06/14/2011 05:49 pm ET Updated Aug 14, 2011

Reforming Medicare Without Harming Seniors

Everyone wants to reform Medicare. Program spending has been rising for years and needs to be brought under control. Congressional Republicans, who adopted "the Ryan plan," would like to transform Medicare into financial support for seniors and the disabled who would then search the private insurance market for affordable coverage. Since the inevitable result for most beneficiaries would be coverage that is both less comprehensive and more expensive than traditional Medicare, the Ryan plan is very unpopular, the "end of Medicare as we know it." Democrats have been slow to come up with their own Medicare reform plan. As they ponder what to do in this contentious atmosphere, some facts and analysis can't hurt.

Here is a fact: Medicare and other insurers have only two levers to pull to contain expenditures on care. One is to limit who is eligible for benefits, especially discouraging those who will need lots of services from signing up. Since all employed Americans who pay into Medicare become eligible when they reach age 65 or become disabled, that is not an option for program officials. The other is to limit characteristics of the coverage itself by increasing the amounts people pay when they use services, adjusting the rules under which they can use services, or lowering payment rates to providers. Problem is none of these methods can be counted on to reduce spending. For example, higher cost-sharing will cause many older Americans on fixed incomes to delay using services. As a result, some will get sicker and require avoidable, expensive care later.

The very important point: Since these are the only tools any insurer has to limit its spending, usually, it will mean taking something away from beneficiaries. That is the fact. The Ryan plan is a particularly dramatic illustration.

Here is the question: Can Medicare spending be controlled without reducing eligibility or benefits? I believe the answer is yes, but not easily or quickly.

The key is in the insurers' second lever, adjusting the terms of coverage. Changing the focus to the caregiver - instead of assuming the patient implicitly "demands" unnecessary services - would permit the adoption of provisions that can encourage providers of care to choose services that are most likely to work, avoid those with a small probability of helping, and invest in technology to help them distinguish between the two. Further, since utilization decisions require agreement by both patient and doctor, and patients tend to follow their doctors' recommendations (because doctors are the experts they consult when they think they need services), those provisions are likely to work.

This idea, which is not new, involves changing the method of payment for providers and defining eligible providers as Accountable Care Organizations (ACOs). These are organizations that are willing -- and able -- to take responsibility for caring for patients and to be held accountable for clinical (and financial) outcomes. If Medicare pays an ACO for all who enroll with it instead of for each service provided, the ACO can convert the sum of all its fees into a budget. Then, it can figure out the best way of using its budget to provide good care to its enrolled patients. For example, it might convene its own physicians to develop effective policies for serving patients who present with particular symptoms. It might decide to invest in electronic medical records, which allow all of a patient's providers to access his clinical information electronically, thus, avoiding duplicate services that contribute to excess spending. It might also add a decision support module to the information system so that individual physicians can access reliable information about uncommon conditions. By reducing the great variation in treatment for patients with similar conditions, these steps would also reduce unnecessary spending.

The problem is that few such organizations exist currently. Those that do - like the Geisinger Clinic or Intermountain Health Care - are justly celebrated. So, Medicare needs policies that encourage the formation of such organizations and, over a period of years, transition to this new arrangement. Doctors who are connected electronically to an ACO could continue to practice in small community offices. Patient interactions with them might not change in ways that are obvious, yet their care would be better, and the system as a whole would save money.

It should also be obvious by this point that Medicare's problems reflect conditions in the U. S. medical care system as a whole more than deficiencies in the program itself. Thus, public policy implemented by Medicare officials might facilitate the transformation of the entire U. S medical care system so that all Americans can benefit from more reliable quality and lower costs.

Finally, reforms that emerge from defining a problem clearly, searching for and implementing rational solutions that are most likely to have the desired impact, and making adjustments to respond to unexpected results are in the distinctly American tradition of pragmatism. What could be more American can than that!

Stephen M. Davidson is Professor, Health Policy and Management, Boston University School of Management; and author, "Still Broken: Understanding the U. S. Health Care System" (Stanford University Press, 2010).