Lecture -

Issues for Developing Medicare Payment Policy
 
 

As the Commission has focused on the immediate issues the BBA raises, it has also considered the new law's effects over the long term. Improvements in payment policy for one provider may have unintended consequences for others. The new prospective payment systems required for Medicare fee for service will redistribute payments both within and across health care delivery sectors. And new payment policies for Medicare+Choice most likely will affect fee-for-service providers, while changes to traditional Medicare will affect private health plans. Decisions about risk adjustment, data reporting, expanded benefits, and cost containment inevitably will affect the entire Medicare program. In fulfilling its mandate, the Commission will consider how these policies interrelate and their potential effects for-all providers.
 
 

Policies for Fee-for-Service Providers
 
 

Medicare currently makes fee-for-service payments to a variety of providers, among them physicians, acute care hospitals for both inpatient and outpatient care, home health agencies, skilled nursing facilities, hospices, ambulatory surgical centers, psychiatric and rehabilitation facilities, dialysis facilities, and clinical labs and durable medical equipment suppliers (see Table 1-1-2). The share of total Medicare spending for each provider type varies substantially across sectors, 49 percent for hospital inpatient services, 21 percent for physicians' services and 9 percent for home health agencies (see Table 1-1-3). Clearly, these sectors reflect different aspects of health care delivery by producing different types of services, and serving different types of beneficiaries. They are, nonetheless, interrelated, so that policy changes affecting one type of provider may have important implications for another.
 
 

Payment policies can be described by several common features:
 
 

Despite these commonalities, payment policies differ substantially by provider type (see Table I- 1-2). For example, physicians' payments are made at the service level, while PPS hospital inpatient payments are made for all of the services provided in connection with a single discharge. Paying for a bundle of services, such as those for a particular inpatient admission, is thought to reduce incentives to provide too many services. In lieu of bundling, the payment policy for physicians uses a separate volume control mechanism that links payment rates to spending growth.
 
 

Payment policies often have similar aims, but use different strategies to achieve them. For instance, both physician and hospital payments are adjusted for geographic variation in input prices, but the payment policies use different geographic areas and input price indexes. It seems clear that new prospective rates for rehabilitation facilities, home health agencies, and the others called for in the BBA should be geographically adjusted. How areas should be defined for this purpose is less clear, however.
 
 

Cost-sharing policies also differ across sectors, with possible consequences for where beneficiaries' seek care. For example, a beneficiary may face dramatically higher out-of-pocket costs if a service is performed in a hospital outpatient department than in a physician's office. The absence of copayments for home health care may also affect choices about care delivery. Some argue that the differences in policies are basically irrelevant, since only about 10 percent of Medicare beneficiaries cover their own cost sharing. Those without supplemental insurance, however, are predominantly the near-poor and African Americans, who are the most apt to be affected by these policies.
 
 

It is also unclear what additional adjustments should be incorporated into payments and to what sectors these should apply. For example, until now only PPS hospital inpatient payments have been adjusted for the costs of training physicians. The Commission is reviewing Medicare's role in supporting this activity. If it concludes that that support should continue, the Commission will also study whether payment to other types of providers should be adjusted to reflect the shift in training from inpatient to ambulatory settings.
 
 

Improving the performance of Medicare's fee-for-service program will require, at least in part, a better understanding of how the sectors relate to one another, both financially and in providing services. For instance, the implementation of prospective payment for hospital outpatient services is likely to change the volume of services provided not only in these sites, but also in physicians' offices and ambulatory surgical centers, since they are often close substitutes. Careful design of the outpatient prospective payment system should ensure care delivery in the most appropriate setting and minimize any disruption to beneficiaries.
 
 

Some inconsistencies across payment policies may be appropriate if they reflect different patient mixes or treatment protocols. Payment policies should be reexamined, however, if they produce payment differentials that simply reflect how the policies have evolved. Although Medicare beneficiaries can receive rehabilitation services either in skilled nursing facilities or in rehabilitation facilities, for instance, the payment mechanisms for both provider types differ. Currently, Medicare pays skilled nursing facilities a limit based on a facility-specific per diem for routine services, subject to a national average. Rehabilitation facilities are paid under the rules set by the Tax Equity and Fiscal Responsibility Act of 1982 for inpatient providers excluded from PPS. Resolving these discrepancies in payment approaches is complicated, however, by the differences in treatment approaches used by these providers.
 
 

As a practical matter, it is difficult to determine whether the types of patients served or the services provided differ when comparing payments across sectors. Efforts to analyze payments across sectors are limited by the lack of reliable schemes to classify patients and the care they receive in different settings. Designing and implementing better policies will require more information, and should be revisited as new data become available.
 
 

Medicare+Choice and Fee-for-Service Payment Policies
 
 

Until 1998, Medicare's payments to private health plans were based on the average payments made on behalf of beneficiaries in the fee-for-service program. Under the Balanced Budget Act of 1997, Medicare+Choice payment rates are no longer directly linked to local fee-for-service spending. Instead, they blend average spending locally and nationally. In addition, payment floors guarantee some minimum level of base payment rate in all counties. Moreover, each year, local and national fee-for-service averages are updated to reflect overall growth in Medicare spending per capita; the BBA guarantees a minimum increase of 2 percent to base rates. Also, beneficiary liability under Medicare+Choice is not to exceed that in the fee-for-service program for the basic Medicare benefit package.
 
