Finding a More Rational System:
Medicare Physician Payment Reform

Most discussions on physician payment inevitably lead to an examination of the Medicare physician payment formula and the recurring debate on annual updates. Given its stature in the market, as Medicare payments go, so go the private insurer payments to physicians. While another reduction in Medicare payments to physicians was teed up for 2006 and, in fact, went into effect, the Deficit Reduction Act of 2005 preemptively provided a reprieve by reversing the cut.1 With a 4.7 percent cut scheduled in 2007, heated discussion has begun on Capitol Hill.2 A recent House Energy and Commerce Subcommittee on Health hearing, "Medicare Physician Payment: How to Build a Payment System that Provides Quality, Efficient Care for Medicare Beneficiaries," signaled that Congress' understanding that changes need to be made to the current system.

Current System

The current payment system for public - and many commercial - insurers is largely driven by the Medicare Physician Fee Schedule (MPFS). Implemented in 1992, the MPFS is based on national uniform relative value units (RVUs) for resources associated with providing specific services. RVUs are established for physician work, practice expenses, and malpractice premiums. Payments are calculated by multiplying RVUs for services by a dollar conversion factor. The MPFS is updated annually and physician work RVUs are reviewed at least every five years.3 The financial machinations associated with Medicare payments each year are largely driven by the sustainable growth rate (SGR), a mandated formula which provides for cuts in physician payments if use of Medicare services exceeds the gross domestic product. Projections point to continued cuts in physician payments over the next 10 years, unless changes are made to the SGR formula itself, or to the payment system as a whole.

Recently, physician groups have expressed concern that reduced compensation will decrease access for Medicare beneficiaries.4 A recent study by the Center for Studying Health Systems Change indicates, however, that Medicare beneficiaries' access to physicians does not appear to be a problem, and is comparable to access for privately insured patients.5

Looking Ahead

CMS Administrator Mark McClellan recently said that he was "optimistic that the federal government could also make some structural changes as soon as this year in the way doctors are reimbursed."6 Like other stakeholders, McClellan believes that the current system does not place priority on quality care, but instead rewards volume and return treatments.7 8 Several proposals for changes to the payment system have been developed by a number of organizations, including:

• Models of care coordination, such as the Advanced Medical Home,9
• Evidence-based case rates,10 and
• Pay-for-performance.

Several demonstrations have been put into place, but critical technical challenges remain before these concepts can be translated into a new payment system:

• How much payment should be for quality vs. base payments?
• How do you attribute patient level quality to physicians?
• What quality measures should be used?
• Will it be necessary to risk adjust payments?
• Is the system appropriate for all types of care?

HCFO has funded several projects examining physician payment. Douglas A. Conrad, Ph.D. completed three projects examining the role of physician compensation on physician behavior. He found that the relationship between physician payment and productivity is not as strong as prior studies had suggested. Thomas H. Rice, Ph.D. examined physician responses to Medicare payment reductions, in both the public and private sectors. He found that with Medicare payment reductions, physicians increased the number of privately-insured patients they treated in addition to increasing the number of medically-unrelated procedures to privately insured patients. Janet Mitchell, Ph.D. evaluated a policy change in Medicare's physician payment which substantially reduced fees paid for certain "overpriced" surgical procedures. Her findings suggested that volume responses by surgeons to payment changes under the Medicare Fee Schedule might have been smaller than the Health Care Financing Administration's (now CMS) original estimates. Barry Saver, M.D., examined the impact of different methods by which health plans pay for specialty physician services (capitation, salary, and fee-for-service) on the cost and quality of those services. He found that more often than not, fee-for-service payment is associated with higher procedure rates than capitation payment, but not in every case.

HCFO Related Projects

Grant No.: 26417
Title: Effects of Physician Compensation Method on Physician Behavior and Satisfaction in Managed Care Organizations
Institution: University of Washington
Principal Investigator: Douglas A. Conrad, Ph.D.
Grant Duration: February, 1995 - March, 1997

Paragraph Summary: Do different payment strategies affect how a physician practices within a managed care setting? Researchers at the University of Washington examined the effects of alternative compensation strategies on the clinical efficiency of individual primary care doctors in a managed care environment. The project team studied five health plans/managed care organizations in the greater Puget Sound area of Washington to identify primary care physicians who are paid under salary, capitation, or fee-for-service arrangements. The study then analyzed patient utilization and cost for episodes of care for eight common conditions. The objective of this study was to understand better how groups reallocate payments they receive from health plans into individual compensation and how that activity influences physician practice.

