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Health Reform II: Lawmakers Eye Medicare Payment System

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The House Energy and Commerce Committee health subcommittee is trying to draw attention to looming battle over the Medicare physician payment system.

Rep. Joseph Pitts, R-Pa., chairman of the subcommittee, said in his opening statement that the system now used to pay physicians for providing services to traditional Medicare beneficiaries “is broken, and has been for some time.”

If nothing is done, physicians could see Medicare reimbursement rates cut by Caduceusabout 29% Jan. 1, 2012, Pitts said, according to a written version of his remarks posted on the Energy and Commerce website.

The Congressional Budget Office (CBO) has estimated that the cost of fixing the problem could start at $298 billion, Pitts said.

“This staggering price tag is just one side of the physician payment reform problem,” Pitts said. “The current payment system is fundamentally flawed, and keeping the current system or making minor adjustments is no longer a viable option.”


Many Medicaid and commercial health insurers use contracts that pay health care providers or plan administrators based at least partly on care for a particular health problem, care provided for a patient, or care provided for a group of patients.

The traditional Medicare program pays physicians a fee for each service delivered, and critics argue that the fee-for-service approach drives up costs.

A Medicare Sustainable Growth Rate (SGR) provision in the Balanced Budget Act of 1997 is supposed to increase Medicare physician fees using a formula based on factors such as the estimated overall changes in fees for physicians’ services, regulatory changes, changes in real per-capita gross domestic product, and changes in the number of Medicare fee-for-service beneficiaries.

Congress has been trying to control Medicare costs in recent years by changing the (SGR) formula or putting off implementation of SGR adjustments, but, so far, it has always responded to political pressure by canceling implementation of any SGR system changes that would lead to cuts in physicians’ fees.

A New Payment System?

The SGR formula is a problem, but Congress also needs to talk about the system it would use to replace the SGR formula, Pitts said.

Harold Miller of Pittsburgh, executive director of the Center for Healthcare Quality and Payment Reform, talked about the advantages and disadvantages of shifting to various proposed payment methods, such as an “episode of care” system that would cover the cost the costs of treating a condition and also the costs of treating any related infections and complications.

“In effect, the hospital and physicians would be providing a limited warranty on their care,” Miller said.

The problem with that approach is that it would do nothing to reduce the number of episodes of care, Miller said.

Paying a physician a “global payment” that would cover all services a patient receives during a given

period could help, Miller said.

In the 1990s, some physicians went broke after making ill-fated attempts to accept a single payment, or capitation payment, for each patient served in exchange for managing all care costs for the patient.

Both the episode-of-care and global-payment system would be different from capitation, because both would insulate the physician from insurance risk, Miller said.

Michael Chernew, a professor at Harvard University, acknowledged that some doctors may have trouble coping with a shift to a new payment system.

But, if policymakers do not proceed from the assumption that organizations can change, “no amount of payment reform or other policy changes will solve our problems and we are doomed to a system that operates far below our aspirations,” Chernew said.

The American Medical Association, Chicago, says it agrees on the need to shift away from the SGR system and shift toward a system that rewards physicians and hospitals for keeping patients healthy and for managing chronic conditions well.

But there should also be a 5-year period of stable statutory fee updates, the AMA says in written testimony.

“This will allow time to develop and test demonstration and pilot projects that would form the basis for a new Medicare physician payment system,” the AMA says.

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