Improving Care for the End of Life, Online Edition The Palliative Care Policy Center

Sourcebook : Improving Care for the End of Life : 9.0 Medicare Reimbursement

Modern society must learn how to assure that dependent and disabled persons can live well,
despite living for a long time with eventually fatal illnesses.
- American Geriatrics Society

Most of the model programs that have demonstrated good care for patients at the end of life are sustained by cross-subsidies within their organizations or by grants awarded by private foundations. Foundations, other private organizations, and some government programs have supported advances in the end-of-life field and in quality improvement programs. However, programs that rely on such funds can rarely be sustained indefinitely - much less replicated widely.

No current reimbursement strategy regularly matches financial incentives with desirable care. As a result, health care managers interested in developing new programs for end-of-life patients need to consider not only cash flow but also the effects of various funding strategies on the tendency to create - or to sustain - patterns of inadequate care for dying patients.

Each funding method in Medicare has different incentives for and barriers to providing quality care to patients at the end of life. In the current framework, most providers cannot afford to earn a reputation for providing excellent care in difficult cases - that is, care that is complex and expensive but also includes continuity, medications, counseling, and nursing.

Why focus only on Medicare? Because most other reimbursement systems are similar, and because three-quarters of deaths occur while the patient is in the Medicare system. Since the 1980s, more than a quarter of annual Medicare expenditures have been accounted for by the 5 to 6 percent of beneficiaries who died that year (Lubitz and Riley, 1993). Because most elderly people are sick for a few years with the illness that eventually claims their lives, one may reasonably estimate that nearly half of Medicare expenditures go for the care of eventually fatal illnesses, and care for serious and eventually fatal illnesses represents a substantial proportion of the services most health care organizations provide.

Any one patient, at any one time, can be in only one of the three Medicare payment systems: fee-for-service, full risk capitation, or hospice. In most circumstances, the patient is presumed to be in Medicare fee-for-service unless the patient has chosen to enroll in a capitated system or in hospice. These are summarized below and are explained at length in later sections.

Capitated, Risk-Bearing Payments

In this model, Medicare reimbursement essentially equals the local per capita rate (the "AAPCC") times the number of enrollees. The minor adjustments for age and gender do not usually add up to a substantial effect; the more substantial adjustment for nursing home residence affects few beneficiaries (unless that is the target population).

Currently, only a few managed care plans provide care for large numbers of seriously ill Medicare patients. For a few years, Medicare capitation saw dramatic growth; but since July 1998 the proportion of Medicare beneficiaries enrolled in managed care plans has been holding at about 15 percent, or 5 million beneficiaries (HCFA Medicare Managed Care Cost Report, Plans have no incentive to enroll or retain patients with substantial care needs. Since Medicare does not yet have any adjustment for severity of illness, managed care plans cannot afford a reputation for excellence in caring for the seriously ill, because that would attract patients whose expenses are predictably higher than reimbursements.

Seriously ill patients could actually benefit from the continuity, comprehensiveness, and flexibility in service array that capitated risk-bearing managed care plans usually provide. However, the costs of enrolling or retaining unusually sick patients have prevented such innovation. The Balanced Budget Act of 1997 aims to correct this distortion by requiring a system of risk adjustment (for expected utilization for sick patients), starting in the year 2000. The form of these risk adjusters is still quite uncertain, and it is likely to be delayed and also implemented in phases.

In capitated managed care, the cash flow, the locus of risk, and the organization of the physician providers are all quite variable. In traditional HMOs, the physicians were a closed panel, the provider group owned the hospitals, and providers were responsible for clinics and the risk for costs. Now many managed care contractors collect the capitation but pass both the money and the risk through to provider groups who serve many such contractors. Accountability can be difficult to locate.

If a manager in such a system aims to assess the merits of a special service for the seriously ill at the end of life, that manager will be able to estimate the cash inflow for existing patients fairly directly (at least until risk adjustment is initiated). However, what matters most are two elements that can be much more difficult to estimate. The first is to estimate the effects on case mix of having such a service: Will it attract high-cost patients disproportionately? If substantial, adverse risk selection would obviously prevent establishing the new service. The second is to estimate the effects on recent costs of having such a service. If current costs are running five times the AAPCC (not an unusual figure) and the new service promises to cut costs to twice the AAPCC, then encouraging the new service might well be wise, so long as it does not attract more high-cost beneficiaries.

Some well-controlled systems will be able to predict the utilization of a new service. However, another variable to consider is the degree to which eligible beneficiaries are likely to use the service. Such data may not be readily available but can be estimated with some accuracy as a program begins. Parameters for continuation or revisions can then be built into the development plan.


Medicare reimbursement for hospice is based on a per diem, all-inclusive rate, so its core funding is predicted by multiplying the home care hospice rate by the number of patients and days on service. This reimbursement approach means that hospice incentives are more like those in capitated managed care than in fee-for-service. However, hospice's comprehensive service array (it even includes most prescription drug costs), its enrollment limitations (only people with "prognoses of less than six months" are eligible), and its avoidance of hospitalization and high-tech interventions make it quite different from the other reimbursement models. (More about hospice is included later in this chapter.)


Most of Medicare is in the fee-for-service sector, and most payments are linked to the setting and the service. Incentives for providers in fee-for-service care generally encourage patterns of care that expand services, rather than prevent future exacerbations or provide coordinated care with many different kinds of services. To estimate reimbursements in fee-for-service, one has to estimate numbers of patients, the duration of services in each setting, services per patient per unit time in each setting, reimbursement rates, and denial and appeal effects. These are spelled out in the following section, which describes fee-for-service payments according to setting (e.g., home health, skilled nursing facility, hospital).

In This Chapter

This chapter, which is generally organized by treatment setting, provides information about how Medicare could reimburse providers for services to the seriously ill. This chapter:

This chapter cannot, of course, construct a business plan for any single organization. Instead, the information and tables here enable readers to explore ways to tailor a plan that provides services to patients with advanced illness. It focuses only on the background considerations regarding how Medicare can be billed, in various settings, for specially tailored programs that serve dying patients. To generate a financial plan in this rapidly changing environment, a manager will need to estimate costs and revenues for various strategies. Organizations can estimate their own costs for each specific type of service, based on the type and number of patients to be served over a period of time. Managers must also assess the match of services with their patients. The service array for patients who are poor, who use home care or nursing care, or who have no family support will be quite different from the service array designed for patients who have extensive financial and family support.

Some unusual Medicare payments are not discussed here: PACE (Program of All-Inclusive Care of the Elderly), Evercare, and Social HMOs. These effectively provide capitation rates for special populations: nursing home dual eligibles (Medicare and Medicaid) for PACE, nursing home residents for Evercare, and a deliberate population mix with expanded benefits for Social HMOs. They all offer real opportunities for excellent palliative care, but they are not available everywhere and may take quite some time and effort to establish.

Innovators Need to Know

  • Medicare does pay for services to those with serious and eventually fatal illnesses.
  • Billing Medicare can be very complex and requires focused attention.
  • Because of geographic differences in fiscal intermediary practices, institutions must get to know their own fiscal intermediaries.
  • Programs that want to develop and offer palliative care and hospice services might first focus on a small set of services in a specific setting, such as a palliative care consult in a hospital unit.

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This online version of the book Improving Care for the End of Life: A Sourcebook for Health Care Managers and Clinicians is provided with permission of Americans for Better Care of the Dying [ ] and Oxford University Press. All rights reserved.

For further information on quality improvement in end-of-life care visit The Palliative Care Policy Center [ ].

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