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A Report from The Center for Health Research
July 2009
Elizabeth Rula, PhD
Healthways Center for Health Research
701 Cool Springs Blvd.
Franklin, TN 37067
(615) 614-4921
elizabeth.rula@healthways.com

James Pope, MD
EVP and Chief Science Officer
Healthways, Inc.
701 Cool Springs Blvd.
Franklin, TN 37067
(615) 614-4476
jim.pope@healthways.com

Joel C. Hoffman
Senior Vice President
Ingenix Consulting
1331 17th Street, Suite 1100
Denver, CO 80202
(215) 327-4930
joel.hoffman@ingenixconsulting.com

Direct correspondence to:

Center For Health Research
Healthways, Inc.
701 Cool Springs Blvd
Franklin, TN 37067, USA

The actuarial model described in this report, as well as the design of the risk reduction scenarios and the calculation of their impact on cost,
were developed and validated by Ingenix Consulting under a consulting engagement from Healthways. Ingenix Consulting combines business
insight of its experienced consultants with the unmatched health care data resources and analytics of Ingenix to provide advanced solutions to
meet client needs. Senior Ingenix Actuarial consultants and practitioners with representative experience, led by Ingenix senior vice-president
Joel Hoffman, spearheaded this work.
Potential Medicare Savings through Prevention and Health Risk Reduction

INTRODUCTION
The number of individuals aging into the Medicare Program is projected to increase dramatically between 2010 and 2030
due to the aging of the “baby boomers.” As a result, the total number of Medicare beneficiaries is projected to grow from the
2008 level of 45 million to nearly 80 million by 2030.1, 2 Further, the well-known burden of chronic disease in the Medicare
population – data from 2002 showed that half of Medicare beneficiaries had been treated for at least 5 chronic conditions
and this population accounted for more than 75% of Medicare spending3 – will become an even greater challenge as a result
of increasing prevalence rates for these diseases. Together, these factors will create a considerable, perhaps unsustainable,
financial burden on the program.

Historically, the financial burden on Medicare resulting from the very high prevalence and cost of beneficiaries with chronic
disease has generated significant interest in the development of interventions that can reduce those costs. Such initiatives have
been proven successful on a small scale. A geriatric case management program offered to Medicare members with multiple co-
morbid conditions, for example, reduced annual healthcare costs by $7,720 per person compared with eligible nonparticipants.4
Similarly, the Medication Therapy Management Program of the Centers for Medicare and Medicaid Services (CMS) showed a
greater reduction in monthly prescription costs for plan enrollees compared with those who declined the plan.5 Outcomes
from CMS Medicare Health Support Pilot are still outstanding. In addition, numerous other analyses show that even modest
reductions in the prevalence of obesity or tobacco use would have a profound impact on Medicare costs.6, 7

The seemingly inexorable increase in the prevalence of chronic disease and in cost has recently led to recognition by those
engaged in the current national healthcare reform debate that an effective solution is going to have to provide for meaningful
health and disease prevention strategies in addition to the proven approaches for mitigating the clinical, social and financial
costs of disease. This perspective is supported by findings from multiple sources, including a recent Milken Institute Report
demonstrating the savings that could accrue from improved preventive care and modest improvements in modifiable risk
factors such as unhealthy behaviors. It concluded that such improvements, by the year 2023, could reduce the number of
chronic disease cases by 40 million and reduce the costs associated with these diseases (in terms of treatment costs and lost
productivity) by $1.1 trillion annually. 8

In the present study, we determined the specific healthcare cost savings to Medicare that would result from shifting the Medicare
population toward improved health status by reducing risk factors associated with chronic disease. Using standard actuarial
modeling, we calculated the present dollar value of the Medicare program for a typical beneficiary enrolled in fee-for-service
(FFS) Medicare from beginning of eligibility at age 65 until death. Using the model, we derived specific savings estimates that
are based on various risk-reduction scenarios. The model provides important insights on the long-term impact of interventions
aimed at reducing health risk levels on the net present value of the Medicare benefit over a lifetime.

2
Potential Medicare Savings through Prevention and Health Risk Reduction

SUMMARY OF KEY QUESTIONS AND KEY TAKE-AWAYS

What is the present value (PV) of Medicare-covered benefits for a typical beneficiary enrolled in FFS Medicare from
age 65 until death?
– The PV of the FFS Medicare benefit over a lifetime, from age 65 to death, is $174,018 per beneficiary (2008 dollars)
– FFS Medicare enrollment: 37.5 million beneficiaries
– Therefore, the total cost of FFS Medicare over the lifetime of present beneficiaries is projected to be $6.5 trillion
(2008 dollars)

What is the financial impact of increasing the proportion of Medicare FFS beneficiaries who are Low Risk in terms
of health status at age 65?
– Increasing the proportion of beneficiaries who are Low Risk at age 65 from 54% of the population entering
Medicare to 65% of the population, reduced average lifetime costs by $30,499 per beneficiary ($1.1 trillion in
total savings for present enrollment, 2008 dollars)

What is the financial impact of reducing health risk progression in the FFS Medicare population?
– Preventing 10% of upward risk transitions that would otherwise occur after entry into Medicare reduced average
lifetime costs by $4,361 per beneficiary ($163.5 billion in total lifetime beneficiary savings for present enrollment,
2008 dollars)

What total annual savings will FFS Medicare achieve if risk levels are reduced prior to and during the years of the
Medicare benefit through a combination of pre- and post-Medicare health promotion, prevention and chronic care
management initiatives, using modest and optimistic estimates based on current enrollment?
– A modest scenario of increasing the proportion of Low-Risk individuals at age 65 from 54% to 65% and preventing
10% of upward risk transitions that would otherwise occur during the years of Medicare was estimated to save $65.2
billion annually, or $652 billion over ten years (2008 dollars)
– Modeling changes of greater magnitude, a scenario of increasing the proportion of Low-Risk individuals at age 65
from 54% to 75% and preventing 50% of upward risk transitions that would otherwise occur during the years of
Medicare was estimated to save $142.8 billion annually, or $1.4 trillion over ten years (2008 dollars)
Note: The scenarios summarized above are examples of the literally infinite number of combinations and permutations that
can be created using the actuarial model described herein. All scenarios presented in this report show savings; those using less
aggressive assumptions yield smaller savings and those using more aggressive assumptions yield larger savings.

