Is There an “Efficient Frontier” for Medicare Payment Reform?

An Essay on Financial Health Risk Self-Selection

By Dr. David Edward Marcinko MBA CMP™


Health economist Austin Frakt PhD, of the Incidental Economist, alerted us to this recent publication “Achieving Cost Control, Care Coordination, and Quality Improvement through Incremental Payment System Reform”, by and from: (Averill, et al., JACM, 2010). The paper describes various Medicare payment reform methods.

The Abstract

The healthcare reform goal of increasing eligibility and coverage cannot be realized without simultaneously achieving control over healthcare costs. The reform of existing payment systems can provide the financial incentive for providers to deliver care in a more coordinated and efficient manner with minimal changes to existing payer and provider infrastructure. Pay for performance, best practice pricing, price discounting, alignment of incentives, the medical home, payment by episodes, and provider performance reports are a set of payment reforms that can result in lower costs, better coordination of care, improved quality of care, and increased consumer involvement. These reforms can produce immediate Medicare annual savings of $10 billion and create the framework for future savings by establishing financial incentives for long-term provider behavior changes that can lead to lower costs.

Patient Risk Sharing

Of course, the third dimension of risk [beyond traditional doctor/hospital provider and Medicare insurer] would be the risk borne by the patient insured (degree of cost-sharing or “consumer responsibility”). This relationship is represented diagrammatically right here:

Brief Review of MPT

Modern portfolio theory (MPT) attempts to maximize investment portfolio expected returns for a given level of risk by carefully choosing the proportions of various asset classes. As a mathematical formulation, the concept of diversification aims to select a collection of assets that collectively lowers risk [measured by standard deviation] more than any individual asset class. This pleasing point is known as the “efficient frontier.” And, it can be seen intuitively because different types of assets often change in value in opposite ways.

Is There an Insurance Efficient Frontier?

Health insurance [medical payment reform] econometric considerations may now be extended in this analogy to suggest that medical providers and CMS payers are the surrogates for two dimensions in the MPT. The third might be the risks borne by the patient insured (degree of cost-sharing or “consumer responsibility”), as above.


Then, patients could self-select where they wish to fall on the health insurance “efficient frontier”, balancing all three dimensions as in MPT, along with lifestyle and moral hazard considerations, etc.


And so, your thoughts and comments on this ME-P are appreciated. Is there an “efficient frontier” for Medicare payment reform?

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10 Responses

  1. On Medicare Payment Flaws

    Of course there is an EF for Medicare payments. The government just doesn’t seem to have a clue.

    And, as a FA, this was a novel application of the EF concept. I wish I had thought of it. Keep up the innovative ideas.



  2. AMA Advocates for Bill That Would Nix IPAB

    The American Medical Association is lending its support to federal legislation that would repeal the controversial Independent Payment Advisory Board (IPAB) provision included in last year’s healthcare reform law.

    Currently, there are bills in both congressional chambers to repeal the IPAB, a panel of nonelected officials tasked with drafting Medicare-savings proposals to the president and Congress. Rep. Phil Roe (R-TN), a physician, introduced a bill in the House of Representatives this year that was referred to the House Energy and Commerce Health Subcommittee, which will examine the issue in a hearing July 13. Meanwhile, Sen. John Cornyn (R-TX) introduced legislation in the Senate that has been referred to the Senate Finance Committee.

    Source: Jessica Zigmond, Modern Healthcare [7/7/11]


  3. Docs Not Receiving Medicare Feedback: GAO

    The Government Accountability Office recommended to the CMS in a new report (PDF) that the agency improve its process for giving feedback to physicians on their Medicare spending. The feedback, mandated by the Medicare Improvements for Patients and Providers Act of 2008, is designed to tell physicians how much Medicare is spending as a result of their care relative to other similar physicians.

    But the GAO found in a performance audit conducted from June 2010 through August 2011 that most physicians were not receiving the reports after the CMS applied methodological screening criteria for determining which doctors are appropriate to receive the feedback. In addition, getting the physicians to read the reports was a challenge cited by the GAO report.

    Source: Paul Barr, Modern Physician [8/12/11]


  4. Medicare Premiums for the Rich Folks

    According to Austin Frakt PhD, over at the Incidental Economist, we’re still in full speculation mode about what deficit-cutting ideas President Obama will suggest to the supercommittee, discussed elsewhere on this ME-P. One idea, among others, that has been mentioned is increasing Medicare premiums for higher-income beneficiaries.

    Not everyone may know that today some Medicare premiums are tied to income. This is complicated because Medicare is chopped up into parts: Part A (hospital insurance), Part B (physician services), Part D (outpatient prescription drugs). I’m leaving out Part C, which is the program for comprehensive private plans (Medicare Advantage), which bundles Parts A and B and, optionally, D.