Grantee Publications

Title: The Impact of Financial Incentives on Physician Productivity in Medical Groups
Author(s): Conrad DA, A Sales, SY Liang, A Chaudhuri, C Maynard, L Pieper, L Weinstein, D Gans, N Piland
Journal: Health Services Research
Volume: 37(4)
Date: August 2002

Title: Physician Compensation & Risk-Bearing Arrangements in Medical Groups: Impact on Physician Productivity
Institution: University of Washington
Principal Investigator: Douglas A. Conrad, Ph.D.
Grant Duration: September, 1997 - November, 1999

Paragraph Summary: What are the consequences of alternative methods of compensating physicians in medical groups on physicians' productivity? Researchers at the University of Washington examined this question by: 1) examining impact on physician productivity of different physician compensation and risk-bearing arrangements and 2) qualitatively assessing the detailed behavioral mechanisms by which those compensation and risk-bearing arrangements influence physician productivity. Data for the first part of the analysis - the evaluation of the effects of compensation method on physician productivity - came primarily from the Medical Group Management Association's (MGMA) 1998 Compensation and Production Survey and their 1998 Practice Cost Survey. The respondent sample for these surveys was approximately 8000 physicians from approximately 500 group practices. The Compensation and Production Survey contains data on individual physician levels of production, annual compensation, compensation method, individual characteristics, ownership form, group size, and other necessary information. The key informant sample consisted of 40 medical groups in 4 states ( Wash., Ore., Calif. and Wisc.). The objective of the study was to help health care executives, researchers and payers who must craft (and evaluate) risk-bearing arrangements to better understand how financial incentives affect physician productivity, and to identify best practices with respect to compensation - those practices that encourage productivity while also discouraging overuse and underuse.

Title: Physician Compensation & Risk Bearing Arrangements in Medical Groups: Market Level Effects and Impacts on Physician Productivity and Risk Contracting
Institution: University of Washington
Principal Investigator: Douglas Conrad, Ph.D.
Grant Duration: February, 2000 - July, 2001

Paragraph Summary: What is the effect of physician compensation and risk-bearing arrangements on physician productivity and risk contracting? Researchers at the University of Washington conducted this study as a tie-in to related and recently completed HCFO project. The goal of the new study was to increase understanding of the impact of these differing compensation and risk bearing arrangements on physician productivity. Using data from the Medical Group Management Association's (MGMA) 1998 Compensation and Production Survey and their 1998 Practice Cost Survey (data for 1997), the researchers: 1) added an additional year of MGMA data (for 1998) and used the models created for the aforementioned ongoing study to analyze the effects of physician compensation on productivity; and 2) used InterStudy data, to conduct a longitudinal analysis of the effects of changes in managed care penetration and other market factors on risk bearing by medical groups, group productivity, and approaches to physician compensation at the market level for 1995 through 1998. The objective of the study was to augment the ongoing study of the effects of physician compensation on physician productivity and to examine the effects of market-level variables on physicians' productivity.

Title: Impact of Medicare Payment Reductions for "Overpriced" Surgical Procedures on Utilization and Access
Institution: Center for Health Economics Research
Principal Investigator: Janet B. Mitchell, Ph.D.
Grant Duration: March, 1991 - December, 1992

Paragraph Summary: This project evaluated a policy change in Medicare's physician payment which substantially reduced fees paid for certain "overpriced" surgical procedures. The study examined whether observed changes in utilization were the result of the policy change and assessed the impact on access for vulnerable populations (very old, black, and rural beneficiaries). The research was intended to provide policy-makers with an indication of how physicians will respond to Medicare's new physician payment mechanism (the RBRVS), that were due to be phased in between October 1992 and January 1996.