METHODS model as a proxy for health risk based on the burden of

Full methods are detailed in Appendix A. In brief, Medicare
Part A and Part B data for the years 2002–2006 from the
Medicare 5% Sample Limited Data Set,9 Medicare Trust
Fund enrollment projections and Vital Statistics age/
gender-specific mortality rates were used to develop a
model to estimate average Medicare costs based on age
and health risk. In preparing the 5% Sample data, only
those people who were eligible for both Parts A and B of
Medicare were included. Individuals enrolled in managed
care plans were excluded. These criteria and the inclusion
of all outliers ensured that the complete A+B medical and
payment picture was captured. The available data does not
include Part D, and therefore, no projections with respect
to pharmaceutical costs are included in this model. The
model was used to project the costs of a cohort of 878,700
individuals, an estimate of the 2007 enrollment of 65 year
olds in Medicare A+B. The cohort was stratified into three
health status groups: Low Risk, Medium Risk and High
Risk, using the CMS Hierarchical Condition Category (HCC)
chronic disease.10 The model was based on numerical
representations of assigned risk level, as well as survival
for all individuals in the Sample. Tables based on individual
age (life tables) were developed for each of the three health
status groups. The tables calculate the overall weighted
average per-beneficiary per-month (PBPM) and average
lifetime costs from age 65 through 100. Both risk levels and
costs change as the cohort ages, and these transitions are
projected in the model based on the trends experienced in
the Medicare 5% Sample population.
The impact of improving health status within this population
was assessed via risk-reduction scenarios that were modeled
by adjusting the risk distribution of the population based
on changes to risk levels that could theoretically result
from health, prevention and chronic care management
initiatives. Such programs help prevent and mitigate health
risk factors, such as hypertension or high cholesterol, and
promote sustained healthy lifestyle behavior choices, such

3
Potential Medicare Savings through Prevention and Health Risk Reduction

as diet, exercise and tobacco use, to prevent onset and/or

worsening of chronic disease. These scenarios included: (1)
Increasing the percentage of Low-Risk individuals at age
65 to simulate a healthier incoming Medicare population,
(2) Delays in natural risk transitions (age 65 distribution
is maintained for a certain number of years, after which
natural progression begins), (3) No risk progression (age
65 distribution is maintained throughout lifetime); and (4)
Decreased upward risk transition (a percentage of people
who would otherwise have moved from Low to Medium/
High Risk, or from Medium to High Risk, do not make
that transition). Delaying transitions does not allow any
dynamic changes in risk for a certain number of years (i.e.
health status at age 65 is held static for a defined number
of years, so there is no increased or decreased risk), whereas
decreasing upward transitions still allows for any natural
downward transitions that occur.
For each scenario, PBPM costs and lifetime costs were
estimated, based on the changed risk profile of the
Medicare population. As opposed to PBPM costs, lifetime
costs reflect changes in death rate that occur as a result of
reduced risk under the tested scenarios, and thus reflect
the net impact of both the PBPM savings and the increased
duration of expenditure. As shown in Table 2, the baseline
average lifespan for the population from age 65 is 19.0
years. The range of risk-reduction scenarios tested resulted
in a lifespan increase of 0.2 to 6.1 years. In all scenarios,
projected savings are net of additional costs associated
with extended lifespan. Total annual Medicare savings were
estimated first by determining the savings that would accrue
annually per beneficiary based on the difference in average
lifetime costs (lifetime savings) and the average number
of years in the Medicare program based on death rates for
each scenario. The average annual savings per beneficiary
was then multiplied by the total number of FFS Medicare
beneficiaries; 37.5 million.11
Scenario Variables:
Increases in the percentage of Low Risk individuals
at age 65
– Simulates a healthier incoming Medicare
population; at baseline, 54% of incoming 65 year
olds are Low Risk using CMS-HCC categorization
– Reflects potential outcomes of prevention and
wellness interventions that occur prior to Medicare
eligibility
Delays in natural risk transitions
– For each individual, health status at age 65 is held
static for a defined number of years, after which
natural risk progression begins
– During the period of delay, there are no dynamic
changes in risk; both upward and downward
transitions are blocked
No risk progression from age 65
– Individual health status at age 65 is maintained
throughout lifetime
– Neither upward nor downward transitions occur
Decreases in the percentage of upward risk transition
– A percentage of people who would otherwise
have moved into a higher risk group (i.e. from Low
to Medium/High Risk, or from Medium to High
Risk) do not make that transition
– Natural downward transitions in risk (i.e. moving
into a lower risk group) are allowed

To test the reproducibility of the results using the HCC-CMS

method of categorization, we repeated the analysis using
two additional indices for population risk segmentation:
the Agency for Healthcare Research and Quality (AHRQ)
diagnosis categories12 and the Resource Utilization Bands
from the Johns Hopkins Adjusted Clinical Groups (ACG)
Case-Mix System.13 Both methods are detailed in Appendix A.

