Recently, Medicare began a competitive bidding process for durable medical equipment.  Is it working?  According to the Wall Street Journal, the answer is no.

“Normally when the government wants to buy something, it asks companies how much they can provide and to name their price. Winners are selected from the lowest bid up until the government has what it needs at the lowest possible cost, and thereby finds competitive equilibrium prices.

Under Medicare’s highly unusual version of competitive bidding, it will pay the winners the median price of all the winning bids, rather than using the clearing price. Bids are also for some reason nonbinding.

This matters because it creates incentives for unscrupulous third-party companies to make low-ball “suicide bids.” If the median price shakes out high enough, they automatically win the contract, buy the medical products from manufacturers and turn a profit. If it isn’t, they can dump the contract since bidding involves no commitment.”

I still think competitive bidding in Medicare will work; the auctions just have to be set up in a more logical way.

Dividing States into 3 Group

The most advance States fall into Group 1 (CA, CO, CT, DC, HI, IN, MA, MD, NV, OR, RI, UT, VT, WA, WV). These states have either enacted an exchange establishment law or in which the governor has established one by issuing an executive order. Massachusetts and Utah had already passed exchange laws before enactment of the ACA. All Group 1 states (except Colorado, Massachusetts and Utah) have received an exchange establishment grant.

Group 2 states (AL, AZ, DE, IA, ID, IL, KY, ME, MI, MN, MO, MS, NC, NE, NJ, NM, NY, PA, TN, VA, WI) have not yet established exchanges, but have demonstrated significant interest in doing so. Most notably, 17 of the 21 states have received level 1 federal establishment grants, which represent a second round of funding for state exchange development work beyond the initial state planning grants. Although Wisconsin has not received a level 1 federal establishment grant, Wisconsin is using federal funds to develop an IT system to fully integrate exchange eligibility determination and enrollment with state-based public insurance programs (i.e., Medicaid and CHIP). Recently, however, Wisconsin Governor Scott Walker has rejected all federal funding for implementation of the ACA. Of the remaining four states, Virginia and Wisconsin have passed legislation stating its intent to develop an exchange, although they have not yet passed exchange establishment legislation, New Jersey has establishment legislation pending in its legislature, and Pennsylvania’s governor has recently announced that his administration is taking steps to establish a state exchange.

Group 3 states (AK, AR, FL, GA, KA, LA, MT, ND, NH, OH, OK, SC, SD, TX, WY) do not meet any of the criteria for Groups 1 and 2 and are the furthest from successfully implementing the ACA provisions.

Correlation between Exchange Progress and Potential Increases in State Health Insurance Coverage

A research article from the Urban Institute finds that States with the ‘most to gain’ from the ACA are actually the most likely to fall into Group 3. States that currently have the least generous Medicaid programs and the largest share of uninsured workers are the least likely to have made significant progress in implementing the ACA provisions.

I can think of two reasons for this finding. The first is philosophical. These States began with less generous health insurance programs. Thus, the residents (or politicians) in these States may prefer to have less generous health insurance programs than other States. Hence the natural aversion to implementing the ACA provisions. The second reason is financial. Because these States have the largest share of uninsured individuals, they would also incur the largest percentage increase in cost to finance the ACA provisions. Although it is true that these States would likely receive the largest subsidies, these subsidies will not cover the full cost of the ACA implementation.

Questions States need to answer to implement an Exchanges

• Should the exchange be run by an existing government agency, a new agency, a quasi-governmental entity or a not-for-profit private entity?
• What should the composition of the governing board be?
• How should the administrative costs of running an exchange be financed?
• Should the exchange be able to actively negotiate with plans over premiums?
• Can plans be excluded, or must all qualified plans be allowed to participate?
• In computing premiums, should enrollees in the Small Business Health Options Program (SHOP) exchange and nongroup exchange markets be pooled together, or should their premiums be set separately?
• What will be the role of agents and brokers in the exchange?
• Should state insurance regulations be identical inside and outside the exchange?
• How will Medicaid/CHIP eligibility and enrollment be integrated with the exchange?
• Should the Basic Health Plan option be implemented?

