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Position Statement

Principles of Medicare Reform

This Position Statement was developed as an educational tool based on the opinion of the authors. It is not a product of a systematic review. Readers are encouraged to consider the information presented and reach their own conclusions.

Medicare is the Federal health insurance program for the nation's elderly. Part A of the program covers inpatient hospital services, inpatient care in skilled nursing facilities after hospitalization, home healthcare and hospice care, among other services. Part B of the program covers physician services, outpatient hospital care, diagnostic services, and durable medical equipment and ambulance services, among other services. Part D provides coverage for prescription drugs.

Medicare continues to face both short-term and long-term fiscal challenges that will continue to impact both patients and providers:

  • on January 1, 2010, payments to physicians will be cut by 21% under Medicare’s Sustainable Growth Rate (SGR) formula;
  • the Trustees project that in 2010 Medicare Part A expenses will exceed payments into the Part A Trust Fund. Congress will face the challenge of finding money to begin repaying funds borrowed from the Trust Fund;1 and
  • in 2019 the Medicare Trust Fund will be completely devoid of Trust Fund monies and Medicare taxes will only be able to cover 78% of the projected Part A costs.2

Factors causing the growth in Medicare costs include but are not limited to:

  • a 50 percent increase in the number of beneficiaries since the start of the program;
  • an increase in the life span of beneficiaries which increases the number of years that they use medical services;
  • advances in medical science and technology that prolong and enhance the quality of life but may be costly;
  • the addition of the part D prescription drug benefit;
  • the increased prevalence of obese patients which is a significant factor in the growth of Medicare expenses associated with treating chronic diseases among seniors;3
  • increased beneficiary demand for services due to many factors – first dollar coverage among Medigap plans, direct to consumer advertising, lower beneficiary cost-sharing requirements, and a medical liability system that encourages inefficiencies including the practice of defensive medicine; and the growth of chronic disease among seniors in which obesity is a significant contributing factor; and
  • fraud and abuse.

The American Academy of Orthopaedic Surgeons (AA0S) believes that the Medicare program needs fundamental reform because of its impending financial crisis which threatens patient access to medical care. To achieve Medicare solvency, the AAOS believes that policymakers must undertake a thorough review of all program components, including health care delivery and benefits, payments to providers, and initiatives to contain costs.

I. Health Care Delivery and Benefits

Medicare Managed Care

While managed care plans have been available within Medicare for several decades, enrollment in such plans has increased significantly - particularly since 2003 - such that today nearly one in five seniors has chosen to enroll in a Medicare Advantage (MA) plan. While MA plans in general save individual Medicare beneficiaries money, the cost to the federal government is more than it would have paid for the same services under traditional fee-for-service Medicare. While MA plans with patient protections should remain a choice for seniors, payments made by the federal government to MA plans should more closely reflect the costs of providing care in the traditional Medicare fee-for-service plan. In considering such an alignment however appropriate consideration may be given to whether there may be long-term savings for some enrollees in MA plans due to better management of their conditions or early interventions. Since the Medicare population is generally less healthy and more expensive to treat than the younger population, it is important to ensure the Medicare Advantage plans have checks and balances in place to guarantee enrollees quality of care and access to appropriate providers.

The AAOS believes that managed care plans offered within the Medicare program should have effective patient protection measures to ensure that quality and access are not jeopardized. Payments to MA plans should more closely reflect the costs paid in traditional Medicare fee-for-service plans.

Quality Initiatives

The AAOS has been engaged in quality initiatives to improve patient care and outcomes for several decades and maintains this as a top priority. The AAOS has been involved in helping develop the quality measures for orthopaedic care under the Physician Quality Reporting Initiative (PQRI). Additionally, the AAOS has initiated legislation in the Congress – the Access to America’s Orthopaedic Services Act – that will identify shortfalls in access to quality musculoskeletal care and close these gaps in care.

The AAOS believes it is important that orthopaedic surgeons have direct input into the development of quality standards and supports quality initiatives that demonstrate effectiveness in improving patient outcomes. It is important that quality and reporting initiatives are regularly re-evaluated to ensure that they continue to improve the quality of orthopaedic care.

II. Payments to Providers

Limiting access to services and cuts in payments to providers have been the traditional means by which government policy makers have sought to curb Medicare spending. For more than two decades Medicare payments to physicians and hospitals have been cut by tens of billions of dollars. Payment to physicians, which account for 23% of Medicare expenditures, have been cut due to a number of factors including reimbursement freezes, fee reductions, limits on balance billing, implementation of the "resource-based" payment system, and a flawed Medicare reimbursement formula. If allowed to continue this will result in significant access and quality problems as providers struggle to deliver care below their actual costs.