4
Potential Medicare Savings through Prevention and Health Risk Reduction

RESEARCH FINDINGS Scenarios

Population Risk Distribution by Initial Risk Profile
The life table analysis begins with a total population of
848,700 65 year olds, an estimate of the 2007 Medicare
enrollment. The risk levels and costs for this cohort were
modeled over time, beginning in 2008, based on trends in
historical data from the Medicare 5% Sample, as described
in Appendix A. The distribution of risk within the population,
using the default CMS-HCC risk categorization methodology,
predicts that as these individuals age they shift progressively
into higher risk categories (Figure 1). The Low-Risk group
initially accounts for more than half of the population and
subsequently drops to 25% of the population by age 88. The
loss of individuals in the Low-Risk group is accompanied by
an increasing proportion of High- and Medium-Risk persons
over time, with the High-Risk group increasing from 31% of
the population at age 65 to 50% of the population at age
84. This level remains relatively stable due to the high rates
of mortality in the High-Risk group at older ages that is
matched by the upward transition of Medium- and Low-Risk
individuals into the High-Risk group.
FIGURE 1. RISK DISTRIBUTION BY AGE AT BASELINE
(CMS-HCC CATEGORIZATION)
Low Risk Medium Risk
60%
Proportion of Population
Using the CMS-HCC risk-categorization method baseline
with no changes to underlying risk levels or transition
rates, the average total lifetime cost for a new Medicare
beneficiary is $174,018 (2008 dollars) per beneficiary from
age 65 to death. The costs under specific risk-reduction
scenarios and change in costs compared to this baseline
scenario are summarized in Table 2. Each scenario, described
under Methods, leads to a significant reduction in both
PBPM and lifetime costs. As would be expected, the more
pronounced the reduction in risk status, the greater the cost
savings. While decreasing 100% of upward transitions had
the greatest impact, the analysis shows that any reduction
in the transition to higher risk categories is associated with
savings for the Medicare program. Further, even relatively
modest (10%) and, therefore, likely achievable reductions
in the percentage of the population experiencing upward
transition would result in meaningful savings.
Since each of the risk-reduction scenarios serves to increase
longevity, more people survive to incur costs at older ages.
Lifetime total cost reflects both the impact of PBPM cost at
each age and the predicted life span. Our analysis indicates
increased longevity dilutes the long-term savings accrued
by any intervention that reduces health risk by adding
High Risk additional years of expenditure, explaining the variation in
percentage reductions for PBPM costs, which do not reflect
longevity, and total lifetime costs. Accordingly, the savings

50%
estimates are more dramatic using PBPM costs, but it is
40% particularly noteworthy that substantial lifetime savings are
30% still achieved despite the increased years of expenditure.
This phenomenon is further explained in Appendix B.
20%

10%
Using the estimates of lifetime costs and the average number
of years of the benefit for each scenario, we calculated
0%
65 70 75 80 85 90 100 the total annual savings to Medicare. The two combined
Age scenarios at the bottom of Table 2 represent two ends of
the spectrum of possible results from health management
interventions. A plausible scenario (65% Low Risk at age 65
As an illustration of risk category distribution by age cohort,
and a 10% decrease in upward risk transitions) is estimated
Table 1 demonstrates risk transitions of men from age 70 to
to provide $65.2 billion in annual savings. The scenario
age 74, as described in the Table A2 in Appendix A. This data
representing the high-end of possible risk-reduction
shows that, based on the Medicare 5% Sample data, 35.6%
outcomes (75% Low Risk at age 65 and a 50% decrease in
of those who were initially Low Risk and 27.9% of those who
upward risk transition) is estimated to save Medicare $142.8
were initially Medium Risk move to a higher risk category
billion per year. Therefore, implementing effective health
during the 5 years of analysis.
promotion, prevention and chronic care management
programs could save Medicare between $650 billion and
TABLE 1: BASELINE DISTRIBUTION OF MALES BY CMS-HCC RISK LEVEL $1.43 trillion dollars over 10 years.
AT AGE 70 (INITIAL OBSERVATION, 2002) AND AGE 74 (FINAL OBSERVATION, 2006)
We next determined the combined impact on lifetime costs
Number of Lives
Initial Risk Final Risk Category
of reduction of risk prior to Medicare enrollment and delaying
Category Low Medium High Total, n (%) the progression of risk after enrollment, which simulates
Low 28,143 6,186 9,402 43,731 (44.2) the outcomes of interventions both prior to and during the
Medium 3,516 8,720 4,732 16,968 (17.2) years of Medicare participation. The combinations were of
High 4,408 3,412 30,369 38,189 (38.6) increased proportions of Low-Risk individuals at age 65 and
Total, n (%) 36,067 18,318 44,503 98,888
(36.5) (18.5) (45.0) (100) of progressive delays in risk progression until no transitions
occur (i.e. age 65 risk distribution unchanged; 34 year delay).
The results of this analysis are shown in Figure 2.

