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Medicare’s Push for More “Skin in the Game”


Stefanacci RG. Medicare's push for more "skin in the game." Annals of Long-Term Care: Clinical Care and Aging. Online exclusive. June 2012.


Richard G. Stefanacci, DO, MGH, MBA, AGSF, CMD 

Series Editor: Barney S. Spivack, MD, FACP, AGSF, CMD

Dr. Stefanacci served as a CMS Health Policy Scholar for 2003-2004, is associate professor of health policy, University of the Sciences, and a Mercy LIFE physician, Philadelphia, PA; and is chief medical officer, The Access Group, Berkeley Heights, NJ.

Dr. Spivack is associate physician editor of Clinical Geriatrics, and is Medicare Medical Director, OptumHealth Care Solutions, United Healthcare, Westport/Trumbull, CT; founder, Connecticut Geriatrics Society; and consultant in geriatric medicine, Greenwich Hospital, Greenwich, CT, and Stamford Hospital, Stamford, CT.

With the growing number of baby boomers reaching retirement age and the proliferation of cutting-edge diagnostic tools and treatments to increase longevity, there has been a recent move by Medicare to increase patients’ “skin in the game,” referring to Medicare putting more decisions in the hands of patients and providers and forcing them to make value determinations on healthcare services. This Medicare Update column explains how the recent shift may help Medicare save resources while still enabling patients to receive necessary care.  

Although Medicare spending in 2010 saw a deceleration from the growth of 7.0% observed in 2009, it still grew 5% that year, reaching $524.6 billion.1 It appears that 2012 will see a continuation of the discussion of Medicare cost-cutting that occurred in 2011 and previous years, as Medicare continues to face significant growth. This growth can be attributed to the increasing number of baby boomers reaching retirement age and the proliferation of cutting-edge diagnostic tools and innovative treatments, which have increased longevity. While some of these new tools in the diagnostic and treatment arena have improved morbidity and mortality rates, others are often used without any evidence that they work better than existing and less expensive options.

Given the severe pressure on resources and the inability to simply increase revenue to cover exploding Medicare costs, the only possible routes to control Medicare spending are payment reductions and/or decreases in healthcare utilization. This is because Medicare costs are a factor of payments multiplied by utilization; thus, Medicare is looking to have patients and providers decrease healthcare costs by controlling use of services and by increasing their financial responsibility, or having them put more of their “skin in the game.” The “skin in the game” idiom was coined by world-renowned investor Warren Buffett, who used it to refer to a situation in which an individual makes a financial investment in the company he or she is running. In healthcare, “skin in the game” refers to paying more out of pocket for healthcare services.

Placing decisions in the hands, or pockets, of patients and providers forces them to make value determinations. This may be an easier option, at least politically, than the alternative of having Medicare make these determinations. The Clinical Guidelines Committee of the American College of Physicians2 attempted to explain that efforts to control expenditures should focus on both the value and costs of healthcare interventions. Determining whether an intervention provides high value requires assessing whether its health benefits justify its costs. While high-cost interventions may provide good value because they are highly beneficial, conversely, low-cost interventions may have little or no value if they provide little benefit. Given the challenges in determining the benefit of certain interventions, it is often easier for Medicare to pass this responsibility onto patients and providers by increasing their skin in the game.

Not Rationing

Donald Berwick, MD, previous acting administrator for the Centers for Medicare & Medicaid Services (CMS), was quoted as saying, “The decision is not whether or not we will ration care—the decision is whether we will ration with our eyes open.”3 The “we” in Berwick’s statement may not have been “CMS.” For both political and regulatory reasons, Medicare may be unable to reduce utilization through rationing. This in part is because Medicare is forced to cover any and all services that are deemed medically necessary. The original statutory language that established Medicare in 1965 instructed that CMS pay for services that are reasonable and necessary for the diagnosis or treatment of any illness or injury or to improve the functioning of a malformed body member.4 This definition of medically necessary cannot take into account the value of a particular service.

To make the determination of coverage, CMS is required to use a formal and transparent process, with reliance on a review of the best available evidence about the effectiveness of the treatment and technology under consideration. CMS can also seek expert advice from the Medicare Evidence Development & Coverage Advisory Committee (MEDCAC), which consists of 100 experts in medicine, biological and physical sciences, public health administration, patient advocacy, healthcare data and information management and analysis, healthcare economics, and medical ethics. Over the past decade, CMS has only issued about a dozen National Coverage Determinations each year. This approach has been limited because of political and other obstacles that prevent its widespread use.