Source: Blavin F, Buettgens M and Roth J “State Progress Toward Health Reform Implementation: Slower Moving States Have Much to Gain.” RWJF and Urban Institute Real Time Policy Analysis, January 2012.

Methodology

To start with, HUD uses household data to measures gross rents.  Gross rents include both the cost for shelter (i.e., rent) and utilities.  To measure these costs, HUD uses 5-year estimates from the American Community Survey (ACS).  For FY2012, HUD used 2005-2009 ACS data.  The advantage of using 5 years of data is that the sample size is larger, thus increasing the precision of the rent estimates.  However, rent information from 2005 may be out-of-date.

To correct this problem, HUD uses a recent mover adjustment.  The recent mover adjustment compares the rent estimates from the most recent 1-year ACS estimates (e.g., 2009) against the 5-year estimates (e.g., 2005-2009).  If the difference between the two is statistically significant at the 90th percentile (|Z score|>1.645)¹, then the rent estimates are adjusted to match the 2009 estimate.  Although HUD could simply use a weighted average of the rent estimates and give more weight to more recent years, HUD does not do this, but instead uses this discrete ‘recent mover adjustment’ instead.

Using the ACS data, however, means that county rent estimates are not up-to-date through 2012.  To update the rents through 2010, HUD uses an inflation factor.  Specifically, they use the CPI housing index through 2010.  They account for regional variation in inflation by using metro-area housing CPI estimates for large metro areas with CPI-housing data available and regional CPI-housing data where metro-level information is not available.² D

Why do I care?

Why does the Healthcare Economist care about rental data? The reason is that the practice expense geographic practice cost index (GPCI) estimate regional variation in office rent cost for physicians using rental data from the American Community Survey. Prior to using the ACS, the practice expense GPCI relied on the HUD estimates to calculate regional variation on office rents. More detail on how the GPCIs use ACS rental data as a proxy for regional variation in physician rental costs can be found in this report.

¹ HUD ensures that the recent mover estimate for each non-metropolitan portion of the state has at least 100 ACS sample observations. If any state non-metropolitan recent mover rent is based on fewer than 100 observations, the recent mover factor would be calculated based on the 1-year recent mover data and 5-year standard quality data for the entire state.
² From the final rule: The ACS data are updated through 2009 using the one-half of the change in annual CPI measured between 2008 and 2009. This data are further updated through the end of 2010 using the annual change in CPI from 2009 to 2010. As in previous years, HUD uses Local CPI data for FMR areas with at least 75 percent of their population within Class A metropolitan areas covered by local CPI data. HUD uses Census region CPI data for FMR areas in Class B and C size metropolitan areas and non-metropolitan areas without local CPI update factors.. From 1990 to 2000, rents increased by 3 percent on average. To pro-rate 2010 rent estimates to 2012, HUD applies this 3 percent adjustment to the 2010 estimates to arrive at the final 2012 FMR estimates. It may seem odd that HUD uses old data (1990-2000) to trend rents, but the recent volatility in the housing market may imply that pre-2000 data may better reflect long-run trends in housing prices.

Whereas most Medicare pays most hospitals through the inpatient prospective payment system (IPPS), it pays certain rural hospitals based on their reported costs.  Medicare pays Critical Access Hospitals (CAH), for instance, 101 percent of its report cost for inpatient, outpatient, laboratory, and therapy services.  It also pays this providers 101 percent of their cost for post-acute care for CAH beds are “swing beds” (which are beds that can be used for either acute or post-acute care).

However, how should Medicare define ‘critical’? The simplest definition is just whether a hospital is in a rural (i.e., non-metropolitan) area. However, there are various gradations of ‘rural’. A rural hospital on the outskirts of a big city would be far less ‘critical’ then one very far from distant areas. One could define ‘critical’ based on facility volume. If the low volume is due to poor quality, however, defining these hospitals as critical could just reward poor hospitals. Third, could define a hospital as isolated based on its distance from other facilities who could provide comparable care. Alternatively, one could identify critical hospitals based on demographic factors such as population density in the surrounding areas.