5
Potential Medicare Savings through Prevention and Health Risk Reduction

TABLE 2: MEDICARE PBPM AND LIFETIME COSTS FROM AGE 65, CHANGES IN COSTS FROM BASELINE, AND SAVINGS ESTIMATES
BASED ON RISK-REDUCTION SCENARIOS

Lifetime Average Annual Per Total Annual Ten Year

PMPM Change Total Change Years of Person Savings Savings
Risk-Reduction Scenarios Cost ($) (%) Cost ($) (%) Benefit Savings ($) ($ Billions) ($ Billions)
Baseline 803 – 174,018 – 19.0 – – –
People with Low-Risk
status at age 65
65% 596 -25.8 143,519 -17.5 21.0 1,452 54.5 545
75% 427 -46.8 112,458 -35.4 22.9 2,688 100.8 1,008
Delay risk transitions by:
1 year of age 779 -3.0 170,880 -1.8 19.2 163 6.1 61
2 years of age 758 -5.5 168,159 -3.4 19.4 302 11.3 113
Keep age 65 risk static at each age 623 -22.4 147,163 -15.4 20.6 1,304 48.9 489
Decrease upward transitions by:
10% 770 -4.1 169,657 -2.5 19.3 226 8.5 85
50% 600 -25.2 144,000 -17.3 20.9 1,436 53.9 539
100% 239 -70.2 69,135 -60.3 25.1 4,179 156.7 1,567
65% Low Risk at age 65 + and
Decrease upward transitions by 10% 557 -30.6 136,800 -21.4 21.4 1,739 65.2 652
75% Low Risk at age 65 + and
Decrease upward transitions by 50% 281 -49.6 79,961 -54.1 24.7 3,808 142.8 1,428

FIGURE 2: IMPACT ON LIFETIME COSTS OF DELAYING RISK TRANSITIONS AFTER AGE 65

BY THE PROPORTION OF LOW-RISK INDIVIDUALS AT AGE 65 (CMS-HCC CATEGORIZATION)

54% (baseline) 65% 75%

180,000

170,000
Present Value Lifetime Costs In Dollars

160,000

150,000

140,000

130,000

120,000

110,000

100,000
05 10 15 20 25 30
Years of Delay In Risk Transition

6
Potential Medicare Savings through Prevention and Health Risk Reduction

Alternative Approaches to Risk Categorization

To ensure that the results of the model were reproducible
FIGURE 3: RISK DISTRIBUTION BY AGE AT BASELINE USING
and not specific to the CMS-HCC method of categorization, AHRQ (A) AND ACG (B) CATEGORIZATION
two alternative approaches to risk categorization, derived
from AHRQ and ACG methods, were employed. Each of the
two alternative approaches provides a different set of Low, Low Risk Medium Risk High Risk
Medium and High distributions, different probabilities of A
80%
transition among risk categories, different mortality rates,
70%
and different PBPM cost values. The risk distributions for the

Proportion of Population
AHRQ and ACG methods are illustrated in Figure 3. 60%

50%
Use of either the AHRQ or the ACG method resulted in 40%
savings that were directionally consistent with those using
30%
the CMS-HCC method (Table 3). Both alternative methods,
however, demonstrated substantially greater reductions 20%

in lifetime total costs for all scenarios that increased the 10%
percentage of patients with Low-Risk status at age 65, 0%
compared with the default method. This was particularly 65 70 75 80 85 90 95 100
Age
marked with the ACG method (e.g. 84% and 88% reduction
in lifetime costs vs. 18% and 35% with the CMS-HCC method B
for 65% and 75% Low Risk at age 65, respectively). This 80%

disparity occurs because each of the three approaches 70%

distributes the starting population in different ways. The Proportion of Population
60%
HCC method started with 54% Low Risk at age 65, so only 50%
a moderate improvement was required to achieve 60% and
40%
65% Low Risk. The AHRQ and ACG methods distribute more
of the age 65 population to Medium and High Risk (only 30%
29% and 15% are Low Risk at age 65, respectively), so much 20%
greater improvements in risk levels were required to achieve 10%
60% and 65% Low Risk, which was reflected in the higher
0%
savings estimates. 65 70 75 80 85 90 95 100
Age
Overall, percentage reductions in lifetime costs for each
scenario were slightly lower with the AHRQ method
compared with the ACG method. The CMS-HCC method
provided more modest estimates, on the whole, than either
of the two alternative approaches.

TABLE 3: MEDICARE LIFETIME COSTS FROM AGE 65, AND CHANGES IN COSTS FROM BASELINE, BASED ON RISK-REDUCTION SCENARIOS
USING AHRQ AND ACG RISK CATEGORIZATION METHODS

CMS-HCC Method AHRQ Method ACG Method

PV Lifetime PV Lifetime Change from PV Lifetime Change from
Risk-Reduction Scenarios Total Cost ($) Total Cost ($) Baseline(%) Total Cost ($) Baseline(%)
Baseline 174,018 174,232 – 173,180 –
People with Low-Risk
status at age 65
65% 143,519 73,600 -57.8 27,666 -84.0
75% 112,458 53,166 -69.5 20,346 -88.3
Delay risk transitions by:
1 year of age 170,880 171,157 -1.8 169,310 -2.2
2 years of age 168,159 168,365 -3.4 165,746 -4.3
Keep age 65 risk static at each age 147,163 143,591 -17.6 133,922 -22.7
Decrease upward transitions by:
10% 169,657 169,711 -2.6 167,578 -3.2
50% 144,000 141,143 -19.0 134,268 -22.5
100% 69,135 50,399 -71.1 44,378 -74.4
65% Low Risk at age 65 + and
Decrease upward transitions by 10% 136,800 65,398 -62.5 24,596 -85.8
75% Low Risk at age 65 + and
Decrease upward transitions by 50% 79,961 33,103 -81.0 18,531 -89.30

