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Medicare News

Medicare Commission Wants Some Cuts, Equalization, End to How Doc Fees Decided

MedPAC tells Congress it also wants changes in low-income drug assistance to encourage more genetics

March 19, 2012 – The Medicare Payment Advisory Commission (MedPAC) has released its annual report to the Congress, Medicare Payment Policy 2012, which recommends some pay reductions for nursing homes and hospitals, an equalization of pay for the same service, more emphasis on generic drugs and, once again, a plea for an end to the way physician’s fees are determined each year.

The 2012 report by the independent Congressional agency includes payment policy recommendations for 10 of the health care provider sectors in fee-for-service Medicare. MedPAC also reviews the status of the Medicare Advantage (MA) plans and prescription drug plans (Part D) and makes recommendations as appropriate.


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“In this report, we continue to make recommendations to increase the efficiency of Medicare - that is, to find ways to provide high-quality care for Medicare beneficiaries at lower costs to the program,” writes Chairman Glenn M. Hackbarth, J.D., in a cover letter to Vice President Joe R. Biden, President of the U.S. Senate, and Rep. John A. Boehner, Speaker of the House of Representatives.

In the letter, Hackbarth pointed to four key recommendations and another attempt by MedPAC to change the way physician’s fees are determined in Medicare.

As it did last year, the committee recommends repealing the sustainable growth rate (SGR) system, which annually results in automatic pay cuts for doctors, and replacing it with specified updates that would no longer be based on an expenditure-control formula.

While the SGR may have resulted in lower updates for Medicare’s physician payments, it has failed to restrain volume growth. In addition, temporary, stop-gap “fixes” to override the SGR are undermining the credibility of Medicare by engendering uncertainty and frustration among providers, which may be causing anxiety among beneficiaries,” writes Hackbarth.

The following are the four key recommendations in his letter.

“First, we provide a series of fee-for-service payment system update recommendations that result in net savings to Medicare while maintaining access and quality.

“Second, we make a recommendation to equalize payment rates for evaluation and management office visits provided in hospital outpatient departments (OPDs) and physician offices. In 2011, Medicare paid about 80 percent more for a 15-minute office visit in an OPD than in a freestanding physician office. The Commission maintains that Medicare should seek to pay similar amounts for similar services, taking into account differences in the definitions of services and differences in patient severity. Setting the payment rate equal to the rate in the more efficient sector would save money for the Medicare program, lower cost sharing for beneficiaries, and reduce the incentive to provide services in the higher paid sector.

“Third, we recommend revising and rebasing the skilled nursing facility (SNF) prospective payment system to more closely match SNFs’ costs. Revising the payment system to more accurately pay for nontherapy ancillary services and to base therapy payments on patient characteristics will shift payment from facilities that concentrate on intensive therapy to facilities that treat medically complex patients. Rebasing will reduce Medicare spending and bring Medicare’s payments more in line with SNFs’ costs. We also recommend reducing payments to SNFs with relatively high rates of rehospitalizations. Avoidable rehospitalizations of SNF patients increase Medicare’s spending, expose beneficiaries to additional disruptive care transitions, and can result in hospital-acquired infections or other adverse health consequences.

“Fourth, we recommend modifying the Part D low-income subsidy (LIS) copayments to encourage the use of generic drugs when available in selected therapeutic classes. Switching from brand-name drugs to generic drugs can result in significant cost savings. Part D drug plan sponsors have been more successful at encouraging generic substitution among non-LIS enrollees than among LIS enrollees.

"Plans often use cost-sharing differentials to motivate beneficiaries to use generic drugs. However, since cost sharing for LIS enrollees is set by law rather than by each plan, sponsors have limited ability to manage drug spending for this population. By revising the LIS copayment structure, Medicare may be able to reduce program spending without substantially affecting access to needed medications. The policy would take into account the limited income of this population and retain the existing exceptions and appeals process.”

A news release about the report by MedPAC explains these recommendations.

