Medicare in the United States is a national social insurance program administered by the U.S. Federal Government. The main purpose of Medicare is to provide health insurance care for U.S. Seniors over the age of 65. 

According to a July 20 Kaiser Family Foundation report, those who have paid into the Medicare trust fund via the mandatory  2.9 percent payroll tax for at least 10 years automatically qualify for Medicare Part A, which provides inpatient care and is the main prerequisite for all of the other parts of Medicare (Parts B, C and D). It should be noted that there are other ways to qualify for Medicare, such as having a permanent disability, but about 83 percent of the 55 million Medicare recipients are U.S. citizens who have paid into this trust fund, according to the National Committee to Preserve Social Security and Medicare.

The trust fund, however, is shrinking rapidly and could run out by 2026, according to a June 22 Washington Post article.  The Centers for Medicare and Medicaid Services notes that the ratio of the number of contributing workers under the age of 65 to the number of Medicare beneficiaries —mainly people over the age of 65 —  is falling, according to a March 21, 2013 piece by the Heritage Foundation. This ratio was 4.5 in 1965, and it is projected to be about 2.8 by 2020. In other words, the number of people taking money out is growing faster than the number of people putting money in. 

Take that ratio with the clear rise of healthcare costs around the United States, according to a July 28 Kaiser Family Foundation report, and this trust fund is expected to become overdrawn  within the next decade. 

A significant portion of reimbursement for Medicare parts A and B is currently under a fee-for-service reimbursement schedule, according to the Centers for Medicare and Medicaid Services. Under a fee-for-service system, Centers for Medicare and Medicaid Services reimburses hospitals, doctors, nurses, x-ray technicians and other health care providers for every service the hospital or provider allocates. One of the main problems with this fee-for-service method is that many health experts, such as Princeton economics professor Uwe Reinhardt, believe that this method could possibly lead to unnecessarily expensive and excessive care, thus resulting in growth of healthcare spending, according to a Dec. 13, 2012 Health Affairs Health Policy Brief.

 In order to fully understand the problem with this fee-for-service spending, picture this scenario: John gets admitted to the hospital because he is complaining of hip problems. Upon admission, the emergency room doctor recommends that John get an x-ray. Unfortunately, it turns out that John needs a hip replacement. After his operation, John undergoes three weeks of post-acute care — that is, short-term care after surgery in order to aid his recovery. 

By the time John finishes treatment, the Centers for Medicare and Medicaid would have to pay for all of the services provided by the x-ray technicians, doctors, nurses and other healthcare providers separately as required by the fee-for-service system. All of these separate services can easily add up to several thousands of dollars. Of the many proposed solutions to these problems of the fee-for-service system, one promising option that the government is testing is bundled payments.

According to the American Medical Association, bundled payments cover services by multiple providers during a single episode of care. In other words, health care providers accept a predetermined lump sum or “bundled payment” for all the costs of a specific medical condition. Going back to the example of John, under bundled payments, the emergency room doctor who first recommended that John take an x-ray, the radiologist who took his x-ray, the operating room doctor who performed the hip surgery on John and the physical therapist who worked with John for three weeks after his surgery would all get paid one “bundle” of payment. 

Who receives how much of this bundle of payment is determined by numerous factors such as geography, type of treatment and cost of supplies, according to the Centers for Medicare and Medicaid Services. The bundled payments method could encourage healthcare providers to work together and coordinate John’s care in one of the most cost-effective ways possible. According to the New England College of Medicine, the Bundled Payments for Care Improvement Initiative has been testing four bundled payment plans that cover different combinations of physician, hospital and post-acute care since 2013. It should be noted that as of now, this is a voluntary program for which hospitals apply in order to participate, according to a July 30 Modern Healthcare article. The idea is appealing, as it could be a solution to help Medicare cut costs by moving away from this fee-for-service system.

Admittedly, there are a few potential problems that bundled payments could cause. According to the New England Journal of Medicine, bundled payments could “inhibit coordination” across other conditions because this system focuses on covering payments for one condition at a time. Also, this is a potential financial risk to providers, because several complications could arise during treatment that could raise the costs for providers even though they are restrained to work under a fixed fee, according to Hospitals and Health Networks.

Despite potential problems of bundled payments, this system should be considered because Medicare spending is rising under the fee-for-service system.

A significant part of the overall Medicare reimbursement system is under a fee-for-service system. This, along with the declining contributor-to-beneficiary ratio has, in part, led to the overall shrinking of the Medicare trust fund. 

The Bundled Payments for Care Improvement Initiative is a relatively new program, and it obviously has its flaws like most other health care reimbursement programs, but its use could reduce the rapid growth of Medicare spending and potentially prolong the life of the trust fund.