7
Potential Medicare Savings through Prevention and Health Risk Reduction
CONCLUSIONS
The model presented estimates the lifetime present
value of the Medicare benefit from age 65 at
$174,018, expressed in 2008 dollars
Interventions that reduce risk progression or
decrease risk prior to Medicare enrollment can lead
to net cost savings despite increasing longevity
The method of risk categorization does not affect
the direction of the overall findings, supporting the
plausibility of the model results
There are substantial opportunities for savings
through modest improvements to the health of
the Medicare population
The combined impact of health promotion,
prevention and chronic care management initiatives
prior to and after the age of 65 are projected to save
Medicare between $652 billion and $1.4 trillion over
10 years (see Table 2)
Limitations
The stratifications of the Medicare population presented
here was based on age, gender and the categories assigned
by each of the disease severity indices. The stratifications
serve only as an approximation of actual risk levels since
actual risk data is not available in the 5% Sample. The testing
of multiple models of risk segmentation demonstrated
reproducibility, but because similar variables are used within
each of these models, the result of each approach is limited
by the fact that unavailable factors contributing to overall
risk could not be accounted for in the model.
The risk-reduction scenarios presented are purely theoretical
and are not based on measured outcomes of any actual
past or present wellness, health or disease management
program. The model does not have the capacity to estimate
the risk-reduction outcomes that could be achieved by
such initiatives. It estimates the savings that could result
from defined changes to health risk among Medicare
beneficiaries.
Policy Implications
Absent significant system changes, the already
unsustainable cost of healthcare will continue to grow,
threatening America’s ability to compete in a global market
and the viability of our economy as a nation. Historically,
solutions designed to head off this scenario have focused
on adjustments to payment, coverage, manpower and/
or facilities policy. These “supply-side” solutions have
consistently proven inadequate to meet the challenge of
improved health and reduced cost which our 21st century
healthcare system must attain.
To date, the Congressional Budget Office (CBO), citing a lack
of sufficient evidence, has not valued savings in scoring
legislation aimed at promoting programs designed to
improve health and, as a result, reduce healthcare costs.
One reason is the absence of a clearly delineated model
demonstrating the impact of a successful program. The
model proposed here demonstrates the potential for
considerable savings from the implementation of programs
that can achieve risk-reduction results.
It is clear from an analysis of the various scenarios
presented that the larger the percentage of healthy/low-
risk individuals who enter the Medicare population and the
slower their natural progression into higher risk categories,
the greater the reduction in costs to the system and the
nation. Although the levels of risk reduction tested in
these scenarios could not be achieved immediately after
implementation of health and wellness programs, they
represent a spectrum of possible outcomes that could be
achieved over time and make a case for implementing such
programs in the near term so that savings can be realized
as soon as possible. If it can be demonstrated that the
magnitude of these potential savings is significantly greater
than the cost of the interventions needed, there would be
significant net savings to the taxpayer.
From this analysis, policy makers have access to two
important new measures against which progress toward
the health improvement outcomes in the Medicare program
can be assessed: (1) The population’s baseline health risk
distribution; and (2) The baseline rate of change of that
risk. This analysis also provides a valid model for various
simulation exercises – e.g., should Medicare prevention
benefits be extended to the 55 to 64 age group? – that can
and should be conducted to further inform public policy in
this area.
While it is unclear which policy options will lead to the
potential savings described in this report, there are many
descriptions of successful programs that may warrant closer
scrutiny as options that may yield savings for the Medicare
program, for example:
8
Potential Medicare Savings through Prevention and Health Risk Reduction
Initial evaluation of a real-world Internet smoking
cessation system. Cobb, NK et al. Nicotine Tob Res
2005;7(2):207-16. Key findings: This study of an Internet
smoking cessation program demonstrated a smoking
cessation rate of 11.5% among all enrollees after 3
months in the program, a conservative estimate since
survey non-responders were counted as smokers.
Among survey responders, 44.6% reported abstinence
in the 3-month survey. Sustained use of social support
elements of the program was associated with 3 to 4
times greater abstinence.
Increased adherence to cardiac standards of care during
participation in cardiac disease management programs.
Coberley, C et al. Dis Manag. 2008;11(2):111-8. Key
findings: This study of a cardiac disease management
program aimed at improving adherence to standards
of care found that members significantly improved in
medication adherence and in testing rates for low-
density lipoprotein (LDL) after a single year in the
program, with a corresponding relative increase of 36%
in LCD control.
Healthcare use and costs associated with use of a health
club membership benefit in older adults with diabetes.
Nguyen, HQ et al. Diabetes Care 2008;31(8):1562-7.
Key findings: This study found that diabetic Medicare
Advantage members enrolled in a specialized health
club benefit had significantly lower healthcare costs
than matched controls during the year after enrollment,
a difference of $1,633 in adjusted total costs. Costs
trended lower for participants in year 2 of the program,
demonstrating the slower growth in healthcare costs
that was achieved.
Tobacco Cessation through Participation in a
Comprehensive Multi-Media program. Severtson, L et
al. Outcomes & Insights in Health Management 2009;1(1).
Key findings: This study of a smoking cessation
program that provides options for telephonic coaching
and/or Web-based support found that 27.2% of all
enrollees had successfully quit smoking 7 months
after program enrollment, with survey non-responders
counted as smokers. When only survey responders
were considered, the quit rate was 44.7%. Greater
engagement with program support elements, including
telephonic coaching and online social networking, was
associated with a greater likelihood of cessation.
The inescapable conclusion provided by the application
of this model is that significant reductions in healthcare
costs are possible should such comprehensive solutions be
applied to the Medicare and pre-Medicare population.
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MedPAC Report to the Congress: Promoting Greater
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Thorpe, KE and Howard, DH. The rise in spending among
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Picariello, G et al. Impact of a geriatric case management
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Medicaid and Medicare Costs & Savings from Covering
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DeVol, R and Bedroussian, A. An Unhealthy America: The
Economic Burden of Chronic Disease. Milken Institute, 2007.
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Merriman, K and Asper, FM. Differences in how the Medicare
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10
payments using the CMS-HCC method. Health Care Financ
Rev 2004;25:119–41.
Medicare: A Primer. Kaiser Family Foundation, 2009.
11
Available at www.kff.org/medicare/upload/7615-02.pdf.
Accessed July 7, 2009.
12
www.ahrq.gov//clinic/cps3dix.htm
13
www.acg.jhsph.edu/index.htm
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Potential Medicare Savings through Prevention and Health Risk Reduction

