peter v. lee consumer-purchaser disclosure project invitational working session july 26, 2006

Provider Payments: How They Work, Implications for Cost & Quality and

Creating a Consumer/Purchaser Policy Agenda

Peter V. Lee

Consumer-Purchaser Disclosure Project

Invitational Working Session

July 26, 2006

© Consumer-Purchaser Disclosure Project, 2006 2

Agenda

• Introduction and Context

• The “Basics” – Medicare Physician and Hospital Payments

• Private Sector Payment

• Policy Options for Payment Reform to Promote Value


Goals of Payment Reform: Build on Consumer-Purchaser Medicare Value Purchasing Consensus

• Valid performance measurement

• Public reporting

• Pay for performance


Issues for Consumer, Purchaser and Labor Consideration

• Comments requested on reform of Medicare physician payments to bolster payments for primary care – due 8/21/06

• Annual review of SGR – without change, physician payments will be cut 4.2%

• Consider longer term payment reform to promote quality and value


MedPAC’s “Payment adequacy framework”

MedPAC, March 2006


General Context to Physician and Hospital

Payment


Context: Source of Payment for Health Care


Context: Medicare’s market share varies by sector

MedPAC, March 2006


Context: Changing Medicare Spending –1995 to 2005

MedPAC, June 2006


Physician Payment:Context and How it Works

in Medicare


Context: Sufficiency of Payment – Physicians Accepting New Patients

MedPAC, June 2006


Physician Payment MethodologyPhysician Payment Methodology

• Resource-Based Relative Value Scale Resource-Based Relative Value Scale (RBRVS) system was adopted by Medicare in (RBRVS) system was adopted by Medicare in 1991 and copied by many private insurers.1991 and copied by many private insurers.

• Designed to lessen the historical disparity Designed to lessen the historical disparity between office visits – bread and butter of between office visits – bread and butter of primary care – and procedures provided by primary care – and procedures provided by specialists. specialists.

Adapted from T. Bodenheimer, M.D., UCSF, May 2006


Medicare Physician Payment Issues to Medicare Physician Payment Issues to ConsiderConsider

#1: How RVUs are determined#1: How RVUs are determined

#2: How RVUs are updated (the “RUC”)#2: How RVUs are updated (the “RUC”)

#3: Volume of Services#3: Volume of Services

#4: Role of SGR#4: Role of SGR

#5: Impact on private insurance#5: Impact on private insurance



#1. How RVUs are determined#1. How RVUs are determined

• 2005 Medicare fee for CPT code 99214: 2005 Medicare fee for CPT code 99214: 30 minute office visit30 minute office visit (Evaluation & management -- E/M -- code)(Evaluation & management -- E/M -- code)– Relative value unit (RVU): 2.18Relative value unit (RVU): 2.18– Conversion factor:Conversion factor: 37.9 37.9– Fee 2.18 x 37.9 Fee 2.18 x 37.9 = = $82.62 (Varies with $82.62 (Varies with

location)location)

• 2005 Medicare fee for CPT code 45378: 2005 Medicare fee for CPT code 45378: colonoscopycolonoscopy (takes about 30 minutes) (takes about 30 minutes) – RVU: RVU: 5.465.46– Conversion factor: Conversion factor: 37.937.9– Fee 5.46 x 37.9 Fee 5.46 x 37.9 = = $206.93$206.93



Why is the gastroenterologist paid Why is the gastroenterologist paid 274% of the family physician’s 274% of the family physician’s payment for 30 minutes of work?payment for 30 minutes of work?




