This post is based on testimony at a hearing of the House Ways & Means Subcommittee on Health, March 6, 2007.

The primary problem with the SGR [sustainable growth rate] is that while it controls total spending by physicians, it does not affect the volume and intensity of spending by individual physicians. In fact, there is some concern that it may actually exacerbate the incentives for individual physicians to increase the volume and intensity of services they provide. The reason is that nothing that they do as individuals is likely to affect the overall spending level for physician services.

This has led to serious questions about what the current Medicare fee schedule is and is not rewarding. While some trade-offs are inevitable because multiple goals may not be entirely compatible, the incentives associated with an SGR, particularly when applied only to one segment of Medicare spending (that is physician spending), have been viewed by many as being perverse.

MedPAC [the Medicare Payment Advisory Commission] has identified two major choices for the Congress. The first is to repeal the SGR and focus on the development and adoption of payment reforms that would improve incentives for physicians to provide high-quality services at lower costs. The second is not to repeal the SGR but to extend spending limits across all of Medicare, perhaps with targets differing across regions to reflect the well-known variations in spending by region.

While I don’t disagree with the basic dichotomy that has been laid out — repeal the SGR or extend the concept to all of Medicare — I would phrase the choices slightly differently. As MedPAC has also noted, Medicare needs to institute policies that improve the value of the program and reward providers for the efficient use of services — as well as creating incentives to improve quality and care coordination — no matter what it does about expenditure targets.

Moving in this direction for physicians will require, among other things, the use of a less disaggregated fee schedule; and the use of a less disaggregated fee schedule should make it possible to do away with the SGR for at least a period of time. Care coordination and the focus on better treatment for chronic conditions, which is where so much of Medicare spending occurs anyway, is unlikely to work well when physicians are being reimbursed on a micro unit basis. Figuring out how to create the right bundles and recognizing the significant power shifts that could result will be difficult and time-consuming. But there are interesting demonstrations that are already started or at least being developed that should provide some assistance.

The coronary artery bypass graft (CABG) demonstration that was started when I was at HCFA [the Health Care Financing Administration, now the Centers for Medicare and Medicaid Services] bundled all Part A and Part B expenditures into a single payment and although not conclusive appeared to result in lower costs and as good or higher quality for the participating groups. A gain-sharing demonstration is starting that would allow physicians and hospitals that are not financially at risk to work together and share savings that result from better care of complex cases and chronic care patients. Other demonstrations are attempting to show the effects of disease management or better care coordination in a fee-for-service system.

MedPAC has recommended elsewhere — and as co-chair of the IOM subcommittee that was responsible for the recent release of the IOM report on pay-for-performance, I concur — the idea of adopting payment strategies that reward institutions and, when we can put in the proper measurement systems, clinicians who provide high-quality, low-cost care and do so in at least a budget-neutral manner. The early results from the Premier demonstration are consistent with conventional wisdom that increasing quality can be associated with lower costs. But this is just one small example. As the IOM report makes clear, however, moving to a system that realigns incentives will require a lot of changes and a lot of difficult decisions, not the least of which is a uniform, national set of performance measures.

I regard pay-for-performance, or results-based payment, as part of the process to begin realigning incentives in Medicare so that the payments that are made are more in line with the objectives of the Medicare program. Many changes will need to be made to restructure the payment system so that it encourages more of what we want produced (i.e., high-quality, efficiently produced, appropriate care) and that recognizes that much of the care needed by an aging population will have to focus on the needs of individuals with multiple chronic conditions.

As important as it is to realign incentives, it is also important to provide both payers and providers with better information on the relative clinical effectiveness of alternative medical procedures and technologies. A number of other countries have been involved with the concept of comparative clinical effectiveness but generally only for new pharmaceuticals and medical devices. Similar information needs to be available for medical procedures as well, since that’s where most of the money is spent.

Even if incentives are appropriately aligned, we can hardly expect to “spend smarter” if clinicians and payers (and patients) don’t know “what works when, for whom, under what circumstances.” Getting such information will require a significant investment and take several years to develop. But in a sector that is now spending $2 trillion, it is hard to explain why that type of investment would not be appropriate.

The bottom line: “We need to know more and pay for it better.”
If that doesn’t work to slow down Medicare expenditures, we had better be prepared to introduce expenditure targets across the board in Medicare, but recognize it will be hard not to exacerbate problems with medical silos in a world that really needs better coordination across medical boundaries.

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