One reason for this finding could be strict government regulation.  All vaccines must be approved by the FDA.  Further, the CDC provides guidelines to physicians regarding who should get which vaccines.  The CDC also is a large purchaser of vaccines.  Thus, at first glance, it seems that government regulation may be causing industry consolidation in the vaccine market.

A paper by Danzon and Pereira, however, finds this not to be the case.  They find that the likelihood a supplier exits from a particular vaccine market is not effected by whether the CDC is a purchaser of the vaccine, the amount of vaccine the CDC purchases, or the CDC price at the time the firm exits.

The authors propose that the large economies of scale in vaccine production are the cause of the lack of competition in the vaccine market.

“The vaccine industry is characterized by large fixed costs of initial vaccine development as well as substantial ‘semifixed’ costs of producing an individual batch (a process that may take 6 to 18 months) but low marginal costs of producing an additional dose, up to the batch limit, and low storability. If there are multiple competing suppliers with large sunk costs and low marginal costs, competition may drive the price low enough that it is relatively unattractive for multiple firms to remain in the market and for new firms to enter.”

Further, the demand for vaccines is price sensitive.  Insurers (public and private) typically pay physicians and hospitals a fixed payment per vaccine administered.  Increases in vaccine costs come directly from the provider’s bottom line.

Some observers may point to the 2004-2005 influenza vaccine shortage and claim that government regulation had to cause this shortage.  The authors note that although several suppliers did exit the market before the shortage years, “…this cannot be blamed on government purchase and price controls, as less than 20 percent of the flu vaccine is publicly purchased.”

• Source: Patricia Danzon and Nuno Pereira, “Vaccine Supply: Effects Of Regulation And Competition.” NBER Working Paper 17205, July 2011.

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.

• Centered on short-term acute care
• Focused on specialist alignment
• Driven by a volume-based service-line strategy
• Using expensive medical equipment purchases to encourage physician referrals
• Attracting patients with new construction in support of market share growth
• Short-term acute hospitals focus on profitable service lines such as oncology, cardiology, neurology, and orthopedics.

Specific examples of this growth are abundant.  In Indianapolis, all four of their hospital systems built coronary surgery centers at a combined cost of $210 million.  A community hospital 15 miles north of the city opened a smaller, open-heart surgery program.  In Cincinnati, nine hospitals performed open heart surgery. Eight Boston Hospitals Have da Vinci System, which may indicate that robotic surgery may be used for marketing purposes.

However,  health reform has started to change these trends.  Medicare is instituting more bundled payment (e.g., dialysis payments)  rather than pure fee-for-service.  Further, Medicare’s Shared Savings Program (MSSP)  aims to use Accountable Care Organizations (ACOs) to coordinate patient care improve quality and reduce the rate of growth in health care spending.

How will hospitals respond to the changing market landscape?  One way hospitals can improve their margins is to only treat healthier patients to improve their performance in the case where risk adjustment methods are imprecise.  Also, provider mergers may be a trend. Access larger populations will lessen risk providers must bear under new payment models.  Larger size also means that hospitals can negotiate better rates with suppliers.  Hospitals will likely sell redundant or non-core assets.

Hospitals will also adopt new technology to better manage care. For instance, Henry Ford Health System in Detroit uses an embedded specialized software called RadPort in its electronic physician order entry system that prompts physicians to enter specific information when ordering radiology tests.  The pilot, funded with a CMS grant, will see whether these prompts will reduce utilization levels.

• Source: Avalere Health Webinar, “Increasing Capital Productivity in a Value-Based World“, October 26, 2011.

As recent Health Economics articles finds that almost half of physician practices fail to meet the NCQA’s medical home standards.  Specifically,

“Forty-six percent…of all practices lack sufficient medical home infrastructure. While 72.3 percent…of multi-specialty groups would achieve recognition, only 49.8 percent…of solo/partnership practices meet NCQA standards. Although better prepared than specialists, 40 percent of primary care practices would not qualify as a medical home under present criteria.”

Source:

• Hollingsworth, J. M., Saint, S., Sakshaug, J. W., Hayward, R. A., Zhang, L. and Miller, D. C. (2011), Physician Practices and Readiness for Medical Home Reforms: Policy, Pitfalls, and Possibilities. Health Services Research. doi: 10.1111/j.1475-6773.2011.01332.x

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.

“Cesarean delivery rates in both California and the United States as a whole rose by 50 percent between 1998 and 2008, climbing from 22 percent to 33 percent of all births in just a decade. This upward trend, which is seen for every type of woman regardless of race/ethnicity, age, weight, or the gestational age of the pregnancy, shows no signs of reversing. The increasing rates are largely the result of two factors: a significant rise in first-birth cesareans done in labor, and a marked decline in vaginal births after a prior cesarean (VBAC).”

