Medicare Payment System Design: An Overview

Medicare Payment System Design: An Overview

Medicare Payment System Design: An Overview January 15, 2009 Mark E. Miller, Ph.D. Executive Director Medicare Payment Advisory Commission A. Bruce S...

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Medicare Payment System Design: An Overview January 15, 2009 Mark E. Miller, Ph.D. Executive Director Medicare Payment Advisory Commission

A. Bruce Steinwald Director, Health Care U.S. Government Accountability Office

Roadmap • Introduction to Medicare Payment Systems • Inpatient Prospective Payment System • Physician Fee Schedule • Post-Acute Care Services • Q&A

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Total benefit spending for CY2007=$428 billion Outpatient prescription drugs 12%

Hospital inpatient 29%

Managed care 18%

Other feefor-service settings 12% Home health 4%

Hospital outpatient 6% Physician 14%

Skilled nursing facility 5% Source: CMS Office of the Actuary, 2008

3

Medicare spending in selected settings Type

Number of providers

2007 Medicare program spending

Hospital inpatient (general acute)

PPS: 3,400 CAH: 1,300

$107 billion

Hospital outpatient (general acute)

PPS: 3,400

$29 billion

Physicians & LLPs*

785,000

$60 billion

Home health

9,400

$15.8 billion

SNF

15,000

$22.1 billion

* Limited licensed practitioners

4

Components of Medicare spending

Number of X Number of X Payments = beneficiaries Services per service

(population)

(utilization)

Total program expenditures

(payment rates)

5

Principles of Medicare Payment ƒ Ensure beneficiary access to high quality care in an appropriate setting ƒ Give providers an incentive to supply care efficiently ƒ Pay similarly for services, irrespective of setting ƒ Control program spending

6

Structural elements of a PPS ƒ What is a prospective payment system? ƒ Defining the products and services ƒ Unit of payment ƒ Classification system

ƒ Setting relative values ƒ Setting a national base payment rate

7

Structural elements of a PPS, continued ƒ Adjusting for local market conditions ƒ Variation in the cost of providing care (input prices)

ƒ Other adjustments (teaching; nonphysicians) ƒ Updating payment rates

8

Key elements of selected payment systems Payment system description

Inpatient acute care hospitals

Home health agencies

Physicians

Unit of payment

Hospital stay

60-day episode Service

Classification system

745 MS-DRGs

153 HHRGs

6,700+ HCPCS codes

Single value for each DRG

Single value for each HHRG

Physician work; practice expense; liability insurance

Hospitals’ billed

Estimated mean cost per HHRG

Expert judgment;

Product definition

Relative values Components of relative values

Sources of relative values

costs

practice expense data; premium survey 9

Key elements of selected payment systems, continued Payment system description

Inpatient acute care hospitals

Home health agencies

Physicians

Base rate Source of base amount

Updated providers’ 1982 costs

Spending in preceding system

Projected spending under preceding payment method

Hospital wage index (HWIr)

Hospital wage index (HWIu)

Separate GPCIs: work, practice expenses, PLI

Local market adjustments

Labor input prices

10

Key elements of selected payment systems, continued Payment system description

Inpatient acute care hospitals

Other payment adjustments

Low-income patients (DSH); IME programs; rural payments

Payments for capital costs

Separate prospective rates

Home health agencies

Physicians

Shortage areas; Nonphysician practitioners (reduced rate) Included in payment rate

Included in payment for practice expense

11

Total spending for 2007=$428 billion Outpatient prescription drugs 12%

Hospital inpatient 29%

Managed care 18%

Other feefor-service settings 12% Home health 4%

Hospital outpatient 6%

Skilled nursing facility 5%

Physician 14%

Source: CMS Office of the Actuary, 2008, as reported by MedPAC

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Other Part A & B Payment Systems • • • • • • • •

Hospital Outpatient Prospective Payment System (OPPS) Post-Acute Care (PAC) Ambulatory surgical centers (ASCs) End-Stage Renal Disease (ESRD) Clinical laboratory services Ambulance services Durable medical equipment (DME) Part B drugs

• Not included in a prospective payment system or fee schedule • Cancer hospitals, children’s hospitals, critical access hospitals 13

Other Medicare Payment Systems

• Medicare Advantage plans (Part C) • Prescription drug plans (Part D)

14

Inpatient Prospective Payment System (IPPS) • IPPS replaced the previous cost-based reimbursement system in FY 1984 • Under IPPS, hospitals generally receive a fixed predetermined amount for each inpatient hospital stay, regardless of their actual costs • The payment amount is based largely on the patient’s principal diagnosis • First prospective payment system used in Medicare 15

Two Major Changes in IPPS Will Be Completed in 2009

• Charge-based

¼

Cost-based Diagnosis-Related Groups (DRG) weights

• DRGs

¼

Medicare Severity DiagnosisRelated Groups (MS-DRGS)

16

What are MS-DRGs? • MS-DRGs identify patients with similar clinical problems who are expected to consume similar amounts of hospital resources • Groupings are based on factors such as patient diagnoses and whether the patient had surgery • There are about 300 base DRGs that are split into more than 700 MS-DRGs depending on the presence of a (major) comorbidity or complication • Each MS-DRG is assigned a relative weight, which compares its costliness to the average Medicare case 17