APPENDIX A
DETAILED METHODOLOGY

Model Development
All data presented were generated from a standard actuarial
model developed by Ingenix Consulting to generate BOX 1: CONTENTS OF EACH LIFE TABLE
Medicare cost estimates based on population health risk. – Death rate
The model determines the costs of a cohort of 878,700
– Number of lives starting each year by age, with
individuals, representing the 2007 enrollment of 65-year-
age 65 corresponding to 2008
olds in Medicare, using data from the Medicare 5% Sample
Standard Analytical Files for years 2002–2006 to project – Average lifetime beneficiary months
costs and risk levels beginning in 2008. Data from the 5% – Number of total beneficiary months lived in
Sample includes average cost of benefits for fee-for-service each year
(FFS) Medicare Parts A and B, probabilities of death and
– Part A, Part B and total PBPM costs for each year
average number of months of enrollment (beneficiary
and age, developed by trending the 5% Sample
months), all stratified by age, gender and health status. All
cost for that age, gender and status forward to
of the data was organized into life tables that are numerical
the given year
representations of mortality and survival for a patient cohort
based on individual age. – Part A, Part B and total PBPM for each year and age
discounted back to 2008
Life Table Methodology – Total discounted Medicare costs and average
Life tables were developed for each of the 3 risk categories, lifetime costs per beneficiary for the entire cohort,
defined in the next section. The information from these by gender and by risk level. Total dollars equals
three tables was compiled into a final table that provides beneficiary months times the discounted
information about the death rate, population size and total PBPM
Medicare cost averages for the total population and by age
(from 65 to 100) and gender (Box 1). Costs are expressed
as the overall weighted average per-beneficiary per-
month (PBPM) and average lifetime cost beginning at age
65. The 5% Sample cost data were trended to a starting
point of 2008 corresponding to age 65; therefore, age 100
corresponds to the year 2043. For ages 95 and over, the 5%
Sample PBPM cost experience was erratic, so the combined
average PBPM for this group was calculated. For age 100 we
used this calculated combined average cost, based on the
assumption that no one would live beyond 100 (i.e. a death
rate of 100% at age 100 years).

Death rates were calculated based on age and health risk

using the 5 years of 5% Sample data and these rates are
variable depending on the underlying risk distribution
of the population. Probabilities of death were adjusted to
match the age/gender-specific metrics from the National
Vital Statistics Report for December 2007. For costs, each of
the 5 years was trended to 2008 and then averaged together.
Annual trends of 4.5% (Part A) and 4.0% (Part B) were used
together with an annual discount rate (i.e. adjusted for
future inflation) of 4.0%. Development of the 5% Sample
data included only those people enrolled in both Medicare
Part A and B; those enrolled in Medicare Part C (Medicare
Advantage) at any time during the 5 years were excluded.

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Potential Medicare Savings through Prevention and Health Risk Reduction

Risk Segmentation of 5% Sample

The Medicare 5% Sample was segmented into Low-,
Medium- and High-Risk groups based on health status using BOX 2: ASSIGNMENT OF RISK CATEGORIES
three different approaches (Box 2). The default method CMS-HCCs:
used disease groupings from the Centers for Medicare and 1. Low Risk – people with no hits on an HCC diagnosis
Medicaid Services Hierarchical Condition Category (CMS- group
HCC) risk model. This model was developed in 2004 to 2. Medium Risk – remainder (people within an HCC
allow distribution of healthcare payments from Medicare to group, not one of the chronic conditions considered
private healthcare plans based on accurate assessment of the High Risk)
risk of expenditure. The model classifies patients according 3. High Risk – people with chronic heart failure,
to a hierarchical system of increasing risk categories. For coronary artery disease, chronic obstructive
example, in the coronary artery disease hierarchy, acute pulmonary disease, cerebrovascular disease or
myocardial infarction is ranked above unstable angina, diabetes
which is in turn ranked above prior myocardial infarction.
AHRQ: Assignment of detailed disease categories
Two alternative approaches to risk segmentation were tested (see Table A1)
to validate that results using CMS-HCC categorization were
ACG based on RUBs:
plausible and not an artifact of using the CMS-HCC method.
1. Low Risk – RUBs 0 (no diagnoses) and 1 (healthy)
The first alternative method used Agency for Healthcare
2. Medium Risk – RUBs 2 (low) and 3 (moderate)
Research and Quality (AHRQ) diagnosis categories. These
3. High Risk – RUBs 4 (high) and 5 (very high)
categories are based on classifications of disease type (e.g.
infectious diseases, neoplasms, nervous system disorders, ACG – Adjusted Clinical Groups; AHRQ – Agency for
etc.), which are then subdivided into Low-, Medium- and Healthcare Research and Quality; CMS-HCC – Centers for
High-Risk conditions (Table A1). The second method used Medicare and Medicaid Services Hierarchical Condition
Resource Utilization Bands from the Johns Hopkins Adjusted Category; RUB – Resource Utilization Band
Clinical Groups (ACG) system. The five bands – which range
from ‘no diagnoses’ to ‘very high risk’ – were condensed
into three broad categories of High, Medium and Low Risk
to align with the other two methods. Each of the three
approaches provides a different set of Low, Medium and High
distributions, different probabilities of transition among
risk categories, different mortality rates and different PBPM
cost values.