Medicare’s Sustainable Growth Rate (SGR) Formula

Medicare’s flawed Sustainable Growth Rate (SGR) formula, enacted in the 1997 Balanced Budget Act, has resulted in payments to physicians that have failed to keep pace with increases in practice costs as measured by the Medicare Economic Index (MEI). Payments to physicians would have risen by nearly 20 percent between 2001 and 2008 had they been adjusted by the MEI. Actual payments to physicians have remained flat and have declined in real dollar value when inflation is considered. Conversely, between 2004 and 2007 payments to MA plans, hospitals, and nursing homes have increased.

The AAOS believes that further cuts in payments to physicians will threaten access to quality care. The AAOS believes a priority for Congress should be to enact a permanent fix to Medicare’s flawed Sustainable Growth Rate (SGR) formula that is fully paid for without borrowing from future Medicare payments, that is sustainable long-term, and that more closely reflects the actual increased practice cost as measured by the MEI. The AAOS also believes that the short-term savings gained by cutting physician and hospital reimbursement will not solve Medicare's long-term financial crisis.

Balanced Billing

The ban on the ability of providers to balance bill has further impacted the ability of providers to cover the widening gap between inadequate Medicare payments and the cost of providing services. In the absence of a reasonable long-term solution to inadequate Medicare payments under the flawed SGR, the federal rules prohibiting balanced billing should be repealed and insurers should be forbidden from including them in physician-insurer contracts.

The AAOS believes that in the absence of SGR reform repeal of the ban on balanced billing will help providers close the gap between inadequate Medicare payments and the cost of providing services to seniors.

III. Cost Containment and Solvency

In order to ensure the long-term sustainability of Medicare, policy makers must adopt new models of providing health care coverage for seniors and ensure that seniors have access to a wider range of choices that best meet their health care needs.

Privatization Choices

Addressing the Medicare financial crisis could involve privatization of part or all of the program. Privatization could reduce costs and shift much of the financial risk in patient care from the Federal government to the private sector. It would also give beneficiaries a wider range of health care options from which to choose and it would encourage seniors to make informed decisions about their care.

The AAOS believes that policy makers should give serious consideration to privatizing all or part of the Medicare program. In any such privatized plans, however, it is critical that patient protection standards be enacted to make certain that patients have access to quality care and that Medicare dollars are used for patient care.

Defined Contribution Plans

One approach is for the Federal government to give beneficiaries a defined contribution based on individual income and health status, among other factors. These contributions would be used by beneficiaries to choose from a range of private plan options or the standard fee-for-service system with the government continuing as the insurer. This proposal is similar in approach to several bipartisan bills in the Congress that are aimed at addressing the cost of insurance in the non-Medicare population. Like a defined contribution plan as proposed for Medicare, those bills in the Congress would provide a limited tax benefit (i.e. subsidy or contribution) to individuals based on income and health status to be used for the purchase of health insurance.

The AAOS believes that policy makers should enable seniors to select a defined contribution option.

Medical Savings Accounts

Medicare Medical Savings Accounts (MSAs) should continue to be permitted to operate much like Health Savings Accounts (HSAs) do for the under-65 population. This includes a federal contribution to a medical savings account combined with the purchase of a high deductible health plan. As a long-term approach to addressing Medicare insolvency, it is important that today’s under-65 working population not face barriers in establishing HSAs and that they are permitted to seamlessly transition HSAs into retirement to be used for a broader range of health care expenses under Medicare. Already over 6 million Americans are enrolled in HSA-eligible health plans. Policy makers should encourage the under 65 population to be better prepared to meet a higher portion of their health care expenses in their retirement as Medicare’s future is likely to require a greater beneficiary cost-sharing

The AAOS strongly supports enabling seniors to choose a Medicare Medical Savings Account (MSA) and encourages policy makers to make the transition from Health Savings Accounts (HSAs) to MSA seamless for those enrolling in Medicare who have an HSA.

Medicare Enrollment Eligibility

Congress should not expand eligibility for Medicare to a broader segment of the population. Medicare is well on its way to insolvency as it is, and since 2001 Congress has been unable to identify or enact a permanent solution to address Medicare’s physician reimbursement shortfall much less the larger issues related to Medicare’s long-term solvency.

Given Medicare’s short-term and long-term insolvency the AAOS is opposed to proposals that would expand eligibility for enrollment in Medicare. Rather, policy makers should consider incrementally raising the eligibility age for Medicare to be consistent with Social Security.

Medical Liability Reform

Professional liability matters are a major concern to the AAOS and their patients. These concerns include the practice of defensive medicine, high rates of malpractice insurance premiums and the problem of access to medical care, created, in part, by the high costs of providing medical care. All of these factors contribute to the growing costs of Medicare, and enactment of liability reforms will save Medicare dollars.