As any good economist would say, there are two factors affecting the change in Caesarean rates: demand and supply. On the demand side, women are more comfortable having a Caesarean than ever before. When a woman is pregnant, more of their peers will have had a Caesarean and the are thus their fear of this major surgery may decrease. Further and with the tremendous amount of faith most women place in modern medicine and their physicians specifically, Caesareans may seem like a more ‘advanced’ way to give birth.

On the supply side, there is a simple reason why Caesareans have risen: money. Physicians get paid more when they do Caesareans. Further, a vaginal birth takes a long time and involves a lot of watchful waiting and monitoring. The Caesarean procedure–although much more intensive and generally worse for the women–is much faster. According to the CMQCC report, “Many nurses talked about the timing of cesareans done during labor, citing the competing demands on physicians for clinic appointments and their desire for balance between work and the rest of life”Kaiser Permanente, where physicians are paid a salary and beneficiaries receive all services from KP docs, generally have among the lowest Ceasarean rates in the state of California.

Doctors do not find it profitable to supervise vaginal birth. And to be honest, I don’t blame them. A typical vaginal birth without complications may not require much direct supervision of a physician. Substituting more labor (i.e., time spent with the patient) by using a midwife in place of more capital (i.e., human capital that the physician accumulated) is more likely to produce better birth outcomes for the average women. Physicians could be brought in only for complicated cases which require additional expertise and surgical skills.

Source:

• Main EK, Morton CH, Hopkins D, Giuliani G, Melsop K, Gould JB. Cesarean Deliveries, Outcomes, and Opportunities for Change in California: Toward a Public Agenda for Maternity Care Safety and Quality. CMQCC White Paper 2011

Leveraging the skills of these nurses the utmost capacity is vital to maximizing the efficiency of the health care system.  In a recent report from the Institute of Medicine (IOM), the policy recommendations focused on four main issues:

1. Nurses should practice to the full extent of their education and training.
2. Nurses should achieve higher levels of education and training through an improved education system that promotes seamless academic progression.
3. Nurses should be full partners, with physicians and other health professionals, in redesigning health care in the United States.
4. Effective workforce planning and policy-making require better data collection and information infrastructure.

In general, although the recommendations are sensible, physicians may fear that nurses will begin taking some of their market share.  A more detailed explanation of my views of these recommendations is listed below.

Workforce Licensing

The Healthcare Economist has been a persistent advocate of loosing state and federal restrictions on the occupation scope of work practices. For instance, nurse practitioners cannot prescribe medicine in many states. The IOM advocates that the Federal Trade Commission and the Department of Justice examine whether these laws are anti-competitive. Opponents will claim that healthcare quality will decrease, but I have not seen any empirical evidence of this claim. Further, by allowing nurses to replace primary care doctors for some types of care, the cost of care will decrease giving the poorest individuals increased access to the medical care they need.

Increasing Nursing Autonomy

The second and third recommendation areas deal with increasing the autonomy of nurses. By improving the education of nurses, the quality of care they can provide will increase. One of the advantages of using nurses rather than doctors to treat patients is that they are lower cost skilled professionals. Increasing educational requirements will increase the cost of nurses and nurses may end up being psuedo-physicians, who do not offer material cost savings. As medicine does become more complex, however, nurses may require more educations. An increase in the variance of the education may increase efficiency, offering providers the ability to choose from both very qualified nurses with a masters or Ph.D. to supervise other nurses or deal with more complex cases, as well as nurses with much less education which could focus on more routine tasks.

More education, however, isn’t an unambiguous good. More education is costly and reduces the supply of workers. Further, although learning in school is beneficial, learning on the job also imparts important skills.

The IOM’s 2nd and 3rd recommendation areas will likely cause complaints from physicians. Increasing nursing education will not only drive up the price for nurses, but may also make nurses competitors for the physician’s services. Allowing nurses to be full partners in the redesign of the healthcare system–although sensible–also infringes on the hegemony of physicians. Thus, these two recommendations will likely meet fierce resistance from the AMA and other physician organizations.

Improve Data Collection Processes

An unbiased observer would say that one should collect more data regarding the demand and supply of nurses only when the benefit of this information outweighs the cost. As a researcher who depends on high quality data to make logical inference, more data is almost always good. Free data is even better. There are significant fixed costs to collecting data; by providing these data for free, the benefits from the use of the data can be shared across many users.

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.