Health care workers in personal protective equipment attend to a patient.

Value-Based Reimbursement Can Decrease Spending on Medicare During COVID-19

By Sravya Chary

Since the start of the COVID-19 pandemic, the virus’ disproportionate threat to the Medicare patient population has been widely discussed and acknowledged. In light of the public health crisis and an increasing financial burden placed on entities involved in Medicare cost sharing, a value-based Medicare system would not only reduce costs, but also better protect the elderly and chronically ill during the pandemic.

Medicare, a federal health insurance plan, was created in 1965 to provide coverage for individuals aged 65 or older. Since then, the plan has expanded to include people under 65 with certain disabilities and persons of any age with End-Stage Renal Disease.

Medicare consists of four parts (A through D) in which individuals may enroll to receive benefits. Part A provides enrollees with hospital coverage while Part B provides medical coverage (e.g., doctor’s visits, x-rays, lab tests, preventative screenings, and outpatient visits). Parts A and B together comprise “Original Medicare.” Part C, or Medicare Advantage, is offered through private insurance plans. It covers Original Medicare along with potential added benefits. Part D provides enrollees with prescription drug coverage through private health plans.

Over the past 50 years, the Medicare patient population has tripled in size (as of 2020, 67.7 million Americans are Medicare beneficiaries). Concurrently, federal spending has increased.

Medicare is one of the largest programs in the federal budget. In 2019, Medicare costs accounted for $644 billion (14% of total federal spending) – a stark increase since 1970 when Medicare only accounted for 3% of federal spending. Further, the fast-growing program is expected to account for 20% of the federal budget by 2049.

2020 Medicare Reform

To address heightened government spending on Medicare, a series of reforms went into effect on January 1, 2020 that comprehensively increased costs for beneficiaries, private insurance plans, and drug manufacturers.

Although the intent of the reform was to prevent a substantial increase in government spending on Medicare in 2020, the unforeseen realities of the pandemic have and will continue to financially burden Medicare cost sharers. This is especially true considering the increased risk the virus poses to Medicare beneficiaries, which leads to increased rate of hospitalization, use of intensive care units, use of mechanical ventilation, and post-acute care.

Further, although the Medicare Part D cost sharing structure was reformed to increase the monetary threshold to enter the catastrophic coverage phase (a phase at which 80% of prescription drug costs are paid for by the government) the increased need for prescription drugs during the pandemic has the potential to increase the number of beneficiaries entering the catastrophic coverage phase. This increase would result in a sudden and unexpected increase in government spending on Medicare.

COVID-19 Impact on Medicare Patients

On June 22, 2020, the Centers for Medicare and Medicaid Services (CMS) released preliminary COVID-19 Medicare claims data, which showed that between January 1, 2020 and May 16, 2020, more than 325,000 Medicare patients were diagnosed with coronavirus. Further, roughly 110,000 of those patients were hospitalized. This translates to 518 cases and 175 hospitalizations per 100,000 Medicare beneficiaries.

In a study published by the Center for Disease Control and Prevention (CDC), among 1,482 laboratory-confirmed COVID-19 hospitalizations, 43.4% of patients were aged 65 years or older whereas only 31.1% were between the ages of 50-64 and 24.7% between ages 18-49. The CDC noted that the findings of the study suggested that not only does the 65+ demographic show an increased rate of COVID-19-related hospitalization, but the majority of those hospitalized for coronavirus have preexisting medical conditions – many of which are chronic illnesses.

Original Medicare enrollees are covered by a fee-for-service Medicare system funded directly by the government. On the other hand, Medicare Advantage enrollees are covered under a managed Medicare system, in which the government, private insurance providers, and drug manufacturers (in the case of Part D enrollment) share the costs associated with the enrollee’s care.

CMS released key findings on COVID-19 among Medicare Beneficiaries, which stated that from January 1, 2020 through May 16, 2020, Medicare spending just for fee-for-service hospitalizations was $1.9 billion. Further, an analysis by the National Association of Accountable Care Organizations found that the COVID-19 pandemic has the potential to increase government Medicare spending to a staggering value of $115.4 billion over the next year. The analysis found that the burden was not limited to the government but also extended to Medicare Advantage Plan cost sharers.

Shift from Fee-For-Service to a Value-Based System

In response to these key findings, Seema Verma, the administrator of CMS, released a call to action on June 22, 2020 in which she encouraged government officials to join CMS in moving away from a fee-for-service model to a value-based model in Medicare.

Verma sheds light on the Achilles’ heel of a fee-for-service model: the focus on volume. In a fee-for-service model, healthcare organizations are reimbursed for each procedure, treatment, or test that is conducted. In such a model, unnecessary procedures or tests can be conducted with no benefit to the patient due to financial incentives. This model can greatly increase government and private plans’ spending on Medicare while doing little to improve patient health. Alternatively, value-based models compensate healthcare organizations based on patient health outcomes. Value-based systems place emphasis on quality of care and encourage healthcare providers to make decisions transparently based on valuable scientific information.

The aim of the value-based model is two-fold: 1) to address the social determinants of health and address disparities faced by Medicare patients; and 2) to incentivize healthcare providers to shift their focus away from quantity and towards quality of care, thus improving health outcomes.

Not only does a value-based system have the potential to greatly decrease government spending by reducing the number of unnecessary procedures and treatments provided, but it also can significantly improve health outcomes for the elderly and chronically ill by making these outcomes the primary incentive for reimbursement. During COVID-19, the need for a more cost-effective and outcomes-based system has been made devastatingly clear; a value-based reimbursement system is a step in the right direction for the Medicare patient population.


The above opinions are wholly my own and in no way represent the opinions of my affiliated institutions.

Sravya Chary

Sravya Chary is a manager in the pharmaceutical industry, a Master of Bioethics (MBE) candidate at Harvard Medical School, and a Petrie-Flom student fellow for the 2020-2021 academic year.

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