Why has Medicare’s Innovation Center failed?

The House Energy and Commerce Committee recently convened a hearing on the Center for Medicare and Medicaid Innovation.

Although the center “was created over a decade ago and provided billions in funding and broad authority to find ways to save taxpayer dollars and improve health outcomes for patients,” Rep. Cathy McMorris Rodgers (R-Wash.) and Rep. Brett Guthrie (R-Ky.) noted, “it has little to show in demonstrated successful outcomes.” Why is this so?

Medicare traditionally pays healthcare providers for every service and procedure they deliver. It makes separate payments for hospitals, physicians, rehabilitation services, diagnostic tests and drugs associated with the treatment of a single medical condition. If costly low-value services are delivered, it pays for those. If doctors make errors, and patients require additional treatment, it simply writes additional checks. This provides little incentive for prevention or the cost-conscious employment of medical services.

The Affordable Care Act sought to remedy this problem by establishing the Center for Medicare and Medicaid Innovation, giving it $1 billion per year in additional funds to experiment with new “value-based” methods of payment. The Innovation Center was authorized to expand such arrangements nationwide on a permanent basis if they were proven to improve quality or reduce costs.

The most ambitious of these arrangements were designed to make groups of clinicians responsible for the health outcomes and aggregate medical costs associated with their patient populations. Typically, these were structured by establishing a benchmark level of expected spending for a defined set of patients and rewarding the healthcare providers with a share of any savings achieved. Narrower models related to the treatment of specific medical conditions, to primary care or to the integration of long-term care with medical services.

When the center was established, advocates hoped it would enable the “scientifically guided redesign of U.S. health care financing.” But it remains subject to political considerations and technical constraints that have suffused Medicare since the outset. Importantly, it is bound by Medicare beneficiaries’ legal entitlement to medically necessary care, and courts have determined it must therefore maintain reimbursement at levels needed to assure access to covered benefits.

It has been hard for the Innovation Center to establish appropriate “value-based payment” rates. The cost of treating a patient with heart disease will vary greatly according to his or her specific co-morbidities and risk of complications. Concerns that payment incentives would lead medical providers to avoid high-risk patients or to withhold costly drugs from seriously ill cancer sufferers have deterred the center from requiring providers to participate.

As a result, most Innovation Center models have been established on a voluntary basis, and medical organizations have insisted on being paid more in return for bearing additional risk. As the center has typically based benchmarks on average patient costs, these have tended to only attract providers which already had below-average expenses — rewarding them for “savings” they did nothing to deserve.

“Value-based payments” work best for relatively standardized standalone procedures, such as joint replacements. But, although these have reduced readmissions, they have not generated statistically significant savings after bonus payments to providers.

Even in cases where the center has identified excessive payments that did little to improve access to care, Congress has stepped in to block its attempts to cut them.

The Congressional Budget Office had originally predicted that the Innovation Center would save taxpayers $3 billion from 2011 to 2020. In fact, it increased expenses by $5 billion. CBO admitted that it underestimated the extent to which models would be voluntary and fail to reduce costs. Out of over 50 demonstration models, only four met the net savings and quality requirements for expansion.

In 2021, the Center announced a “Strategy Refresh.” Having failed at its designated mission to reduce Medicare’s cost, it gave itself another: “addressing health disparities and … ensuring equitable access, quality, and outcomes.”

Its efforts to expand benefits (coverage of insulin drugs, mental health services, dementia care) have proven more politically rewarding than its fruitless battles to cut costs. But the gradual expansion of Medicare benefits is already unaffordable, and should be reined in unless paid for by Congress.

It is unrealistic to expect the Innovation Center to cut the cost of traditional Medicare. The inflated utilization of low-value services is intrinsic to the program’s core commitment to pay for any medical service that beneficiaries wish to consume, regardless of its value — and encouraged by Medigap and Medicaid supplemental coverage, which often eliminate patient cost-sharing. But this effort is also unnecessary, given the rapid growth of privately managed Medicare Advantage plans, in which 51 percent of beneficiaries are now enrolled.

Medicare Advantage plans receive monthly payments to cover healthcare services for beneficiaries who opt to enroll. This insulates the plans from interest group politics, and gives them an incentive to procure medical care in the most cost-effective manner. Plans can greatly reduce expenses by making sure enrollees receive appropriate preventative services, steering them to cheaper providers and verifying the necessity of costly low-value services.

Whereas Innovation Center models are unable to prevent beneficiaries from seeking costlier services from nonparticipating providers, beneficiaries tend to opt for Medicare Advantage plans that are most effective at restraining costs because they benefit from the associated savings. Even if Medicare Advantage plans are themselves currently overpaid, the system’s structure is fundamentally sound and sufficient to remedy Medicare’s value problem.

In 2017, the Republican-led Congress attempted to repeal the Center for Medicare and Medicaid Innovation, but was obstructed by CBO’s estimate that doing so would increase the program’s cost. Since CBO has now changed its mind, and determined that keeping the center in place increases Medicare costs, Congress should revisit the issue and eliminate an operation that is now likely to only increase expenditures.

Chris Pope is a senior fellow at the Manhattan Institute.