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IOM Panel Raises Concerns About Lowering Medicare Pay For High Spending Areas

Mar 22, 2013

An Institute of Medicine panel on Friday panned an idea that has been raised in Congress to pay Medicare providers in some areas of the country less if their regions are heavy users of medical services.

The idea is an outgrowth of decades of research into why Medicare spends more per beneficiary in some places such as New York City, Florida and McAllen, Texas, and significantly less in parts of Minnesota and Wisconsin. Much of those spending totals—20 to 30 percent by some estimates—cannot be explained by the age or health of residents, leading some analysts to surmise the extra spending is due to unnecessary services and waste.

At the request of members of Congress from lower spending areas, Secretary of Health and Human Services Kathleen Sebelius in 2010 asked the IOM to look into the issue. While not overtly giving advice to lawmakers, the panel's 30-page interim report identified many downsides to adjusting Medicare payments to hospitals, doctors and other providers based on region. Such a practice, it suggested, "would likely mischaracterize the actual value of services" and result "in unfair payments" to physicians and institutions that were careful in using Medicare services but were located in regions marked by heavy spending.

The panel studied hospital-referral regions, which lump together all providers into 306 areas. Those regions, devised by the Dartmouth Atlas, can have as few as two hospitals and as many as 87.

The IOM researchers noted that spending varied significantly even within regions. For instance, the panel looked at Manhattan, one of the highest-spending hospital-referral regions, and Albuquerque, N.M., one of the lowest-spending regions. Within the Manhattan area, there are geographic subsections that spend less than a quarter of what is spent in some of the areas within Albuquerque. And within those smaller areas, there is substantial variation between neighboring hospitals.

The quality of care also varies substantially within hospital referral regions, the report noted.

"Areas don't make decisions. Physicians and hospitals and delivery systems make decisions on how patients are treated," said Dr. Joseph Newhouse, a Harvard Medical School researcher who headed the panel, in an interview. "The incentives really need to go to the decision makers."

The panel said the health law's payment reforms that target doctors and hospitals make more sense, although those efforts are so new there isn't evidence of whether they are effective in encouraging higher quality, more cost-conscious care. Those programs include several that have already begun—one paying hospitals based on quality and the other penalizing more than 2,200 with excess readmissions—as well as another set to launch in 2015 to pay large physician groups based on quality.

The panel affirmed a conclusion of the Dartmouth Atlas: that the wide variations of spending between regions cannot be explained completely by the differences in the health and age of the populations. The panel did note that the use of services after a hospital stay, including skilled nursing home, home health and hospice care—"strongly influenced" the total spending in areas, accounting for 40 percent of the difference. As an example, the IOM researchers pointed out that 2 percent of Medicare beneficiaries in LaCrosse, Wis., used home health services, while 38 percent of beneficiaries in the Dallas-Fort Worth area used those services.

Many of the trends identified in the report have been noted before by the Atlas and the Medicare Payment Advisory Commission.

Some of the IOM research delves deeper. For instance, the panel found that regional summaries of the quality of care could mask the fact that "a region that provides good quality cardiac care is no more likely to provide good quality cancer care than some other region," said Dr. Peter Bach, an epidemiologist at Memorial-Sloan-Kettering Cancer Center in New York and one of the panel members.

"The notion that there's a region that promotes [overall] high quality care doesn't hold up to testing," Bach said.

The report was embraced initially by people on both sides of the debate about whether high-spending regions should be penalized financially through what is known as a "geographic value index."

"What we've tried to point out all along is that geographic variation is real, but it raises more questions than answers," said Atul Grover, chief public policy officer of the American Association of Medical Colleges. "People have this gut reaction that 30 percent of all health care spending is wasted, but if that conclusion is based on studies of geographic variation, then the IOM report probably indicates that conclusion isn’t warranted."

U.S. Rep. Ron Kind, D-Wis., who represents one of the low-spending areas, said the panel's work will help lawmakers move the health system away from paying providers for services and toward reimbursing for results.

"What the IOM is doing is helpful, it's producing great reports and access to data we've never had before," Kind said in an interview. "It's clear that the variation is there, you can't attribute it to the population is being served. There are too many tests, too many procedures being done. Ultimately the goal here is to figure out a way to kill fee-for-service."

Data from the Centers for Medicare & Medicaid Services provided to the panel shows that even after higher wages and special payments for teaching residents are taken into account, 17 regions of the country spent more than $11,000 per beneficiary in 2011, and 26 areas of the country spent below $7,000. 

The report did not evaluate geographic variation in spending for people who are insured by a private company, through the private Medicare Advantage Plans or Medicaid. Those will be studied in a future report that will be released this summer.

A previous IOM report, issued last September, estimated the health system wasted $750 billion in 2009 through unnecessary services, inefficient delivery of care, needless administrative costs, inflated prices, fraud and prevention failures.

This article was produced by Kaiser Health News with support from The SCAN Foundation.

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