Rather than Medicare taking the lead in controlling utilization, Medicare’s approach has focused on forcing patients and providers to bear more financial responsibility. This is an attempt to battle overutilization that results from moral hazard, which is defined by economic theory as behaviors that encourage overutilization because the result of such behaviors have little, if any, financial consequences for the individuals who participate in them. For example, when comparing eating practices of patrons at an all-you-can-eat buffet with those at a restaurant where individuals are required to order à la carte, it has been found that people consume significantly more at the all-you-can-eat restaurant. Such a situation also exists with insurance;  namely, the greater the insurance coverage, the higher its use, a finding Medicare has recognized for some time.

Because the Medicare Part D benefit was established with a predetermined allocation of $400 billion over a 10-year period, it was virtually impossible to provide uniform benefits to all Medicare beneficiaries, catastrophic coverage to those with the highest drug costs, and additional subsidies to provide significant assistance to low-income beneficiaries without a significant gap in coverage. A Medicare Prescription Drug Benefit that provided comprehensive coverage to all Medicare beneficiaries would have cost at least twice as much over the 10-year period. Congress and virtually every stakeholder knew that the $400 billion budget allocation would necessitate a significant gap in the Prescription Drug Benefit at the time of the earlier budget debate. This coverage gap resulted in a period in which Medicare beneficiaries were 100% responsible for the cost.5

The “skin in the game” expression became popular during the debate regarding Medicare’s Prescription Drug Benefit. The belief in having beneficiaries be responsible for 100% of the cost of medications was that they would adjust their medication use to include only those medicines that they truly valued or needed. The Medicare Payment Advisory Commission (MedPAC) noted that without significant cost sharing, Medicare beneficiaries are hidden from the prices, leading to higher use of resources, both those that are necessary and unnecessary.6

Despite Medicare’s desire to force even more skin in the game on the part of beneficiaries, Medicare is tempered in this approach from political pressure. This pressure has resulted in this approach being reversed, as demonstrated by the filling in of the Medicare Part D coverage gap and the elimination of any out-of-pocket payments for several preventive services, such as mammograms. The concept behind the reversal was that patients’ increased skin in the game could result in underutilization of needed services.

Because the elimination of moral hazard requires a consumer who can pay for services, those individuals without the ability to pay are taken out of this equation. Medicaid provides a safety net against skin in the game applications for the poorest Americans. For example, those with Medicare and Medicaid have no coverage gap in their prescription drug coverage through Medicare Part D. This situation presents a case ripe for overutilization. Again, not surprisingly, utilization levels for dual eligibles are significantly higher than for Medicare beneficiaries. Since out-of-pocket expenditures cannot be used as a way to encourage more appropriate utilization, payers are forced to use other techniques, which may include prior authorization, step therapy, and gate-keeping, which often become burdensome to providers.


Patients’ Skin in the Game

One of the areas where there is a significantly high level of moral hazard is in the Medicare Part B space. Medicare Part B covers physician services, diagnostic testing, and medications purchased and administered by providers. Medicare pays 80% of the cost of Medicare Part B services, while the remaining 20% is the responsibility of patients. This is blocked, however, by Medigap insurance. Medigap is possessed by the majority of Medicare beneficiaries and covers the additional 20%, eliminating any patient out-of-pocket expenses for any Part B service. When patients incur no out-of-pocket expenses, they have no financial incentive to forego a service. To put this issue into perspective, consider a diagnostic radiopharmaceutical indicated for positron emission tomography (PET) imaging to detect beta-amyloid aggregates in the brain. A negative florbetapir-PET scan is clinically useful in ruling out the presence of pathologically significant levels of beta-amyloid in the brain; thus, this test could be used to directly detect the hallmark pathology of Alzheimer’s disease. Although the test costs thousands of dollars, it could be offered at no cost to the millions of Medicare beneficiaries at risk for dementia, costing Medicare several billion dollars.

To prevent such scenarios, several proposals are under consideration to control the growth in Medicare spending, with most proposals advocating higher cost-sharing for patients. One such proposal attempts to achieve savings by restricting coverage under Medigap plans to require enrollees to pay a larger share of the costs of Medicare-covered services.7 In 2008, about one in six Medicare beneficiaries, which equates to more than 7 million people, had purchased a Medigap supplemental insurance policy and had no other source of supplemental coverage. Medigap policies cover some or all of Medicare’s cost-sharing requirements. Medigap coverage provides “first dollar” coverage, which is the type of an insurance policy feature that provides full coverage for the entire value of a loss without a deductible. Some analysts contend that comprehensive “first dollar” coverage from Medigap leads enrollees to obtain unnecessary services because of a moral hazard and lack of skin in the game, resulting in excess Medicare spending.8 The Congressional Budget Office (CBO) has proposed a plan that would prohibit Medigap policies from paying the first $550 of enrollees’ cost-sharing and require that they cover no more than half of Medicare’s additional required cost-sharing up to a fixed out-of-pocket limit.9 CBO estimates that this approach would produce savings of $3.7 billion in 2013 and $53.4 billion over a 9-year period from 2013 to 2021.