• 3 factors go into the RVU3 factors go into the RVU– Work (about 50%) Work (about 50%) – Practice expense (about 45%)Practice expense (about 45%)– Malpractice insurance costs (about 5%)Malpractice insurance costs (about 5%)




• Most of the difference between the office visit and the Most of the difference between the office visit and the colonoscopy is in the work portion of the RVUcolonoscopy is in the work portion of the RVU

• Colonoscopy has a work portion of the RVU over 300 Colonoscopy has a work portion of the RVU over 300

times that of the work portion of the office visittimes that of the work portion of the office visit

• Adapted from T. Bodenheimer, M.D., UCSF, May 2006


30 minutes does not = 30 minutes30 minutes does not = 30 minutes

• The work portion of the RVU includes The work portion of the RVU includes – TimeTime– Intensity (amount of work per unit time)Intensity (amount of work per unit time)

• 99214 Office visit vs. colonoscopy, time is the same. 99214 Office visit vs. colonoscopy, time is the same. Intensity is much higher for colonoscopyIntensity is much higher for colonoscopy– Even though a GI specialist has done 800 Even though a GI specialist has done 800

colonoscopies and can do them almost without colonoscopies and can do them almost without thinking, thinking,

– It is considered more intense than caring for an It is considered more intense than caring for an elderly patient with CHF, diabetes, depression and elderly patient with CHF, diabetes, depression and acute dizzinessacute dizziness



#2. How RVUs are updated (the “RUC”)#2. How RVUs are updated (the “RUC”)

• Medicare mandates that RVUs be updated every 5 Medicare mandates that RVUs be updated every 5 yearsyears

• CMS has delegated the update process to the CMS has delegated the update process to the Relative Value Update Committee (RUC)Relative Value Update Committee (RUC)

• The RUC is a committee of the AMAThe RUC is a committee of the AMA• It recommends RVU changes to CMS, which must It recommends RVU changes to CMS, which must

approve themapprove them




• The RUC has 29 members, most named by specialty The RUC has 29 members, most named by specialty societies, including primary care specialtiessocieties, including primary care specialties

• Specialty societies request changes in RVU values; Specialty societies request changes in RVU values; survey at least 30 of their members to find out of a survey at least 30 of their members to find out of a certain service should receive a higher or lower RVU certain service should receive a higher or lower RVU valuevalue

• Primary care represents 14% of the seats on the Primary care represents 14% of the seats on the RUC (and provide about half of all Medicare visits)RUC (and provide about half of all Medicare visits)




• If you are an ophthalmologist, and cataract surgery If you are an ophthalmologist, and cataract surgery which used to take 50 minutes now takes 30 minutes, which used to take 50 minutes now takes 30 minutes, one might expect the RVU value should go down one might expect the RVU value should go down (and it did go down when RBRVS was put into effect)(and it did go down when RBRVS was put into effect)

• But if your specialty society surveys you to ask what But if your specialty society surveys you to ask what you think the cataract surgery RVU should be, are you think the cataract surgery RVU should be, are you going to say it should go down? you going to say it should go down?

• Of course not. You recommend that the RVU go upOf course not. You recommend that the RVU go up• How do you justify that? How do you justify that? • Since we do in 30 minutes what we used to do in 50 Since we do in 30 minutes what we used to do in 50

minutes, clearly each minute is more intense, so the minutes, clearly each minute is more intense, so the work portion of the RVU should go upwork portion of the RVU should go up



#2. How RVUs are updated (the “RUC”)#2. How RVUs are updated (the “RUC”)• This update method strongly biases toward increasing RVUs This update method strongly biases toward increasing RVUs

rather than decreasing RVUs. rather than decreasing RVUs. • The 86% of RUC members who are not primary care tend to The 86% of RUC members who are not primary care tend to

vote together on RVU updatesvote together on RVU updates• In the 2000 update process, the RUC recommended 469 In the 2000 update process, the RUC recommended 469

increases in RVUs and only 27 reductionsincreases in RVUs and only 27 reductions• In the 2000 update process, E/M codes were not discussed In the 2000 update process, E/M codes were not discussed

at all. Procedure and imaging codes went up and office at all. Procedure and imaging codes went up and office codes remained the samecodes remained the same

• CMS historically has accepted virtually all RUC CMS historically has accepted virtually all RUC recommendationsrecommendations

• 2006 proposed changes to increase work value of E/M 2006 proposed changes to increase work value of E/M represents CMS breaking RUC logjamrepresents CMS breaking RUC logjam



#3. Volume of Services#3. Volume of Services• E/M visits make up 80% of primary care incomeE/M visits make up 80% of primary care income• E/M Medicare volume increased 15% 1999-2003E/M Medicare volume increased 15% 1999-2003• Imaging Medicare volume increased by 45% Imaging Medicare volume increased by 45% • Income = price (fee) x volume. Income = price (fee) x volume.

