Medicare has been in the health policy spotlight in recent months, with the launch of political ads and bus tours to promote the new prescription-drug benefit; behind-the-scenes lobbying by health-care providers to influence implementation of the Medicare Modernization Act; the launching of pay-for-performance initiatives; and other recent announcements by Mark McClellan, administrator of the federal Centers for Medicare and Medicaid Services (CMS) and a faculty member on leave from CHP/PCOR.

CHP/PCOR director Alan Garber discussed key Medicare issues and challenges in a recent interview. Garber chairs the CMS' Medicare Coverage Advisory Committee and is lead investigator for a research project to develop a proposal to reform the Medicare program.

How will the new prescription drug benefit affect Medicare's financial problems?

Garber: This year's report by the Medicare Trustees states that the Medicare Modernization Act, which includes the drug benefit, will exacerbate Medicare's existing financial problems. They're referring to the fact that we have a shrinking number of working, tax-paying Americans to support the growing number of Medicare beneficiaries, who will soon be receiving additional benefits - that kind of system can't be sustained. The numbers tell a very simple story: there will either have to be new sources of revenues or reductions in expenditures.

Despite these concerns, the MMA addresses a very real problem - the absence of a drug benefit for Medicare, which had become a glaring and seemingly illogical omission, particularly as drugs have become a more important part of health care. That said, there has been plenty of controversy about the way the benefit has been implemented, and plenty of concern that Congress has failed to put in place a sustainable mechanism to pay for it.

Medicare's system for paying healthcare providers has been criticized on many fronts. What is the biggest problem with Medicare's reimbursement system?

The real issue is not how complicated Medicare's reimbursement system is -- though it is remarkably complex -- but the fact that it offers inappropriate incentives for care. There is nothing in Medicare's typical reimbursement approach that discourages inappropriate care, and in fact it may encourage inappropriate care.

As one example, Medicare reimburses oncologists for administering chemotherapy in their offices. In the past, this was a lucrative business for many oncologists, who could charge Medicare much more than it cost them to purchase and administer some of the drugs. According to CMS and many observers, this led many oncologists to administer chemotherapy inappropriately. But many oncologists claim that Medicare underpaid for the other services they provided to cancer patients. CMS has decided to fix the problem by cutting reimbursement for chemotherapy, but not by addressing complaints of under-reimbursement for other services. When you have a fee-for-service reimbursement system - which applies to the more than 85 percent of beneficiaries who are enrolled in traditional Medicare - it's very hard to get the incentives right. If you set the fees too high for services you promote overuse. If you set the fees too low you promote underuse.

Are you suggesting we should do away with traditional Medicare and change to a fully managed care version that pays providers using a prepaid, flat-rate reimbursement?

I don't think that's the answer. It's not likely to be politically acceptable; most of us believe that any Medicare reform needs to preserve choice for beneficiaries, offering them traditional Medicare along with managed care options. The question is, how can we make their choices more meaningful and how can we make options available that will ensure higher quality care?

What are some encouraging recent developments in the Medicare program?

Mark McClellan is pursuing a number of promising initiatives. One of them, "pay for performance," offers financial rewards to clinicians and hospitals who provide care that leads to better outcomes. For example, hospitals would receive higher reimbursements if they have unusually favorable outcomes for heart attack patients or lower-than-expected rates of preventable infections.

He's also trying to catalyze the rapid adoption of electronic health records. CMS is now making available to physicians a version of VISTA, the VA's electronic system, at greatly reduced cost. While computers have become ubiquitous in our lives, they have been slow to make inroads into doctors' offices, where paper charts and handwritten notes remain the norm. The CMS has made a bold move in trying to make it easy and inexpensive for physicians to implement electronic health records. They recognize that this is an important tool for improving quality of care.

Are there signs that Medicare is rethinking its long-standing reluctance to consider cost-effectiveness in deciding what therapies to cover?

It does seem odd that cost-effectiveness is not explicitly considered when CMS decides what should be covered by Medicare. We're in a real quandary because Medicare's expenditures will soon overtake its revenues, yet Medicare is being asked to pay for new technologies that are extraordinarily expensive, while beneficiaries still fail to receive some forms of care that are both inexpensive and highly effective.

Virtually every other country considers cost in deciding what it will pay for. Yet whenever the administrators of the Medicare program have sought to introduce notions of cost in deciding what to cover, they have met with powerful political resistance. Any politician who gets out in front on this issue risks attracting the ire of active, politically powerful constituents. The leadership will have to come from members of the public. They can participate most effectively by gaining a better understanding of Medicare's challenges and letting their senators and representatives know their views concerning the future of Medicare. Politicians will not be ready to lead on this issue unless they know the public is behind them.