligible special needs plan, which is designed to integrate program benefits for dual-eligible beneficiaries through a single managed care organization. In addition, dual-eligible special needs plans that meet certain performance and quality-based standards may seek CMS approval to offer benefits beyond what other MA plans offer if such benefits would help bridge the gap between Medicare- and Medicaid-covered services. Although a large percentage of dual-eligible beneficiaries (43 percent in 2012) were under age 65 and qualified for Medicare because they were disabled, we found that few fully integrated dual-eligible special needs plans serve disabled dual-eligible beneficiaries or report lower costs for Medicare services.[23] In addition, moderately better health outcomes for disabled dual-eligible beneficiaries in dual-eligible special needs plans do not necessarily translate into lower levels of costly Medicare services—that is, inpatient stays, readmissions, and emergency room visits.[24]

Access to preventive services. Over the past several years, researchers have found that certain preventive services are effective in early diagnosis or reduced prevalence of diseases that contribute to the growth in Medicare spending. To encourage beneficiary use, PPACA removed beneficiary cost-sharing requirements for many Medicare-covered preventive services, such as mammograms and colorectal cancer screening. However, in our work we found that while Medicare beneficiaries’ use of some preventive services—cardiovascular disease screening and cervical cancer screening—generally aligned with clinical recommendations, the use of other preventive services, such as osteoporosis screening and immunizations, did not.[25] Medicare beneficiaries who did not receive certain preventive services commonly reported that they had limited information on prevention; had concerns about discomfort, side effects, or efficacy; or their doctor did not recommend the services. Furthermore, we found better use of preventive services by beneficiaries is unlikely without appropriate Medicare coverage. For instance, low use of some recommended services—such as osteoporosis screenings—may result, in part, from limiting which beneficiaries are covered or how frequently the service is covered. Conversely, the absence of required cost sharing for certain services that are not recommended, such as prostate-specific antigen testing for prostate cancer for men aged 75 or older, may contribute to the inappropriate use of those services. In 2012, we suggested Congress require beneficiaries to share the cost when they receive services that the U.S. Preventive Services Task Force recommends against.

Program Management

CMS has overcome some challenges in managing the Medicare program as it implemented some program improvements in recent years, including a competitive bidding program for durable medical equipment (DME). However, more could be done to improve how CMS manages the Medicare program, including its handling of the growing number of appeals for denied claims.

Competitive bidding program. We had previously reported that Medicare sometimes overpaid for DME items relative to other payers.[26] Congress required that CMS implement a competitive bidding program for DME suppliers, which the agency began in 2009. In early assessments, we found that beneficiary access and satisfaction appeared stable and the competitive bidding program has led to savings.[27] More recently in 2016, we found that the number of beneficiaries receiving DME items covered under the competitive bidding program generally decreased after implementation of phases of the program that began in July 1, 2013.[28] Available evidence from CMS’s monitoring efforts indicates no widespread effects on beneficiary access, but some beneficiary advocacy groups have reported specific access issues, such as difficulty locating contract suppliers and delays in delivery of DME items. Changes such as expanding the program into additional competitive bidding areas; using pricing from competitive bidding areas to set prices in non-competitive bidding areas (which was fully phased in as of July 2016); and selecting new contract suppliers for contracts for new rounds of bidding will provide significant new data to further assess the effect of the program. Continued monitoring of the competitive bidding program experience is important to determine the full effects it may have on Medicare beneficiaries and DME suppliers.

Appeals process. Medicare has seen significant growth in the number of appeals submitted by providers, beneficiaries, and others dissatisfied with the program’s decisions to deny or reduce payment for claims. The Department of Health and Human Services (HHS) attributes the increase in appeals to several factors, including for example, CMS’s recent increased focus on program integrity activities, which has resulted in more denied claims and more appeals. In fiscal year 2014, Medicare denied 128 million FFS claims, or 10.5 percent of claims submitted. Medicare’s administrative appeals process for FFS claims consists of 4 levels of review (Levels 1 through 4) and allows appellants who are dissatisfied with decisions at one level to appeal to the next level, with separate appeals bodies making decisions at each level. From fiscal year 2010 to 2014, the number of appeals at all levels of Medicare’s administrative appeals process increased significantly but varied by level. The largest rate of increase (over 900 percent) was experienced at Level 3, in which cases are reviewed by administrative law judges. The large volume of appeals has resulted in backlogs in decisions; in fiscal year 2014, more than 90 percent of Level 3 decisions were issued after the 90-day statutory time frame.