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 Potential Medicare Savings through Prevention and Health Risk Reduction

TABLE A1: AHRQ DISEASE CATEGORIES CLASSIFIED BY RISK LEVEL

AHRQ Categories classified into High/Medium/Low Risk

AHRQ Chapter High Medium Low
1 Infectious Septicemia, Unspecified bacterial Tuberculosis, Hepatitis Mycoses, Viral infections, STD,
Diseases infection, HIV Immunizations, Other
2 Neoplasms Cancers except as noted Melonomas, Prostate, Unspecified neoplasm, Non-epithelia skin cancer,
maintenance chemotherapy/radiation Benign neoplasms
3 Endocrine/ CF and Immunity disorders, Diabetes Diabetes without complications Thyroid, Nutritional,
Metabolic with complications Hyperlipidemia, Gout, Fluid/
Electrolyte/Other disorders
4 Blood Diseases Anemia, Coagulation disorders, Disease of white
blood cells
5 Mental Retardation, Substance abuse,
Disorders Affective disorders, Schizophrenia,
Anxiety, Screening, Other
6 Nervous System Paralysis Meningitis, Encephalitis, Parkinson’s, MS, Epilepsy, Headache, Cataract, Retinal
Coma, Other hereditary disorders, Glaucoma, Blindness,
Other eye disorders, Otitis media,
Dizziness, Other ear/sense organs/
nervous disorders
7 Circulatory Heart valve disorders, Myocarditis/ Coronary atherosclerosis, Nonspecific chest pain, Ill Hypertension, Hemorrhoids
System myopath, Acute MI, Pulmonary heart defined, Conduction disorders, Cardiac dysrhyth-
disease, Cardiac arrest & ventricular mias, Occlusion/stenosis, Ill defined CVD, Transient
fibrillation, CHF, Acute CVD, cerebral ischemia, Other circulatory, Varicose veins
Atherosclerosis, Arterial aneurysms/ of lower extremity
embolism/thrombosis, Phlebitis
8 Respiratory COPD, Pleurisy/pneumothorax, Pneumonia, Asthma, Aspiration pneumonitis, Influenza, Acute bronchitis,
System Respiratory insufficiency, Lung disease Other lower/upper respiratory disease Other URI
9 Digestive Intestinal infection, Peritonitis/ Mouth/teeth/jaw diseases, Esophageal disorders,
System intestinal abscess, Biliary tract disease, Gastroduodenal ulcer, Gastritis, Other stomach
Liver disease, Pancreatic disease (not disorders, Appendicitis, Abdominal hernia, Enteritis,
diabetes) Diverticulosis, Other
10 Genitourinary Nephritis, Renal failure Other kidney/ureter/bladder disease, Ill-defined UTI, Hyperplasia of prostate,
System conditions Genital disorders (male & female),
Non-malignant breast conditions,
Endometriosis, Ovarian cyst
12 Skin/Tissue Chronic ulcer of skin Skin infections Other inflammatory skin
conditions, Other skin disorders
13 Musculoskeletal Infective arthritis/osteomyelitis, Rheumatoid arthritis, Lupus, Other acquired Osteoarthritis, Other non-traumatic
System Pathological fracture deformities joint disorders, Spondylosis,
Osteoporosis, Other connective
tissue disease, Other bone disease

Categories relate to the individual claim lines. People will be assigned to High, Medium and Low based on their highest level across all claims. Conditions not
mentioned here are by default classified as Low.

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Potential Medicare Savings through Prevention and Health Risk Reduction

TABLE A2: ILLUSTRATION OF RISK CATEGORY CALCULATION FOR A

Calculation of Health Status Distribution Based 74-YEAR-OLD MAN BASED ON TRANSITIONS BETWEEN RISK CATEGORIES

