Public Policy Lecture Focuses on History and Future of Healthcare Provider Payments

The system Medicare uses to determine how healthcare providers are compensated for caring for Medicare beneficiaries has some strengths but, like the wider US healthcare system, fails to sufficiently reward or promote efficiency and quality and needs to be reworked, Peter Hollmann, MD, told the crowd assembled for the 2007 Public Policy Lecture during AGS' annual scientific meeting.

An assistant clinical professor in medicine at Brown University and Senior Medical Director of Blue Cross/Blue Shield of Rhode Island, Dr. Hollmann began his lecture with an overview of the evolution and workings of the payment system.

"Back in the late 80s, when CMS (the Centers for Medicare and Medicaid Services) was HCFA and dinosaurs roamed the land, Medicare used a charge-based system called "customary, prevailing and reasonable" or CPR that evolved slowly from charges," Dr. Hollmann explained, beginning a speech that was punctuated by humor but conveyed the urgency of reforming healthcare compensation in the US.

The CPR system was problematic, he noted. There was wide variation in payments, and new procedures and technologies tended to be overvalued while payments for older procedures remained flat over time, despite the increasing cost of providing them. All told, the system was criticized for being too costly. As a result, various alternatives, including enrolling all beneficiaries in HMOs, were considered -- with the American Medical Association (AMA) and other organizations advocating for a fee-for-service alternative, viewing this as most likely to preserve provider autonomy in care decisions. Ultimately, Medicare switched to a relative value scale for determining Medicare payments to providers, introducing the current fee-for-service Resource-Based Relative Value Scale (RBRVS) system in 1992.

The RBRVS is a standardized payment schedule in which payments for each covered service are determined based on the cost of providing them, Dr. Hollmann explained. This cost has three basic components: provider work, practice expense (such as the cost of staffing, equipment and supplies), and professional liability insurance. Protocols dictate how each component is valued. The provider work component, for instance, is determined by several factors, including how much time it takes to provide a given service, and the technical skill, physical and mental effort, and stress involved. On average, provider work accounts for 52% of the value of a given service; practice expense, 44%, and professional liability insurance, 4%.

"Most public and private payers use the Medicare RBRVS or some very similar system," Dr. Hollmann noted.

In the Medicare system, covered services are assigned both a Current Procedural Terminology or "CPT" code and a RBRVS value. The AMA's CPT Editorial Panel, of which Dr. Hollmann is a member, both creates and revises CPT codes. When determining how to value the service, CMS considers recommendations from another group, the Resource-Based Value Scale Update Committee (RUC), which is convened by the AMA. The RUC has 23 members, Dr. Hollmann explained. Of these, 23 are appointed by member specialty medical societies, and 6 are appointed by the AMA. Most seats are permanent, but 3 rotate. AGS presently holds one of the rotating seats. There is also a special RUC Five-Year Review Subcommittee that reviews existing potentially mis-valued CPT codes and advises CMS on assigning more appropriate relative values to them. (For more on how seats in the RUC and other panels involved in determining the value of services are allocated, and why at least 1,000 AGS members must also be members of the AMA if AGS is to continue to have a voice in these matters. (see related story)

Anyone can approach Medicare's CPT Editorial Panel to propose a new CPT code for a service that has become widespread and for which there is no existing code, Dr. Hollmann explained. When a new code is created, the AMA sends an announcement to all specialty societies, offering them the opportunity to participate in the valuation of the service . A survey of persons who perform the newly coded service participate in a survey designed to determine the value of the service relative to other services that have esatablished values. The RUC then reviews these comments and makes recommendations regarding the proposed code to CMS, which ultimately decides whether to cover the new service and code and, if so, what value to assign it.

"To date, CMS has adopted 96-97% of the RUC's recommendations," Dr. Hollmann reported. "In large part that's because the RUC well understands CMS' expectations and rules -- it's not that CMS accepts anything the RUC says."

Along with its strengths, the RUC-based system has several weaknesses, he noted. Among other things, the RUC often fails to reduce the values assigned to codes as efficiency and proficiency increase and practice costs decline, he pointed out. In an attempt to address this, the RUC recently formed a committee to identify potentially over-valued codes for reevaluation. Another, harder-to-address shortcoming of the system is that it doesn't consider the medical or social value of a service relative to other services.

"The problem in our country is that nobody is doing this," Dr. Hollmann noted, launching into a review of healthcare spending in the US and other nations.

The US, he pointed out, is the only country where healthcare expenditures account for more than 13% of gross domestic product (GDP). In Canada, Australia, and Sweden, healthcare spending accounts for 8.1 to 10% of GDP; in China, Japan, the UK, Spain, and Finland, it totals 5.1 to 8% of GDP.

Rising healthcare expenditures are both pushing the cost of health insurance out of reach of a growing number of Americans, and seriously undermining the viability of Medicare, Dr. Hollmann noted. Medicare's Sustainable Growth Rate (SGR) formula, which mandates cuts in payments to healthcare providers when Medicare spending hikes outstrip economic growth, is supposed to rein-in spending. Because spending has been rising so steeply, however, the SGR has been mandating untenable cuts for the last several years, he noted. Congress has been blocking these cuts, but in so doing has also been setting the stage for larger mandated cuts in subsequent years. This coming year, payments to Medicare providers are slated for a 10% cut. If expenditures continue to rise as forecast, providers will face a 40% cut in payments by 2015, Dr. Hollmann warned.

What's the answer? Among other things, we need to improve quality, he argued. Reports from the Institute of Medicine and other research indicate that there's significant room for improvement on that front. We also need to take a close look at spending on care to extend life toward the end of life, he added, noting that the cost of extending life by one year at age 65 totaled $145,000 in 1990. By comparison, the cost of extending life by a year at age 15, was $31,600. In addition, we need to consider the value of high-priced technological innovations before investing widely in them. Further efforts to gather cost-effectiveness information, and develop quality and efficiency measures and measurement are needed as well. In short, we need to reengineer the nation's healthcare delivery system, Dr. Hollmann concluded. And we need to start now.

To view a Webcast of Dr. Hollmann's lecture, visit the 2007 Virtual Annual Meeting Page on www.americangeriatrics.org.