Traditional Medicare’s improper payments stem from its centralized payment system, which uses price controls. This system often leads to providers receiving either too much or too little, resulting in inefficiency that can negatively impact patients.  

In the case of Medicare physicians, the current system was initially (and incredibly) sold to Congress in 1989 as a “scientific” system for setting doctors’ pay. The process is quite arbitrary and heavily politicized; a yearly target of intensive lobbying among various specialty groups desperately seeking higher reimbursement. 

Not surprisingly, faced with reduced or inadequate Medicare reimbursement, physicians have a powerful economic incentive to ramp up the volume of medical services or procedures to secure a larger income from the Medicare program. Unnecessary tests or inappropriate procedures are the very definition of waste. 

Hospitals currently receive higher Medicare payments for services that could be provided in clinics or doctors’ offices, raising costs and reducing competition. This policy contributes to unnecessary spending. A more sensible policy is “site neutrality,” where Medicare pays the same amount regardless of service location. The Congressional Budget Office estimates this change would save taxpayers about $157 billion over 10 years, with further savings possible in private healthcare markets.  

Medicare Advantage

Medicare Advantage plans are overpaid by roughly $83 billion relative to traditional Medicare, according to the Medicare Payment Advisory Commission. 

The Commission traces these overpayments to two main sources: 

(a) “coding intensity” on the part of MA plans, meaning that the plans add to seniors’ list of diagnoses to report their higher health risk and thus get higher reimbursement; and 

(b) “favorable selection,” meaning that MA plans attract a younger and healthier cohort of seniors than traditional Medicare, even though the government’s administrative payment is based on the higher average health cost of all beneficiaries. In terms of selection effects, the higher government payment is based on the government’s own payment formula, and that is obviously not the fault of the plans.

The payment system is flawed, relying on benchmarks tied to traditional Medicare and a risk-adjustment model that encourages overstatement of patient risk.

Congress could secure major savings by reforming Medicare Advantage payment.

First, it could disentangle plan payment from traditional Medicare pricing and authorize straight market-based competitive bidding on a regional basis for offering standard Medicare benefits. It could set payment to health plans on the average plan bid, like the way the government pays competing health plans in the popular and successful Federal Employees Health Benefits program (FEHBP), as well as drug plans in Medicare Part D, the prescription drug program. 

Second, Congress could establish a retrospective risk adjustment payment system for financing plans with more costly beneficiaries. Insurer funds could be deposited in a common risk pool, based on beneficiaries’ expected health costs, and the pool would reimburse plans with a disproportionately high number of high- cost beneficiaries at the end of the plan year. This would take the guesswork, gaming, and any fraud out of the system entirely. Instead of projecting the cost of high-risk beneficiaries, health plans would henceforth be reimbursed (“made whole”) only for the real costs that their older and sicker enrollees actually incurred. 

Bypass the Middlemen

Most of the real fraud takes place through middlemen: various third-party vendors, such as suppliers of durable medical equipment, false-front hospice centers, or fly-by-night home health providers. Tougher and more aggressive criminal investigations and prosecutions can effectively deal with that problem, aided by more advanced data analytics, including the deployment of artificial intelligence to scour claims. Enforcement efforts have already resulted in charges and roughly $15 billion in recovered funds. 

Congressional leaders should consider Trump’s proposal to address insurance fraud and improve the Affordable Care Act’s health insurance exchanges. The plan would send government funds straight to eligible individuals, letting them choose their own health plans and encouraging competition among insurers. 

Congress could authorize “direct primary care” options for patients enrolled in either traditional Medicare or Medicare Advantage. In such programs, the government or the subsidized health plan would pay a monthly fee to the patient’s primary care doctor directly for routine medical services, thus bypassing the bureaucratic claims processing apparatus altogether.   

THE AUTOPSY: DID DEMOCRATS REALLY WANT TO KNOW?

Personal health accounts, whether provided through Medicare Advantage plans or traditional Medicare, can improve patient satisfaction and deliver efficient care. Congress should allow seniors to contribute to health savings accounts that they had during their working lives, and lawmakers should allow Medicare Advantage plans to include such an option in their annual health plan offerings. Such a model, allowing direct cash payment to physicians for a wide variety of services, is flexible and lessens the likelihood of fraud. 

Good policy work can root out fraud. Patient control of health care dollars and decisions can radically reduce waste. 

Robert E. Moffit, PhD, is a Senior Research Fellow in Health and Welfare Policy at the Heritage Foundation, and coeditor of Modernizing Medicare: Harnessing the Power of Consumer Choice and Market Competition, published by Johns Hopkins University Press.