Fee-for-service payment rate recommendations

The report presents the Commission’s recommendations for 2013 rate adjustments in FFS Medicare. These “update” recommendations—which MedPAC is required by law to submit each year - are based on an assessment of payment adequacy taking into account beneficiaries’ access to care, the quality of the care they receive, supply of providers, and providers’ costs and Medicare’s payments.

For example, for skilled nursing facilities (SNFs), the Commission observed adequate access to care for beneficiaries, stable quality outcomes, and Medicare margins exceeding 10 percent for the tenth year in a row (2010 margins were 18 percent).

Taken together, those indicators led the Commission to recommend bringing down payments to SNFs to a level more consistent with the costs of treating Medicare patients.

The Commission also reasserted its recommendation to revise the payment system to pay SNFs more equitably.

In addition, the Commission recommended reducing Medicare’s payments to SNFs with relatively high rates of rehospitalization.

Aligning payment rates across health care settings

In the past, the Commission has recommended delivery system reforms to help Medicare move beyond traditional FFS and encourage quality, coordination, and judicious use of resources. However, while those new payment systems are being developed and refined, the Commission is also committed to finding ways to overcome the challenges of the FFS payment systems’ “silos.”

Because Medicare’s FFS payment systems were developed independently, the program can pay very different amounts for similar services. For example, Medicare pays about 80 percent more for a 15-minute evaluation and management office visit provided in a hospital outpatient department than in a freestanding physician’s office.

This difference creates a financial incentive to provide services in the higher paid setting and raises costs for both the beneficiary and the Medicare program. In this report, the Commission recommends equalizing the payment rates for these office visits. Going forward, MedPAC will explore other opportunities to align payment rates for similar services provided in other settings.

Addressing the sustainable growth rate system

The sustainable growth rate system - Medicare’s policy for updating physicians’ fees based on overall expenditure growth - is fundamentally flawed. It has not restrained volume growth, and the deep cuts called for by the SGR formula, combined with temporary stop-gap fixes, have undermined beneficiaries’ and providers’ confidence in Medicare.

The report reprints the Commission’s October 2011 letter to the Congress in which it recommended repealing the SGR and replacing it with specified updates that would no longer be based on an expenditure-control formula. The scheduled updates would favor primary care over specialty services to help correct the undervaluation of primary care.

Despite the high budget score associated with a full repeal of the policy, the Commission concluded that the risks of retaining the SGR outweigh the benefits and offered a list of options for defraying the cost of repeal.

Medicare Advantage

In the Medicare Advantage (MA) program, enrollment continues to grow, beneficiaries continue to have wide access to plans, and plan performance on quality measures is mixed, but improving.

Additionally, the MA benchmarks and plan payments have moved closer to FFS levels and many plans’ bids are below FFS. Those promising trends should be continued by encouraging efficiency and innovation in MA plans through financial pressure and ensuring that Medicare spending is controlled, beneficiary choice is preserved, and quality of care is high.

Part D (Medicare Drug Benefit)

Participation in the Medicare drug benefit remains quite high, and the average beneficiary has over 30 stand-alone drug plans to choose from, in addition to many MA plans that have drug benefits. CMS estimates the average monthly premium in 2012 will be $31, a slight decrease from 2011.

At the same time, the Commission reports that costs for enrollees receiving the low-income subsidy (LIS) are growing rapidly. High-spending LIS enrollees tend to fill more prescriptions, fill more costly prescriptions, and take more brand-name drugs.

Unlike other Part D enrollees, LIS beneficiaries’ cost sharing for brand-name drugs does not differ significantly from the generic co-pays. Therefore, LIS enrollees do not have an incentive to choose the generic option when one is available.

In this report, the Commission recommends modifying the copayments for LIS enrollees to encourage the use of generics - a strategy that has been successful in encouraging greater use of generic drugs among non-LIS enrollees.

