Hospitals and Labs Pay for the Doc Fix

Today’s Managing Health Care Costs Indicator is 19%

It’s good news is that Congress is actually working – and has fast-tracked reauthorizing the Social Security tax break,   unemployment insurance, and the “doc fix” to prevent 27.4% decreases in Medicare physician payment.  Providing relief to those who are unemployed in this terrible economy, avoiding a middle income tax hike, and avoiding a catastrophic decrease in physician fees are all important.  Doing these together makes it harder to defeat the effort.

Doctors are the health care winners in this, at least for 2012.  Let’s look at who are the losers.  Kaiser Health News has links to a number of articles on this topic.  

·          Hospitals are the biggest losers.   They’ve already given back substantial future increases as part of the Affordable Care Act, and the current legislation will remove federal payment for bad debt and decrease payment for disproportionate share hospitals – those which take care of a large share of the most impoverished Americans.   Safety net hospitals in Massachusetts have fared poorly under health care reform, and this legislation makes it likely that this will be repeated across the country.  Rural hospitals maintained their enhanced fees.

·         There will be a $5 billion clawback from the public health funding promised in the Affordable Care Act.   It’s public health efforts that have the highest return on investment – and it’s disheartening to see us lower this investment.  However, many Republicans opposed this public health funding – and it’s easier to stop paying for education to prevent future disease than to make it difficult for Grandma to find a physician

·         Laboratories are big losers as well. Their fees will be shaved another 2%; The Affordable Care Act had already lowered laboratory fees by as much as 19%.

·         Louisiana is a surprise loser.  Senator Mary Landreiu had obtained an additional $2.5 billion in Medicaid payments for her state.  This is being rescinded.

The “doc fix” only cost $20 billion – since it is only for the rest of 2012. This means we’ll be back to this issue again at the end of the year, and by that time the cut to be averted will be even larger than 27.4%.          

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Who's Responsible for the Rise in Medicare Costs

Today’s Managing Health Care Costs Indicator is $300 billion

Click image to enlarge

Today, the New England Journal e-published an evaluation of which states and which specialties have “overspent” in Medicare, leading to the SGR (sustainable growth rate) cuts of 27.4% as of January unless Congress acts to overturn this. Congress is having trouble – because eliminating the SGR and freezing physician payments would cost $300 billion over the next ten years.   Ali Alhassani et al have shown huge discrepancies.  This article is a good demonstration of how the threat of across-the-board cuts is unlikely to drive diverse providers to diminish their utilization.  

Excess expenditures in Alaska from 2003-2009, for instance, are 130% of total 2002 expenditures, while Maine has increased its spending at such a low rate that they are responsible for ‘saving’ almost half of 2002 expenditures over the same time period.   I’m guessing that former Senator Ted Stevens’ securing a 35% permanent rate increase for Alaska providers probably plays some role for overspending in the frozen northwest.

The authors also show that large states like Texas, Florida and New York drive much more of the total Medicare costs – but of course these states will also see a larger portion of the total across-the-board cuts. 

The authors also show that radiation oncology has driven very large increases in Medicare expenditure, while thoracic surgery costs have substantially lagged the SGR target.   Of course, there have been huge improvements in radiation therapy over the last decade, while the decrease in smoking and improvements in less-invasive techniques have happily led to much less work for thoracic surgeons.  

The current impasse in Congress makes it more likely that the SGR will not be fixed for the thirteenth or so time since 2003 – which could lead to these across the board cuts. This could well lead to access problems for Medicare beneficiaries – it’s a terrible way to lower health care costs!

There is a better way.   This is reprinted from a 2009 post:

The SGR was not a “glitch,” but it was a poorly designed way of trying to prevent overutilization.  The problem is that the benefit of increased revenue to individual providers overwhelms the risk of a pay cut due to overall higher than expected utilization.  This is a classic “tragedy of the commons” problem – where it pays for each individual provider to do more procedures, knowing that her contribution to the “overgrazing” will be overwhelmed by the practices of the general population. 