– Fee = $300Fee = $300 You do 100 in a year, income = $30,000You do 100 in a year, income = $30,000You do 150 in a year, income = $45,000. You do 150 in a year, income = $45,000.

• Primary care physicians cannot do E/M visits in shorter Primary care physicians cannot do E/M visits in shorter time; it reduces quality and increases physician stresstime; it reduces quality and increases physician stress

• Specialists can do procedures in shorter time Specialists can do procedures in shorter time – Technology improves Technology improves – The more you do a procedure, the faster you becomeThe more you do a procedure, the faster you becomeAdapted from T. Bodenheimer, M.D., UCSF, May 2006


Increases in volume of Medicare services, 1999-2003

Type of service Volume

increase Evaluation and management services 15% Major surgery 14% “Other procedures” (chemotherapy, endoscopy, minor surgery)

26%

Diagnostic tests 36% Imaging 45% These trends continued in 2004-2005These trends continued in 2004-2005



Context: Physician Services – Some Areas Growing More Rapidly

MedPAC, June 2006


Context: Growth of Physician Spending Higher growth in procedures, imaging and tests MedPAC, June 2006


#3. Volume of Services#3. Volume of Services• A major contributor to the widening income gap between A major contributor to the widening income gap between

primary care and specialties is volume of services primary care and specialties is volume of services delivereddelivered

• Many procedural specialists and physicians performing Many procedural specialists and physicians performing imaging services (mainly radiologists and cardiologists) imaging services (mainly radiologists and cardiologists) had huge income gains by providing a higher volume of had huge income gains by providing a higher volume of servicesservices

• In many cases this was possible because the services In many cases this was possible because the services could be provided in less timecould be provided in less time

• Volume increased only slightly for primary care office Volume increased only slightly for primary care office visits. Without reengineering (e.g. group visits, on online visits. Without reengineering (e.g. group visits, on online care – which generally are NOT reimbursed by Medicare) care – which generally are NOT reimbursed by Medicare) visits cannot be done faster without reducing quality and visits cannot be done faster without reducing quality and physician/patient satisfaction (which drop with shorter physician/patient satisfaction (which drop with shorter visit times)visit times)



#4: Role of the SGR#4: Role of the SGR

• The total amount of money that Medicare pays The total amount of money that Medicare pays physicians each year is based on a formula called the physicians each year is based on a formula called the SGR = Sustained Growth RateSGR = Sustained Growth Rate

• Total Medicare physician payment rises based on Total Medicare physician payment rises based on number of Medicare beneficiaries, physician practice number of Medicare beneficiaries, physician practice expense rise, and increase in gross domestic productexpense rise, and increase in gross domestic product




• If the volume of Medicare physician services goes up If the volume of Medicare physician services goes up faster than the SGR, then the conversion factor is faster than the SGR, then the conversion factor is reduced the following yearreduced the following year

• Example: If SGR formula allows total Medicare Example: If SGR formula allows total Medicare physician payment to rise by 5% in 2005, but total physician payment to rise by 5% in 2005, but total Medicare physician payment rose 10% in 2005 due Medicare physician payment rose 10% in 2005 due to increases in volume, then the conversion factor to increases in volume, then the conversion factor (and thereby physician fees) go down by 5% in 2006(and thereby physician fees) go down by 5% in 2006



#4: Role of the SGR#4: Role of the SGRPrimary Care Perspective…Primary Care Perspective…• Volume growth in procedures, diagnostic tests, and imaging Volume growth in procedures, diagnostic tests, and imaging

are the reason why Medicare physician payments have are the reason why Medicare physician payments have exceeded the SGR limit. Growth in primary care office visits did exceeded the SGR limit. Growth in primary care office visits did not contribute to exceeding the SGR limit.not contribute to exceeding the SGR limit.

