Traditional Medicare

Medicare has evolved over time, but elements of the traditional program have been consistent. People in the traditional program can choose any facility or provider who participate in Medicare (a high share of U.S. providers and practitioners). There are few requirements for referrals or prior authorization. Traditional Medicare is administered by a federal agency, the Centers for Medicare and Medicaid Services (CMS), with help from contractors who pay bills, build information technology systems, and provide many other functions. The various methods for paying providers, like hospitals and physicians, and the coverage parameters such as cost-sharing and number of days of coverage, are set in law and regulation. They are consistent across the country.

Historically, Traditional Medicare has utilized a “fee-for-service” payment method. This means a fee is paid per service delivered. Organizations like the Medicare Payment Advisory Commission review payments to providers annually to see whether they are adequate to assure access to care. They then make recommendations to Congress as to whether to increase or decrease the annual update for inflation or change other aspects of the payment system to improve incentives for access, quality, and efficiency for each type of provider.

Experts have critiqued aspects of the traditional program. One area of concern is that payment methods tend to reward providers and practitioners who provide more services to more people and more specialized services in general. The concern is that the incentives in these payment systems may lead to unnecessary and poorly coordinated care at the expense of primary care, fueling higher spending than optimal for patients and taxpayers. Moreover, early fee-for-service payment systems did not explicitly seek to reward higher quality.

Over time, CMS has experimented with new payment systems and models of care delivery. They have also invested in the development of quality measures for nearly all of the providers and practitioners furnishing care to people enrolled in Traditional Medicare. This work was accelerated with the establishment of the Center for Medicare and Medicaid Innovation and implementation of the Medicare Shared Savings Program (MSSP) in 2012.

MSSP is a permanent (as opposed to a temporary demonstration project) part of Traditional Medicare. In MSSP, hospitals or physician groups agree to be paid in part through traditional payment methods and in part based on the quality and utilization experienced by their patients over a year. This type of arrangement can also be referred to as an accountable care organization, or ACO. The MSSP has grown in terms of provider organizations, patients, and savings. With 10.9 million participants in 2023, it is the largest ACO in Medicare. Not every provider organization participating in MSSP has saved money or improved quality, and some organizations have dropped out. Other organizations have remained in the program and new organizations have joined it. CMS is working to recruit more participation from rural areas. Although savings to date have been small as a percent of total spending, some recent reports have found meaningful increases in savings to the program (see also Chronic Care Coordination and Accountable Care Organizations).

Traditional Medicare could be more efficient and give providers stronger incentives to furnish high-quality, coordinated care as effectively and efficiently as possible. The program also could be better from an insurance perspective. It could cover services that beneficiaries need, like eyeglasses and dental care, and beneficiaries’ liability for cost-sharing could be lower across the board (see also Benefits adequacy and affordability).

A number of factors require the future consideration of Medicare policy changes in both the traditional program and Medicare’s private plan options. These include continued increases in medical costs, rapid changes in medical technology, and the aging of the baby-boom generation (those born between 1946 and 1964), which translates to the addition of ten million enrollees to the program through 2030. Medicare must remain a strong, broadly supported social insurance program so that it can continue to protect current and future generations.