We recommended that HHS take additional steps to improve its oversight of the appeals process, including collecting more complete and consistent data that would assist in monitoring efforts and addressing inefficiencies in the way certain repetitious claims—such as those for monthly oxygen equipment rentals—are adjudicated.[29] HHS has taken some actions to reduce the backlog of appeals. For instance, CMS has offered administrative agreements to eligible hospitals that are willing to withdraw their pending appeals in exchange for timely partial payments, in order to more quickly reduce the volume of claims pending in the appeals process. As of August 2016, CMS has executed settlements amounting to nearly $1.5 billion with 2,022 hospitals, representing approximately 346,000 claims that were in the appeals system. In September 2016, CMS announced it would execute another round of settlements for hospitals with inpatient claims in appeals. In addition, in July 2016, HHS issued a proposed rule that would revise certain appellate procedures in an effort to improve the Medicare appeals process and reduce the backlog. However, HHS has not yet taken actions to address our specific recommendations, and the backlog shows no signs of abating, as the number of incoming appeals continues to surpass adjudication capacity at certain review levels. For fiscal year 2016, the average length of time to process Level 3 appeals was 877 days, compared with the 90 days generally required by statute, and up from the 662 days for fiscal year 2015.[30]

Oversight of Patient Care and Safety

CMS has made progress in improving the health and safety of millions of Medicare beneficiaries, which represent a significant portion of the U.S. population. According to CMS, Medicare Quality Improvement Organizations—which work with providers, beneficiaries, and others to improve health care delivery systems to achieve better care for lower costs—-supported efforts that from fiscal year 2011 through fiscal year 2014 helped to prevent tens of thousands of beneficiaries from being admitted or readmitted to hospitals; reduce the number of health care associated infections; and reduce the number of nursing home patients who experienced pressure ulcers or the use of restraints. CMS has also improved its oversight of quality of care. In 2012, in response to our recommendation, CMS included long-term care hospitals in its validation surveys, which are used to measure the effectiveness of surveys conducted by accrediting organizations on the extent to which facilities meet federal standards for quality of care. However, CMS can further improve how it oversees patient care and safety, as described below.

Clinical data registries. Clinical data registries (CDR) have the potential to improve the quality and efficiency of care for all Medicare beneficiaries by collecting extensive, standardized data and providing feedback to physicians on their performance based on their peers. CDRs are entities that collect detailed information on the therapies that patients receive and changes in their clinical condition over time in order to evaluate and improve care practices and outcomes. In 2013, we recommended that HHS adopt several key requirements to ensure qualified CDRs actually improve the quality and efficiency of care that beneficiaries receive.[31] For example, CMS should require qualified CDRs to demonstrate improvements on key measures of quality and efficiency for their target population and establish a process for monitoring qualified CDRs’ compliance with requirements. HHS should also enhance the effect of qualified CDRs on quality and efficiency by making it easier to develop them by promoting the use of health information technology. HHS concurred with each of our recommendations, but also noted some challenges it expects, for example in establishing a set of core measures for qualified CDRs, as we recommended, given the number of clinical specialties on which qualified CDRs may focus. We maintain, however, that a minimum set of core measures—even if small—could help CDRs promote national-level quality improvement initiatives.

End-stage renal disease. In 2013, Medicare spent about $11.7 billion on dialysis care for about 376,000 Medicare patients. Dialysis is the most common treatment for individuals with end-stage renal disease, and while the vast majority of dialysis treatments are performed in dialysis facilities, dialysis treatments received at home may increase autonomy and health-related quality of life for some patients. Physicians and other stakeholders estimate that between 15 and 25 percent of patients needing dialysis could realistically be on home dialysis. In 2012, about 11 percent of patients needing dialysis received home dialysis.