• Even though primary care did not cause the excess Medicare Even though primary care did not cause the excess Medicare physician payments, primary care physicians fees are reduced physician payments, primary care physicians fees are reduced the same percentage as fees for physicians responsible for the the same percentage as fees for physicians responsible for the volume growth in procedures, diagnostic tests, and imaging.volume growth in procedures, diagnostic tests, and imaging.

• While specialist income benefits from the volume growth, and While specialist income benefits from the volume growth, and primary care income does not, primary care fees are cut the primary care income does not, primary care fees are cut the same amount as specialist fees under the SGR.same amount as specialist fees under the SGR.




• The 2006 conversion factor is 1% below the 2001 The 2006 conversion factor is 1% below the 2001 conversion factorconversion factor

• If the SGR formula is not changed, the conversion If the SGR formula is not changed, the conversion factor is expected to drop by 5% per year for the next factor is expected to drop by 5% per year for the next 6 years6 years

• Thus even though office visit will get a substantial Thus even though office visit will get a substantial increase from the 2005 RUC 5 year update process, increase from the 2005 RUC 5 year update process, that increase will be eroded by reductions in the that increase will be eroded by reductions in the conversion factorconversion factor



#5: Impact on Private Insurance#5: Impact on Private Insurance

• For Medicare, the conversion factor is the same for all For Medicare, the conversion factor is the same for all CPT codes (37.9 in 2006) CPT codes (37.9 in 2006)

• Payment = RVU x conversion factorPayment = RVU x conversion factor• Big difference!! For many private insurers, the conversion Big difference!! For many private insurers, the conversion

factor varies factor varies • Specialists often enjoy conversion factors higher than Specialists often enjoy conversion factors higher than

primary care conversion factorsprimary care conversion factors



#5: Impact on Private Insurance#5: Impact on Private Insurance• 2002 survey of 34 large commercial insurance plans in different geographic 2002 survey of 34 large commercial insurance plans in different geographic

regions (HMO, PPO, traditional insurance)regions (HMO, PPO, traditional insurance)• On average On average

– Office visits received Office visits received 104% of Medicare fee 104% of Medicare fee– Surgery, dx procedures, imaging: 120% of Medicare feeSurgery, dx procedures, imaging: 120% of Medicare fee

• In highest paid marketsIn highest paid markets– Office visits: Office visits: 147% of Medicare fee 147% of Medicare fee– Surgeries:Surgeries: 330% of Medicare fee 330% of Medicare fee– Dx procedures/imaging: Dx procedures/imaging: 250% of Medicare fee 250% of Medicare fee

Deckman and Associates, Washington DC, August 2003Deckman and Associates, Washington DC, August 2003



#5: Impact on Private Insurance#5: Impact on Private Insurance

Another survey (2001): Another survey (2001): • Private insurers paid Private insurers paid

– Office visits:Office visits: 104% of Medicare fee104% of Medicare fee– Procedures, imaging: Procedures, imaging: 133% of Medicare fee133% of Medicare fee

Direct Research, LLC. Vienna, VA. August 2003Direct Research, LLC. Vienna, VA. August 2003



#5. Impact on Private Insurance#5. Impact on Private Insurance• 2005 Medicare fee for CPT code 99214: 30 minute office visit2005 Medicare fee for CPT code 99214: 30 minute office visit

– Relative value unit (RVU): Relative value unit (RVU): 2.182.18– Conversion factor:Conversion factor: 37.937.9– Fee 2.18 x 37.9 Fee 2.18 x 37.9 = = $82.62 $82.62

• 2005 Medicare fee for CPT code 45378: colonoscopy (30 minutes)2005 Medicare fee for CPT code 45378: colonoscopy (30 minutes)– RVU: RVU: 5.465.46– Conversion factor: Conversion factor: 37.937.9– Fee 5.46 x 37.9 Fee 5.46 x 37.9 = = $206.93$206.93

