Report to the Congress: Medicare Payment Policy

Medicare Payment Advisory Commission (MedPAC)
March 1, 2010

The goal of Medicare payment policy is to get good value for the program’s expenditures, which means maintaining beneficiaries’ access to high-quality services while encouraging efficient use of resources.

Managing base rates will not solve the fundamental problem with current Medicare payment systems, discussed in our June 2008 report, that providers are paid more when they deliver more services (fee-for-service), without regard to the quality or value of those additional services. To address that problem directly, the Commission was an early proponent of payment reforms now widely discussed, including “medical homes,” “bundling,” and “accountable care organizations.”

For two reasons, however, comprehensive reform of Medicare’s payment systems is not a ready panacea. First, the new payment models need to be tested and refined; it is one thing to conceptualize a new model but quite another to implement it on a broad scale. Second, reorganization of how care is delivered may be necessary for payment reform to work. For example, “bundling” would pay a lump sum to the hospital, physicians, and post-acute providers caring for a patient during an inpatient admission plus some interval post-discharge (e.g., 30 days). Currently, those providers often act independently of one another and have no formalized means for collaborating, much less for sharing financial risk. Payment reform will often require reorganizing the delivery of care, a complex and time-consuming activity in its own right.

As much as reformers – including the Commission – may wish to hasten a sweeping overhaul of Medicare payment systems, Medicare is likely to continue using its current payment systems for some years into the future. This fact alone makes unit prices – both their overall level and the relative prices of different services – an important topic. In addition, unit prices under the current payment systems could affect the prospects for payment reform for the following reasons:

• The level of unit prices has an immediate and direct effect on Medicare expenditures. By limiting unnecessary updates, the Congress can achieve budget savings and lower beneficiary premiums and cost sharing. Although some critics of Medicare claim that it pays too little for each unit of service, in their 2003 Health Affairs article, Uwe Reinhardt, Gerard Anderson, and others found that high unit prices are one of the most important reasons that total U.S. health expenditures per capita are the highest in the world.

• By limiting and altering Medicare’s unit prices, Medicare provides an impetus for providers to volunteer for experiments with new payment methods. Medicare payment reform will often require changes in how providers are organized. Therefore, payment reform will likely need to proceed, at least initially, on a voluntary basis. Voluntary reform poses two challenges: First is the challenge of getting enough volunteers; after all, reorganizing can be difficult work since it may well entail a redistribution of income among participants. A physician subspecialist, for example, is unlikely to volunteer to participate in an accountable care organization that intends to redistribute income from subspecialists to primary-care providers – unless the subspecialist believes that redistribution is likely to happen under the current payment system. The second challenge is that if there is no financial pressure on providers that choose to stay in the current fee-for-service payment systems, their incentive to take a risk on a new system will be limited – and only providers who expect that they will fare better financially under the new payment method will volunteer. As a result, all other things being equal, voluntary payment reform could increase, not decrease, Medicare expenditures. Steady pressure on unit prices under Medicare’s current payment systems, coupled with appropriate redistribution of payments, will help address both of these challenges.

• The relative values used in Medicare’s payment systems signal what the program values and can, by themselves, shape the delivery system. On the one hand, inappropriately high unit prices may encourage heavy investment in equipment (e.g., MRI or computed tomography scanners) or programs and facilities (e.g., cardiac specialty hospitals and programs) that institutional providers are then reluctant to abandon. In extreme cases, badly mispriced services may leave the program vulnerable to fraud and abuse. On the other hand, comparatively low unit prices may discourage providers from delivering certain services. Take, for example, the relatively low amount paid for primary care services as opposed to subspecialty services. The comparatively low compensation for primary care has contributed to the dramatic decline in the number of U.S. medical school graduates choosing careers in primary care.

In conclusion, changing Medicare’s payment methods is essential to improving efficiency and value in health-care delivery. But such payment reform is unlikely to happen – or at least will not happen as quickly – without steady pressure on the level of prices paid by Medicare as well as attention to the relative values assigned to different services. We hope this report contributes to that effort.

MedPAC Report to the Congress (381 pages):


Patient Protection and Affordable Care Act

U.S. Senate
December 24, 2009


There is established an independent board to be known as the ‘Independent Medicare Advisory Board’.

PURPOSE.—It is the purpose of this section to, in accordance with the following provisions of this section, reduce the per capita rate of growth in Medicare spending. Click Bill Number; Insert H.R. 3590; Click Search; Click Text of Legislation; At end of version 5 click PDF (2409 pages); Go to pages 982-1033 for SEC. 3403 on the Independent Medicare Advisory Board.

Wake up! Big changes are coming in health care financing!

For those who are upset about the 21 percent cut in Medicare payments instituted yesterday, this provides you with hardly an inkling of what may be ahead.

The sustainable growth rate (SGR) was a well intentioned effort to slow the increase in Medicare payments to more closely match the rate of inflation. MedPAC (Medicare Payment Advisory Commission) played an advisory role in establishing SGR, but it required the action of Congress to institute it.

Because physicians then increased the frequency and intensity of services, the SGR formula required a very modest rate reduction – each year. Congress was reluctant to approve the rate reductions and so they postponed them – each year. But the reductions were cumulative and have remained on the books. This year Congress has failed to act so the cumulative 21 percent reduction was applied as of yesterday. HHS is withholding payments for the next ten days to give Congress one more chance to halt the reductions for this year, but no definitive resolution is in sight.

If this is what has happened when MedPAC has had only an advisory role, just think of the possibilities of an empowered MedPAC. The Independent Medicare Advisory Board (IMAC) that would be established by the enactment of the Senate health care reform legislation has tremendous powers to move forward with their recommendations, with Congress being relegated to having only limited veto powers on their actions.

When you read MedPAC’s Medicare Payment Policy report presented to Congress yesterday, you can begin to imagine the potential of IMAC as an empowered MedPAC. It is likely that we would be moving ahead with the initial phases of accountable care organizations (ACOs) and bundled payments. A recent qotd discussed how these concepts might actually increase spending instead of achieving their goal of reducing spending, that is for private insurers negotiating with a more highly consolidated delivery system. But the IMAC rules would apply to Medicare exclusively, and Medicare doesn’t have to negotiate.

Health care cost increases must be contained. I’m not as concerned about those who can afford the high prices of health insurance and health care as I am about those who will not be receiving the health care that they need because they can’t pay for it and government support will be inadequate to remove the financial barriers to care.

The private insurers have proven to be incapable of controlling spending. The government has been effective, but in what way? For Medicaid, they have simply underfunded the program. The government is depending on both captive providers and provider charity to absorb the losses on Medicaid.

What about Medicare? Actually Medicare has been very effective in using innovations to slow cost increases, including some innovations recommended by MedPAC. The problem is that there is now a perception on the part of many providers that Medicare has been too aggressive in slowing spending, and there are early signs that access may become impaired for Medicare beneficiaries because of a lack of willing providers. It is crucial that Medicare maintains a balance between fair compensation for the providers while at the same time not supporting today’s excesses in health care pricing.

Are you still awake? Here’s where I’m going to lose some of you.

We do need an Independent Medicare Advisory Board, but not for Medicare as we know it. Letting the private insurance industry have free rein while allowing Medicare to ratchet down rates risks converting Medicare into another underfunded Medicaid program.

What we need instead is an Independent Medicare Advisory Board (or a public administrative equivalent) that strives for optimal payment policies for our entire health care system, i.e., for a single payer Medicare for all program. Patient and provider push back would ensure that we would have the balanced compensation rules that we need.

It’s too bad that we can’t use reconciliation to enact an improved Medicare for all. Or can we?