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MedPac Fix for Flawed Doctor Payment System May Mean Transforming Health System

By John Reichard, CQ HealthBeat Editor

January 9, 2007 -- The Medicare Payment Advisory Commission (MedPac) is preparing to file a report with Congress in March that would chart two alternative paths to fixing the flawed Medicare mechanism for paying doctors—one of which would entail setting expenditure targets encompassing all providers, not just limiting the expenditure target to physicians, which is the case under the current system.

The other "pathway" expected to be included in the report would entail repealing the current expenditure target known as the sustainable growth rate formula, or the SGR. Known as "Pathway One," that approach also would involve "developing and adopting new approaches for improving the value" of Medicare spending.

But the commission appears divided on whether the SGR should be repealed altogether. The mechanism provides for payment cuts the following year to recoup spending amounts above the expenditure target. Although it has teed doctors up for many consecutive years of payment cuts, the SGR is not without at least some value, two MedPAC commissioners said Tuesday. They both are former directors of the Congressional Budget Office, Douglas Holtz-Eakin and Robert Reischauer.

"Pathway Two" posits that if there isn't agreement that the SGR should be repealed, expenditure targets should be widened to include outlays for all types of providers. Including a wide range of providers would create incentives for them to coordinate to keep down the costs of care, supporters of a wider cap reason. The problem with the current cap on doctor spending is that it leads doctors to enter into ventures with other types of providers to boost levels of care provided to Medicare patients to excessive, inefficient levels, some of MedPAC's commissioners said Tuesday.

MedPAC Chairman Glenn Hackbarth said he sees "broad agreement" on the commission that if a target were retained it should be applied to all providers, not just doctors. He also sees wide support on the panel for another component of Pathway Two, setting expenditure targets on a geographic basis to reflect the fact that some regions of the country are associated with much higher levels of per capita spending on Medicare patients without any improvements in quality—in fact quality appears to be lower in higher spending areas, according to some researchers.

Pathway Two includes other components that are tantamount to a transformation of the U.S. health system to spur doctors, hospitals, and other providers to work together to provide more coordinated care. The vision involves combining providers into accountable health systems that would be rated on the quality and efficiency of their care and eventually paying them accordingly.

Payment incentives are a key to the vision of a transformed system. Commissioner Nancy M. Kane said capitated payment needs to be a central feature of a transformed system. Capitation refers to a system of payment in which a fixed sum of money is paid to providers to deliver a particular type of care, with providers liable for the added costs if treatment exceeds the capitated amount or free to keep the profits if they can provide care more cheaply. "At the federal level, we should be thinking about how we can get back to a capitated environment," she said.

Talk of widespread adoption of capitation was rampant in the mid-1990s, but faded amid the public backlash against managed care.

Commissioners cautioned that whatever path Congress takes to overhauling physician care, a substantial investment of new resources in the Centers for Medicare and Medicaid Services will be essential to establishing a new system. But MedPAC is not prepared to advise Congress which of the two paths to take. Commissioner Sheila Burke said she and her colleagues lack the details "to understand how to go on one path or the other."

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