Grantee Publications

Title: Do Increases in Payments for Obstetrical Deliveries Affect Prenatal Care?
Author(s): Fox M and K Phua
Journal: Public Health Report
Volume: 110(3)
Date: May 1995

Title: Impact of Medicare Payment Reductions on Access to Surgical Services
Author(s): Mitchell J.B. and J Cromwell
Journal: Health Services Research
Volume: 30(5)
Date: December 1995

Title: Evaluation of a Natural Experiment to Raise Medicaid Fees for Physicians
Institution: Harvard University Medical School
Principal Investigator: Joseph P. Newhouse, Ph.D.
Grant Duration: October, 1993 - December, 1994

Paragraph Summary: What impacts do increased Medicaid physician reimbursements have on the availability of, access to, and total costs of primary care? The researchers evaluated a 1986 "natural experiment" in Tennessee, wherein Medicaid physician fees for primary care were raised by 50 percent in nominal terms and by 25 percent relative to Medicare. The objectives of this project were to (1) assess whether increased reimbursement leads office-based providers of primary care to be more willing to treat Medicaid patients; (2) assess whether beneficiaries respond by shifting their site of care from hospitals to outpatient office settings; (3) estimate the savings from any shift in the site of care; and (4) estimate the "offset effect" (the extent to which increased physician reimbursement for primary care increases total Medicaid payments for such care). The results provided valuable information about the potential cost and effects of increasing Medicaid fees. The study also revealed whether replacing Medicaid with a public program that reimburses providers at the same level as private insurers can be expected to ensure reasonable access to office-based care for the poor.

Grantee Publications

Grant No.: 22992
Title: Physician Fee Policy and Medicaid Program Costs
Author(s): Gruber J, E.K. Adams, J.P. Newhouse
Journal: Journal of Human Resources (http://www.ssc.wisc.edu/jhr/home.html)
Volume: 32(4)
Date: March 2003

Title: Physician Response to Medicare Payment Reductions: Impacts on the Public and Private Sectors
Institution: University of California, Los Angeles, School of Public Health
Principal Investigator: Thomas H. Rice, Ph.D.
Grant Duration: June, 1992 - August, 1994

Paragraph Summary: How have physicians reacted to provisions in the 1989 and 1990 Omnibus Budget Reconciliation Acts which reduced Medicare fees for 245 "overvalued" surgical procedures? Using data from the Commission on Professional and Hospital Activities, this study examined how physicians alter practices and billings in response to Medicare fee reductions not only for Medicare services, but also for services provided to privately-insured patients. The study explicitly analyzed the extent to which physicians "cost-shift" to the patients covered by private insurance. The findings are intended to assist policymakers in understanding how physicians would respond to Medicare's [then] new fee schedule and the potential "spill-over" effects to the private sector.

Grantee Publications

Title: A Tale of Two Bounties: The Impact of Competing Fees on Physician Behavior
Author(s): Rice T, S Stearns, D.E. Pathman, S DesHarnais, M Brasure, and M Tai-Seale
Journal: Journal of Health Politics, Policy, and Law
Volume: 24(6)
Date: December 1999

Title: Volume Responses to Medicare Payment Reductions with Multiple Payers: A Test of the McGuire-Pauly Mode
Author(s): Tai-Seale M, T Rice, and S.C. Stearns
Journal: Health Economics
Volume: 7(3)
Date: May 1998

Title: Do Physicians Cost Shift
Author(s): Rice T, S Stearns, S DesHarnais, D Pathman, M Tai-Seale, and M Brasure
Journal: Health Affairs
Volume: 15(3)
Date: September 1996

Title: The Impact of Performance Reporting on Consumer and Physician Organization Behavior
Institution: Harvard School of Public Health
Principal Investigator: Meredith B. Rosenthal, Ph.D.
Grant Duration: March, 2003 - October, 2004

Paragraph Summary: How are public "report cards" on consumer and physician behavior being disseminated? The researchers evaluated PacifiCare's Quality Index report cards which provide a relative performance assessment of provider groups in selected areas of clinical, service, and administrative quality. The researchers tested: (1) how new and continuing health plan enrollees use comparative quality information to select a physician group; (2) how mobilization of consumer choice based on comparative quality information drives physician group performance improvements; and (3) how physician groups are responding to performance measurement when data are used for confidential benchmarking only while other dimensions of quality are reported to consumers. This project fills an information gap concerning the value of publicly reported quality information and to provides guidance to public and private decision makers on the measurement and dissemination of provider quality information.

