Medicare attracts fraudulent health care providers seeking to profit from the elderly. Source: HHS Office of the Inspector General.

Medicare is an essential program for retired Americans, with more than 55 million people participating in the program this year. Yet certain aspects of Medicare have drawn criticism as being costly and inefficient. Calls for reform led to the enactment of the Affordable Care Act, better known as Obamacare, and now, the government is turning its attention to Medicare to see what gains it can make in shoring up the finances of the program while ensuring that older Americans who rely on the program get the healthcare they need.

Early last week, the Department of Health and Human Services announced that it would seek to transform the basis under which medical professionals receive payment from Medicare. As you can expect from a program that costs the federal government more than $500 billion annually, the various winners and losers from Medicare reform will fiercely debate the merits of switching from the current model and whether new initiatives will truly help improve the quality of care that Medicare provides to its participants.

How Medicare works and where it's going
Under the current system, Medicare has a fee-for-service model. That means that in order for a doctor or other medical professional to get paid, the patient has to receive some form of service, whether it's an examination, a test, or some other procedure.

Secretary of Health and Human Services Sylvia Burwell. Source: HHS.

The new HHS proposal, however, would start tying the amounts that Medicare pays to what the government calls "alternative payment models," with the expectation that healthcare providers would have to demonstrate the quality and value of the services they provide in order to get full reimbursement for their work. In its press release, HHS set a goal of having 30% of its payouts tied to quality and value metrics by the end of next year, with a further goal of reaching 50% by the end of 2018.

HHS clearly believes that moving away from the fee-for-service model will have positive impacts. Its press release noted how "providers are paid based on the volume of care, rather than the value of care provided to patients," further observing that "it does not matter whether these services help or harm the patient" as far as receiving reimbursement is concerned. Currently, Medicare makes about 20% of its payments to healthcare providers using alternative payment methods, and already, the program has seen savings of more than $400 million through the use of accountable care organizations.

Changing incentives for healthcare providers
One challenge of greater use of alternative payment methods is that as with the fee-for-service model, medical professionals have incentives to help them make the most of the system that don't perfectly align with the goals of Medicare. With fee-for-service, providers get rewards for providing services even if they're unnecessary.

Source: HHS.

Under an account care organization model, by contrast, networks of doctors, hospitals, and other providers work together in order to meet quality goals. That gives those networks an incentive to go after the healthiest Medicare beneficiaries in order to meet requirements for serving a minimum number of participants. If the goal of alternative payment methods is to improve the quality of healthcare even for those who need the most assistance, providers will be wary of patients who need the most care without any guarantee that they'll actually help those providers meet their quality- or value-based goals. Indeed, ACOs can end up owning penalties if they don't reach their appropriate benchmarks, making it even more crucial to attract the healthiest patients.

Pilot programs designed to test these new models have had mixed success. The Pioneer ACO program has helped Medicare save more than $875 million, but 40% of the initial participating organizations left the program. Many provider organizations seem unprepared to take on the risk of penalties and other financial hits that the ACO structure envisions, and as long as safer alternatives are available, healthcare professionals are likely to resist the paradigm shift unless they see a clear advantage for their own particular situation.

One thing is clear, though: Private employers have already moved toward implementing similar moves in their own efforts to control costs. Through initiatives like wellness programs, companies are in a position to deliver more targeted educational efforts to their employees, and linking cost savings to enhanced pay and benefits creates a direct incentive for workers to align their efforts with their employers. Changes to Medicare will involve a much larger scale, and it will be harder to align the interests of 55 million participants with differing needs and capacities to pay for services.

Nevertheless, the experience of private employers working with healthcare providers and health insurance companies to streamline efficiency could have lessons that Medicare could take for its own benefit.

Medicare is a huge program, and making major changes to its basic operation will necessarily involve contentious debate. Nevertheless, with everyone sharing the goal of ensuring that the government program provides services in a way that is financially sound, considering alternatives to way the current Medicare system works could be smart if it leads to a combination of less expensive, higher-quality healthcare for the tens of millions of Americans who depend on it for their health.