Below, I provide more information on other types of types of rural hospital designations in Medicare.

Not all rural hospitals are CAH’s however.  CAHs are limited to 25 beds and primarily operate in rural areas. Medicare also can designate a hospital as a sole community hospital (SCH) or a Medicare-dependent hospitals (MDHs). According to MedPAC, “SCHs receive the higher of either (a) standard inpatient prospective payment rates or (b) payments based on the hospital’s costs in a base year updated to the current year and adjusted for changes in their case mix. MDHs are similar to SCHs, but they
are eligible for a prospective payment rate based on a blend of current PPS rates (25 percent) and their historical costs (75 percent).”

Below is a breakdown by the number of rural hospitals.

Some provisions in health reform which affect rural hospitals include:

• A low-volume adjustment for hospitals with under 1,600 discharges
• A wage index floor of 1.0 for certain frontier states
• $400 in funding for hospitals in low-spending urban and rural areas

Source: MedPAC Payment Basics, Critical Access Hospitals.

The VBP program will evaluate physicians along two broad dimensions: quality and cost.  In the final rule:

Section 1848(p) of the Act requires the Secretary to ‘‘establish a payment modifier that provides for differential payment to a physician or a group of physicians’’ under the physician fee schedule ‘‘based upon the quality of care furnished compared to cost *** during a performance period.’’ The provision requires that ‘‘such payment modifier be separate from the geographic adjustment factors’’ established for the physician fee schedule. In addition, section 1848(p)(4)(C) of the Act requires that the value modifier be implemented in a budget-neutral manner.

Quality

The current quality measures to be used include:

1. The measures in the core set of the Physician Quality Reporting System (PQRS);
2. All measures in the Group Practice Reporting Option (GPRO) of the Physician Quality Reporting System; and
3. the core measures, alternate core, and 38 additional measures in the Electronic Health Records (EHR) Incentive Program measures.

Cost

The current measures of cost CMS is using are total per capita cost measures and per capita cost measures for beneficiaries with four chronic conditions (COPD; heart failure; coronary artery disease; and diabetes).

By January 2012, however, CMS will choose an episode grouper which can evaluate physicians based on episodes of care. Specifically:

Section 1848(n)(9)(A) of the Act requires us to develop by January 1, 2012, an episode grouper that combines separate, but clinically related items and services into an episode of care for an
individual, as appropriate.

Other Issues

One of the main problems of the physician VBP is attribution of patients to doctors. In managed care organizations, patients are assigned a primary care doctor or gatekeeper who are responsible for the patient’s overall care. In Medicare, the patient can see any willing provider; because the primary care doctor cannot restrict the patient’s choice of care, it is more difficult to hold them responsible for the care. Specifically, Medicare beneficiaries never have to choose a primary care doctor, so identifying the doctor to be ultimately responsible for each patient’s overall care is difficult.

Physicians require additional information to understand why the received the VBP scores they did. For this purpose, CMS will create Physician Feedback Reports, confidential reports providing more detailed information of the underlying factors which produce these scores.

For the VBP modifier in 2015, CMS will use 2013 as the initial performance period 2013. This means that payment adjustments in 2015 will be on care provided 2 years ago. Although evaluating physician performance, allowing for appeals and adjusting payments takes time; two years is a long lead time.

Earning a living is not as simple for doctors as other professions.  Sure doctors make a lot of money.  But knowing how much they get paid for a particular service is complex.