A full list of recommendations is included in the fact sheet, which is printed below and a pdf copy is available online – click her to fact sheet.

The full report is also available in pdf online – click here to full report.

About MedPAC

The Medicare Payment Advisory Commission (MedPAC) is an independent Congressional agency established by the Balanced Budget Act of 1997 (P.L. 105-33) to advise the U.S. Congress on issues affecting the Medicare program. The Commission's statutory mandate is quite broad: In addition to advising the Congress on payments to private health plans participating in Medicare and providers in Medicare's traditional fee-for-service program, MedPAC is also tasked with analyzing access to care, quality of care, and other issues affecting Medicare.

The Commission's 17 members bring diverse expertise in the financing and delivery of health care services. Commissioners are appointed to three-year terms (subject to renewal) by the Comptroller General and serve part time. Click to more information on their website.


Fact Sheet

Report to the Congress, March 2012

The Medicare Payment Advisory Commission is required to annually review Medicare payment policies and make recommendations to the Congress. The 2012 report includes payment policy recommendations for 10 of the health care provider sectors in fee-for-service Medicare. MedPAC also reviews the status of the Medicare Advantage (MA) plans and prescription drug plans (Part D) and makes recommendations as appropriate.


The principal focus of the report is the Commission’s recommendations for annual rate adjustments under Medicare’s various fee-for-service payment systems or health care provider sector ―updates. The Commission bases its update recommendation for each sector on an assessment of payment adequacy, including beneficiary access to care (supply of providers, service use, surveys of access), quality of care, providers’ access to capital, and provider costs and Medicare payments (where available). The Commission’s recommendations for 2013 are listed below.

Inpatient and outpatient hospitals

   ● The Congress should increase payment rates for the inpatient and outpatient prospective payment systems in 2013 by 1.0 percent. For inpatient services, the Congress should also require the Secretary of Health and Human Services beginning in 2013 to use the difference between the increase under current law (projected to be 2.9 percent) and the Commission’s recommended update (1.0 percent) to gradually recover past overpayments due to documentation and coding changes.

   ● The Congress should direct the Secretary of Health and Human Services to reduce payment rates for evaluation and management office visits provided in hospital outpatient departments so that total payment rates for these visits are the same whether the service is provided in an outpatient department or a physician office. These changes should be phased in over three years. During the phase-in, payment reductions to hospitals with a disproportionate share patient percentage at or above the median should be limited to 2 percent of overall Medicare payments.

   ● The Secretary of Health and Human Services should conduct a study by January 2015 to examine whether access to ambulatory physician and other health professionals’ services for low-income patients would be impaired by setting outpatient evaluation and management payment rates equal to those paid in physician offices. If access will be impaired, the Secretary should recommend actions to protect access.

Physicians and other health professionals

   ● The Congress should repeal the sustainable growth rate (SGR) system and replace it with a 10-year path of statutory fee-schedule updates. This path is comprised of a freeze in current payment levels for primary care and, for all other services, annual payment reductions of 5.9 percent for three years, followed by a freeze. The Commission is offering a list of options for the Congress to consider if it decides to offset the cost of repealing the SGR system within the Medicare program. (First recommended in October 2011).

   ● The Congress should direct the Secretary to regularly collect data—including service volume and work time—to establish more accurate work and practice expense values. To help assess whether Medicare’s fees are adequate for efficient care delivery, the data should be collected from a cohort of efficient practices rather than a sample of all practices. The initial round of data collection should be completed within three years. (First recommended in October 2011).

   ● The Congress should direct the Secretary to identify overpriced fee-schedule services and reduce their relative value units (RVUs) accordingly. To fulfill this requirement, the Secretary could use the data collected under the process in recommendation 2 (above). These reductions should be budget neutral within the fee schedule. Starting in 2015, the Congress should specify that the RVU reductions achieve an annual numeric goal—for each of five consecutive years—of at least 1.0 percent of fee-schedule spending. (First recommended in October 2011).

