ECONOMIC REPORT OF THE PRESIDENT

more to cover Medicare patients than it would have cost to cover the same
patient in traditional Medicare (MedPAC 2009). To do so, the ACA phased
in changes to the “benchmarks” used to determine payments to Medicare
Advantage plans. These provisions have taken effect without adverse effects
on the premiums or availability of Medicare Advantage plans, consistent
with the view that pre-ACA payment rates were excessive. Access to
Medicare Advantage plans remains essentially universal among Medicare
beneficiaries, and the share of Medicare beneficiaries enrolled in a Medicare
Advantage plan has risen from 24 percent in 2010 to a projected 32 percent
in 2017, while average premiums are estimated to have fallen by 13 percent
from 2010 through 2017 (CMS 2016b).
Reforming the Structure of Medicare’s Payment Systems
A second approach to increasing the value produced by the health
care delivery system is to improve the structure of the payment systems that
public health care programs and private insurers use to pay medical providers.
Historically, the U.S. health care system has been dominated by “fee-forservice”
payment systems in which medical providers are paid separately for
each individual service they deliver, like an office visit, a diagnostic test, or
a hospital stay.
Fee-for-service payment undermines the efficiency and quality of
patient care in three important ways. First, fee-for-service payment encourages
providers to deliver more services than necessary since each additional
service translates into additional revenue. Second, fee-for-service payment
encourages providers to deliver the wrong mix of services. In a system with
payment rates for thousands of different services, payment rates for some
services will inevitably end up being set too high relative to the underlying
cost of some services and too low for others, biasing care toward those
services that happen to be particularly profitable, whether or not those
services create the most value for patients. Third, fee-for-service payment
fails to reward providers who improve health outcomes because payment is
completely independent of the outcomes they achieve for their patients.19
The perverse short-run incentives created by fee-for-service payment
may also distort the long-run trajectory of medical technology. Because
of the shortcomings catalogued above, fee-for-service payment tends to
encourage widespread use of resource-intensive new technologies, even if
they generate modest health benefits, while often failing to ensure equally
widespread use of less resource-intensive new technologies that generate
19 While health care professionals have other reasons to deliver high-quality care, including
their concern for their patients’ well-being and their desire to attract and retain patients, the
evidence summarized earlier demonstrates that this was not always sufficient to ensure that all
patients received high-quality care.
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