June 1, 2011 — Physician and hospital groups have long complained that they are short-changed by geographic adjustments to Medicare payments that do not accurately reflect their costs of doing business. In a new report, the Institute of Medicine (IOM) today called for fundamental changes in the way the Centers for Medicare and Medicaid Services calculates the adjustments.
Almost 40% of hospitals have been granted exemptions to how their adjustments are calculated, strongly suggesting that the methods for determining how the same procedures or services are paid differently throughout the country are inadequate, notes the committee that wrote the report, titled “Geographic Adjustment in Medicare Payment: Phase 1: Improving Accuracy.”
“The Medicare program needs more precise and objective tools and methods to assure the nation that the billions being spent are appropriately and fairly disbursed,” said committee chair Frank Sloan, PhD, the J. Alexander McMahon Professor of Health Policy and Management and professor of economics at Duke University in Durham, North Carolina.
“As the criticism we heard from a range of healthcare providers indicates, there is significant skepticism about the fairness and accuracy of how adjustments are currently being determined,” Dr. Sloan pointed out. “This report’s recommendations will increase the likelihood that the geographic adjustments reflect reasonably accurate measures of regional differences in expenses.”
Sparked by complaints from healthcare providers, Congress and the Department of Health and Human Services sought advice from the IOM on how to improve the accuracy of the data sources and methods used for making the geographic adjustments.
“Doctors in California, for example, have long complained that the adjustments are unfair,” Bruce Steinwald, MBA, a Washington consultant and member of the IOM committee, told Medscape Medical News. “So have rural doctors and hospitals, where fees are lower than in urban areas. There is a higher concentration of primary care doctors in rural areas who feel the rates are unfair.”
Recommended System to Focus on Greater Accuracy
“What we have now is a hodge-podge of adjustments and exceptions, all resulting in diluting the fundamental purpose of having geographic adjustments in the first place,” he said. “We’re trying to promote a system focused on greater accuracy.”
If the IOM recommendations are enacted, some physicians and hospitals will be paid more and others will receive less to remain budget-neutral under federal law. “We don’t have enough information yet to say exactly how payments would change if our recommendations are adopted,” says Steinwald. “But everyone is better off if the payment system is accurate. That’s a more solid foundation to make any policy changes on top of it.”
Salaries and benefits make up one of the largest costs of providing care, and the Medicare program should use health sector data from the Bureau of Labor Statistics to develop its indexes for calculating wage adjustments for hospitals and private practice health professionals, the report says. Bureau of Labor Statistics data are a more accurate, independent, and appropriate source than the hospital cost reports, physician surveys, census data, and other information currently used, the committee said. Congress will have to revise a section of the Social Security Act to enable this change.
Medicare also should take into account median wage data for all types of workers in private practice settings and hospitals to calculate payments, the report adds. At this time, regional wage differences are based on data for registered nurses, licensed advance practice nurses, health technicians, and administrative staff only, which does not reflect the full workforce in many practices or hospitals.
Medicare also adjusts payments based on labor markets. It uses a set of 441 markets to determine hospital payments and a different set of 89 markets for practitioner adjustments. Instead, the program should employ the metropolitan statistical areas developed by the Office of Management and Budget for both. Metropolitan statistical areas reflect information on where people live and work and on decisions made by employers and employees that define labor markets’ boundaries, the report notes.
Commercial rent information would provide a more accurate assessment of variations in the price of office space than information on median subsidized rents for a 2-bedroom apartment, which is what the Medicare program currently relies on, the report adds. Because no sources of commercial rent data have the broad geographic coverage necessary, a new source should be developed. The IOM also recommends applying the hospital wage index for facilities other than acute care hospitals; for example, skilled nursing facilities and home health agencies, taking into account patient mix and staffing.
Report Agrees With AAFP Position
Glen Stream, MD, president-elect of the American Academy of Family Physicians (AAFP), told Medscape Medical News that he is pleased with the IOM report. It “appears to agree with the AAFP position that geographic adjustments are not the route for improving rural residents’ access to primary care physicians,” he said.
AAFP would abandon geographic adjustments in favor of incentives such as a permanent, meaningful, and direct bonus payment to physicians who work in underserved areas. “This approach would both increase student interest in primary care medicine and [increase] primary care physician interest in working in rural areas,” Dr. Stream said.
“We look forward to the 2 future IOM reports that will focus more specifically on payment and the strength and distribution of the rural physician workforce — issues that have [the] greatest interest for family physicians,” he added.
Medicare provides coverage for 39 million people aged 65 years and older, and 8 million people with disabilities. In 2010, the program made up approximately 15% of the federal budget, at an estimated cost of $500 billion.
The report is the first of 3 to be issued by the committee. A supplemental report that discusses physician payment issues further will be issued this summer. A final report to be released in 2012 will present the committee’s evaluation of the effects of the adjustment factors on healthcare quality, population health, and the distribution of the healthcare workforce.
Source: Institute of Medicine. Geographic Adjustment in Medicare Payment: Phase 1: Improving Accuracy . Published June 1, 2011.

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