I. Health Care Cost Statistics:
Health care costs are far higher in the United States than in any other advanced nation,
whether measured in total dollars spent, as a percentage of the economy, or on a per
– In 2005, the U.S. spent $2 trillion on health care, which is16 percent of GDP
and $6,697 per person.
– Health care costs have grown on average 2.5 percentage points faster than
U.S. gross domestic product since 1970.
– Almost half of health care spending is used to treat just 5 percent of the
– US ranks 25th in infant mortality and 23rd in life expectancy
II. How physicians current get paid by Medicare:
The current payment system compensates physicians principally on the basis of the
volume of services they provide. Fee-for-service payments, which is how Medicare
pays physicians, creates incentives for physicians to provide more services, not
necessarily services that are most effective. Fee-for-service payment systems are credited
with contributing to the lack of coordination of care across providers and settings and the
provision of services that have little or no health benefits.
Arriving at Medicare’s physician payment schedule:
Resource Based Relative Value System (RBRVS): a system for describing,
quantifying, and reimbursing physician services relative to one another. The RBRVS
incorporates three components of physician services - physician work, practice expense,
and professional liability insurance.
Relative Value Unit (RVU): RBRVS assigns services performed by a physicians or
other provider a relative value unit (RVU) adjusted by geographic region. This value is
then multiplied by a fixed conversion factor, which changes annually, to determine the
amount of payment.
The Sustainable Growth Rate (SGR): mechanism is a formula that was enacted by
Congress to control Medicare physician spending growth by reducing fees when
spending exceeds a target amount. In recent years, it has produced a series of scheduled
across-the-board physician fee reductions that have been superseded by legislation.
Policymakers have proposed modifying or eliminating the SGR mechanism, but that
would result in higher Medicare spending and an increased federal budget deficit.
III. Payment Reform options:
Goal: Change the way we pay for care to reward high quality, appropriate use of health
care resources and encourage reorganization of care so that it is well-coordinated and
responsive to patients' needs.
Several reform options are currently being debated in Congress:
1. Increase payment for primary care
2. Bundle payments for acute care episodes
3. Align payments with value not volume
4. Adopt the medical home model of payment
5. Fix the Sustainable Growth Rate (SGR) formula
1. Increase payment for primary care by changing the RBRVS Medicare payment
Research shows that primary care improves quality and restrains costs in the health care
system. However, primary care is in crisis in the US as few doctors are entering the field.
Our current payment system does not adequate reward the work done by primary care
physicians and has created a payment divide. Currently, a primary care physician earns
approximately 55 percent of the average earnings for all other non-primary care physician
To correct this payment imbalance, there are several reform options advocated by groups
such as the American College of Physicians and MedPAC. They include:
- Provide immediate/short-term payment increases in the relative value units most
often utilized by primary care physicians (evaluation and management codes).
- Allow for payment for services provided outside of face-to-face encounters with
the patient. Add new payment codes for such work.
- Recognize the value of critical elements of chronic care delivery, such as disease
self-management and follow-up, and the cost of providing these services and
factor this into the ―relative value unit‖ for primary care.
- Recognize the value of quality improvement and performance measurement on
the basis of evidence-based quality, cost efficiency, and patient experience of
care, and recognizing the cost of obtaining these data
- Recognize and appropriately value the complexity, time, and costs associated with
sicker-than-average patients, avoiding a potential disincentive for physicians to
treat patients with more complex conditions
2. Bundle payments for acute care episodes to encourage integrated care.
Bundled payment systems (also known as "case rates" or "episode—based payment")
would make a single payment for all services related to a treatment or condition,
possibly spanning multiple providers in multiple settings.
- For example, a single payment could be made for coronary artery bypass graft
(CABG) surgery, including presurgical services, facility and physician fees for the
inpatient surgical procedure, and follow-up care, including monitoring and
Providers would assume the cost of services for a particular treatment or condition as
well as costs associated with preventable complications. Since providers would
receive a set payment covering the average cost of a bundle of services, there would
be an incentive to reduce the number services that have no or minimal benefit.