A number of factors can affect the type of dialysis patients receive, including patients’ preference and clinical factors, but Medicare payment policy may also play a role. In 2015, we found that dialysis facilities have financial incentives in the short term to increase dialysis treatments provided in facilities.[32] Medicare’s monthly payments to physicians for managing the care of home patients are often lower than those for managing in-center patients, which may also discourage physicians from prescribing home dialysis. Further, just a small fraction of Medicare patients have used the Kidney Disease Education benefit—which provides pre-dialysis education and is designed to help patients make informed decisions related to their treatment. Limited use of this benefit may be due to statutory limitations on the types of providers who are permitted to furnish the benefit and on the patients eligible to receive it. We recommended that CMS examine and, if necessary, revise policies for paying physicians to manage the care of dialysis patients, and examine the Kidney Disease Education benefit, and if appropriate, seek legislation to revise the categories of providers and patients eligible for the benefit.[33] HHS concurred with the first recommendation but did not agree with the second, stating that CMS must prioritize its activities to improve care for dialysis patients. We maintain the importance of ensuring that Medicare patients with chronic kidney disease understand their condition and the implications of various treatment options; however, the limited use of the Kidney Disease Education benefit suggests it may be difficult for patients to receive this education.


[1] GAO, Medicare: Payment Methods for Certain Cancer Hospitals Should Be Revised to Promote Efficiency, GAO-15-199 (Washington, D.C.: Feb. 20, 2015).

[2] The 21st Century Cures Act reduced by 1 percentage point the target payment-to-cost ratio used to calculate additional outpatient payments that PPS-exempt cancer hospitals receive, for services furnished on or after January 1, 2018. Pub. L. No. 114-255, § 16002, 130 Stat. 1033 (2016).

[3] GAO, Medicare: Increasing Hospital-Physician Consolidation Highlights Need for Payment Reform, GAO-16-189 (Washington, D.C.: Dec. 18, 2015).

[4] E/M office visits are a common type of service that can be performed in both HOPDs and physician offices. GAO-16-189.

[5] In 2015, Congress partially addressed this trend by excluding services furnished by off-campus hospital outpatient departments from this higher payment, effective January 1, 2017. However, this exclusion will not apply to services furnished by providers billing as hospital outpatient departments prior to enactment of the legislation—that is, all providers billing as hospital outpatients during our study—who would continue to be paid under higher rate or to services provided by on-campus hospital outpatient departments. Congress later added providers meeting a mid-build requirement to the list of providers to which the exclusion would not apply.

[6] GAO, Hospital Uncompensated Care: Federal Action Needed to Better Align Payments with Costs, GAO-16-568 (Washington, D.C.: June 30, 2016).

[7] PPACA also provided for 5 percent of an applicant’s income to be disregarded when calculating modified adjusted gross income, which effectively increases this income level to 138 percent of the federal poverty level. As of October 2016, 31 states and the District of Columbia had opted to expand Medicaid eligibility under PPACA.

[8] See GAO, Medicare: Higher Use of Advanced Imaging Services by Providers Who Self-Refer Costing Medicare Millions, GAO-12-966 (Washington, D.C.: Sep. 28, 2012); GAO, Medicare: Higher Use of Costly Prostate Cancer Treatment by Providers who Self-Refer Warrants Scrutiny, GAO-13-525 (Washington, D.C.: July 19, 2013); and GAO, Medicare: Action Needed to Address Higher Use of Anatomic Pathology Services by Providers who Self-Refer, GAO-13-445 (Washington, D.C.: June 24, 2013).

[9] GAO-12-966.

[10] GAO, Medicare Part B: CMS Should Take Additional Steps to Verify Accuracy of Data Used to Set Payment Rates for Drugs, GAO-16-594 (Washington, D.C.: July 1, 2016).

[11] GAO, Medicare Part B: Data on Coupon Discounts Needed to Evaluate Methodology for Setting Drug Payment Rates, GAO-16-643 (Washington, D.C.: July 27, 2016).

[12] GAO, End-Stage Renal Disease: CMS Should Improve Design and Strengthen Monitoring of Low-Volume Adjustment, GAO-13-287 (Washington, D.C.: Mar. 1, 2013).

[13] See, for example, GAO, Medicare Physician Payment Rates: Better Data and Greater Transparency Could Improve Accuracy, GAO-15-434 (Washington, D.C.: May 21, 2015) and Medicare Payment Advisory Commission, Moving Forward from the Sustainable Growth Rate (SGR) System, letter to Congress (Washington, D.C.: October 2011).

[14] PPACA changed how the maximum per capita payment amount to an MA plan is calculated so that it more closely aligned with Medicare FFS spending. Specifically, the changes, which are to be phased in from 2012 through 2017, will result in maximum payments being tied to a percentage of per capita Medicare FFS spending in each county. In general, for those counties in the highest Medicare FFS spending quartile, the maximum payment to an MA plan will be 95 percent of county per capita Medicare FFS spending, and for those counties in the lowest Medicare FFS spending quartile, the maximum payment amount will be equal to 115 percent of county per capita Medicare FFS spending.

