Why do hospitals argue that they need certain more profitable departments (like cardiology) in order to compensate for other money-losing departments? Why do doctors have an incentive to order one type of treatment over another? Since physicians and hospitals are reimbursed on a fee-per-service basis according to the cost of treatment, if the reimbursement rates are accurate no such discrepancies in profit gain should exist. But they do – in part because of the difficulty of determining accurate, generalizable prices for procedures, but also because of the competition for money between different specialties. Here I’d like to examine how Medicare Fee-for-Service rates are set for freestanding medical centers, as a way of offering insight into the distortions in price involved in the health care market.
Reimbursement rates are established by the Center for Medicare and Medicaid Services (CMS), which voluntarily relies on the American Medical Association’s (AMA’s) Relative Value Scale Update Committee (RUC) to determine the costs associated with each procedure. The RUC is made up of about 30 representatives of different medical specialties – the idea being that no one interest dominates and the group remains neutral overall. They collectively agree upon pricing based on physician surveys (audited by government-appointed consulting firms) and invoices (or other concrete evidence of costs, like salary). Beyond the cost of medical equipment, variable inputs like the amount of time a machine is used per patient and the number of medical staff involved in the administration of a treatment influence the cost estimation considerably – which is why the physician surveys are important. Once proposed rates are established, a “notice and comment” period begins for comment letters to be submitted. After these are reviewed, a final rule is determined, which becomes the Medicare Physician Fee Schedule.
In an ideal world, the cost of delivering care would be equal to the reimbursement rate in every case -- and patients would know the costs prior to deciding on treatments. But there is variability in cost even between patients receiving the same care at the same hospital, let alone different patients at different hospitals. Different machines, different numbers of hospital staff, different procedure times. Given the high price of medical technology and hospital staff, inaccurate estimation of any of these variables has a large impact on the cost to the hospital.
And there are a number of signs that these estimations are far from accurate. Rates typically increase with each annual reevaluation by the CMS, despite the fact that new procedures become more efficient with time. To ensure that the CMS spending doesn't increase more quickly than GDP, the Medicare Sustainable Growth Rate (SGR) is used to control spending. When the CMS sends an annual report to the Medicare Payment Advisory Commission (a group that advises the U.S. Congress on the previous year's total and target spending), the report has a conversion factor which is used to change reimbursement rates across the board in the coming year, such that they meet the target sustainable growth rate. As a result, reimbursements calculated from survey data and direct price inputs are typically cut in half across the board. If these rate calculations were accurate, everyone would be reimbursed half of their actual costs and everyone would go out of business.
Whether intentional or not, certain specialties have done a particularly good job of inflating their costs in these calculations, such that some departments are overpaid. It is far harder to inflate the cost of annual physicals relative to that of cardiac surgery, for example, which involves ever-evolving technologies and techniques. With larger discrepancies in profit margins, physicians are more tempted to suggest the more expensive procedures, even when a cheaper procedure (or no treatment at all) may arguably be more beneficial. This is exactly what doctors were accused of in 2011, when urologists came under scrutiny for sending patients for radiation at centers where they had financial interests. These expensive radiation treatments were reimbursed at a high price, making them unreasonably profitable.
But these updates to the fee schedule have yet to be implemented in the 16 years since the SGR was enacted by the Balanced Budget Act. Every year since 2002, with pressure from the American Medical Association and other physician groups, Congress suspends the updates, allowing spending to increase at a rate greater than the growth in GDP. This year the cost to overriding the updates was approximately $30 billion, paid for by hospitals and some Medicaid payments.
But these updates to the fee schedule have yet to be implemented in the 16 years since the SGR was enacted by the Balanced Budget Act. Every year since 2002, with pressure from the American Medical Association and other physician groups, Congress suspends the updates, allowing spending to increase at a rate greater than the growth in GDP. This year the cost to overriding the updates was approximately $30 billion, paid for by hospitals and some Medicaid payments.
In a recent New York Times Op-Ed, Bill Keller underlines the importance of decreasing the cost of health care by cutting prices -- not through across the board cuts, but through effective bargaining. He accurately states that the most significant factor in our inflated health care costs “is that our system charges far more for each service – each office visit, each hip replacement, each day in a hospital bed, each dose of antibiotic” than other countries. As a result, we get the same amount of care for almost double the cost: though Americans “spend more than twice as much per capita as other developed countries on health care – a crippling 18 percent of the country’s economic output, and growing,” the volume of services provided are “not much different from other developed countries.” He cites our inability to bargain prices down as the main culprit – a problem he thinks we could fix by having one big payer (like the government or large hospitals).
Another solution that has been proposed is to bundle payments based on risk group. This would work well alongside Michael Porter's vision of health care, in which hospital departments are structured around disease groups rather than specialty. In this model, rather than having separate departments for Surgery, Radiation Oncology, and Medical Oncology there would be one department for patients with tumors in the Central Nervous System in which Neurosurgeons, and Medical Oncologists and Radiation Oncologists specializing in CNS saw patients together, attended relevant lectures, and met regularly to review cases. (Porter also argues that there should be less redundancy such that MGH and the Brigham and Women's Hospital shouldn't both have the same departments, although this assumes that better care would result from physicians collaborating in the same workplace rather than competing with each other for resources and patients.) In the primary care setting, this could mean physicians working alongside social workers, nutritionists, nurses, and others, each contributing their expertise in order to deliver high quality care.
Though having more people involved may seem more expensive (and it may be initially), the positive health care outcomes over time would more than pay for the costs. This structure would also allow primary care doctors to spend more of their time as leaders overseeing patient care, rather than trying to individually address the many factors (social, economic, etc) contributing to each patient's health in a brief office visit. I like the sound of that!
Though having more people involved may seem more expensive (and it may be initially), the positive health care outcomes over time would more than pay for the costs. This structure would also allow primary care doctors to spend more of their time as leaders overseeing patient care, rather than trying to individually address the many factors (social, economic, etc) contributing to each patient's health in a brief office visit. I like the sound of that!
References:
Benjamin Falit, "The 2013 Medicare Physician Fee Schedule's Treatment of IMRT/SBRT: How we got there and Future Alternatives," (2012).
Robert Stein, "Doctor-owned centers spark criticism, scrutiny," The Washington Post, February 28, 2011.