 

Substantial variation in payment rates across geographic areas may discourage health plans from participating in Medicare where payment rates are too low. As a result, the BBA sought to encourage plan participation by no longer setting payment rates entirely based on fee-for-service outlays at the county level. It reduces some of the variation in payments to health plans by blending local rates with the national average. While that may reduce variation in general, it does so across the board. The variation in fee-for-service spending results from differences in prices, patient health status, and in practice style. Because health plans can influence this last factor, it may be reasonable to remove this source of variation from their payments. Therefore, new payment approaches should be considered when policy makers are better able to disentangle these sources of variation across areas. Moreover, once better risk-adjustment methods are implemented and established within Medicare+Choice, it may be appropriate to reconsider the use of an input-price-adjusted national rate as the base rate for all health plans.
 
 

As a result of the BBAs new approach for setting capitation payments, payments to health plans are no longer comparable to average fee-for-service spending in communities nationwide. By setting a minimum payment rate, capitation payments in some counties are now over 50 percent higher than average fee-for-service spending. At the other extreme, payments to health plans are falling below fee-for-service spending in those counties with above-average spending. The implications of these differences in average spending for Medicare+Choice enrollees and for those in the traditional program are difficult to predict. Changes in enrollment, plan availability, benefit offerings, and beneficiary financial liability over the next few years should be carefully monitored so that problems of access and quality for beneficiaries in either Medicare+Choice or fee for service are detected promptly.
 
 

Table I-1-2

Common Features of Payment Systems, by Provider Type
 
Provider

Type

 Unit of

Payment

 Basis of

Payment

 Payment Update

Method
Payment Adjustments
 Other

Feature

 Beneficiary

Liability
Geographic Access Other
Physician Service RBRV scale times the conversion factor Annual update set by sustainable growth rate system Geographic practice cost indexes applied to 89 payment areas. 20% bonus payments in Health Professional Shortage Areas. Reduction in payment for some services when provided in non-office settings. Spending control links updates in payment to volume growth. 20% of fee schedule amount plus balance billing (up to 9.25% of fee schedule amount).
Acute care hospitals Discharge/ transfer DRG relative weight times the standardized amount. Annual update Area wage adjustment for each MSA or statewide rural area. Dispro-portionate share adjustment; provisions for sole community, Medicare-dependent and rural referral. Indirect medical education. Additional payment for graduate medical education. Special provisions for capital. Deductible per spell of illness and copayment for 61-150 days.
Psychiatric facilities, long-term care hospitals, rehabilitation facilities. Discharge Lower of actual costs or limit based on updated facility-specific historical costs (target amount). Costs minus 15% for capital. Facility-specific annual increase to target amount, varies depending on relationship of costs to target amount. N/A None Bonus or relief if costs are below or above target amount. Exceptions payments for demonstrated costs substantially above target amounts. Deductible per spell of illness and copayment for 61-150 days.
Skilled nursing facilities. Day for routine care, costs for ancillary and capital. Lower of actual per diem costs or limit for routine care. Costs for ancillary services and capital. Annual update to routine cost limit. (currently frozen). Wage index adjustment to routine limits, based on MSA or statewide rural area.. None None  Exceptions to routine cost limits; new facility exemption from limits. After first 20 days, daily copayment.
Home health agencies Visit  Lower of actual costs, or per visit limits that are applied to aggregate facility costs, or per beneficiary limit. Annual update to per visit limits. Wage index adjustment to limits, based on MSA or statewide rural areas where service is provided. None Exceptions to limits None  None 
Hospital outpatient department Service Lower of charges, costs, or blended rate subject to 5.8% reduction for operating and 10% reduction for capital. NA Wage index adjustment to fee schedule portion of blend, based on MSA or statewide rural areas. None  None  Extra payments for interns and residents 20% of charges
Clinical lab & durable medical equipment Service of item Fee schedule Periodic updates Lab-regional fee schedules of fee schedule None  None  None  Lab=None

DME=20%
Ambulatory surgical centers Eight service cost categories Fee schedule Periodic updates Wage index adjustment based on MSA or statewide rural area. None  None  None  20% of ASC rate
Hospice Per diem Daily rate subject to beneficiary cap. Annual updates Wage index adjustment based on MSA or statewide rural area. None  None None $5 for drugs; 5% of inpatient respite care rate limited to inpatient deductible amount.
Dialysis facilities Per dialysis treatment (outpatient) Composite rate bundles routine dialysis services None Wage index adjustment based on MSA or state-wide rural area. None  None None 20% of rate.

 
 
 

Table I-1-3

Medicare Payments, Providers, and Beneficiary Use, by Fee-for-Service Sector
 
Provider/ Service Type Total 1996 Outlays (in Billions) Percent of Total 1984 Outlays Percent of Total 1996 Outlays Number of Providers Number of Beneficiaries That Used Services (in Thousands) Percent of All Beneficiaries Average Medicare Payment per User in 1996 Beneficiary Cost Sharing, as Percent of Total Payment
Hospital inpatient $98.6 65% 49% 5,075 6,964 19% $11,336 9%
Skilled nursing facility 11.7 1 6 15,553 1,233 3 6,325 NA
Home health agency 18.3 3 9 9,886 3,468 9 9,240 0
Hospice 2.0 - 1 2,135 309 1 6,058 NA
Physician 41.7 24 21 787,513 29,539 79 1,409 20
Outpatient 16.6 6 8 NA 19,709 53 778 40
Other 11.6 4 6 NA NA NA NA NA