• 2005 private insurance fee for CPT code 45378: colonoscopy 2005 private insurance fee for CPT code 45378: colonoscopy – RVU:RVU: 5.465.46– Conversion factor Conversion factor 45.5 (120% of Medicare)45.5 (120% of Medicare)– Fee 5.46 x 45.5Fee 5.46 x 45.5 == $248.43$248.43

• Markets in which gastroenterologists are well organized: colonoscopy feeMarkets in which gastroenterologists are well organized: colonoscopy fee– RVU:RVU: 5.465.46– Conversion factorConversion factor 75.8 (200% of Medicare)75.8 (200% of Medicare)– Fee 5.46 x 75.8Fee 5.46 x 75.8 == $413.87$413.87



Context: Private Insurer Payments to Physicians Compared to Medicare far Higher for Imaging, Procedures and Tests

Direct Research, LLC, for MedPAC, August 2003


Implication of Current System: Implication of Current System: Primary Care PerspectivePrimary Care Perspective

Unequal payment for equal time benefits procedural Unequal payment for equal time benefits procedural specialistsspecialists

Many procedure RVUs have increased in the RUC’s Many procedure RVUs have increased in the RUC’s 5 year reviews, but primary care RVUs did not increase 5 year reviews, but primary care RVUs did not increase

1995 – 2006 (1995 – 2006 (BUT – CMS has issued rules for changes!)BUT – CMS has issued rules for changes!) Rapid growth in volume of procedures and imaging has Rapid growth in volume of procedures and imaging has

increased some specialist incomesincreased some specialist incomes Private insurers tend to pay specialists at a higher percent Private insurers tend to pay specialists at a higher percent

of the Medicare fee than they pay primary care physiciansof the Medicare fee than they pay primary care physicians Under the SGR system, while the drivers of increased Under the SGR system, while the drivers of increased

Medicare physician payments are procedures, testing, & Medicare physician payments are procedures, testing, & imaging volume growth, primary care physicians are imaging volume growth, primary care physicians are penalized even though they did not contribute to the penalized even though they did not contribute to the volume growthvolume growth



Physician Payment – Future IssuesPhysician Payment – Future Issues

• Proposed rule to increase payment Proposed rule to increase payment evaluation and management servicesevaluation and management services

• SGR reform will be major issue for end SGR reform will be major issue for end of 2006/early 2007of 2006/early 2007

• Payment changes to promote care Payment changes to promote care coordination and higher value still on coordination and higher value still on horizonhorizon


Hospital Payment: Context and How it Works in

Medicare


Context: Hospital Payments Growing for Medicare

MedPAC, June 2006


Context: Hospital length of stay declining far more rapidly in Medicare

MedPAC, March 2006


Context: Hospital Occupancy Flat (significant local variation) MedPAC, June 2006


Context: Overall Medicare margins – drivers of cost shift…1. Includes outpatient, medical education, rehab., psych…2. Wide variation (25% of hospitals have margins over 5.5%; 25% had margins of -14.5% or lower3. MedPAC estimates 2006 overall margin of -2.2% if no adjustments

MedPAC, June 2006


Context: Hospital margins from all payers

Wide variation, with 72% of hospitals having positive margins MedPAC, June 2006


Medicare Payments for Inpatient Hospital Services

Source: MedPAC Presentation, Senate Finance Committee, April 2003


Medicare Hospital Inpatient Payments


Context: Ten DRG’s are 30% of discharges and over 20% of Medicare hospital costs MedPAC, June 2006



See Appendix for Details on Cost Related Payment Adjustments


Medicare Hospital Outpatient Prospective Payment System

Source: MedPAC Presentation, Senate Finance Committee, April 2003


Hospital Outpatient Prospective Payment System



See Appendix for Details on Adjustments to Base Payments

CMS 2006 Proposed Changes to Hospital Inpatient Payment – Background

CMS determines Medicare’s payment to hospitals for different types of admissions (“Diagnostic-Related Groups” or DRGs), e.g., heart attack, hip replacement, pneumonia