I provide an overview of the physician reimbursement system here.  That overview does not take into account all the payment modifiers in the Medicare’s physician reimbursement system.  Consider the following payment modifiers:

• For many procedures, Medicare pays providers for the professional and technical component.  The professional component is the physician’s work and expertise; the technical component provides reimbursement for equipment and supplemental staff needed to perform the procedure.  If the procedure is billed globally, then the physician receives both components.  If another entity performed the technical component, then the physician is only paid for the professional component.  For instance, for lab tests, the lab may run the test (technical component) but the physician would be the one interpreting the test (professional component).
• If you assist in a surgery, you receive 16% of the fee the primary surgeon does.Under some circumstances, the individual skills of two surgeons are required to perform surgery on the same patient during the same operative session.  If you are a co-surgeon (rather than an assistant at surgery), you receive 62.5% of the typical reimbursement for that surgery.
• If you perform a bilateral surgery–a surgery done on both sides of the body (e.g., right arm and left arm)–then you receive 150% of the payment you would have received from doing a unilateral surgery.
• When multiple procedures are performed through the same endoscope, payment will be made for the highest valued endoscopy (100% of the allowance) plus the difference between the next highest and the base endoscopy.
• If you perform multiple surgeries in the same day on the same patient, you do not get paid the same amount as if these were performed on multiple days.  The highest valued procedure is paid 100% of the allowance.  For the second through the fifth highest valued procedures, the physician receives 50% of the typical payment amount.
• If you are a physician assistant, nurse practitioner, or a registered dietitian or nutritionists; you receive 85% of the payment an MD would receive for performing the same service.
• If you are a clinical social worker, you receive 75% of the payment an MD would receive for performing the same service.
• If you are a certified nurse midwife, you recieve 85% of the payment an MD would receive for performing the same service.  If you are a midwife, you only receive 65%.

If you don’t think Medicare is bureaucratic, just take a look at those rules.

As I previously noted, this delaying the cut to physician payment is not a long term fix. Either Medicare should remove the sustainable growth rate (SGR) provision and acknowledge the fiscal impact of paying doctors more or they should impose the SGR or (more likely) a modified SGR.

The current two month delay makes it seem as if Congress will cut Medicare payments to physicians by 27 percent on March 1, 2012, even though this will of course not happen.

With respect to the ‘doc fix’ issue, more transparency is needed.

In the meantime, I pose to you, my reader, a bet.  Do you think the ‘doc fix’ gets passed?  Before you read on, make your predictions in the comments section below.

Healthcare Economist’s Prediction

What is the doc fix?  In 1998, Medicare implemented the Sustainable Growth Rate (SGR) system.  Medicare intended that the SGR  was intended to slow the rate of growth on Medicare physician spending by decreasing reimbursement to physicians over time (for more information, see here).  Each year since 1998, however, Congress has reversed the decrease in physician payment rates.  It did not, however, abolish the SGR.  Abolishing the SGR would create a huge shortfall in Medicare spending.

Instead, Congress temporarily removes the SGR for the upcoming year without abolishing it.  Because the gradual decreases in physician payments were never implemented,  if the SGR is not overturned, Medicare physicians would see a 27.4 percent decrease in their reimbursement rates.  Ezra Klein’s WonkBlog notes that this may in fact be a good idea.

This is unlikely to happen.

Although the Washington Post questions whether it will actually happen, physicians are a strong lobbying group and a 27.4 decrease in anyone’s salary is enough to cause Congressmen to have their inboxes filled with letters and emails from angry physicians.

If you ask most Americans if they want to have their payroll taxes lowered, they will say they do.  If you ask most Americans if they Medicare physician fees should be cut, they will say no.  The recently passed payroll tax cut, however, funds Medicare physician salaries; payroll taxes in part are used to fund Medicare.

By passing the doc fix, Medicare finances will be placed into peril.  By failing to pass the doc fix, reimbursements will be cut and Medicare may begin to look more like Medicaid–a insurance benefit where finding a doctor willing to accept low reimbursement rates is difficult.

In my opinion, Congress will do what they always do: pass the buck to the next generation. The doc fix will pass.

For instance, this article examines how to align the Medical Expenditure Panel Survey (MEPS) to aggregate U.S. benchmarks provided in the National Health Expenditure Accounts (NHEA).  Today, I review some of these adjustments.