on Risk Transitions
Changes to population risk levels over time were modeled Observations Determining the Chance of Number of
using risk transition rates calculated from the 5% Sample. For Assignment to Low-Risk Group Observations:
this project, transition rates were defined as the probability Low-Risk males aged 70 in
of moving from one risk category to another. These rates 2002 and still Low-Risk in 2006
12
were calculated by determining the number of people Low-Risk males aged 71 in
transitioning from one risk category to another for each age 2002 and still Low-Risk in 2005
and gender, and also for the 5 years available in the dataset. Low-Risk males aged 72 in
For example, the calculation of the chance of being in the 2002 and still Low-Risk in 2004
Low-Risk group for a 74-year-old man in 2006 is based on Low-Risk males aged 73 in
30 observations. The dataset covers the years 2002–2006, 2002 and still Low-Risk in 2003
so the 30 observations for the Low-Risk group at age 74 Medium-Risk males aged 70 in
includes men who were Low Risk in 2002 and remained 2002 who are Low-Risk in 2006
Low Risk up to the age of 74, plus those who were initially
Medium-Risk males aged 71 in
Medium Risk who became Low Risk by the age of 74, and so 2002 who are Low-Risk in 2005
forth (Table A2). Similarly, there are 30 observations each for
Medium-Risk males aged 72 in
individuals at Medium Risk and those at High Risk at age 74. 2002 who are Low-Risk in 2004
Together, the three sets of 30 observations provide the Low,
Medium-Risk males aged 73 in
Medium and High distribution at age 74. This longitudinal
2002 who are Low-Risk in 2003
assessment of risk transition was performed for beneficiaries
of every age from 65 through 100. High-Risk males aged 70 in
2002 who are Low-Risk in 2006
High-Risk males aged 71 in
Modification to Population Risk Levels 2002 who are Low-Risk in 2005
and Scenario Testing
High-Risk males aged 72 in
The model is built to allow the user to make modifications 2002 who are Low-Risk in 2004
in primary assumptions about risk levels or distribution to
High-Risk males aged 73 in
determine how these changes impact Medicare costs. Any
2002 who are Low-Risk in 2003
change in underlying risk in the population results in a
Values beginning with the 2003 data 9
change in trended PBPM costs from Medicare Parts A and
B and a change in death rates and thus average beneficiary Values beginning with the 2004 data 6
months. All of these changes are reflected in the average Values beginning with the 2005 data 3
lifetime cost that the model calculates. Total Observations: 30

Population risk level can be altered through three primary

routes: a change in the baseline risk distribution (the
percentage of age 65 individuals in each risk category),
a change in the starting point of risk progression (age 65
risk levels remain static for a defined number of years, after
which normal risk progression proceeds), and a change in
the percentage of people who have upward transitions in
risk (i.e. move from Low Risk to Medium/High Risk or from
Medium Risk to High Risk, still allowing natural changes
in downward transitions of risk). Within the model, each
of these variables can be changed to a value that the
user chooses; for the purposes of this paper, specific risk-
reduction scenarios were chosen to illustrate the
functionality of the model and to demonstrate the potential
savings from health management interventions that
produce these results.
In the initial set of scenarios, the percentage of patients
categorized as Low Risk at age 65 was increased to 65% and
75% to reflect impact of health and wellness
interventions prior to Medicare eligibility. The second set of
scenarios test the potential impact of interventions during
the years of Medicare and included delaying natural risk
transitions by a certain number of years, keeping age 65
risk static at all ages, and reducing upward transitions in
risk by 10% (i.e. 10% of people who would otherwise have
moved from Low to Medium/High Risk, or from Medium
to High Risk, do not make that transition), 50% and 100%.
Finally, combined scenarios were modeled to demonstrate
the cumulative impact of reducing risk progression prior to
and during the years of Medicare. The two combinations,
65% Low Risk at age 65 plus a 10% decrease in upward
transitions and 75% Low Risk plus a 50% decrease in upward
transitions, represent the two ends of the spectrum with
respect to what population health initiatives could achieve.
Cost trends were also calculated over a spectrum of possible
delayed risk scenarios.

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Potential Medicare Savings through Prevention and Health Risk Reduction

APPENDIX B
IMPACT OF INCREASED LONGEVITY ON
LIFETIME COST SAVINGS
Any intervention that reduces population risk results in a
decreased death rate (increased longevity), so more people
survive to incur costs at older ages. This dilutes the long-term
savings accrued by health interventions by adding additional
years of expenditure. This phenomenon is illustrated in
Table B1, in which baseline total beneficiary months, and
average per-beneficiary per-month (PBPM) and total costs
at baseline are compared with a risk-reduction scenario, a
10% decrease in upward risk transitions, for men of specific
ages. PBPM costs are lower at every age, but total cost (for all
living beneficiaries) increases above age 87, due to a greater
number of people reaching these ages. Despite the fact that
total Medicare costs contributed by beneficiaries over age
87 under this scenario (and others presented in this paper),
total costs over the lifetimes of these beneficiaries (Total)
are still lower than in the baseline scenario. Therefore,
despite the increased number of beneficiary months, and
thus the total costs, at older ages when population health
risk is reduced, cumulative savings can still be achieved.

TABLE B1: ILLUSTRATION OF DIFFERENCE BETWEEN PBPM SAVINGS AND TOTAL SAVINGS THAT ACCRUE FROM
DECREASING UPWARD RISK TRANSITIONS BY 10% (MEN, SELECTED AGES AND CUMULATIVE)

Baseline Scenario: 10% Decrease Change in Cost

Risk Distribution in Upward Transitions from Baseline

Age Beneficiary- Average Total Cost Beneficiary- Average Total Cost Average Total
(years) months PBPM ($ millions) months PBPM ($ millions) PBPM Cost ($)
($) ($) ($)
65 2,946,126 611.62 1,802 2,946,126 611.62 1,802 0.0 0.0
70 4,157,972 628.46 2,613 4,173,135 598.54 2,498 -4.8 -4.4
75 3,490,562 824,57 2,878 3,528,724 782.93 2,763 -5.1 -4.0
80 2,649,000 987.28 2,615 2,707,259 939.00 2,542 -4.9 -2.8
85 1,702,152 1,165.38 1,983 1,767,367 1,109.86 1,962 -4.8 -1.1
90 853,849 1,301.07 1,111 905,664 1,242.66 1,125 -4.5 1.3
95 295,199 1,503.97 444 321,817 1,437.14 462 -4.4 4.2
100 59,214 1,438.09 85 67,011 1.371.62 92 -4.6 7.9
Total 78,048,205 832.54 64,978 79,353,929 798.77 63,385 -4.1 -2.5

PBPM= per-beneficiary per-month

*Total is for all years 65-100

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