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IOM Report Critical of Geographic Payment Adjustment in Medicare

By John Reichard, CQ HealthBeat Editor

March 22, 2013 -- A long-pursued goal of lawmakers from parts of the United States with high-quality, low-cost care—that their providers be rewarded with higher Medicare payments—got no support from a recently released Institute of Medicine (IOM) report.

"Providing higher Medicare payment rates to hospitals and clinicians in regions of the country characterized by good health outcomes and relatively lower spending and decreasing payment rates in regions with overall lesser quality and higher spending would not give providers the incentive to delivery care more efficiently," the Institute said in a news release summarizing the findings of an IOM committee that prepared the report. The report is an interim one, with the final version due out this summer.

Members of Congress from those regions with the high-quality, low-cost care, which include the upper Midwest and the Pacific Northwest, first asked the IOM to do the report in 2009.

Geographic spending variations in the Medicare program have captured the attention of Congress ever since Dartmouth researchers found that Medicare spending and quality varied geographically. Health care spending and utilization rates varied widely by region, but did not appear to be consistently related to health outcomes or patient satisfaction, the Institute noted in the interim report, citing Dartmouth data.

"Seeking strategies to reduce costs, policymakers naturally wondered whether cutting payment rates to higher-cost areas would save money without adversely affecting health quality for Medicare beneficiaries," the report said. It further noted that according to a 2002 study by Dartmouth researcher John Wennberg, Medicare spending would drop by as much as 29 percent if practices of low-cost, high-quality regions were adopted nationwide.

Moreover, some lawmakers from high-quality, low-cost areas argue that highly efficient hospitals are penalized under the current payment system, the report also observed. Based on these observations, some policymakers believe that adjusting payments geographically could be a way to encourage all providers coordinate care in a region and improve their efficiency.

But the study said that decisions about care are made provider by provider, and not on a regional level. Providers within regions do not spend consistently on care or routinely deliver the same quality of care. So "using a geographically based value index to set Medicare reimbursements would reward underperforming providers in some regions and penalize those achieving good outcomes at lower cost in other areas," the report concluded.

The report also found that much of the geographical variation in Medicare spending relates to differences in spending on post-acute care. And the magnitude of spending on post-acute care in some areas—such as parts of Florida—raises concerns about fraud, it said.

If the IOM's findings disappointed Wisconsin Democratic Rep. Ron Kind, it wasn't apparent from his statement. He called the report "another important step forward in moving toward a more quality- and value-based health care delivery system. The report clearly indicates there is substantial geographic variation throughout the U.S. and within our local communities, and builds on another recent IOM study that found $750 billion in wasteful spending in the health care system each year," Kind said

"Today's report demonstrates the need to continue building on the payment and delivery system reforms included in the Affordable Care Act," he added. "Substantial savings are possible if we better incentivize hospitals, physicians, and physician groups to provide high-value care whether through a value modifier or other delivery system reforms."

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