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Table 4.
Use of Medicare Services by High- and Low-Cost Spending Groups, 2001

Low Cost (Bottom 75 Percent)

Average Use Percentage with Conditional Service Type

on Service

1.7 1.4 1.4 2.2 11.3

2.4 0.3 0.1 14.0 73.6

1.0 1.1 1.1 1.4 6.0

the end of life imply different spending patterns prior to death. Whereas people dying from organ failure experience gradually diminishing functional status with periodic exacerbarions of their illness, thus incurring very high spending before death, other people who die suddenly often incur little health care spending in their last


High Cost (Top 25 Percent)

Average Use
Percentage with Conditional
Service Type

on Service

Type of Service

Short-Term Hospital Admission
Other Hospital Admission
Skilled Nursing Facility Admission
Emergency Department Visit
Physician's Office Visit


Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.
Note: As an example of how to read the information in this table, among the 74.8 percent of high-cost beneficiaries who had a short-term

hospital admission, the mean number of admissions was 1.7.

of acute health shocks several years in a row than have an episode or two in a given year and then recover. Therefore, high expenditures in one year are likely to decrease over time as expenditures regress to the mean in subsequent years.

year of life.

An examination of the spending patterns of Medicare
beneficiaries reveals a second pattern: the quantitative im.
portance of the subsequent death of high-cost beneficia-
ries. About 14 percent of beneficiaries with high Medi-
care expenses in a given year die during that
Figure 2). Within four years, that fraction accumulates to

year (see

40 percent.

In general, impending mortality greatly increases the probability of an individual's incurring high costs regardless of his or her prior spending. Studies show that about one-quarter of total Medicare payments are for the rypically expensive and intensive treatment received in a patiene's last year of life, which often postpones death for only a short time. Indeed, the high mortality rate among high-cost beneficiaries reported in Figure 2 confirms that a sizable fraction of spending by high-cost beneficiaries is for people near death. But not all deaths result in high spending, nor do all high-cost beneficiaries die soon thereafter.'

Different trajectories of functional decline at

Although patients who die incur no further medical costs, they also offer little potential for cost savings if they had been targeted for an intervention strategy. Taking subsequent mortality into account, however, strengthens the empirical correlation of high spending over time. For high-cost beneficiaries in 1997 who did not die over the next four years, nearly one-half-instead of

one-quarter-were high cost at the end of 2001. In Figure 2, the numbers of living high-cost and low-cost beneficiaries were roughly equal in each year from 1998 through 2001. Had there been no persistence in high medical expenses, only one-quarter of those beneficiaries would have been expected to be high cost during those years.

8. Sec Christopher Hogan and others, “Medicare Beneficiaries' Costs

of Care in the Last Yeas of Life," Health Affairs, vol. 20, no. 4
July/August 2001), pp. 188-195; and James D. Lubitz and Ger-
ald F. Riley, “Trends in Medicare Payments in the Last Year of
Life," New England Journal of Medicine, vol. 328, no. 15 (April
15, 1993), pp. 1092-1096.

9. Moreover, because a patient's time of death is unpredictable

(except perhaps in cases such as advanced cancer), it is only in hindsight that researchers can estimate which costs were associated with care at the end of the patient's life and which costs were asso

ciated with attempts to save the patient's life. 10. See June R. Lunney, Joanne Lynn, and Christopher Hogan, “Pro

files of Older Medicare Decedents,Journal of the American Geriatrics Society, vol. 50, no. 6 (June 2002). pp. 1108-1112; and June R. Lunney and others, “Patterns of Functional Decline at the End of Life,Journal of the American Medical Association, vol. 289, no. 18 (May 14, 2003). pp. 2387-2392.


Table 5.
Transition of Medicare Beneficiaries
Between High- and Low-Cost Spending
Groups, 1997 to 1998

cive 1997-2001 spending put them in the top 25 percent of all beneficiaries for that 60-month period, Figure 4 displays the distribution of the number of months in which they were in the top 25 percent of beneficiaries in terms of spending in that monch. The median number of months is 22. In other words, about half of cumulatively high-cost beneficiaries had high monthly costs during 22 months or more of the 60-month period. That result could indicate that there may be time and opportunity to intervene to affect the use of Medicare services for a significant number of high-cost beneficiaries because they remain persistently high cost over an extended period.

