In recent years, the American public has become well acquainted with many of the challenges facing our nation’s health care system. Controversial issues such as the survival of the Affordable Care Act and proposals to convert Medicare to a premium support model capture headlines regularly.(a) Yet there is another, quieter reform underway that has the potential to affect over 9 million Americans and reduce the nearly $320 billion spent caring for them each year.1

The reform targets a population known as the “dual eligibles,” those individuals who are eligible for both Medicare and Medicaid.(b) This population includes many of the nation’s sickest and most vulnerable adults, and is comprised of both low-income seniors (5.6 million beneficiaries) and low-income people with disabilities (3.6 million beneficiaries). These are also some of the most expensive people to treat: dual eligibles represent less than a tenth of the 97 million beneficiaries of Medicare and Medicaid, yet they account for over one-third of all spending.2

While the dual-eligible population is diverse, they are generally sicker than other Medicare or Medicaid beneficiaries, with half of duals having three or more chronic conditions and six in ten having cognitive limitations.3 As a result, members of this population often need extensive health and long-term care services. Meeting their health needs requires coordinating numerous and varied types of care, including physical, behavioral, pharmaceutical, and long-term care services. Unfortunately, the current system is fragmented, with nursing home care paid largely by Medicaid, and acute hospital care paid primarily by Medicare. This bifurcated coverage means that each program has a narrow interest to limit its share of the costs by shifting expenses to the other program—and neither is incentivized to take responsibility for the delivery of high-quality, coordinated care.

To illustrate, take the case of a female nursing home resident with pneumonia who has coverage under both Medicaid and Medicare. While this condition can generally be treated effectively by providers within the nursing home at a cost to Medicaid of perhaps $500 per day, states can instead send the patient to a hospital, where the cost may exceed $1000 a day but will be borne in full by the federal government through Medicare. Experts estimate that such unnecessary hospitalizations cost upwards of $3 billion dollars each year, a clear example of how poor coordination and skewed incentive structures can lead to higher costs.

The Affordable Care Act of 2010 created several opportunities to improve the delivery of care and reduce costs for the dual eligible population, including the creation of a new Medicare-Medicaid Coordination Office at the Centers for Medicare and Medicaid Services (CMS).(c) One of the Office’s primary projects is a Financial Alignment Initiative aimed at harmonizing spending on Medicare and Medicaid. CMS and 26 states are preparing to launch a large-scale managed care demonstration project that will test and evaluate potential changes in how care is delivered to the dual-eligible population.(d)

Some of the states aim to improve care within the existing fee-for-service model. Care providers will continue to be reimbursed based upon the individual services they provide to patients, but new state-sponsored initiatives will be created to improve the efficiency and quality of care. For example, initiatives may attempt to reduce preventable hospitalizations among nursing home residents or increase the availability of home- and community-based services that allow elderly and disabled individuals to remain in their homes rather than move into long-term care facilities.

The majority of the states, however, plan to implement much more extensive changes. They will participate in a new federal-state partnership model that will test a variety of approaches for the integration of Medicare and Medicaid financing and services, most notably through capitated managed care models. Under this capitation approach, the government contracts with private managed care companies to handle the care of the dual eligibles for a single payment rate, with the states and the federal government sharing any resulting savings.

As outlined in a new study in the journal Health Affairs, a central challenge to implementing these reforms is a lack of data.4 While a growing share of dual eligibles are entering fully integrated plans where care is well-coordinated between Medicare and Medicaid, the overall numbers are still low, with fewer than 2% enrolled in such plans. Knowing what works—and what doesn’t—is vital for guiding effective policy decisions. CMS’s pilot projects offer an opportunity to greatly enhance the data available to inform these decisions.

New approaches to coordinating care for dual eligibles offer an opportunity to improve healthcare quality while reducing overall costs—a big (and rare) win-win for the nation’s healthcare system. Ideally, a successful plan would ensure providers involved in a patient’s care share information, reducing the need for duplicate tests or services and reducing the risk of medical errors such as drug interactions or other events that can lead to unnecessary hospitalizations.(e) It remains to be seen, however, whether and to what degree the new innovations deliver on this promise.

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