Medicare spending rates based on regional cost variations unlikely to improve health care

(Press-News.org) WASHINGTON -- A "geographic value index" that would tie Medicare payment rates to the health benefits and costs of health services in particular regions of the country should not be adopted by Congress, says a new congressionally mandated report from the Institute of Medicine. The committee that wrote the report concluded that decisions about health care generally are made at the level of the physician or organization, such as a hospital, not at the regional level. Because individual physician performance varies, sometimes even within a single practice group, an index based on regions is unlikely to encourage more efficient behavior among individual providers, and therefore, is unlikely to improve the overall value of health care. The new report reiterates the findings of the committee's interim report released in March 2013.

Variation in Medicare spending across geographic areas is driven largely by differences in the use of post-acute care, which includes home health services, skilled nursing facilities, rehabilitation facilities, long-term care hospitals, and hospices, the committee said. If regional variation in post-acute care spending did not exist, Medicare spending variation would fall by 73 percent, and it would fall by 89 percent if there was no variation in both acute and post-acute care. However, an overall explanation for geographic variation in spending remains elusive. The statistical analyses that the committee examined accounted for factors such as beneficiary health status and demographics, insurance plans, and factors related to health care markets, but much of the variation could not be explained by such factors.

The committee also examined the differences in spending at a variety of levels progressively smaller than geographic regions, such as hospital referral regions, hospital service areas, hospitals, and individual providers. Spending varies greatly across all these levels, and providers even at a small level do not practice the same way or perform similarly. Consequently, a geographic value index would reward low-value providers for practicing in areas that are on average high-value and punish high-value providers in low-value regions. As a result, area-level performance calculations would likely mischaracterize the actual value of services delivered by many providers and hospitals, resulting in unfair payments and inappropriate incentives.

The committee found that in contrast to Medicare, variations in spending in the commercial insurance market are due mainly to differences in price markups by providers rather than differences in the use of health care services. Medicare spending is weakly correlated with commercial insurance across regions, and total spending by all payers in a region is not strongly correlated with either Medicare spending or spending by commercial insurers.

To improve care, payment reforms need to create incentives for behavioral change by decision makers, whether they are at the level of individual providers, hospitals, health care systems, or stakeholder collaboratives. The committee recommended that the Centers for Medicare & Medicaid Services (CMS) continue to test Medicare payment reforms that incentivize the clinical and financial integration of health care delivery systems to encourage coordination of care among individual providers, real-time sharing of data and tracking of service use and health outcomes, receipt and distribution of provider payments, and assumption of risk managing their populations' care continuum. CMS should also evaluate the effects of test payment reforms on health care quality by measuring Medicare spending and beneficiaries' clinical health outcomes and use the results to improve the payment models. If these evaluations demonstrate increased quality, Congress should give CMS the flexibility to accelerate the adoption of the new Medicare payment models.

### Established in 1970 under the charter of the National Academy of Sciences, the Institute of Medicine provides independent, objective, evidence-based advice to policymakers, health professionals, the private sector, and the public. The National Academy of Sciences, National Academy of Engineering, Institute of Medicine, and National Research Council make up the National Academies. A committee roster follows.

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Pre-publication copies of Variation in Health Care Spending: Target Decision Making, Not Geography are available from the National Academies Press on the Internet at http://www.nap.edu or by calling 202-334-3313 or 1-800-624-6242. Reporters may obtain a copy from the Office of News and Public Information (contacts listed above).

INSTITUTE OF MEDICINE Board on Health Care Services

Committee on Geographic Variation in Health Care Spending and Promotion of High-Value Care

Joseph P. Newhouse, Ph.D. (chair)
John D. MacArthur Professor of Health Policy and Management
Harvard School of Public Health and Harvard Kennedy School
Boston

Alan M. Garber, M.D., Ph.D. (vice chair)
Provost
Harvard University, and
Mallinckrodt Professor of Health Care Policy
Harvard Medical School
Boston

Peter B. Bach, M.D.
Director, Center for Health Policy and Outcomes
Department of Epidemiology and Biostatistics
Memorial Sloan-Kettering Cancer Center
New York City

Joseph R. Baker, J.D.
President
Medicare Rights Center
New York City

Amber E. Barnato, M.D., M.P.H., M.S.
Associate Professor of Medicine, and of Clinical and Translational Science, Health Policy, and Management, and
Director, Clinical Scientist Training Program and Doris Duke Clinical Research Fellowship
University of Pittsburgh
Pittsburgh

Robert M. Bell, M.S., Ph.D.
Lead Member, Technical Staff
Statistics Research Department
AT&T Labs Research
Florham Park, N.J.

Karen Davis, Ph.D.
Eugene and Mildred Lipitz Professor and Director
Roger C. Lipitz Center for Integrated Health Care
Department of Public Health Policy and Management
Johns Hopkins Bloomberg School of Public Health
Baltimore

A. Mark Fendrick, M.D.
Professor
Departments of Internal Medicine and Health Management and Policy, and
Director, Center for Value-Based Insurance Design
University of Michigan
Ann Arbor

Paul B. Ginsburg, Ph.D.
President
Center for Studying Health System Change
Washington, D.C.

Douglas A. Hastings, J.D.
Chair of the Board of Directors
Epstein Becker & Green, P.C.
Washington, D.C.

Brent C. James, M.D.
Chief Quality Officer and Executive Director
Institute for Health Care Delivery Research
Intermountain Healthcare Inc.
Salt Lake City

Kimberly Johnson, M.D.
Assistant Professor of Medicine
Division of Geriatrics and Center for Palliative
Duke University Medical Center
Durham, N.C.

Emmett B. Keeler, Ph.D.
Senior Mathematician
RAND Corp.
Santa Monica, Calif.

Thomas H. Lee, M.D.
Professor of Medicine
Harvard Medical School and Harvard School of Public Health, and
CEO and Medical Director
Partners Community Healthcare Inc.
Boston

Mark B. McClellan, Ph.D., M.D.
Director, Engelberg Center for Health Care Reform, and
Leonard D. Schaeffer Director's Chair in Health Policy Studies
The Brookings Institution
Washington, D.C.

Sally C. Morton, Ph.D., M.S.
Professor and Chair
Department of Biostatistics
Graduate School of Public Health
University of Pittsburgh
Pittsburgh

Robert D. Reischauer, Ph.D.
Distinguished Institute Fellow and President Emeritus
The Urban Institute
Washington, D.C.

Alan Weil, J.D.
Executive Director
National Academy for State Health Policy
Washington, D.C.

Gail R. Wilensky, Ph.D.
Senior Fellow
Project HOPE
Bethesda, Md.

STAFF

Robin Graham, Ph.D., M.P.H.
Study Director