Frederick Cahn, PhD04.12.07
New Recommendations From the Medicare Payment Advisory Commission
By Frederick Cahn, PhD
On March 1, the Medicare Payment Advisory Commission (MedPAC) released two reports to Congress. One was its annual report on Medicare payment policy; the other was a report that was required under the Deficit Reduction Act of 2005 on alternatives to the “Sustainable Growth Rate System” (SGR) that is intended to control physician expenditures. The theme of both reports is to restrain growth in Medicare fee-for-service spending through incentives for providers to increase both efficiency and quality.
The MedPAC is an independent federal body established by the Balanced Budget Act of 1997 to advise Congress on issues affecting the Medicare program. In its reports, the MedPAC sees the trend of increasing spending without commensurate increases in the “value” of the program, combined with the demographic trends that are increasing the proportion of beneficiaries in the overall population, are leading to unsustainable growth in the program and its impact on the economy and federal budget. Also, while there has been some increase in quality of care, there remains a substantial variation among providers in quality as well as utilization of services. In summary, the MedPAC recommends that Medicare should adjust payments for quality and exert financial pressure on providers to control their costs.
The goal of the MedPAC is to match Medicare productivity with the 10-year average of productivity gains in the general economy, which is 1.3% for 2008.
The commission recommends increases in average inpatient and outpatient payment rates equal to the hospital market basket (a measure of input prices) but implemented concurrently with a quality incentive program. (See last month’s column on value-based purchasing.) Thus, depending of the measurement of quality performance, some hospitals would see more than the market basket increase and some less.
MedPAC Recommendations
The commission recommends that part of the funding for a quality incentive payment policy should come from reducing indirect medical education (IME) payments. The MedPAC claims that more than half of the IME add-on payment is unrelated to the additional cost of care for the hospital’s teaching program. If implemented, this reduction may put pressure on the medical device industry, as these teaching hospitals also use more products from advanced technology and adopt new technologies faster.
More perilous for medical device companies is the recommendation that the Centers for Medicare and Medicaid Services (CMS) implement severity-based DRGs. Last year, the CMS’ proposal for severity-based diagnosis-related groups (DRGs) came under intense criticism from the medical device industry, as it would have led to large (greater than 10%) decreases in payments for many procedures that use advanced medical device technology, such as stents and pacemakers. The criticism caused the CMS to withdraw the proposal for 2007 and initiate investigation of alternative grouping methods. Presumably, the 2008 Inpatient Prospective Payment System proposed rule (due this month—not available as of press time) will have a new proposal for severity-adjusted DRGs.
For outpatient dialysis, the MedPAC recommends an increase equal to the projected change in input prices less the expectation for productivity growth. However, the report also suggests bundling all dialysis-related services, including drugs, into a single payment and continued efforts to improve dialysis quality. For the products subject to bundling, eliminating separate payments would increase competitive pressure and decrease the willingness of providers to purchase any new technologies that would increase their costs.
The MedPAC recommended that Congress update payments for physician services by the projected change in input prices, minus expected productivity growth. However, physician services are a focus of concern. While the commission reports that beneficiary access to physicians is good and there are small improvements in quality, the volume of physician services grew by 5.5% per beneficiary across all services in 2005. Growth was greatest in imaging services at 9%, with volume of some advanced MRI and CT procedures increasing by 14%.
The Medicare program has tried to limit growth in the cost of physician services through a statutory formula called the sustainable growth rate. The SGR determines the annual update to the physician payment rate consistent with an expenditure target that is tied to growth in the gross domestic product. However, the MedPAC points out that the SGR neither rewards physicians who restrain volume growth nor punishes those who prescribe unnecessary services. Furthermore, the SGR formula calls for substantial decreases in payment rates through 2015. If implemented, these consecutive annual cuts would result in many physicians dropping out of the program, thus limiting the access of Medicare patients to physician services.
The commission offers Congress the alternative of scrapping expenditure targets and determining the rates through their own political process (probably not a very palatable alternative) or finding some alternative method of setting targets. However, none of the alternative methods of limiting expenditures that the MedPAC examined restrain the growth in volume of services. The commission believes that this problem lies in the inherent incentives of the fee-for-service payment system, perhaps aggravated by supplemental coverage policies.
The group suggests that any realistic method of restraining expenditures needs to be applied to all providers, not only physicians, and should encourage cooperation among physicians and hospitals, reward providers for efficient use of resources and create incentives to increase quality. Suggestions for accomplishing these goals include pay for performance systems that link payments to quality of care, gainsharing arrangements, more bundling and packaging of services, tighter standards for providers and better billing accuracy. Regarding payment accuracy, the MedPAC suggests that in some cases, growth in the volume of services is due to misevaluation of services in the “relative value units” used to measure the intensity of the various physician services, and that the CMS should have the ability to submit corrections in these relative value units to the American Medical Association.
The MedPAC also believes that the better collection and dissemination of information on physicians’ use of resources to both providers and patients would lead to better efficiency. And, to be sure, the group believes that such information ultimately should be used to adjust payments to physicians. To the extent that such recommendations are implemented, fundamental changes in the incentive structure of US medical care will result, affecting the use of medical technology and the adoption of new technology.