Updated annually based on changes in hospitals’ average charges for various procedures

Goal of proposed rule to have payment more accurately reflect patient complexity and relative cost of the service


CMS 2006 Proposed Rule to Revise Hospital Payments Shifts payment from average charges to average estimated

costs (2007) Major changes (“severity adjustment”) in the DRG

classification system designed to more accurately reflect costs of individual patient (2008) Replaces 526 DRGs with 861 CMS-DRGs (“CDRGs”) Subdivides CMS-DRGs into from one to four severity levels Several thousand new patient categories: creates new

DRGs, eliminates or subdivides some old DRGs, further divides DRGs by disease severity, including co-morbidities, and other characteristics such as age

Does NOT address shifting payments to reward outcomes (comments solicited separately on this issue – see Letter to Secretary Leavitt and from Consumer-Purchaser Disclosure Project, June 12, 2006)


MedPAC’s Perspective – Kudos to CMS for Taking “Great Strides” to Improve Accuracy of Payments

Need some technical refinements

Movement from DRG to CDRG payment system substantially increases payment accuracy

Encourage implementation of both cost-based weighting and CDRGs in 2007

Future need to reform outlier payments


Device Manufacturers’ Perspective -- Problems with Proposed Changes to Hospital Payment

Shifts payment from advanced technology to routine care Massive cuts in some of the most advanced, effective

treatments Penalizes new technology and treatments as the result of

three to five year data lags Creates rapid, excessive shifts in payment by introducing one

major reform in 2007 and another major reform-that often moves payment in the opposite direction-in 2008

Major sources of inaccuracy Inadequate time to review, analyze, and correct problems Hence – proposes delayed implementation


Background Appendix

Physician and Hospital Payments


Context: Medicare Payments by Service – 2004 to 2010


Context: Increasing number of physicians serving Medicare

MedPAC, March 2006


Composition of the RUC MedPAC, March 2006


Increases in Medicare volume 2001-2004Increases in Medicare volume 2001-2004

-10%

0%

10%

20%

30%

40%

50%

60%

70%

D Column 1-3 8% 42% 67% 20% 44% 32% 39% 30% 5%-

New PtOV

CT MRI Hip

ReplKnRepl

DiscSurg

ArthrColonos

copyColecto

my



Context: Private Insurer Physicians Fees about 20% Higher than Medicare

Direct Research, LLC, for MedPAC, August 2003


Context: Medicare’s Share of Expenditures by Service Type


Context: Distribution of Medicare Payments


Context: Inpatient margins – drivers of cost shift…1. Reduced after BBA in 19962. Wide variation (25% of hospitals have margins over 10% and 47% had positive margins; but 25% had margins of -14.5% or lower and 53% had negative margins.

MedPAC, June 2006


Medicare Hospital Inpatient Payments: Cost-Related Adjustments


Hospital Outpatient PPS: Adjustments to Base Payments


Hospital Outpatient PPS: Coinsurance and Buy-downs


Hospital Outpatient PPS: Case Example


Context: Medicare Beneficiary Use of Services


Context: Utilization in Medicare – Few People, Big Dollars


The Disclosure Project

The Consumer-Purchaser Disclosure Project is a coalition more than 50 of the nation’s leading consumer, labor, and employer organizations that working to advance publicly reported, nationally standardized measures of clinical quality, efficiency, equity, and patient centeredness for health plans, hospitals, medical groups, physicians, other providers, and treatments. The Disclosure Project is supported by financial and in-kind support of participating organizations and by financial support from the Robert Wood Johnson Foundation.

For more information:

Visit our website: http://healthcaredisclosure.org/

Contact: Katherine BrowneManaging DirectorEmail: [email protected](202) 238-4820

peter v. lee consumer-purchaser disclosure project invitational working session july 26, 2006

Documents

source of payment

valuegoals of payment

minutes of work

medicare spending

rvu colonoscopy

family physicians payment

determined2005 medicare

location2005 medicare