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IOM Calls for Medicare Reimbursement Formula Overhaul

 |  By cclark@healthleadersmedia.com  
   June 03, 2011

Medicare needs to change the controversial way it uses geographic price variables to calculate physicians and hospital reimbursement in order to more accurately reflect the cost of providing care for 39 million beneficiaries, the Institute of Medicine recommended in a lengthy report released Wednesday.

The 17-person IOM committee set forth 11 recommendations for two sets of providers, hospitals and physicians, both of which could shift some of the $500 billion a year in Medicare spending from doctors and health systems in some parts of the country to those in others.

"There's a great deal of uncertainty and dissatisfaction with the methods that are employed. They're complicated and don't seem to work that well," said IOM president Harvey Fineberg. "This is about improving accuracy."

Asked how inaccurate the current pay system is, Frank Sloan, chairman of the 17-person committee that prepared the report, replied that it's a system that "reflects history.

"It reflects the floors that have been put into the system, the requests for exceptions and exceptional treatment on the part of individual institutions. And that kind of system at some point, built up over decades, is worthy of reexamination."

"If you came in from outer space and say this system, you would see that there are aspects of it that do not make sense."

In a nutshell, the committee is recommending that payment to hospitals be based on a wage index for all healthcare workers – from health IT experts to accountants and attorneys. Wage would be based on data collected by the Bureau of Labor Statistics, rather than on labor costs reported by hospitals.
 

This change would "allow the index to reflect the price of labor, not the reported cost of labor, which the committee views as an improvement in accuracy," the report says.

It would also reflect the "broad range of healthcare professions and skills, outpatient clinics, office based practices, and other clinical settings," that are now used to determine hospital pay.
Such a change in payment structure would require Congressional legislation because it would require a budget neutrality adjustment.

Another major recommended change would shift the wage index geographic area to include commuting patterns for healthcare workers who reside in a county located in one labor market but who commute to work to another.

For physicians, the change may be pronounced. Instead of being grouped into 89 geographic practice cost index (GPCI) centers nationally, physician pay areas would be grouped according to the 441 metropolitan statistical area market now used for hospitals.

The physician change is extremely controversial, as the existing pay structure is the topic in two lawsuits filed by coalitions of California physicians who claim they have been inappropriately classified as rural, and therefore paid far less, when they actually practice in urban areas where expenses rival those in big cities.

In his lawsuit representing physicians in 10 such California counties that claim underpayment, Millbrae healthcare attorney Dario deGhetaldi calculates the shortfall at $508 million between 2001 and 22010, nearly half of which is owed San Diego County, an urban county of 3.2 million people which is nevertheless classified as rural, according to the existing formula.

Stephen Zuckerman, an economist and author of the latest IOM report, said in a telephone interview Wednesday that if the Centers for Medicare & Medicaid Services adopt the recommendations for changing the physician pay formula, there will be a payment adjustment "that will address a great deal of this issue. Now, cities with higher costs, but [that] have been lumped in with non-metropolitan areas since the late 1990s, have grown and now have higher wage costs," he said.  

"By changing the geographic areas that are at the heart of the adjustment, that will absolutely acknowledge that issue and potentially provide some relief to those cities."

Indeed, Zuckerman added, California is not the only state that will be affected by the physician category shift.

"Many counties around the edges of the Atlanta metropolitan area are now part of metropolitan Atlanta and are included in the non-metro localities in the state of Georgia. And there are examples like that all over the country. We do think moving to the metropolitan statistical area (categories) will do a lot to address this particular problem."

Which areas of the country, and which hospitals, would be hurt or helped by the formula remain unclear, the authors acknowledged in a news briefing Wednesday.

Zuckerman, however, suggested that some rural areas could be hurt hardest because they have been benefitting from gradual adjustments in the formula that included higher cost counties. When those counties are removed from their areas, and lumped into their own MSAs, providers in those areas may end up receiving less.

"There's no question that there will be people who look at this and begin to do rough calculations in their head[s]," he said.

DeGhetaldi says he approves of the IOM's recommendation regarding physicians. But, he added, "there are a lot of moving parts in these recommendations, and no clue how or when or if any of them will ever be implemented. It seems that this would result in a whole new system for calculating payments to hospitals too, and that's pretty complex."

It also won't invalidate the lawsuits, which ask to recapture lost pay to physicians over the last 10 years.

Another recommendation which, if approved, would further affect physician pay involves inclusion of a full range of occupations employed in physicians' offices, not just registered nurses, licensed practical nurses, health technicians and administrative staff.  

The expansion anticipates "future changes in the workforce brought in by changes in the labor market, including the increasing demand for expertise in health information technology."


The Association of American Medical Colleges' president and CEO Darrell G. Kirch, MD, said his group "is pleased that the Institute of Medicine's committee continues to work on ensuring that geographic adjustments for hospital and physician payments are fair and accurate, and we look forward to reviewing this and future reports in greater detail.

"We appreciate the study's recognition that the number of geographic localities used in determining payment adjustments for physicians is insufficient and unfairly penalizes many urban providers.  In the next phase of its work, we urge the committee to address the current shortfall in the geographic practice cost index system, which adjusts for only one quarter of a physician's work and fails to provide full adjustments for the costs of living in communities where teaching physicians often practice." However, he added, the AAMC is concerned that using the BLS data "will fail to include important factors that affect teaching hospitals.  Currently, this information can only be derived from data available in Medicare cost reports."

He added his hope that future work will improve data sources "so that they are as complete and accurate as possible for all health care providers."

This IOM report, and two others that will come this summer and next year related to other aspects of provider geographic payment disparities, were part of language in the original Patient Protection and Affordable Care Act legislation and are prepared at the specific request of Secretary of Health and Human Services Kathleen Sebelius.

A supplemental report that discusses physician payment issues will be released this summer followed by a final report released in 2012 will address effects of the adjustment factors on healthcare quality, population health and the distribution of the healthcare workforce.

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