[15] Since 2004, when CMS transitioned from using only a beneficiary’s principal inpatient diagnosis to using a larger set of major medical conditions to risk adjust MA payments, MA plans have had a financial incentive to ensure that all relevant diagnoses are coded, as this can increase beneficiaries’ risk scores and ultimately the payments that plans receive. In contrast, CMS pays many Medicare FFS providers for services provided rather than on the basis of beneficiaries’ diagnoses.

[16] Pub. L. No. 114-255, § 17006, 130 Stat. 1033 (2016).

[17] GAO, Medicare Advantage: CMS Should Improve the Accuracy of Risk Score Adjustments for Diagnostic Coding Practices, GAO-12-51 (Washington, D.C.: Jan. 12, 2012) and GAO, Medicare Advantage: Substantial Excess Payments Underscore Need for CMS to Improve Accuracy of Risk Score Adjustments, GAO-13-206 (Washington, D.C.: Jan. 31, 2013).

[18] GAO, Medicare Advantage: Substantial Excess Payments Underscore Need for CMS to Improve Accuracy of Risk Score Adjustments, GAO-13-206 (Washington, D.C.: Jan. 31, 2013).

[19] GAO-12-51.

[20] GAO, Medicare Advantage: CMS Should Fully Develop Plans for Encounter Data and Assess Data Quality before Use, GAO-14-571 (Washington, D.C.: Jul. 31, 2014).

[21] GAO, Medicare Advantage: Actions Needed to Enhance CMS Oversight of Provider Network Adequacy, GAO-15-710 (Washington, D.C.: Aug. 31, 2015).

[22] GAO, Medicare and Medicaid: Additional Oversight Needed of CMS’s Demonstration to Coordinate the Care of Dual-Eligible Beneficiaries, GAO-16-31 (Washington, D.C.: Dec. 18, 2015).

[23] GAO, Disabled Dual-Eligible Beneficiaries: Integration of Medicare and Medicaid Benefits May Not Lead to Expected Medicare Savings, GAO-14-523 (Washington, D.C.: Aug. 29, 2014).

[24] GAO-14-523.

[25] GAO, Medicare: Use of Preventive Services Could Be Better Aligned with Clinical Recommendations, GAO-12-81 (Washington, D.C.: Jan. 18, 2012).

[26] GAO, Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical, GAO-08-767T (Washington, D.C.: May 6, 2008).

[27] GAO, Medicare: Review of First Year of CMS’s Durable Medical Equipment Competitive Bidding Program’s Round 1 Rebid, GAO-12-693 (Washington, D.C.: May 9, 2012).

[28] GAO, Medicare: CMS’s Round 2 Durable Medical Equipment and National Mail-order Diabetes Testing Supplies Competitive Bidding Programs, GAO-16-570 (Washington, D.C.: Sept. 15, 2016).

[29] GAO, Medicare Fee-For-Service: Opportunities Remain to Improve Appeals Process, GAO-16-366 (Washington, D.C.: May 10, 2016).

[30] On December 5, 2016, the U.S. District Court for the District of Columbia issued a decision granting summary judgment to the American Hospital Association and ordering HHS to resolve the current backlog of Medicare appeals by December 31, 2020. Am. Hosp. Ass’n v. Burwell, 2016 WL 7076983 (D.D.C. Dec. 5, 2016).

[31] GAO, Clinical Data Registries: HHS Could Improve Medicare Quality and Efficiency through Key Requirements and Oversight, GAO-14-75 (Washington, D.C.: Dec. 16, 2013).

[32] GAO, End-Stage Renal Disease: Medicare Payment Refinements Could Promote Increased Use of Home Dialysis, GAO-16-125 (Oct. 15, 2015).

[33] GAO-16-125.

Congress, HHS, and CMS have taken steps to improve the fiscal integrity of Medicare, and CMS has implemented some of our recommendations, such as providing more frequent feedback to physicians so they can identify opportunities to reduce costs and rebasing payments for end-stage renal disease services using more recent data, which resulted in per treatment payment reductions. However, continued federal improvements to the oversight of Medicare are warranted given the size and complexity of the program as well as the number and scope of ongoing changes to the program.