SGR is poorly designed because the group of procedures it applies to (the equivalent of the “pasture” in the tragedy of the commons) is too big – and no physician would rationally think about cutting back on utilization to prevent future fee cuts.  There is a better way.  Japan has an SGR-equivalent which is by individual service –not generic across all services.  

Prices are revised individually, adjusted for each procedure and drug, and not by an across-the-board conversion rate. In particular, the prices of procedures that show large increases in volume tend to be decreased. (Ikegami  and Campbell, Health Affairs, 2004)       Harvard Link 

As a practical matter, procedures with large increases in utilization are sometimes those where there is new evidence of efficacy, but they are likely to be procedures with an exceptionally high margin.  This method of adjusting helps diminish the excess margin associated with particular services, so there is less likelihood they will continue to be overused. 

So – we should get rid of the SGR – it’s not effective at changing physician utilization, and would cause politically infeasible across-the-board cuts.  As long as we are using primarily fee for service payments, Medicare should adopt the Japanese approach to targeted fee cuts for certain procedures if the volume increases. 

Click image to enlarge.

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Losers

Today’s Managing Health Care Costs Indicator is $320 billion

Barack Obama’s plans to pay for the American Jobs Act would lead to a $4 trillion drop in the deficit –through a combination of decreased expenditures and increased revenue collection (a.k.a. taxes).   Because of the elimination of some current tax expenditures (also a.k.a. tax increases), many feel that this bill is dead on arrival in the Republican-controlled House of Representatives.  Still, this is likely to be the foundation on which an eventual compromised is reached – so we could think of this as the opening bid on the Democratic side.

The Obama proposal includes $320 billion in decreased health care costs, $248 billion from Medicare, and $72 billion from Medicaid.  In all instances, these cuts prevent growth – not cutting existing costs.  There are few winners in these proposals – since they save serious dollars.  My take on impact of these proposals on various stakeholders:

Proposal	Patients	Physicians	Hospitals	Pharma	Home Care
Cut $135 billion in pharmaceutical expenses by making the dual-eligibles (Medicare and Medicaid) eligible for Medicaid-level pricing. This returns prescriptions for these members to the Medicaid schedule – as they were before Medicare Part D was enacted in 2003
Cut $3.5 billion from a public health and disease prevention fund
Institute $100 copay for home care (more than 5 visits) beginning in 2017. (This will yield $400 million in savings) Part of the goal of this is to reduce fraud by making Medicare beneficiaries more cognizant of home care bills
15% surcharge on “rich” Medigap plans, which will yield $2.5 billion in new federal revenue This will raise revenue –but it will also discourage “first dollar” coverage, which many believes leads to overutilization. Providers will likely see increased price sensitivity
Raise Medicare premiums for those who are well off ($20 billion over a decade)
Change Medicaid state reimbursement formulas ($14.9 billion over 10 years).  This will advantage states with high rates of enrolling Medicaid eligibles. Medicaid is the weakest element of the Affordable Care Act – since the states can choose not to fund this
Fix the physician SGR (Sustainable Growth Revenue) formula, so that there would not be massive cuts in Medicare physician fees ($300 billion cost over a decade) This reflects political and other reality – a 29.6% fee schedule cut in January would lead to substantial access issues for Medicare members
Post acute care (rehab hospitals, home care, nursing homes) cuts ($42 billion over ten years. This is consistent with recommendations of MedPAC.  Some worry it could take away the ability of some frail elderly to avoid institutionalization
Bring biosimilar equivalents to market sooner

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CMS 2012 Draft Payment Rules: Automatic Triggers Cause Huge MD Fee Cut

Today’s Managing Health Care Costs Indicator is $330 billion

The Centers for Medicare and Medicaid Services issued its draft 2012 payment rules yesterday. The  payment rules give modest increases to ambulatory facility fees, tie ambulatory surgery fees to quality reporting, and make some much-needed changes in imaging reimbursement.  

The headline is that these draft payment rules cut physician fees by almost a third, as required by the sustainable growth rate formula.   This is the automatic trigger that has been overridden by Congress every year (or more) since 2002.   Just about no one thinks this is a good idea.  Physician payment increases in Medicare have been substantially less than those offered by other payers, and in some communities it's hard to find a physician taking new Medicare patients.  

