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MedPAC's Thoughts Range Far and Wide on How to Replace the Doctor Payment Formula

By John Reichard, CQ HealthBeat Editor

October 5, 2006 -- Give a bunch of brainy people lots of options for how to solve a knotty problem and you might stimulate their imaginations to come up with a particularly good solution. But the message coming out of the Medicare Payment Advisory Commission on Thursday was to expect no miracles when the problem to be solved is how to replace the controversial Medicare physician payment formula.

Charged by Congress with evaluating alternatives to that formula, the influential federal advisory panel heeded the plea of its executive director, Mark Miller, to think widely about other approaches to restraining rising physician care outlays. Fueling its discussion was a staff-compiled draft document listing 11 potential alternatives. But it's clear that the commission is nowhere near knowing what to do with the list.

"It's a tremendous list, very impressive, but what are you going to do and in what order are you going to do it?" asked one commission member, former Congressional Budget Office Director Douglas Holtz-Eakin.

What is clear is the sense among many policymakers that something must be done about the formula and that Congress badly wants advice on what to do.

Known as "the SGR," the sustained growth rate formula has lined up physicians for years of annual cuts averaging 5 percent or more. Doctors have said they'll leave Medicare in droves if Congress doesn't intervene, but the cost of erasing the cuts is steep and adds to the cost of Part B premiums seniors pay for Medicare doctor coverage.

The current formula relies on growth in the gross domestic product, or total amount of economic activity in the U.S., to help establish a yearly target for growth in the volume of Medicare payments to providers. To the extent that overall spending exceeds the SGR target, payments must be cut the following year to recoup the excess spending.

If Congress acts to block an annual cut triggered by the formula, the excess spending that must be recouped doesn't go away; it must be made up in cuts the following year. And to the extent that the SGR target is exceeded in that year as well, the pile of SGR-related "debt" that must be recouped grows larger. Owing to this cumulative debt, doctors face cuts of 5 percent a year every year for nine years under the SGR, MedPAC testified earlier this year.

Miller encouraged commissioners at a meeting last month to begin thinking not only about new ways to set a spending target, but also about other approaches for controlling the volume of physician services.

The 11 alternatives outlined by MedPAC staff for increasing the value of physician spending included instituting a "payment-for-performance" system that pays more for higher-quality care; encouraging better coordination of care; exploring a "bundling" approach in which one payment would cover a number of services rather than a single service; avoiding volume increases to make up for underpayment or to boost profits from overpayment for a particular service by ensuring accurate prices; and promoting efficiency by increasing the use of primary care.

Other alternatives include: redesigning cost-sharing provisions in Medicare benefits to steer beneficiaries toward lower-cost or more-effective treatment options; measuring how many tests and procedures doctors order and comparing that level of resource use with that of their peers; assessing the cost-effectiveness of various types of treatments; tapping the potential of multi-specialty group practices for more efficient care; setting standards providers must meet for the quality of service, such as proficiency in interpreting medical images; and requiring contractors who pay Medicare claims to do more to reduce improper payments by detecting spikes in particular types of services, for example.

Commissioners praised the list of alternatives but said it should be reshaped into a more coherent form. "Many of these things are connected to each other, yet they are sequential," said John M. Bertko, urging the use of a timeline to detail the sequence in which the alternatives might be implemented.

"We need to be very explicit about what needs to go together," said Nancy M. Kane. "It is very misleading to think these things aren't totally related to each other."

Several commissioners expressed wariness about adopting measures on the list without retaining some form of spending target. "I would be very disappointed if this group somehow said, 'Well, we're going to do this list and let's just pitch the SGR,'" Holtz-Eakin said. "The SGR is a highly inelegant defense to anyone who looks at health care," he added. "It is, however, a very, very clear recognition of the fact that we're scared about how much it costs."

"I at least would like to keep some overall pressure on the spending that we're doing before we discard it entirely," he continued.

"Some version of a target . . . needs to be recognized in whatever we do," Bertko said. Medicare can't just do the things on the list and walk away from volume considerations and say it has done the job, agreed Francis J. Crosson. "The SGR can have a significant impact," said Robert D. Reischauer, the commission's vice chairman.

MedPAC's staff floated some ideas for tinkering with the SGR to lessen the severity of its impact on payments. The excess spending to be recouped could be limited to that of the previous year, for example, rather than basing it on the cumulative excess. Another approach would be to make yearly payment updates "less sensitive to missed targets," a MedPAC staffer said. While these "softer" SGR options would lessen cuts or allow modest increases, they would add more to future spending, the staffer added.

It was clear from the meeting that MedPAC has much work to do to meet its March 1 deadline for filing its report with Congress on possible changes to the SGR. Reischauer said that if he were a congressional aide receiving the list of alternatives, "I would feel I don't have anything to sink my teeth into."

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