The article by Selden and Sing (2008) compares NHEA Personal Health Care (PHC) expenditures against MEPS expenditures. Whereas total NHEA in the U.S. was $1.603 trillion in 2003, PHC was only $1.341 trillion since it excludes administrative costs, public health, research, and construction, none of which are captured by MEPS. Using the PHC as the starting point, here are some other key differences between the MEPS and NHEA PHC measure.

Matching MEPS to NHEA PHC using MEPS definition of medical expenditures

• Institutionalized population and active military.  PHC includes these individuals, but MEPS excludes these individuals.
• Medicaid capitated payments.  The authors “…modified the NHEA allocation of capitated Medicaid payments across types of service using the MEPS expenditure distribution, rather than the fee-for-service Medicaid distribution used in the construction of NHEA. This adjustment shifted expenditures from Medicaid Hospital to Medicaid Physician.”
• Drug Rebates. NHEA includes rebates public insurance entities receive from pharmaceutical companies.  These rebates are not captured in MEPS.  The authors remove drug rebates from the NHEA PHC estimates.
• Medicaid/CHIP underreporting.  Like most household surveys, the MEPS data contains fewer observations of individuals stating that they have Medicaid or Children’s Health Insurance Program (CHIP) coverage than is the case when these figures are reported in administrative data.  To correct for this underreporting, the authors used “a 10 percent upweighting of Medicaid and SCHIP recipients, using a raking post-stratification to preserve the MEPS distribution of poverty level, age, sex, Medicare enrollment and uninsurance.”
• Underreporting of high cost cases.  The authors cite other research (Zuvekas, Cohen and Pylypchuk, 2005; Zuvekas, Olin, 2009) which claim that MEPS underreports high cost cases.  This could be due in part because severely ill individuals may be have higher attrition rates.  Thus, the authors modify the MEPS sampling weights to increase the prevalence of high-cost cases.  They do this using a partial non-response model. “Our upweighting strategy targets the top three percent of the expenditure distribution in each of four (hierarchically defined) coverage groups: ever on Medicare, ever on non-Medicare Medicaid and SCHIP, ever on Private, and full-year uninsured. A raking post-stratification was implemented to preserve MEPS distributions by age, sex, race/ethnicity, and poverty level (along with coverage). The average increase in weight was 18.1 percent…”
• Laboratory Tests. “One area in which MEPS is particularly low is separately-billed laboratory tests, the number and financing of which are difficult to ascertain either from household respondents or from follow-back visits to providers ordering the tests.”  The authors allocated that additional lab spending test to individuals in a proportional fashion based on each individual’s use of physician services.
• Other adjustments. For the remaining adjustments, the authors simply scaled the MEPS amounts to match the NHEA figures.

Adjusting MEPS to match NHEA definition of medical expenditures

The list above describes how to calibrate MEPS to match NHEA figures for a MEPS-based definition of medical expenditures. However, the NHEA PHC figures include some expenditures which are not included in MEPS. These costs include:

• Non-medical assistance with activities of daily living. These costs are born mostly by Medicaid. The authors allocated these costs in proportion to home health care by source of payment.
• Hospital Subsidies.  These include Medicare and Medicaid disproportionate share (DSH) payments, Medicare graduate medical education subsidies, State and local subsidies to public hospitals, Medicare retrospective adjustments and capital pass-throughs.
• Public health, public research, public investment in structures and equipment.
• Administrative Costs.  For public programs, the authors allocate administrative costs in proportion to spending on care.  For private insurance, the authors use a regression-based model which compares health expenditures against insurance premiums paid by households and employers.
• Tax Expenditures.  Tax expenditures include: i) the exemption of employer health insurance contributions to from employee income and payroll taxes and ii) the exemption of medical care from state and local sales taxes

Comparing MEPS to Medicare claims data

Not only does MEPS underreport utilization compared the NHEA, similar differences are found when comparing to Medicare claims data. Zuvekas and Olin (2009) find a 19 percent gap between MEPS and Medicare claims data. The The key factors driving these differentials are underreporting of ehalth care utilization by respondents and underrepresentation of high expenditure cases in MEPS.