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Prospectively Identifying Future High-Cost Beneficiaries Whether a strategy of focusing on high-cost beneficiaries could lead to significant reductions in overall Medicare spending would depend on two factors: the ability to identify individuals who will have high costs in the future, and the ability to mitigate those high costs. The existence of Medicare beneficiaries whose high spending persists over an extended period presents potential opportunities for intervention strategies. However, prospectively identifying such individuals could be difficult.

A basic problem is that although researchers can identify characteristics or conditions that are prevalent among high-cost beneficiaries, many low-cost beneficiaries may also share the same characteristics. For instance, a number of chronic conditions were found to be highly prevalent among high-cost beneficiaries, and considerably less prevalent among low-cost beneficiaries. However, because the number of low-cost beneficiaries in this illustration is three times as large as the number of high-cost beneficiaries, the numbers of high-cost and low-cost beneficiaries with those conditions are much more similar (see Table 6). So while diabetes is nearly cwice as prevalenc among high-cost beneficiaries as it is among low-cost ones, the actual number of low-cost beneficiaries with diabetes greatly exceeds the number of high-cost beneficiaries with that condition. Therefore,


intervention strategy that focuses simply on beneficiaries with diabetes will include a large number of people who will not incur significant medical expenditures (at least soon thereafter). Even the most successful strategies for identifying highcost individuals will probably include some who will not turn out to be expensive.

Source: Congressional Budget Office based on data from the

Centers for Medicare and Medicaid Services.
Note: The low-cost (or not high-cost) spending group in 1998 also

includes beneficiaries who died or became disenrolled
between 1997 and 1998.


The Concentration of Spending Over a five-Year Period Given the presence of high end-of-life expenditures and the regression to the mean following a high-cost year, one might expect Medicare expenditures over a longer period to be less concentrated than annual expenditures tend to be. For the entire 1997 cohort of Medicare beneficiaries, that is indeed the case (see Figure 3)." Compared with the distribution of annual expenditures reported in Figure 1, char cohort's five-year inflation-adjusted cumulative expenditures are somewhat less concentrared: the top 5 percent of beneficiaries, when ranked by five-year cumulative spending, accounted for 27 percent of total five-year Medicare spending from 1997 to 2001, compared with 43

percent for annual spending. Furthermore, the top 25 percent of beneficiaries accounted for 68

percent of cotal five-year spending, compared with 85 percent for annual spending.

over five


There is still a great deal of concentration of expenditures

years, however, in because a significant group

of Medicare beneficiaries incurs high spending over an extended period. For beneficiaries whose cumula

11. That cohort is defined as beneficiaries who enrolled in the Medi

care program as of January 1997 and who either remained enrolled for five years (until December 2001) or died. Beneficiaries who subsequently enrolled in a Medicare managed care plan were excluded. There were about 1.4 million beneficiaries in CBO's random sample of that cohort.


Figure 2.
Expenditure History of Medicare Beneficiaries Who Constituted the
Top 25 Percent in 1997
(Percentage of beneficiaries)

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1997 Group in Preceding Years

Base Year

1997 Group in Subsequent Years Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

ple of randomly selected Medicare beneficiaries. (The se-
lection criteria for all of those strategies also required that
the beneficiaries still be alive in January 1998.)12

Illustrative Strategies for Identifying
High-Cost Beneficiaries
This section briefly considers three simple strategies for
prospectively identifying high-cost beneficiaries on the
basis of the characteristics of those beneficiaries discussed
above. The first strategy is to select beneficiaries who were
high cost in the previous year. The spending history
shown in Figure 2 demonstrates that expenditures in the
previous year are correlated with expenditures in the fol-
lowing year. The second strategy is to select beneficiaries
who were hospitalized in the previous year based on the
correlation between hospital admission and continued
high spending. Both the first and second strategies would
delay providing interventions until the disease had pro-
gressed and some substantial costs had already been in-
curred. The third strategy is to select beneficiaries who
were diagnosed with two or more of seven chronic condi-
cions: asthma, chronic obstructive pulmonary disease,
chronic renal failure, congestive heart failure, coronary
artery disease, diabetes, and senility. The resulting sam-
ples from the three stracegies were compared with a sam-