Another way that CMS is forcing patients to have more skin in the game is through the use of least costly alternatives (LCAs). The rationale behind LCAs is that Medicare should not pay more for a service when a similar service can be used to treat the same condition and produce the same outcome at a lower cost.8 This has led to Medicare setting a reference price for a particular product or service. Beneficiaries can still obtain the more costly item, but they must pay the difference between the approved payment amount for the reference item and the amount for the one they choose. This approach enables Medicare to control utilization of items outside of the referenced item by forcing patients to have skin in the game when they select a more expensive service. Without such restrictions in place, there would be no incentive for a patient to choose the referenced item over a more expensive alternative.

This approach may eventually be applied to physician services, which can also affect patients’ skin in the game. In a letter issued to the US Senate and House of Representatives by MedPAC in October 2011, MedPAC recommended a 5.9% annual reduction on all non–primary care provider reimbursement over a 3-year period as a way to reduce provider payments. In making recommendations to correct the sustainable growth rate formula, MedPAC has suggested that more physicians may move to nonparticipating status with Medicare. This status enables providers to charge more directly, with patients being responsible for the difference between the Medicare allowable charge and the physicians’ fee.

Of course, the “skin in the game” concept requires two important ingredients: health literacy and consumers who can pay for services. Health literacy is “the degree to which individuals can obtain, process, and understand the basic health information and services they need to make appropriate health decisions.”10 It represents a constellation of skills necessary for people to function effectively in the healthcare environment and act appropriately on healthcare information. These skills include the ability to interpret documents, read and write prose (print literacy), use quantitative information (numeracy), and speak and listen effectively (oral literacy). Health literacy is essential because healthcare decisions are often complex, and making a determination on whether the benefits outweigh the risks can be difficult, if not impossible. In addition, even when benefits and risks are accurately assessed, many seemingly intelligent consumers forgo the facts and move instead based on emotion. In highlighting the impact of low health literacy, a systematic evidence review by the Agency for Healthcare Research and Quality (AHRQ) discovered a relationship between low health literacy and poor health outcomes.11 Using reading skills as a measure of health literacy, the AHRQ found specific correlations between individuals’ health literacy levels and their ability to comprehend health-related information, which also affected various global health measures and rates of hospitalization and of some chronic diseases.12

Consumers who can pay for services, the aforementioned second ingredient for more skin in the game, are becoming scarce because of a poor economy. Confused and cash-strapped consumers who are faced with decisions that may involve more of their skin in the game may decrease their use of needed services, a decision that may both affect their quality of life and cause an increased financial burden in the future. To prevent such scenarios, a careful balance on the part of payers is required to ensure that patients do not inappropriately decrease their healthcare use.

Providers’ Skin in the Game

Patients are not alone in Medicare’s move to increase others’ skin in the game, as providers are also feeling the effect of this shift. To control healthcare use and perhaps reduce payments, Medicare is looking to bundle payments to providers. In some cases, these bundled payments are significantly lower than those same payments made in fee-for-service cases. The other benefit to Medicare in bundling payments is it puts control of healthcare use in the hands of providers. Depending on the bundled responsibilities, providers would be forced into a position of making utilization decisions.

Although this sounds a lot like the health maintenance organization (HMO) gatekeeper approach of the late 1990s, there are several differences. While HMOs proved successful in reducing costs, they were overwhelmingly unpopular with the public. The hope this time is that an approach the forces control into the hands of providers through accountable care organizations (ACOs), rather than large insurers, will be more acceptable to the public. To foster acceptance of this concept among patients and providers, the final ACO rule has been adjusted by the
US Department of Health and Human Services to be more flexible than the draft regulations. Some of the ways the final rule is more provider-friendly include13:

•            Presence of an upfront payment option

•            Primary care providers are the only providers required to be in an ACO

•            No downside financial risk

•            Fewer report requirements

•            No mandatory electronic health record systems

•            Primary care–weighted metrics

•            Transparent savings pool distribution tied to achieving goals.

One of the ACO initiatives already underway is the Pioneer ACO Model.14 This model is a CMS Innovation Center initiative designed to support organizations with experience operating as ACOs or in similar arrangements in providing more coordinated care to beneficiaries at a lower cost to Medicare. The Pioneer ACO Model will test the impact of different payment arrangements in helping these organizations achieve the goals of providing better care to patients while reducing Medicare costs.

Another ACO project being tested is PRIDE (Personalized Regionally Integrated Disease Entities).15 PRIDE is a conglomeration of organized medical systems that have a goal to introduce accountable care into communities as a means of reducing costs and improving outcomes. All of these ACO programs are based on the following principles:

•            Defining the bundles

•            Defining the payment method

•            Implementing quality measurement

•            Determining accountability

•            Engaging providers

•            Redesigning care.