Bundled payments also encourages coordination of care by holding multiple
providers in multiple settings jointly accountable, through shared payment, for the
total cost of care for a given treatment or condition.
3. Align payments with value not volume.
Pay for performance (P4P) uses financial incentives to stimulate improvements in the
quality of care and, in some cases, reductions in costs.
- P4P programs use a variety of performance measures, including clinical processes
of care and health outcomes, patient safety, patient experience with receiving
care, resource use (i.e., efficiency), and structural indicators such as information
technology investment and use.
The financial incentives are funded by withholding a portion of current payments (or
future payment increases), adding new money to existing payments, or sharing the
savings through reductions in expenditures.
The financial incentives may take the form of an increased payment for each service
delivered or a bonus. Payments are made based on a hospital having attained relative or
absolute performance thresholds, having improved over the prior year's performance,
participating in specific initiatives, or participating in some combination thereof.
Moving away from fee-for-service and toward bundled payment encourages providers to
take broader responsibility for patient care and outcomes control costs while
maintaining or improving quality of care.
4. Adopt the medical home model to promote coordinated care.
Medicare currently does not provide payment for many activities that facilitate the provision of
patient-focused, longitudinal, coordinated care. A ―medical home‖ or ―health home‖ is a
clinical setting that serves as a central resource for a patient’s ongoing care. A medical
home delivery model allows for physicians to get paid for increased level of care
Some of the services provided in a ―medical home‖ include (but are not limited to):
- providing enhanced access (e.g., 24-hour coverage, timely appointments)
- using information technology to improve patient care
- offering a team approach to care management and care coordination services
- reporting quality and patient experience measures
Qualified providers who elect to participate in the program would receive a per member,
per-month medical home fee, in addition to all currently covered fee-for service
payments. The amount of the per-member, per-month payment would vary depending on
the severity of illness of the enrolled patient.
- The medical home delivery model would allow a new per-patient payment in
addition to traditional fee-for-service payments to support increased access to
primary care services, more time spent with patients, and a team approach to care.
5. Fix the Sustainable Growth Rate (SGR) formula:
Every year since 2001, the current Sustainable Growth Rate (SGR) formula has threatened to
impose steep cuts in Medicare physician fee schedule payments. Congress has acted each
year to ―band-aid‖ the situation and avert payment reductions. Physician payments are
scheduled to be cut—this time by 21 percent on January 1, 2010.
Proposed solutions include:
- Phasing out the Sustainable Growth Rate formula system to prevent the ongoing
threat of deep physician payments cuts every 12 months.
- Tailor the growth containment rate to individual fields of medicine instead of
having a blanket rate for all physician payments.
- Allow for saving appreciated in the physician payment silo of Medicare (Part B)
to be realized in the context of the overall Medicare program spending (Parts A or
IV. Understanding The “Payers”
Individuals and businesses
Taxes: Both individuals and businesses pay income taxes to the government. In addition,
there is a payroll tax on employers and employees to finance Medicare.
Premiums: Businesses pay all or most of the premium for employer-based insurance for
employees, and employees pay the remainder. On the individual market, individuals pay
for all premiums out of pocket. Employer-based insurance premiums and individual
insurance premiums are collected by private insurers.
Direct or out-of-pocket payments: This is a direct payment to a provider for health care
services (e.g. a co-payment).
Medicare, Medicaid, S-CHIP: The government uses money generated from taxes to
reimburse providers who take care of patients enrolled in these programs.
Public employees’ premiums: The government also uses tax dollars to pay private
insurers a health insurance premium for federal employees and other public employees.
Tax subsidy: There is a tax subsidy of employer-based insurance that represents a major
cost to the government (on the order of $150 billion). Employees receive health insurance
benefits as tax-free compensation, and employers are able to deduct health insurance
benefits as a cost of doing business. The value of this tax subsidy is an estimated $150
billion a year.