Medicare inpatient physician charges: an ecometric analysis - Hospital Payment: Beyond the Prospective Payment System

Health Care Financing Review, Winter, 1993 by Mark E. Miller, W. Pete Welch

INTRODUCTION

To slow the rapid growth of Medicare physician expenditures, Congress enacted major Medicare physician payment reforms in the Omnibus Budget Reconciliation Act (OBRA) of 1989.(1) One component of the reform, VPS, is designed to give physicians incentives to control growth in service volume and intensity. VPS works by tying future physician-fee increases to growth in expenditures per beneficiary (after adjusting for the aging of beneficiaries, prices, and certain other factors). Under VPS, all physicians in the country are placed in a single risk pool, where the behavior of each physician affects all other physicians.(2)

There are two problems with VPS. First, many observers believe that the number of physicians who share responsibility is far too large to have a major impact on physician behavior (Rice and Bernstein, 1990). If this is true, VPS simply becomes a budget device to control spending through fee reductions. Second, a national VPS tied to growth rates is inequitable because historical physician practice styles are unchallenged. There is considerable evidence that physician practice styles vary substantially across the country, within small areas, and among individual physicians (Chassin et al., 1986,1987; Holahan, Berenson, and Kachavos, 1990; Wennberg and Gittelsohn, 1982; Wennberg, McPherson, and Caper, 1984; Wennberg, Freeman, and Culp, 1987; Wennberg et al., 1989; Welch et al., 1993; Feinglass, Martin, and Sen, 1991). This literature concludes that disease burdens, socioeconomic characteristics, and differences in insurance coverage do not fully explain these variations. Differences in practice style resulting from a lack of consensus among physicians regarding which services are necessary are thought to explain part of this variation.

These problems have prompted the consideration of alternative volume-control strategies, a number of which are centered around the hospital medical staff (Welch, 1989; Miller and Welch, 1992; Mitchell and Ellis, 1992). A medical-staff strategy would define a separate VPS for inpatient physician services and place each medical staff at risk for services provided during the admission.(3) These approaches overcome the national risk-pool problem by defining a small risk pool (the medical staff) with clear organizational mechanisms (e.g., utilization review, peer pressure) for controlling volume and intensity. Some of the medical-staff strategies address the inequities of the current VPS (which is tied to growth rates and applies the same penalty to all physicians regardless of their individual behavior) by defining performance standards in terms of physician service levels rather than growth rates. The medical-staff approaches differ from physician diagnosis-related groups (DRGs) because the medical staff as a group, as opposed to the attending physician, is at risk for the admission. In addition, there would be minimal changes to the current reimbursement system under such a policy--physicians would continue to submit bills as they do now, and their fees would be adjusted depending on the performance of the medical staff as a whole.

To elaborate, a second-generation VPS would ideally be designed around some form of physician organization. Medical staffs of hospitals may be the most promising physician structure on which to base volume control. There are three broad medical-staff strategies that could be pursued. The most direct approach would use the admission as the basis for prospective payment. That is, a case-mix-adjusted payment per admission would be made to the medical staff. A second approach, consistent with the current VPS, would use admissions as a measure of growth. Growth in case-mix-adjusted charges per admission would serve as the volume standard by which medical-staff fees are adjusted. A third approach would limit payments to "high-cost" medical staffs by using case-mix-adjusted charges per admission to define a high-cost threshold (e.g., 115 percent of the national mean). Under any of the three strategies, there would be a single national performance standard for inpatient physician services against which the performance of a medical staff would be judged. Fees for the medical staff of each facility would be adjusted depending on their performance relative to the national standard.

All three medical-staff strategies address the risk-pool issue. Two of the strategies (payment per admission and high-cost medical staffs) are tied to the level of physician services and thus address the equity issue. The strategy tied to growth rates does not address the equity issue.

Note that medical-staff approaches do not cover all physician services and thus would have to be part of a larger volume-control policy. Within the Medicare program, one could define national VPS for all physician services and use the medical staff as a mechanism to help physicians reach the national target. Alternatively, a medical staff strategy could be used in conjunction with non-inpatient VPS defined for each State, for example.