Click to Enlarge  Ginsburg, New England Journal 12/10 

The cost of physician services keeps on going up, and no efforts to lower utilization have worked - so the blunt instrument of threatened massive payment cuts continues to hang over physicians' heads.  The 10 year cost of eliminating the SGR payment cuts would be $330 billion.  

There's a lot of talk in Washington about establishing automatic triggers to prevent the government from overspending.   The SGR is an example of such an automatic trigger that has been in place for some time, through Democratic and Republican administrations and Congressional majorities.   We've proven in health care already that these triggers only work if they make sense and there is enormous political will to support them.  A singular problem with the SGR is that cutting physician unit payments is not an especially effective way to lower overall health care costs.

There has been an enormous amount of lobbying to reverse these cuts over the past decade.  We should expect a similar response to future cuts in government spending triggered automatically, especially those that don't make political or economic sense.

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Freezes and Clawbacks and Cliffs, Oh My!

Today’s Managing Health Care Costs Indicator is 29.4%

The Congressional Budget Office  just released  physician fee schedule that would be required in 2012 under current Medicare rules. The SGR short for sustainable growth rate, mandates that if the increase in total physician costs exceeds an index of practice cost inflation, unit prices will be decreased by up to 7% the following year. The SGR has generated steep physician fee schedule cuts each year since 2002, and Congress has stepped in on multiple occasions to “fix” the SGR and be sure that physician fees would be level, or go up slightly. 

But Congress hasn’t simply appropriated more money for Medicare to account for reversing these fee schedule decreases.  That would have been too transparent!

Instead, Congress has utilized a two accounting maneuvers to maintain a fiction that increased costs in the next year would be recouped at some point in the future.   These accounting maneuvers have been used through Democratic and Republican administrations and legislative majorities. They have allowed our representatives to kick the can forward.     

                                                                                                                                                                            The CBO explains these accounting maneuvers in yesterday’s briefing.

Clawback:   Congress pretends that costs will be decreased  in the ‘out’ years, so that when the CBO is scoring ten year impact, it appears that there is little or no cost to preserving the physician fee schedule.

Cliff: Congress eliminates the floor for payment, and pretends that in subsequent years the SGR could lower fees by more than the initial SGR would have allowed.  Again, the CBO would follow this fiction and project little or no cost to the SGR override over a ten year time horizon.

 

Congress has intermittently also chosen to freeze, rather than decrease physician fees.   A freeze keeps fees at current levels, offering no cost of living increase.  Freezes mean that overall Medicare costs continue to climb, as physicians deliver more and higher intensity services.  A freeze means that no one is happy – Medicare costs go up AND physicians see their office expenses increase without a corresponding increase in their reimbursement.

As I said at the top of the post, a 29.4% decrease in Medicare reimbursement of physicians would be catastrophic.  Most nonprocedural physicians have office expense that approaches or exceeds 50% of revenue – so losing a third of revenue could theoretically cut physician income by 2.3.  Physician access for senior citizens would be severely diminished, and the viability of many physician practices would be threatened.   I don’t think there are any responsible health policy experts who think that’s a good idea.

Click to enlarge. Note "baseline" assumes that SGR is reversed and there is no 29.4% physician fee decrease. 

As you can see in the CBO chart, every option leads to higher provider costs over the next 10 years.   The “baseline” case assumes that the 29.4% decrease is implemented this January.   We’ve had ten years of accounting tricks that obscure the real cost of Medicare.  We need to overturn this potentially devastating cut in physician payment. We also need to support fundamental reform, including bundling payments to limit fee-for-service and implementing  the Independent Payment Advisory Board, bundling payments to address the underlying causes of increasing Medicare costs.

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Obama Administration Shows Medicare Savings

Today’s Managing Health Care Costs Indicator is $120 billion

The Obama Administration issued a report demonstrating $120 billion in Medicare savings over the next five years as a result of the Affordable Care Act.  This coincided with the annual report from the Trustees of Medicare and Social Security which stated that the Medicare hospital fund will become insolvent five years earlier than previously projected, due to lower revenue from the lackluster economy and continued increases in the cost of health care.