Specifically, quantities in MEPS come from household responses. Generally, household accurately report inpatient stays, but underreport emergency department and office visits. Further, household generally estimate their out of pocket cost accurately, but most “…may not know third-party payments at all or report them inaccurately because of confusion about discounts, adjustments, and contractual arrangements.”

Underrepresentation of high cost cases about $25,000 is also a problem. Whereas the top decile spending levels in the claims data spend $23,900, in MEPS the figure is $26,700. For the top five percentiles, Medicare claims has average spending of $38,500, compared to $34,600 in MEPS.

Sources:

• Thomas Selden, Merrile Sing, “Aligning the Medical Expenditure Panel Survey to Aggregate U.S. Benchmarks,” AHRQ Working Paper No. 08006, July 2008.
• Samuel H. Zuvekas, Gary L. Olin, “Validating Household Reports of Health Care Use in the Medical Expenditure Panel Survey” Health Services Research, VOLUME 44 | NUMBER 5 | OCTOBER 2009.
• Samuel H. Zuvekas, Gary L. Olin, ”Accuracy of Medicare Expenditures in the Medical Expenditure Panel Survey” Inquiry, 209 Spring; 46(1):92-108.

The main proposal of the book is a competitive bidding process for all Medicare plans. Currently, there is a form of competitive bidding only for Medicare Advantage (MA) managed care plans. The authors also argues for competitive bidding for fee-for-service (FFS) Medicare (i.e., Parts A and B).  There is already a competitive bidding process for Medicare’s prescription drug program (Part D) which has worked well.

One of the main advantages of Medicare FFS is that beneficiaries do not need a referral for any services and are not limited to certain provider networks. However, Medicare beneficiaries do not pay for these added benefits. In addition, even if HMOs are more efficient than Medicare FFS, Medicare FFS beneficiaries still pay the same Part B premiums.

The authors want beneficiaries to face the true price differentials between the lowest cost plans and less efficient plans., regardless if the plan is Medicare FFS or an MA plan. Thus, beneficiaries would be responsible for any premium differences due to choosing a more expensive plan.

Currently, MA plans receive a variant of the average bid in their service area. The authors propose that Medicare would only pay for the lowest cost plan. This proposal would in essence be a transfer from plans and beneficiaries (who would have to pay the cost differential between the plan they choose and the lowest cost plan) to the government. Given the fiscal hole the federal government is facing, this is a good idea.

Authors also propose to eliminate the 25% tax on premiums. According to MedPAC, “Plans that bid below the benchmark also receive payment from Medicare in the form of a “rebate.” The law defines the rebate as 75 percent of the difference between the plan’s actual bid (not standardized) and its case mix-adjusted benchmark. The plan must then return the rebate to its enrollees in the form of supplemental benefits or lower premiums” The rebate structure gives plans a disincentive from lowering their bids since they only recover a share of the cost decreases.

Another issue focuses on regional adjustments. Living in New York is expensive and health care is more expensive in New York than in rural Mississippi. However, should Medicare subsidize New Yorkers because their health care is more expensive. The authors argue no, but poor individuals in high cost areas will be adversely affected by this policy choice.

A major issue is controlling quality. Plans could create low cost plans by providing low-quality care or failing to provide mandated services. Thus, CMS will need to regulate the plans. Plans with quality levels below a specific level would be barred from enrolling individuals or the government could force beneficiaries to pay additional premiums to enroll in these low quality plans. Public reporting of plan quality is also needed.

Strategic bidding is also a problem. Plans could collude to raise the bid price. However, by having Medicare FFS as an option will cap the amount colluding firms could increase prices. Further, a small firm could bid a very low amount and set the market. Medicare could set the benchmark at the lowest cost plan which meets a minimum size requirement.

Source:

• Robert F. Coulam, Roger Feldman, Bryan E. Dowd. “Bring Market Prices to Medicare: Essential Reform at a Time of Fiscal Crisis,” American Enterprise Institute, Washington DC, 2009.

Another Review of the Book:

• Incidental Economist