The AAOS believes that a uniform system to assure the equitable and efficient handling of medical liability disputes on the federal and state levels is the best solution, particularly in a program like Medicare where the federal government is the largest payer for services. (See AAOS’s Position Statement 1118 - Professional Liability: Federal Tort Reform)

Enhanced Beneficiary Cost-Sharing

The way in which Medicare is financed will also have serious consequences for patient access to quality care. Currently, Medicare Part A is supported by a 2.9 percent payroll tax on annual wages. Part B is financed through general revenues. Both parts are also funded through contributions from beneficiaries in the form of premiums (Part B), deductibles (Parts A and B) and co-payments (Parts A and B).

When Medicare began in 1966, Part B premiums paid 50 percent of program costs and Part B deductibles paid about 45 percent of the average charges for medical services. Today, Part B premiums pay only 25 percent of program costs and deductibles pay less than 5 percent of average charges. In 2003 Congress acted to increase Part B premiums for higher income seniors, raising the 2008 monthly premium from $96 to $122 for higher income seniors earning above $82,000/individual ($164,000/couple) and up to $238 for seniors earning $205,000 per year ($410,000/couple).

While this step was taken to decrease the subsidy to higher income seniors other Medicare cost-sharing provisions have failed to keep pace with inflation. While consumer prices increased more than seven fold between 1966 and 2008, the Part B deductible has only increased from $50 to $135 per month – less than one third the increase in the consumer price index. Yet growth in Part B costs has averaged 9.6% annually over 2002-2007. Furthermore, there is no premium for Medicare Part A and there is no co-payment required for home health, clinical laboratory, pathology or skilled nursing facility services.

As contributions from beneficiaries have decreased in relation to costs, the financial burden has been covered, increasingly, by working people under age 65 through higher general revenue taxes. This financial burden on younger working people is compounded by the fact that the number of workers is shrinking in proportion to the growing number of Medicare beneficiaries. Moreover, many young workers are not able to afford their own health insurance, yet must contribute their taxes to Medicare coverage for seniors.

The AAOS believes that most beneficiaries should assume greater cost-sharing responsibility for the Medicare program, with protections for low income beneficiaries, in order to preserve their access to quality care. There are a broad range of options that policy makers could consider for enhancing beneficiary cost-sharing, among them are:

  • Indexing Part B premiums to gradually raise the overall beneficiary cost-share of Part B increases above 25%.
  • Further reducing the subsidy for Medicare Part B premiums for high-income beneficiaries so that they assume a greater share of program costs.
  • Increasing Part B deductibles and indexing them to better reflect the cost growth in the program.
  • Replacing the complex set of cost-sharing arrangements with a single standardized coinsurance rate.
  • Restructuring Part A financing, including a Part A premium.
  • Establishing a co-payment for home health, clinical laboratory, pathology and skilled nursing facility services.
  • Raising the eligibility age for Medicare beneficiaries to be consistent with the Social Security program.
  • Eliminating the costs generated by the increased utilization of services due to Medigap first dollar coverage.
  • Enacting liability reform to lower the costs of liability insurance and the practice of defensive medicine.
  • Establishing a basic benefit package for every Medicare patient; the projected cost of which, is within the budget and would be expected to cover all basic health care needs. Then allowing supplemental insurance by private companies to enhance an individual’s coverage if they choose.

Graduate Medical Education Funding

The Federal government, through Medicare, is the largest financial supporter of graduate medical education. The private sector contributes to graduate medical education by paying the higher charges of teaching hospitals. In recent years, however, the private sector has become less willing to pay these higher charges. If the Medicare program involves more managed care and/or privatizes, support for graduate medical education may decrease significantly, threatening quality and access for all Americans.

In addition, Medicare's current funding formulas for graduate medical education have led to increases in the number of trainees, which may not be consistent with the nation's current needs.

The AAOS believes that a mechanism needs to be developed to ensure that all payers contribute equitably to graduate medical education funding. In addition, a mechanism should be developed to ensure that the number of residency positions funded through Medicare and other payers actually reflects the nation's health care needs.

Fraud and Abuse

Fraud and abuse accounts for an undetermined amount of wasteful spending throughout the Medicare program, threatens the health and welfare of patients and undermines the mutual trust and respect which is at the core of the provider/patient relationship.

The AAOS strongly supports and will continue to cooperate in efforts to eliminate fraud and abuse in the Medicare program. The AAOS will also continue its educational efforts to address this issue


1. Medicare’s Financial Condition: Beyond Actuarial Balance. Issue Brief American Academy of Actuaries, March 2008.

2. Status of the Social Security and Medicare Programs, 2008 Annual Report.

3. Finkelstein, Fiebelkorn, Wang: National medical spending attributable to overweight and obesity: How much, and who’s paying. Health Affairs, May 13, 2003.

December 2008 American Association of Orthopaedic Surgeons.

This material may not be modified without the express written permission of the American Association of Orthopaedic Surgeons.

Position Statement 1175

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