April 2007

Is There a Solution to the Medicare Physician Payment Problem?

Unless Congress acts soon, Medicare fees paid to physicians will be cut automatically 10 percent next year, with additional cuts of about 5 percent every year beginning in 2009. Organized medicine has made it clear that cuts of such magnitude would adversely affect senior access to health care as physicians close off their practices to new Medicare patients. A more reasonable payment schedule, however, could add as much as $260 billion to the cost of Medicare over the next decade. The recent report from the Medicare Payment Advisory Commission (the government commission that advises Congress on Medicare policy, also known as MedPAC) offering policy options met a hostile reception on the Hill, and the prospects for a permanent solution remain dim.

Panelists at this April 3 event discussed alternative approaches to resolving the Medicare physician payment problem. Mark Miller, executive director of MedPAC, presented the commission's proposals. Bruce Steinwald, director of health policy at the Government Accountability Office, discussed ways in which Medicare can promote more efficient physician practice patterns. Edward Langston, M.D., chairman-elect of the board of trustees of the American Medical Association, addressed the concerns physicians have with the current policy and proposed solutions. Gail Wilensky provided her perspective as the former head of the Medicare program.

Bruce Steinwald
Government Accountability Office (GAO)

In the early 1990s, Medicare introduced a physician fee schedule that included a cost-containment formula called the Volume Performance Standards (VPS). Concerned that increases in physician reimbursements could become unsustainable and because the VPS did not require any reductions in those reimbursements, Congress implemented the Sustainable Growth Rate (SGR) formula. The stricter growth standards of the SGR tied increases in physician payments to multiple factors, including growth in the overall economy.

Impending cuts in Medicare physician reimbursement rates have raised concerns that physicians will merely increase the volume of services performed so that their income levels are maintained. Data contradict such worries. Even in years with greater-than-inflation increases in physician reimbursements, Medicare spending per beneficiary rose tremendously. In recent years, moreover, as the SGR called for increases in physician reimbursement rates that were lower than general inflation, Medicare spending per beneficiary has grown dramatically.

Failure of the SGR to moderate Medicare physician spending motivated Congress to require the GAO to analyze both the SGR system and different methods of containing physician reimbursement costs.

The GAO study examined the methods non-Medicare health care purchasers use to promote efficiency among health care providers. The study focused on one particular practice called provider profiling. This method defines providers as outliers if a large proportion of their patients are overly expensive (controlling for patients' health status and geographic variations in health costs). Assuming that expensive patients should be randomly distributed among providers, the study concludes that those providers with a higher-than-average proportion of overly expensive patients must be practicing medicine inefficiently. Once these outlier providers are identified, a variety of options exist to favor efficiency, such as offering bonuses to more efficient providers, channeling patients to those providers, or even penalizing the outliers.

Medicare's comprehensive claims database, its experience adjusting for patients' health status, and its large sample size of providers in individual geographic areas are tools for effectively implementing a provider profiling system.

Mark Miller
Medicare Payment Advisory Commission (MedPAC)

The SGR adjusts for changes in input costs, in laws and regulations, and in the economy. In years when the expenditure target is exceeded, the dollar amount is offset by lower target updates, just as the system has called for in the past several years. Congressional intervention to override these lower targets merely pushes the targeted reductions into the future, further aggravating an already tenuous situation.

MedPAC believes that negative updates spanning several years can create access problems for Medicare beneficiaries. In addition, the national targeting system fails to promote cooperation among physicians to decrease expenditures, and it inequitably treats cost-efficient physicians the same as their inefficient colleagues.

We are unable to determine which components are driving the increase in the volume of medical services provided by Medicare physicians, and how much each of these components contributes to the rise. As a result, rising physician payments draw down general federal revenues, drive up out-of-pocket costs for Medicare beneficiaries, and complicate the creation of accountability and quality guidelines for physician practices.

With the goals of ensuring beneficiary access to high-quality care, controlling program spending, and paying providers fairly, MedPAC examined several possibilities to improve the operation of the Medicare physician payment system. Two main ways to control expenditures emerged from the study. The first involves eliminating any targeted expenditure system--including the SGR--and implementing a variety of new approaches for improving value, such as adjusting copayments to increase the use of preventive services and decrease the use of discretionary ones, and capturing physician practice patterns by condition and episode of care to compare their resource use relative to their peers'. The second way implements a new system of expenditure targets for all providers in Medicare alongside efficiency incentives and better information on practice patterns, such as geographic variations in expenditure targets and sharing the savings derived from the adoption of improvements in value. Regardless of the path chosen, the Centers for Medicare and Medicaid Services (CMS) need additional resources to conduct research into better payment approaches.

Edward Langston, M.D.
American Medical Association

Congress must repeal the flawed, arbitrary spending targets that Medicare uses to determine annual physician payment updates in order to ensure access to high-quality health-care services for Medicare beneficiaries. In addition, the American Medical Association supports improving mechanisms to identify and eliminate questionable practices.

Expanding spending targets--one of MedPAC's suggested pathways to restrain costs--would worsen SGR-driven pay cuts, further diminishing the ability of physicians to implement health information technology and to participate in quality initiatives. Another flaw of spending targets is that they are unable to control many factors that impact the volume of health-care services: tobacco use, increases in obesity rates, and an aging population, for example. Nevertheless, CMS could fix two administrative policies without legislative authority. The first is to exclude from the SGR costs of Medicare Part B physician-administered prescription drugs. Similarly, CMS could adjust the SGR to account for expanded benefits from national coverage decisions.

Spending on Medicare physician services has been a good investment. The impending cuts in payment rates will be unsustainable for physician practices. An effective physician payment updating system must adequately reflect increases in medical practice costs and distinguish between appropriate and inappropriate growth in those costs. The SGR accomplishes neither of those aims.
 
Gail Wilensky
Project Hope

The SGR should be replaced with a more aggregated fee schedule to improve incentives and control costs more effectively. Bundling services on the following two levels would allow the SGR to be eliminated without the risk of increasing physician spending. The first dimension would bundle services that are part of chronic disease treatment, paying physicians on a capitated basis or by episode rather than for each service performed. The second dimension would bundle services for high-cost/high-volume diagnosis-related groups so that physicians could work together to reduce costs while increasing the quality and coordination of care. The savings garnered from this bundling should be shared between physicians and health plans or between physicians and hospitals.

But even if the SGR is not replaced, Congress should seriously consider MedPAC's other suggestions: new approaches for improving value, efficiency incentives, and better information on practice patterns. Currently, the SGR attempts to limit total physician spending without affecting the volume and intensity of services provided by any particular physician. Its disaggregated, micromanaged fee schedule exacerbates already perverse physician incentives because aggressive spenders are able to do better off financially than conservative spenders, and there is no reward for physicians practicing highly efficient care.

AEI research assistant Jonathan Stricks prepared this summary.