3 Ways to Cut Medicare Spending

Medicare spending is a big long-term concern. Here are three ways we could reduce it.

Jul 20, 2014 at 7:31AM

As reported in the New York Times, Medicare spending seems to be coming under some control. Medicare spending is expected to make up 4.6% of GDP in 25 years, as opposed to the 4.9% the Congressional Budget Office (CBO) had predicted last year.

And the Kaiser Family Foundation notes that Medicare appears to be spending about $1,000 less per person this year than had been previously expected when this year's numbers were forecast in 2010.

Time to break out the champagne?

Not so fast.

The CBO notes that its staff isn't sure about why the spending slowdown has occurred or how long it'll stay.

3 ways to reduce Medicare spending
However, there are some easy ways to potentially reduce Medicare spending over the long haul -- things that we should be watching for over the long term to hopefully help bend that cost curve, control spending, and improve care outcomes.

The first is investments in Accountable Care Organizations (ACOs for short). ACOs take many different shapes and forms, but the Pioneer ACO Model, which Medicare is 'pioneering' (pun obviously intended) gives providers bonuses based on the money they save Medicare each year. A hospital might earn a bonus by systematically helping patients manage chronic diseases, potentially helping prevent a costly emergency room visit. Participating providers have to achieve certain quality targets as well to ensure that the care given doesn't sacrifice effectiveness for cost.

The second is negotiating drug prices. That's right, Medicare can't do that. Europe does. Pharmacy Benefits Managers like Express Scripts (NASDAQ:ESRX) make money by doing it (Express Scripts is perhaps best known for its fight against Gilead Sciences' hepatitis c drug Sovaldi, although it's been taking a hard line on pharmaceuticals for years, perhaps most notably banning GlaxoSmithKline's Advair in favor of AstraZeneca's Symbicort). If Medicare could, there could be some serious money saved.

And thirdly, reducing Medicare Advantage outlays. According to MedPac, Medicare currently pays 6% more on average for each member on a Medicare Advantage plan than in traditional fee-for-service Medicare.

Will all three, or any of these three, actually come to fruition? Who knows. But a serious conversation about Medicare spending will likely focus on some of these huge factors.

In the video below, Motley Fool health care analysts Michael Douglass and David Williamson lay out some of the potential winners and losers if Medicare successfully uses one or more of these strategies to reduce cost. 

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David Williamson owns shares of Express Scripts and UnitedHealth Group. Michael Douglass has no position in any stocks mentioned. The Motley Fool recommends Express Scripts, Gilead Sciences, and UnitedHealth Group. The Motley Fool owns shares of Gilead Sciences and Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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