Title: Investigation into Specialty Payment: Effects on Cost and Treatments
Institution: University of Washington
Principal Investigator: Barry G. Saver, M.D.
Grant Duration: May, 1998 - October, 2001

Paragraph Summary: What is the impact of different methods by which health plans pay for speciality physician services (capitation, salary, and fee-for-service) on the cost and quality of those services? Researchers at the University of Washington are analyzing administrative data from three HMOs (Group Health Cooperative in Seattle, Health Partners in Minneapolis, and Kaiser Permanente Rocky Mountain Division in Denver) to determine the effect of the various payment methods on selected procedure rates, cost, primary care referral patterns, and patient outcomes. In addition to examining how the health plans pay for these services, the researchers were attempting to determine how individual speciality physicians are compensated within their own practices or practice organizations. The objective of this study is to provide policymakers and health plan administrators with better information about the impact of various compensation mechanisms on service provision, costs, referrals by primary care physicians, and compensation of specialists.

Title: Using Physician Profiling Software to Evaluate the Practice Efficiency of Physician Specialists
Institution: University of Southern Maine
Principal Investigator: J. William Thomas, Ph.D.
Grant Duration: July, 2003 - June, 2004

Paragraph Summary: How does examining the feasibility of using episode-based physician profiling systems help to evaluate the practice efficiency of physician specialists? The researchers completed a HCFO-funded study in which they evaluated the accuracy of seven primary care provider profiling methodologies and examined the implications of differences in accuracy for assessments of physician performance. In this project, the researchers focused on two of the seven methodologies which were episode-based - Episode Treatment Groups (ETGs) and the MEDecision Practice Review System (PRS) - to examine 15 (10 medical and 5 surgical) specialties. The objective of the project was to determine whether the risk-adjustment methodologies used to generate reliable profiles in a primary care setting can be extended to specialists given the unique factors that arise in profiling specialty physicians.

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1 Public Law 109-171, 109th Congress. "Deficit Reduction Act of 2005." Signed February 8, 2006.

2 "Docs: 5% Medicare cut would hurt patient care." The Associated Press. http://www.azstarnet.com/allheadlines/141193. Accessed August 25, 2006.

3 "CMS Announces Proposed Changes to Physician Fee Schedule Methodology," Medicare News, Centers for Medicare & Medicaid Services, June 21, 2006. Comments on proposed rule can be made until August 21 st with implementation anticipated for 2007 Medicare physician reimbursements. http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=1887

4 Webber, Tammy. "Doctors fear seniors will lose if Medicare's cut." Indianapolis Star. August 24, 2006.

5 Cunningham, Peter J, et al. "Physician Acceptance of New Medicare Patients Stabilizes in 2004-05." Tracking Report No. 12. Center for Studying Health Systems Change. January 2006.

6 "Docs: 5% Medicare cut would hurt patient care." The Associated Press. http://www.azstarnet.com/allheadlines/141193. Accessed August 25, 2006.

7 McClellan, Mark. "Testimony of Mark B. McClellan, M.D., Ph.D., Administrator of the Centers for Medicare and Medicaid Services Before the House Energy and Commerce Subcommittee on Health Hearing on Measuring the Quality of Physician's Services." July 27, 2006.

8 Wilson, Cecil B. "Medicare Physician Payment: How to Build a Payment System that Provides Quality, Efficient Care for Medicare Beneficiaries." July 27, 2006.

9 "The Advanced Medical Home: A Patient-Centered, Physician-Guided Model of Health Care," A Policy Monograph, American College of Physicians, 2006. http://www.acponline.org/hpp/adv_med.pdf

10 "PROMETHEUS: Provider Payment for High Quality Care." Prometheus Payment, Inc. April 2006.