Editor’s note:  The ideas expressed in this post draw on the “IPAB Working Group,” a panel of health care experts supported by Pfizer and charged with identifying strategies the Independent Payment Advisory Board might use to lower Medicare spending. Though many of the ideas that follow stem from that meeting, the authors take sole responsibility for this content.

Once again, Congress has grappled with how to avoid the double digit (about 27 percent this time) reduction in physician fees called for by the (un)Sustainable Growth Formula that governs Medicare physician payments.  While these cuts have again been delayed, the issue will surface again at the end of the year when the delay expires.

Much of the debate has centered on short term ways to cut spending or increase revenue to avoid increasing the projected deficit when fee cuts are averted.  Given the looming prospect of a dramatic fee cut, with unknown consequences on the health care system, this exercise is certainly necessary as part of the broader discussion regarding the nation’s fiscal future.  But it distracts from the more important discussion of how to save money in Medicare over the coming decades.

Such a discussion must begin with the recognition that the purpose of the Medicare system is not to save money.  If our goal was to spend less, we could abolish the system and spend nothing.   The goal of Medicare is to provide protection for elderly Americans against the financial risk associated with illness, and in the process provide beneficiaries with access to high quality care.  Our challenge is to accomplish those goals in a fiscally sustainable manner. 

Fee For Service: A Broken System

The SGR debate does not address this broader issue.  In fact, the purpose of the current debate is to patch the fee-for-service payment system, which is clearly broken and contributes to the fragmentation and misalignment of incentives that that both sides of the political spectrum are striving to reform.  In the status quo, Medicare struggles to set the appropriate payments across sectors.  For example, though margins are but one indicator of appropriate fees, some sectors, like home health, typically enjoy wide margins (though they are scheduled face cuts in the coming years) and others have, on average, negative margins.

Furthermore, in the FFS system it is difficult to determine the appropriate fees for different services and providers within each sector.   For example, in the physician sector it is widely believed that primary care services are underpaid and services delivered by specialists are overpaid.  On average that may be true, but it is not necessarily true for all primary care or specialist services.  Finding the right relative payments is hard.

Even for a given service, there is variation in costs and profitability across providers.  Even in the high margin sectors, some providers have substantially worse profitability than others.  If this were due to inefficiency among providers, the variation in profitability would not be a great policy concern.  But if it is due to variation in costs associated with underlying differences in markets that is not captured by geographic adjusters or differences in unmeasured case mix, striving to set prices to eliminate excessive profits on average would potentially drive some providers from the market and impede access.

At its core, by defining services at a very micro level, the FFS system creates administrative burden and becomes virtually impossible to manage.  There are 10 code for office visits and about 40 for CT scans, because codes vary based on the part of the body scanned and the use or omission of a contrast agent.  Issues such as how to adjust payments when multiple related procedures are performed are immensely challenging.

On top of this FFS system, the SGR adds the inefficiency and inequity associated with collective responsibility.  Providers in specialties or areas with slow utilization growth have their fees cut in the same manner as physicians in specialties or areas with rapid volume increases.

The Need For Broad Payment Reform

Movement away from the FFS system towards bundled or global systems seems imperative.  The transition will take time.  It will be challenging for many providers and the infrastructure investments needed for success will be substantial.  It will not be a panacea for all the ills associated with payment models.  But compared to the alternative, such payment innovations seem to be a wise way forward.  The Affordable Care Act made great strides towards this goal, establishing institutions needed to implement a range of novel payment models.

More attention needs to be paid to how bundled payment rates will be set, but because existing deficit projections assume substantial volume increases, the trajectory of bundled payment rates per beneficiary could rise even after adjustments for inflation and still keep spending on the projected trajectory.  Organizations accepting such payment would get more revenue per beneficiary each year relative to the status quo and the previous year. They would control the entire payment stream.   Of course, to make this system work, they must control volume and intensity growth.

Bundled/ global payment systems have another virtue; they provide incentives for providers to eliminate waste, fraud and abuse.  While it is notoriously difficult to measure fraud and waste, an estimated 10.5 percent of Medicare FFS payments, and 14 percent of Medicare Advantage payments, in 2010 were “improper,” including both truly deceptive claims and miscoded (but legitimate) billings.  CMS’s Medicare Integrity Program and the government’s jointly directed Health Care Fraud and Abuse Control Program target “improper” payments, which includes fraud, abuse, incorrect documentation, and waste, and these programs have reported exceptional returns on investment of 14 to 1 and 7 to 1, respectively.  Certainly increasing fraud and abuse enforcement could help patch the SGR hole, but in the long run bundled payments will facilitate this effort.

The move towards bundled payment does not obviate the need to fix the SGR.  In fact, fixing FFS payments will ease movement away from FFS because appropriate payments will likely generate more reasonable bundled rates.  But the revised FFS rates must not be set too generously, as doing so may diminish the incentives for providers to transition to new payment models (and associated organizational structures).

Many believe the transition away from FFS will be slow.  Certainly the speed of the transition will depend on the details of payment.  But in Massachusetts the transition has been relatively rapid, as most providers now have accepted some contracts under global payment models and 5 of the 32 Pioneer ACOs are in Massachusetts.  Thus there is the potential for more rapid transition.

An array of tools must be developed going forward.  These include adequate risk adjustment tools and quality measurement.   Many of these have been developed for the Medicare Advantage program and are continually being improved.  Ultimately new models to set payment, such as competitive bidding, may be developed.  In any case, rigorous evaluations must accompany the evolution of the system.

But as we pursue this path of transition, policy must avoid destroying the existing system before the new system is in place.  Short term policy options that impede access to high value services in an effort to save money and fund an SGR patch may well be counterproductive.   Our short run solutions must not impede the path to a long run solution.

Spending more now to avoid constant disruptions will likely facilitate movement away from the FFS system, in part by allowing providers and payers to focus on the transition, in part by helping to establish reasonable bundled payment rates, in part by providing some stability in payment beyond a few years (or months), and in part by providing funds for providers to invest in the future.  Everyone seems to agree that the SGR must go.  We must use this opportunity to create something better.