We have a number of Matters for Congressional Consideration for addressing Medicare payments, costs, and quality of care. Specifically:

  • To increase beneficiaries’ awareness of providers’ financial interest in a particular treatment, Congress should consider directing the Secretary of Health and Human Services to require providers who self-refer intensity-modulated radiation therapy services—a type of cancer treatment—to disclose to their patients that they have a financial interest in the service.
  • To further align Medicare beneficiary use of preventive services with U.S. Preventive Task Force recommendations, Congress should consider requiring beneficiaries who receive services that the Task Force recommends against to share the cost, notwithstanding that cost sharing may not be required for beneficiaries with different characteristics or under different circumstances.
  • To help HHS better control spending and encourage efficient delivery of care, Congress should consider requiring Medicare to pay PPS-exempt cancer hospitals as it pays PPS teaching hospitals, or provide the Secretary with the authority to otherwise modify how Medicare pays these providers. To generate cost savings from any reduction in outpatient payments to PPS-exempt cancer hospitals, Congress should also provide that all forgone outpatient payment adjustment amounts be returned to the Supplementary Medical Insurance Trust Fund.
  • In order to prevent the shift of services from physician offices to hospital outpatient departments from increasing costs for the Medicare program and beneficiaries, Congress should consider directing the Secretary of Health and Human Services to equalize payment rates between the settings for evaluation and management office visits—and other services that the Secretary deems appropriate—and to return the associated savings to the Medicare program.
  • To help HHS ensure accuracy in Part B drug payment rates, Congress should consider requiring all manufacturers of Part B drugs paid at ASP, not only those with Medicaid drug rebate agreements, to submit sales price data to CMS, and ensure that CMS has authority to request source documentation to periodically validate all such data.
  • To determine the suitability of Medicare’s Part B drug payment rate methodology for drugs with coupon programs, Congress should consider (1) granting CMS the authority to collect data from drug manufacturers on coupon discounts for Part B drugs paid based on ASP, and (2) requiring the agency to periodically collect these data and report on the implications that coupon programs may have for this methodology.

In addition, we have made a range of recommendations to HHS and CMS intended to improve program management and control costs that remain open, including the following:

  • To ensure that MA encounter data are of sufficient quality for their intended purposes, the Administrator of CMS should (1) establish specific plans and time frames for using the data for all intended purposes in addition to risk adjusting payments to MA organizations; and (2) complete all the steps necessary to validate the data, including performing statistical analyses, reviewing medical records, and providing MA organizations with summary reports on CMS’s findings, before using the data to risk adjust payments or for other intended purposes.
  • To ensure that future low-volume payment adjustments (LVPA) are made only to eligible facilities and to rectify past overpayments, the Administrator of CMS should (1) require Medicare contractors to promptly recoup 2011 LVPA payments that were made in error, (2) improve the timeliness and efficacy of CMS’s monitoring regarding the extent to which Medicare contractors determine LVPA eligibility correctly and promptly redetermine eligibility when all necessary data become available, and (3) investigate errors that contributed to facilities not consistently receiving the 2011 LVPA and ensure that such errors are corrected. Additionally, to reduce the incentive for facilities to restrict the services they provide to avoid reaching the LVPA treatment threshold, the Administrator of CMS should consider revisions such as changing the LVPA to a tiered adjustment.
  •  In order to improve CMS’s ability to identify self-referred advanced imaging services and help CMS address the increases in these services, the Administrator of CMS should (1) insert a self-referral flag on its Medicare Part B claims form and require providers to indicate whether the advanced imaging services for which provider bills Medicare are self­referred or not; (2) reduce payments for self-referred advanced imaging services to recognize efficiencies when the same provider refers and performs a service; and (3) determine and implement an approach to ensure the appropriateness of advanced imaging services referred by self-referring providers.
  • To increase dual-eligible special needs plans’ accountability and ensure that CMS has the information it needs to determine whether dual-eligible special needs plans are providing the services needed by dual-eligible beneficiaries, especially those who are most vulnerable, the Administrator of CMS should evaluate the extent to which dual-eligible special needs plans have provided sufficient and appropriate care to the population they serve, and report the results in a timely manner.
  • To help ensure appropriate payments to MA plans, the Administrator of CMS should take steps to improve the accuracy of the adjustment made for differences in diagnostic coding practices between MA and Medicare FFS. Such steps could include, for example, accounting for additional beneficiary characteristics, including the most current data available, identifying and accounting for all years of coding differences that could affect the payment year for which an adjustment is made; and incorporating the trend of the impact of coding differences on risk scores.
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