How the strategies fared is displayed in Table 7 on page
12. The share of the Medicare population included in
each of the three selected groups ranged from 17 percent
to 22 percent. To make the subsequent shares of spending
by the

groups more comparable, CBO adjusted the size of each group (by random assignment) to match the size of the smallest original group, or 17 percent of the overall Medicare FFS population. The group with a hospital admission had the largest average spending in 1997 (at $24,900), followed by the high-cost group (at $23,000) and the group with multiple chronic conditions (at $16,900). The reference group had $6,200 in average spending. The previously hospitalized group also had the

12. The selection criteria further required that beneficiaries be

enrolled in Medicare's fee-for-service sector from 1997 to 2001, enabling analysts to track their spending over the entire five-year


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Approaches to Managing Care for High-Cost Beneficiaries The three selection strategies considered above are highly stylized and conceptual illustrations, and they do not address the challenges of designing and implementing workable programs to reduce costs. However, they broadly reflect some of the approaches currendy being developed and tested by various organizations. For example, the selection strategy focusing on people diagnosed with chronic conditions is similar to the approach taken by some private disease management programs. Over the past decade, many private health plans and organizations have begun to offer disease management as a model of care for chronically ill patients, in an attempt both to improve the quality of care that enrollees receive and to slow che growth of their health care costs. Disease management programs vary widely in the specific rechniques and tools they use, but they share some common components that are designed to address several perceived shortcomings of current medical practice. One component is to educate patients about their discase and how they can better manage it. The goal is to encourage patients to use medication properly, to understand and monitor their symptoms more effectively, and possibly to change their behavior. A second component is to actively monitor pacients' clinical symptoms and treatment plans, following evidence-based guidelines. A third component is to coordinate care among providers, including physicians, hospitals, laboratories, and pharmacies. A disease management program can provide feedback and support to physicians about patients' status berween office visits as well as up-to-date information on best practices as they apply to the specific patient. Although disease management is a term sometimes used as a catchall that addresses any and all limitations of fee-for-service care, it does not encompass general care coordination or general prevenrive services, such as flu shots. 13

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In terms of subsequent spending, beneficiaries in each of the three selection groups used more than $46,000 in Medicare-covered services over the next four

years, compared with $27,000 for beneficiaries in the reference group The previously high-cost group accounted for 29 percent of coral Medicare spending over those four years, compared with 28 percent for beneficiaries with a prior hospitalization and 28 percent for those diagnosed with multiple chronic conditions. Those levels of aggregate spending occurred despite the fact that nearly half of the members in each group died before the end of the fouryear period.

Various demonstration projects and initiatives by the Centers for Medicare and Medicaid Services also focus on strategies to improve care for beneficiaries who account for large amounts of Medicare spending. For example, the Chronic Care Improvement Program was created by the Medicare Prescription Drug, Improvement, and Modernizacion Act of 2003 to improve clinical care for

13. See Congressional Budget Office, An Analysis of the Literature on

Disease Management Programs (October 2004).


Figure 4.
Distribution of High-Cost Months Over the 1997-2001 Period
(Percentage of beneficiaries in the top 25 percent)

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Number of High-Cost Months Incurred by Cumulatively High-Cost Beneficiaries

Source: Congressional Budget Office based on data from the Centers for Medicare and Medicaid Services.

beneficiaries with advanced congestive heart failure and/ or diabetes with significant comorbidities. 14 The more recent Care Management for High-Cost Bencficiaries Demonstration is designed to develop and test strategies to improve the coordination of Medicare services for high-cost FFS beneficiaries.

and implement effective intervention strategies, clinical or otherwise, to change beneficiaries' use of medical services.

Identifying individuals likely to be responsible for a large
share of Medicare spending merely points out the possi-
bilicy of focusing on high-cost beneficiaries as a way to re-
duce the program's costs. Realizing those reductions in
spending would ultimately rest on the ability to devise

Initial results from disease management programs and
other efforts indicate the difficulty of reducing the use of
care. In certain cases, the health conditions underlying
high spending may not be amenable to effective interven-
tions. Moreover, although interventions may improve
health outcomes for high-cost beneficiaries, they may
lead to increases in the use of medical care. It is important
to note that improving the care received by high-cost
beneficiaries in itself may be a worthwhile objective, even
if it fails to reduce costs.

14. Nine sites have been selected for the pilot phase of the program.

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