A National Perspective of the Opportunities, Challenges Facing Health Care Cost and Sustainability

Michael E. Chernew, PhD, co-editor-in-chief of The American Journal of Managed Care®, discussed cost and sustainability issues specific to commercial insurance, Medicare, and Medicaid at the National Alliance 2021 Annual Forum held in a hybrid format in Washington, DC.

With COVID-19, health equity, and health care spending posing significant challenges for the health care industry, Michael E. Chernew, PhD, co-editor-in-chief of The American Journal of Managed Care® and chair of the Medicare Payment Advisory Commission (MedPAC), spoke during the last day of the National Alliance 2021 Annual Forum on how the fiscal and operational limitations posed by these concerns are affecting sustainability and the transition to value-based care.

Focusing primarily on health care spending, Chernew noted that as “everyone wants to pay for value until they actually have to pay for value,” efficient delivery and pricing are key to financing and providing access to high-value care.

“We want to avoid spending on low-value services. There is a lot of waste in the system in a range of ways, and we don't want to have people using care that they shouldn't get or care that's more expensive when they could get a cheaper service,” he added.

Notably, managing cost-related issues varies according to the type of coverage sector, with spending growth for commercial insurance shown to be growing much more rapidly than Medicare and Medicaid.

With prescription drug costs identified as a cost burden across all insurance types, Chernew said that health care issues specific to each sector included beneficiary growth and long-term social support for Medicaid, prices for commercial insurance, and beneficiary growth and utilization for Medicare.

Speaking on the fiscal challenges for Medicare, whose Part A trust fund is scheduled to be depleted in 2026, CMS’ Office of the Actuary estimated a 4.7% spending growth per year over the next decade, in which almost half (2.2%) is attributed to beneficiary growth and more than half to volume growth (3.6%). Moreover, these estimates indicate that Medicare price growth is scheduled to run below inflation, at –0.7%.

“The current law is that Medicare fees for physicians [and] hospitals in general will grow slower than inflation. So, the main part now of assumed Medicare cost growth going forward is an assumption about the rate of volume and intensity growth. And the way to solve the Medicare problem….is how to reduce the actual growth in volume and intensity below what the Office of the Actuary assumed in their projections.”

Chernew listed 5 specific issues affecting Medicare spending:

  • Efficient pricing, including site neutral payment, wage index, updates in recommendations on the Medicare Physician Fee Schedule, and postacute care
  • Medicare Advantage
  • Launch prices for drugs
  • Alternative payment models (APMs)
  • Safety net

Although designed for cost savings and efficient in providing benefits to Medicare beneficiaries, Medicare Advantage was noted to be likely overpaid. Some health experts perceive the plan as a mechanism to compensate for the fact that the Medicare benefit package is actually not that great, said Chernew.

“When Medicare Advantage plans bid below fee-for-service (FFS) benchmarks, they have to give a lot of that back to beneficiaries in terms of transportation services, lower cost-sharing, and lower part D premiums. It’s actually quite a good program for getting people benefits, but it is more expensive than FFS.”

Delving further into the cost burden in Medicare, the current system was indicated to encourage use of high-price drugs, as issues regarding biosimilar entry and reimbursement continue to impede cost-effective competition. With payers not only financing previous drugs but also the innovation required to invent novel therapies, Chernew said that simply lowering prices is not an effective solution.

“We need to find out how to get lower prices, get people to use the right drugs, and encourage innovation, because in many clinical areas, the drugs are actually really important.”

Ultimately, curbing cost requires a look into the nuances that may raise the prices for types of care. Addressing FFS, he said that paying for specific care services encourages inefficient production due to the revenue and profit tied to these wasteful options.

In adopting APMs, these models allow for the integration of more cost-effective and value-based care services, mentioned Chernew, while also giving the flexibility to mix and match services to create efficient production of health.


As the plethora of APMs available may create problems for care delivery or even impede commitment from health care systems, focusing on the core message of lowering cost and improving quality through fewer models was recommended to improve uptake.

“I think we will continue to move toward these APMs, because I think the delivery system will understand if given the choice between what's behind door number 1, which is subinflation fee increases, vs number 2, you get to own the waste. If they were really rational, they would want to own the waste….that requires a business model change, which is hard for people to conceptualize: getting paid for doing less as opposed to getting paid doing more.”


Further issues regarding cost in Medicare included the safety net, which Chernew said is the biggest problem he manages at MedPac. As COVID-19 has caused significant utilization and financial disruption that has contributed to the bankruptcy or closure of some hospitals, the “lumpy” payment system where each hospital receives a 3% raise was noted to have a disproportionate impact on vulnerable hospitals and those serving vulnerable patients.

“Figuring out how to deal with that heterogeneity is a challenge. Defining who the safety net is, who the important providers are, how do we make sure there are enough providers in the areas that we need to serve the vulnerable populations—all those things are really important.”

“I think we need to build out a care system in this country that makes sure that everybody has access to high-quality care….And we need to do it in a way that doesn't overpay a whole bunch of other people. And that's kind of the core challenge that we've had.”