   ● Under the 10-year update path specified in recommendation 1 (above), the Congress should direct the Secretary to increase the shared savings opportunity for physicians and health professionals who join or lead two-sided risk accountable care organizations (ACOs). The Secretary should compute spending benchmarks for these ACOs using 2011 fee-schedule rates. (First recommended in October 2011).

Ambulatory surgical centers

   ● The Congress should update the payment rates for ambulatory surgical centers by 0.5 percent for calendar year 2013. The Congress should also require ambulatory surgical centers to submit cost data.

   ● The Congress should direct the Secretary to implement a value-based purchasing program for ambulatory surgical center services no later than 2016.

Outpatient dialysis

   ● The Congress should update the outpatient dialysis payment rate by 1 percent for calendar year 2013.

Skilled nursing facilities

   ● The Congress should eliminate the market basket update for 2013.

   ● The Congress should direct the Secretary to revise the skilled nursing facility payment system to redistribute payments away from intensive therapy care that is unrelated to patient care needs and toward medically complex care. (First recommended in June 2008).

   ● The Congress should direct the Secretary to begin a rebasing of payments in 2014 with an initial reduction of 4 percent and subsequent reductions over an appropriate transition until Medicare’s payments are better aligned with providers’ costs.

   ● The Congress should direct the Secretary to reduce payments to skilled nursing facilities with relatively high risk-adjusted rates of rehospitalization during Medicare-covered stays and be expanded to include a time period after discharge from the facility.

Home health agencies

   ● The Secretary, with the Office of the Inspector General, should conduct medical review activities in counties that have aberrant home health utilization. The Secretary should implement the new authorities to suspend payment and the enrollment of new providers if they indicate significant fraud. (First recommended in March 2011).

   ● The Congress should direct the Secretary to begin a two-year rebasing of home health rates in 2013 and eliminate the market basket update for 2012. (First recommended in March 2011).

   ● The Secretary should revise the home health case-mix system to rely on patient characteristics to set payment for therapy and nontherapy services and should no longer use the number of therapy visits as a payment factor. (First recommended in March 2011).

   ● The Congress should direct the Secretary to establish a per episode copay for home health episodes that are not preceded by hospitalization or post-acute care use. (First recommended in March 2011).

Inpatient rehabilitation facilities

   ● The Congress should eliminate the update to the Medicare payment rates for inpatient rehabilitation facilities in fiscal year 2013.

Long-term care hospitals

   ● The Secretary should eliminate the update to the payment rates for long-term care hospitals for fiscal year 2013.


   ● The Congress should update the payment rates for hospice for fiscal year 2013 by 0.5 percent.

   ● The Congress should direct the Secretary to change the Medicare payment system for hospice to:

      o have relatively higher payments per day at the beginning of the episode and relatively lower payments per day as the length of the episode increases,

      o include a relatively higher payment for the costs associated with patient death at the end of the episode, and

      o implement the payment system changes in 2013, with a brief transitional period.

These payment system changes should be implemented in a budget neutral manner in the first year. (First recommended in March 2009).

   ● The Congress should direct the Secretary to:

      o require that a hospice physician or advanced practice nurse visit the patient to determine continued eligibility prior to the 180th-day recertification and each subsequent recertification and attest that such visits took place,

      o require that certifications and recertifications include a brief narrative describing the clinical basis for the patient’s prognosis, and

      o require that all stays in excess of 180 days be medically reviewed for hospices for which stays exceeding 180 days make up 40 percent or more of their total cases. (First recommended in March 2009).


   ● In 2011, MA enrollment increased to 12.1 million beneficiaries (25 percent). Enrollment in HMOs, the dominant form of MA plan, grew by 6 percent. Local PPO enrollment increased by about 65 percent, and enrollment in regional PPOs grew by about 34 percent between 2010 and 2011.

