Health Care Reform as Payment Reform

A few days ago, the National Commission on Physician Payment Reform issued a slew of recommendations for reducing national health care spending, based on one core principle:

Our nation cannot control runaway medical spending without fundamentally changing how physicians are paid.

This approach has its merits - physician services make up somewhere around 20 percent of national health spending - around $540 billion annually. But more importantly, the authors of the report make an under-appreciated point: that physicians have significant input on the course of care long after the initial office visit. So if we think that we spend too much on health care, it makes sense to start at the initial point-of-contact with the health care system.

Just as Stephen Brill's recent opus illustrated the tangled web of our health care system's "non-price" approach, this report does a terrific job at identifying the broad, structural problems in our health care payment system.

The report identifies several factors driving growing health care spending: fee for service reimbursement, reliance on technology over care management, a disproportionate reliance on specialists over primary care physicians, and a payment scheme that favors hospitals over other outpatient settings.

While the commission recommends these changes to the health care system as a whole, these reforms are particularly well suited to Medicare reform.

Fee For Service

A fee for service system pays a physician for a procedure/office visit/surgery etc. by volume. In a direct-payer system, without insurance companies and government subsidies, this wouldn't be inherently problematic. When you spend your own money you tend to be frugal, and your physicians - in their own self-interest - have to make sure that the care they give is effective enough to keep you from dying but is affordable enough that they keep you as a patient. It's easy to see how this leads to problems in a third-party payer system - when an insurance company or the government is paying your bills, you become less price-sensitive and physicians have the freedom to charge more and provide more services (some of which may be unnecessary), while discriminating based on who is paying (charging Medicare less than private insurance for instance, because of Medicare's monopsonistic bargaining position).

With fixed budgets and profit-motives, private insurers already have some incentive to insure that medicine is evidence-based and that the cost is worth the expected outcomes. The private sector has already recognized the need to mix some outcome-based measures into standard fee-for-service reimbursements - Wellpoint recently announced an effort to reward evidence-based medicine, and even earlier decided to boost primary care physician fees by 10% if they meet certain outcome metrics.

But on the public side, the lack of a fixed budget and tremendous bargaining power makes the powers that be more resistant to "quality-oriented" payment reforms. The fear is that this may lead to lower quality care for those who truly need it. Quality-focused payments generally consist of attempts at managed care - where care for a particular individual is coordinated through a tight network of providers to best determine the most appropriate, long term treatment route that maximizes quality while minimizing cost. The evidence on managed care, however, is mixed. One the one hand, some studies indicate that Medicare Advantage managed care plans tend to reduce racial and ethnic disparities in primary care quality and reduce preventable hospitalization more than FFS Medicare. Yet other studies studies have found little benefit from Medicaid Managed Care Organizations (MCOs) or pay-for-performance approaches. These disparate results may indicate that Medicaid pays providers too little relative to Medicare; they may also point to differences in the underlying structure of different managed care programs; moreover, there may (and likely are) systematic differences between Medicaid and Medicare populations beyond simply age. The point is, given certain conditions - managed care can work to improve quality while cutting costs.

Technology Over Care Management & Reliance on Specialists

These two points logically go hand-in-hand it would appear. In general, this isn't a problem for the private sector - private insurers must generally be more prudent about what they pay for and how much they pay. The profit motive seems to work well here.

Medicare, on the other hand, skews its payment system to favor high-technology, specialist-focused care over primary and evaluative care. The underlying problem here is the relative value unit (RVU) system that values the work of a specialist at a much higher rate than the work of a general practitioner. While cardiac surgery is certainly a complicated, labor-and-technology-intensive procedure that warrants high compensation, a 15-minute, mostly automated cataract extraction isn't, and doesn't. While it may sound simple, a routine office visit requires the GP to consider a variety of possible conditions, across a very broad spectrum of specialties - not an easy task. Yet the ophthalmologist performing the cataract extraction will receive much higher reimbursement from Medicare because his education, specialization, and time are arbitrarily valued more.

The first recommendation here from the commission is simple - increase payments for evaluation and management services that are provided not only by GPs but also by cardiologists, neurologists, and others. This would provide incentive for more focus on evaluation over expensive, often unnecessary treatment (particularly in Medicare). The second set of changes, again is rather simple (and relatively uncontroversial) - don't just use the RVU (set by the Relative Value Scale Update Committee, which is made up mostly of specialists) to set reimbursement rates; and end the SGR (which can be funded largely by eliminating excessive administrative costs, unnecessary services, and fighting fraud) that annually is slated to cut physician reimbursements. Combined, these three recommendations could drastically change the Medicare landscape - perhaps changing it from a high-risk, high-fraud program into one that is more affordable and genuinely seeks to improve patient outcomes.


The last point here should really be a no-brainer. It shouldn't matter whether you get an EKG in a hospital or in a lab - the amount paid should be the same. Once again, this is a major issue for Medicare. Part A (hospital insurance), tends to pay more for the same service performed in a hospital than what Part B, outpatient insurance, pays if the service is performed in a doctor's office. The Medicare Payment Advisory Commission, in a report to Congress noted: Medicare pays 80 percent more for a 15-minute office visit in an OPD than in a freestanding physician office.

There is simply no good reason for such a disparity in payments based on location. Doing so encourages consolidation of providers - this drives up prices with little indication that it improves quality of care.

The exact process for mitigating this discrepancy can take several forms: a global inpatient-outpatient reimbursement rate would statutorily close the gap for instance. Switching FFS Medicare (by shifting beneficiaries to Medicare Advantage plans, for instance) would likely also eliminate this problem through capitated payments.

The commission's report should be welcomed by both sides of the health care debate - the left for its encouragement of quality-based care and the right for its acknowledgment that Medicare has serious, systemic flaws. It offers a unique perspective on the American health care system - one that looks at it holistically rather than as a set of silos. And the focus on payment reform is long overdue. With luck, some of the commission's proposals can find bipartisan support before it's too late to fix our health care problem.

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