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MedPAC Data May Pave the Way for Retooling Medicare Spending

By John Reichard, CQ HealthBeat Editor

September 28, 2009 -- What types of medical conditions account for the highest levels of Medicare spending and spending growth? Figuring that out could help implement new payment incentives in a way that delivers better value for the Medicare dollar, laying the foundation for what health policy wonks call "episode based payment."

In addition to better targeting new payment incentives to improve quality and efficiency, it could also signal areas where spending might be questionable and where further research might pinpoint inappropriate spending.

Data released by the staff of the Medicare Payment Advisory Commission earlier this month stirred excitement among commissioners about moving forward with this type of payment system. The analysis suggested that a manageable number of clinical areas accounted for a big chunk of Medicare spending.

"This is the middle ground way of looking at things where all the action is," said commissioner Peter W. Butler, chief operating officer of the Rush University Medical Center in Chicago. "And if we don't make an impact here, we're not going to change the system. So I think it's the right unit of analysis that we ought to dive into."

"This is just a huge advance," enthused commissioner Arnold Milstein, who recalled lamenting when he first joined the commission the lack of data on what Medicare gets for its money relative to the data available to analysts in industries outside health care. He called the data a real glimpse into "what could be a value-based navigation system for us. . .and for the people putting money into these benefits." The medical director of the Pacific Business Group on Health, Milstein is an expert on health care purchasing strategies to improve the quality and efficiency of care.

MedPAC staffer Jennifer Podulka reported at the commission's meeting September 18 that "the 20 clinical episodes that accounted for the greatest share of total Medicare spending on episodes in 2005 together accounted for 58 percent of total spending on episodes."

The findings confirmed the view of many analysts that Medicare dollars flow overwhelmingly into treatment of chronic conditions. Of the 20 types of clinical episodes, just two were acute conditions: closed fractures or dislocation of the thigh, hip and pelvis, and bacterial lung infections.

The 20 clinical episodes with the highest levels of Medicare spending as a percentage of all program spending on clinical episodes were as follows: ischemic heart disease (14 percent); congestive heart failure (4.3 percent); hypertension (4 percent); cerebral vascular accident (3.6 percent); chronic obstructive pulmonary disease (3.4 percent); diabetes (3.2 percent); joint degeneration of the knee and lower leg (3.1 percent); joint degeneration of the back (3 percent); chronic renal failure (2.8 percent); closed fracture or dislocation of the thigh, hip and pelvis (2.3 percent); cataract (2.3 percent); bacterial lung infections (2.1 percent); malignant growths of the prostate (1.4 percent); malignant growths in the breast (1.4 percent); psychotic and schizophrenic disorders (1.3 percent); major skin malignancies (1.2 percent); joint degeneration of the thigh, hip and pelvis (1.2 percent); other metabolic disorders, 1.2 percent; and atherosclerosis, 1.1 percent.

Podulka also reported on the clinical episodes with the fastest growing annual spending. The top five were joint degeneration of the neck (19 percent); other metabolic disorders (18 percent); lymphoma (16 percent); joint degeneration of the back (16 percent); and joint degeneration of the knee and lower leg (14 percent).

About half of the clinical episodes with the highest levels of Medicare spending were also among the areas with the highest levels of spending growth. Podulka noted that while there was little geographic variation in terms of clinical episodes with the highest levels of Medicare spending, that was not the case for the episodes with the high levels of spending growth. She observed that "policy options that focus on the high-growth conditions are probably going to have some differential impact by local area."

Among the strategies MedPAC is developing to get better value for the Medicare dollar is paying a bundled fee for services involved in treating a clinical episode. Paying such a fee for care in the hospital of a particular condition and for treatment in the period after discharge would replace individual payments per diagnosis to the hospital, doctor, skilled nursing facility, or hospital outpatient department.

Instead, Medicare would make one payment to a provider entity that would allocate the funds among the providers delivering care during the covered episode, Medicare explained in a June 2008 report to Congress. The system would create an incentive for doctors and hospitals to work together to avoid unnecessary forms of treatment. MedPAC also envisions tying levels of payment to the quality of care given for a treatment episode.

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