   ● In 2011, virtually all Medicare beneficiaries had access to an MA plan (0.3 percent did not), and 99 percent had access to a network-based HMO or PPO. Eighty-eight percent of beneficiaries had access to an MA plan that includes Part D drug coverage and has no premium (beyond the Medicare Part B premium). Beneficiaries can choose from an average of 12 plans in 2012.

   ● In 2012, MA plan bids average 98 percent of fee-for-service (FFS) spending, showing that some managed care plans can offer the standard Medicare benefit for less than FFS costs. However, plans bidding below FFS are not available in many parts of the country.

   ● Despite lower plan bids and lower county-level benchmarks in 2012, Medicare will still spend 7 percent more for beneficiaries enrolled in MA plans than if those beneficiaries were in traditional Medicare. This is due in part to additional payments to plans under CMS’s quality-bonus demonstration.

   ● In 2011, MA plans showed some improvement on quality. Plans improved on more process and outcomes measures compared to previous years, including colorectal cancer screening rates and control of blood pressure. However, quality of care continues to vary across plans.


   ● In 2011, about 29 million Medicare beneficiaries (60 percent) were enrolled in Part D plans. Slightly over 30 percent of beneficiaries had other sources of drug coverage at least as generous as Part D’s defined standard benefit, and 10 percent had no drug coverage or coverage less generous than Part D.

   ● Among those in Part D plans, about 11 million (about 36 percent of Part D enrollees) received the low-income subsidy (LIS). Roughly two-thirds of Part D enrollees are in stand-alone prescription drug plans (PDPs); the rest are in Medicare Advantage–Prescription Drug plans (MA–PDs). Most enrollees report high satisfaction with the Part D program and with their plans.

   ● In 2012, beneficiaries have from 25 to 36 PDP options to choose from, along with many MA plans that also offer prescription drug coverage (MA–PDs).

   ● The structure of drug benefits for both PDPs and MA–PDs held fairly steady; the share of plans with no deductible remains at about 43 percent for PDPs and 91 percent for MA–PDs. A smaller share of PDPs provide gap coverage—26 percent compared with 33 percent in 2011—while the share of MA–PDs with gap coverage remains at about 50 percent.

   ● For the basic portion of the benefit, CMS estimates an actual average monthly premium of $31.08, a slight decrease from $32.34 in 2011.

Encouraging the use of lower cost medications by LIS beneficiaries

   ● In 2009, 2.4 million (8 percent) Part D enrollees had spending high enough to reach the catastrophic limit of the Part D benefit. Compared with other Part D enrollees, high-cost beneficiaries filled more prescriptions, filled more expensive prescriptions, and used more brand-name drugs. Of those high-cost enrollees, 83 percent received the LIS.

   ● Part D plans are limited in their ability to modify drug copayments for LIS enrollees. As a result, brand-name drug co-pays for LIS enrollees do not differ significantly from generic drug copays. As a result, LIS enrollees do not have an incentive to choose the generic drug when one is available. Some Part D plans have successfully used differences in cost sharing to encourage greater use of generic drugs among non-LIS enrollees but have been limited in their ability to do so among LIS enrollees.

   ● Part D recommendation: The Congress should modify the Part D low-income subsidy copayments for Medicare beneficiaries with incomes at or below 135 percent of poverty to encourage the use of generic drugs when available in selected therapeutic classes. The Congress should direct the Secretary to develop a copay structure, giving special consideration to eliminating the cost sharing for generic drugs. The Congress should also direct the Secretary to determine appropriate therapeutic classifications for the purposes of implementing this policy and review the therapeutic classes at least every three years.

   ● To avoid negatively affecting access to brand-name medications that are in classes with generic substitutes, the Secretary should be granted broad authority and flexibility to appropriately implement the policy for substitutable drugs and to exclude certain classes of drugs where substitutions may not be clinically appropriate. In addition, current exceptions and appeals processes should remain in place to allow beneficiaries to request more preferred cost-sharing status for a drug when clinical reasons prevent them from substituting a lower cost medication.



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