These savings claimed by the Obama administration look highly credible to me. The vast majority of dollars claimed are from payment decreases – which are straightforward and should yield the savings anticipated.  Health plans will object to decreased profit margins, and providers will object to decreased payment updates, but the Obama administration has all the authority necessary to implement these.  The fraud estimate looks quite low, given that the WSJ reported last week that federal prosecutors are seeking $1b from Johnson and Johnson  alonefor marketing abuses for the antipsychotic medication Respirdal. Competitive bidding for durable medical equipment is likely to save the dollars projected.

The savings from decreased readmissions and complications are harder to predict.   It’s likely that the cost pressures on health care providers will pressure them to continue to reengineer their processes. Don Berwick’s 100,000 lives campaign when he was at IHI was very successful, so I think it’s highly likely Medicare’s effort will be as well, even if his tenure as the CMS Administrator is short.

Of course, this is not nearly enough.  The ten year cost of the “doc fix,” to fund continued physician payment levels to avoid what would be a 25+% cut next year, will be $300 billion.  

But at least this is a start.

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Japanese Have A Better Idea for SGR (Sustainable Growth Rate) Fee Cuts

The House of Representatives voted last week to give another reprieve to physicians, who faced a 21% Medicare fee cut because of a provision called SGR – or Sustainable Growth Rate.   The SGR mandates cuts in fees for all Medicare services if the total number of services increases. Essentially, if too much service is delivered, each unit of service is reimbursed at a lower rate. This helps keep the Medicare budget “in balance.”

National Public Radio and others  characterize the SGR provision as a “glitch.”  Indeed it really feels like a mistake, since each year Congress overturns the SGR and reinstates small fee schedule increases or flat fee schedules. Each year, Congress has only kicked the can forward to the next year. When SGR would have required a 5% fee cut one year, it requires a cut of over 10% the next year, and you can see where this is going.

It was never intellectually honest to overturn the SGR on a year by year basis –because if a 5% pay cut is untenable, a 21% pay cut is unimaginable.   Still, the cost to the federal budget deficit of eliminating SGR altogether would be over $200 billion (over 10 years). The Congressional Budget Office recently reminded us that eliminating this fee cut will also cost Medicare beneficiaries almost $50 billion in increased out of pocket expense over the next ten years.

The SGR was not a “glitch,” but it was a poorly designed way of trying to prevent overutilization.  The problem is that the benefit of increased revenue to individual providers overwhelms the risk of a pay cut due to overall higher than expected utilization.  This is a classic “tragedy of the commons”  problem – where it pays for each individual provider to do more procedures, knowing that her contribution to the “overgrazing” will be overwhelmed by the practices of the general population.

SGR is poorly designed because the group of procedures it applies to (the equivalent of the “pasture” in the tragedy of the commons) is too big – and no physician would rationally think about cutting back on utilization to prevent future fee cuts.  There is a better way.  Japan has an SGR-equivalent which is by individual service –not generic across all services. 

Prices are revised individually, adjusted for each procedure and drug, and not by an across-the-board conversion rate. In particular, the prices of procedures that show large increases in volume tend to be decreased. (Ikegami  and Campbell, Health Affairs, 2004)       Harvard Link 

As a practical matter, procedures with large increases in utilization are sometimes those where there is new evidence of efficacy, but they are likely to be procedures with an exceptionally high margin.  This method of adjusting helps diminish the excess margin associated with particular services, so there is less likelihood they will continue to be overused.

So – we should get rid of the SGR – it’s not effective at changing physician utilization, and would cause politically infeasible across-the-board cuts.  As long as we are using primarily fee for service payments, Medicare should adopt the Japanese approach to targeted fee cuts for certain procedures if the volume increases. 

(Thanks to Tori Fancher, Sophie Miller, Amy Rothkopf, and Alicia Widge of HSPH HPM235 for drawing my attention to this approach)

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