IPPS Payment: Two Payment Components

Operating Payment + Capital Payment •

Payment per discharge



Hospital-specific formula

18

IPPS: Operating Payment Formula Payment = Base rate x Wage index x MS-DRG weight + Add-on payments Base rate

Standardized payment amount divided into labor/non-labor components (separate payment for capital costs)

Wage index

Accounts for geographic variation in hospitals’ labor costs (applied only to labor portion of the base rate)

MS-DRG weight

Reflects a patient’s relative costliness

Add-ons

Includes teaching hospitals/ indirect graduate medical education (IME), hospitals treating a disproportionate share of low-income patients (DSH), costly cases

Note: The formula shown is a simplified version of the payment formula.

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Inpatient PPS: Payment Example MS-DRG 231- Coronary bypass w/ percutaneous transluminal coronary angioplasty (PTCA) and major complication or comorbidity •Major diagnostic category 5: Circulatory diseases •Surgical MS-DRG •Performed at a local Washington DC hospital that has a teaching program and treats a large share of low-income patients

[ (Base rate labor x Wage index) + (Base rate non-labor) ] x MS-DRG weight [($3,574.50 x 1.0974) + $1,553.91] x 7.6438 = $41,861.78 Add-ons IME = $ 13,917.79 DSH = $ 6,532.53 $ 62,312.10

Note: This payment is for operating costs only, based on rates for FY2009.

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IPPS Issues

Payments for Physician Services • The physician fee schedule (PFS) replaced the previous reasonable charge method in 1992 • Services include office visits, surgical procedures and diagnostic tests, and are identified by over 7,000 procedure codes • The fee schedule is based on resource-based relative value scale (RBRVS) • Spending targets are set by the Sustainable Growth Rate (SGR) system to update physician fees annually 22

Nationally Uniform Relative Value Units • Under the RBRVS, each physician service is given a weight that measures its relative costliness • The weights, known as relative value units (RVUs), have 3 components:

RVU

Physician work Time, skill, & training Practice expense Rent, utilities, equipment, supplies, staff Malpractice expense Liability coverage 23

Physician Payment Formula Payment= RVU x Geographic adjustment x Conversion factor * RVU

Reflects relative cost of physician service

Geographic adjustment

Accounts for geographic variation in the cost of providing physician services

Conversion factor

Converts adjusted RVU into dollar amounts

*Other adjustments

e.g., Non-physician providers, Health Professional Shortage Areas

Note: The formula shown is a simplified version of the payment formula.

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Physician Payment: Example 1 Office visit, detailed (established patient)

• Procedure code 99213 • Performed by Washington DC physician in a non-facility setting

RVU x Geographic adjustment x Conversion factor 1.70 x 1.121 x $36.0666 = $68.73

Note: This example is based on current rates effective January 1, 2009.

25

Physician Payment: Example 2 Knee arthroscopy/surgery

• Procedure code 29850 • Performed by Washington DC physician in a facility setting

RVU x Geographic adjustment x Conversion factor 14.67 x 1.121 x $36.0666 = $593.12

Note: This example is based on current rates effective January 1, 2009.

26

Sustainable Growth Rate (SGR) is the system used by Medicare to annually update physician fees • The SGR system sets spending targets and adjusts physician fees based on the extent to which actual spending aligns with specified targets. • The SGR system has called for fee reductions largely in response to increased spending caused by Medicare beneficiaries receiving an increasing volume and intensity of services. • Under current law, the fees that Medicare pays to physicians will be reduced by 21 percent in 2010. Past fee reductions have been averted by administrative and legislative actions since 2002.

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Growth in Volume and Intensity of Medicare Physician Services per FFS Beneficiary,1980-2007 Percentage 9.7

10

9.0 9

9.4

8.3 7.6

8

6.5

7

6.3

Fee schedule and spending targets first affected updates

6 5 3.7

4

3.9

3.9

4.1

5.9 4.5 4.0

3.7

3.2

2.9 3 1.7

2 1

0.2

0

-0.7

2.0 1.5

1.2 -0.2

-1 1980

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Charge-based system aMedicare

Fee schedule and MVPSa

Fee schedule and SGR

Volume Performance Standard

Source: GAO analysis of data from CMS and the Boards of Trustees of the Federal Hospital Insurance (HI) and Federal Supplementary Medical Insurance (SMI) Trust Funds.

28

PFS Issues

Post-Acute Care and Related Services Type

Number of providers

2007 Medicare program spending

Skilled Nursing Facility (SNF)

15,000

$22.1 billion

Home health

9,400

$15.8 billion

Inpatient Rehab Facility (IRF)

1200

$6 billion

Long-term Care Hospital (LTCH)

400

$4.5 billion

Hospice

3250

$10.1 billion 30

Issues in Post-Acute Care ƒ ƒ ƒ ƒ

PPS’ vary (daily/discharge/episode) Patient selection No common patient assessment tools More difficult to define services and episode (e.g. home health) ƒ Medicare pays differently across settings for the “same” patient

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