A danger of implementing bundled payments to providers is that certain providers involved in these programs may become underutilized. This was demonstrated using data from the nationally representative Dialysis Outcomes and Practice Patterns Study (DOPPS). DOPPS showed that uncontrolled secondary hyperparathyroidism has been on the rise among black hemodialysis patients since the implementation in January 2011 of the CMS’s bundled payment system for dialysis services, which includes intravenous vitamin D analogs. Previously, the use of these analogs was paid separately and dialysis centers received payment for the cost of these analogs plus an additional 6%. This resulted in a moral hazard favoring overutilization because of desirable reimbursement levels. By reversing the payment and making it a cost instead of a profit, these dialysis centers now face a moral hazard of underutilization.

Providers’ Guidance

So what does this movement mean for providers? For one, providers will increasingly be called upon to educate their patients regarding the true benefits and costs of a healthcare service so that the most intelligent decision can be made, leading to appropriate utilization as patients are increasingly forced to dig into their pockets to cover a greater share of the costs. Providers will also have to be careful stewards in bundled payments systems to ensure that healthcare utilization does not fall below appropriate levels.

Programs are available to assist patients in making difficult healthcare decisions, such as the Dartmouth-Hitchcock Center for Shared Decision Making ( Realizing that at times it can be hard for patients to decide whether to have surgery, to have a test, or to continue with treatment, such programs use the process of shared decision-making, wherein a conversation between a provider and a patient ensues in which the provider contributes his or her medical expertise and the patient communicates his or her life goals, values, and the importance he or she attaches to these values as they relate to a healthcare decision. In preference-sensitive healthcare situations, there is no single “best” therapeutic action that’s indicated for all patients; therefore, the goal of these programs is to help patients make an informed, preference-based choice among several relevant options.

Education is a critical component in preventing against depletion of Medicare resources, as educated decisions ensure the patient receives appropriate treatment and the payer does not incur unnecessary expenses that have little benefit. To ensure an educated decision is made regarding healthcare utilization, providers are no longer solely tasked with identifying clinically appropriate treatments for their patients, but must also carefully consider in conjunction with their patients the value of those treatments from the perspective of the payer, whether the payer is the patient, Medicare, or the provider group. Such an approach will hopefully save Medicare resources while still enabling patients to get the care they need and deserve. 


The author and series editor report no relevant financial relationships.



1. US Centers for Medicare & Medicaid Services. National health expenditures 2010 highlights. 2010. Accessed April 20, 2012.

2.  Owens DK, Qaseem A, Chou R, Shekelle P; Clinical Guidelines Committee of the American College of Physicians. High-value, cost-conscious health care: concepts for clinicians to evaluate the benefits, harms, and costs of medical interventions. Ann Intern Med. 2011;154(3):174-180.

3.  Rethinking comparative effectiveness research. Biotechnol Healthc. 2009;6(2):35-38.

4. Social Security Act Amendments. §1862(a)(1).

5.  Blum J. A History of creating the Medicare Prescription Drug Benefit: striking compromises, avoiding past mistakes, and minding budgetary constraints. 2006. Avalere Health LLC. Accessed April 20, 2012.

6.  Medicare Payment Advisory Commission Public Meeting [transcript]; November 3, 2011: Washington, DC. Accessed April 20, 2012.

7. Kaiser Family Foundation. Medigap reforms: potential effects of benefit restrictions on Medicare spending and beneficiary costs. July 2011. Accessed April 20, 2012.

8. Medicare Payment Advisory Commission. Report to the Congress: aligning incentives in Medicare. June 2010. Accessed April 20, 2012.

9. US Congressional Budget Office. Reducing the deficit: spending and revenue options. March 2011. Accessed April 20, 2012.

10.US Department of Health and Human Services. America’s health literacy: why we need accessible health information. 2008. Accessed April 20, 2012.

11. Health literacy interventions and outcomes: an updated systematic review. Rockville, MD: Agency for Healthcare Research and Quality, 2011. AHRQ Publication No. 11-E006. Accessed April 20, 2012.

12.US Department of Health & Human Services; Agency for Healthcare Research and Quality. Health literacy interventions and outcomes: an updated systematic review. Accessed May 31, 2012.

13.Kaiser Health News. HHS releases final regulations for ACOs. Accessed June 4, 2012.

14.  Centers for Medicare & Medicaid Intervention. Pioneer ACO model. Accessed June 4, 2012.

15.  Shulkin DJ. PRIDE in accountable care. Pop Health Manag. 2011;14(5): 211-214.


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