    Here’s how premiums in Parts A, B, and D vary by income today.

    Part A: No premium for anyone with 40 or more quarters of qualifying employment or is married to such an individual. Those with fewer than 40 months of qualifying employment can buy in.

    Part B: The Part B premium varies by income from a low of $96.40 to a high of $369.10 per month (2011 values). Additional assistance paying the premium is available for beneficiaries that qualify for Medicaid or the Medicare Savings Program. Some additional details about the Part B premium apply to Part D as well and are described below.

    Part D: The income adjustment to Part D premiums is new as of 2011. It’s a surcharge calculated as a percentage of the national average cost of the standard drug benefit. The surcharge percentages are described by the Kaiser Family Foundation as the same surcharge percentages (35 percent to 80 percent) and income thresholds ($85,000 for an individual and $170,000 for a couple in 2011) as for Part B.

    Similar to the Part B premium provision, the income thresholds for the Part D income-related premium are fixed; that is, they are not indexed to increase annually.

    In 2011, the dollar amount of that surcharge works out to range from $12 to $69.10 a month. Additionally, there is a Low Income Subsidy program for Part D that pays some or all of the premium and cost sharing for low-income beneficiaries.


    And so … is means-testing for Medciare benefits [not premiums] … next?



  5. It’s Medicare Open Enrollment Time

    Hello all FAs – Did you know that your senior clients could be spending hundreds of thousands of dollars on healthcare during retirement as fewer employers offer retiree healthcare benefits and those in Medicare live longer?

    Thus, healthcare planning is becoming an increasingly important issue for financial advisors. If you’re not already into your client’s healthcare planning, now may be a good time to start.

    Medicare open enrollment began last Saturday (October 15th) and will run through Wednesday, December 7th, 2011.

    During this period, your senior clients will be wrestling with their Medicare Prescription Drug Plans. So, offer to help them … or find someone who can.

    Such a gesture will cement your relationships, perhaps lead to referrals and may even open the door for a discussion of other financial planning wants or advisory needs.

    Do well – by doing good!

    Hope Rachel Hetico RN MHA CMP™


  6. APMA Prepared to Blitz Capitol Hill

    The American Podiatric Medical Association is preparing for a three-day blitz of Capitol Hill later this month, where it expects hundreds of its members to lobby up a storm on issues, including Medicaid beneficiary access to podiatrists, physician payment reform and medical liability reform, association lobbyist Peter J. Stein tells PI. The association has confirmed meetings with Sen. Chuck Grassley (R-IA) and Rep. Jason Altmire (D-PA).

    The lobbying efforts will coincide with the association’s 27th annual Podiatric Medical Legislative Conference, which is also being conducted in D.C. The association’s government affairs efforts have been on the upswing lately, spending $300,000 on federal lobbying in 2011 — it’s strongest annual output since 2006, federal records indicate.

    Source: Politico [3/1/12]


  7. CMS Reveals Medicare Physician Pay Data

    Routine office visits accounted for the single largest share of Medicare physician billings in 2012, even though they amounted to just one-seventh of the $77 billion paid by the government for physician services through the nation’s senior citizen healthcare program.

    The data, released Wednesday, comes from the first-ever publication of Medicare Part B payments to individual physicians and physician practices by the CMS. The agency released the data in response to demands for transparency in the wake of a court case requiring the agency to provide public access to physician billing records.

    Editor’s note: For a list of the doctors who received the most Medicare money in 2012, click here and type “specialty and name”

    Source: Joe Carlson, Modern Healthcare [4/9/14]


  8. Medicare Overpays Billions for Office Visits, Patient Evaluations

    The findings by the inspector general of the U.S. Department of Health and Human Services complement a recent ProPublica review that found many doctors bill for services very differently than their peers.

    Ann Miller RN MHA


  9. Trustees’ Report Says Medicare Will be Insolvent by 2028

    The Medicare trust fund will be insolvent by 2028, according to the 2016 Medicare trustees’ report just released.

    The prediction is a departure from the 2030 date the Obama administration outlined in the previous two reports. The estimate is still later than the timeline released by the Congressional Budget Office in January, which estimated the program would be solvent only until 2026.

    The updated estimate is the result of a projected decrease in payroll taxes and a slower-than-expected decrease in inpatient utilization, Andy Slavitt, acting CMS administrator, reported.

    Source: Virgil Dickson, Modern Healthcare [6/22/16]


  10. CMS: National Standardized Medicare Cost Breakdown, 2015

    1. Total Spending – $9,171
    2. Inpatient Spending – $2,572
    3. Post-Acute Care Spending – $1,653
    4. Physician/OPD/Tests/Imaging Spending – $3,525
    5. Durable Medical Equipment Spending – $211
    6. Part B Drug Spending – $381
    7. Ambulance Spending – $136

    Source: Business Wire


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