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Flaws In How Medicare Estimates Costs Mar Payments To Hospitals, Doctors

Click on the map to explore geographic variations in Medicare payments per enrollee.
Kaiser Health News
Click on the map to explore geographic variations in Medicare payments per enrollee.

Medicare pays more to doctors and hospitals in expensive parts of the country. But a prestigious panel says Medicare's methods of evaluating regional costs are disturbingly imprecise and need to be overhauled.

The Institute of Medicine experts said Medicare needs to make a "significant change" to the ways it evaluates salaries of health care workers and real estate costs. Major changes to these calculations would affect the bottom lines of thousands of practitioners and institutions, but the report didn't gauge the impact.

"The Medicare program needs more precise and objective tools and methods to assure the nation that the billions being spent are appropriately and fairly disbursed," said committee chairman Frank Sloan, a Duke University health policy and economics professor, in a statement accompanying the report.

"As the criticism we heard from a range of health care providers indicates, there is significant skepticism about the fairness and accuracy of how adjustments are currently being determined. This report's recommendations will increase the likelihood that the geographic adjustments reflect reasonably accurate measures of regional differences in expenses," he added.

If all its recommendations were adopted, they would represent the biggest transformation in Medicare's geographic payment in two decades, said Bruce Steinwald, an independent consultant and member of the panel. Steinwald said in an interview that the current system "is inaccurate enough that the committee felt fairly substantial changes were warranted."

Accurately calculating regional cost differences is considered essential as Medicare prepares to revamp the way it pays hospitals.

Starting in October 2013, Medicare plans to take the amount hospitals spend per beneficiary into account when setting reimbursements. That approach, incorporated in the health care overhaul, is intended to reward hospitals that treat patients efficiently.

Some health care researchers, led by those at the Dartmouth Institute for Health Policy and Clinical Practice, have asserted that big disparities in regional Medicare spendingare evidence that hospitals and doctors in some regions provide unnecessary medical treatments.

But providers in high-spending areas say they are costlier places to do business. Another Institute of Medicine committee is studying that issue.

Health and Human Services Secretary Kathleen Sebelius asked the IOM, a nonprofit that advises the government, to assemble the panel. Its report pinpointed a number of ways that Medicare's methods are too imprecise. For instance, Medicare divides the country into 89 payment areas when setting reimbursements for doctors. But the panel found those areas were so broad that some lumped together expensive urban regions with less expensive outlying areas.

The panel also recommended Medicare alter the 441 labor markets it uses for setting hospital payment areas. At present, the panel noted, 40 percent of hospitals successfully petition Medicare to be shifted into other areas to get higher payment rates.

Medicare, the report said, also should:

  • Stop relying on hospital reports to calculate regional wages for health care workers and instead use data from the Bureau of Labor Statistics.
  • Broaden how it measures hospitals' and doctors' business costs. In addition to salaries of traditional employees such as doctors and nurses and administrative assistants, Medicare should factor in what hospitals pay the increasing number of other professionals now being employed — information technology and computer experts, for example.
  • Replace its method of estimating the rents that doctors and other providers pay for their offices and clinics. Medicare currently uses data for the cost of two-bedroom apartments that the government collects when setting the price of subsidized housing for the poor. But the committee said that doesn't reflect commercial rent prices.
  • "Taken together, these recommendations will mean a significant change in the way that the indexes are calculated," the report says.

    Copyright 2023 Kaiser Health News. To see more, visit Kaiser Health News.

    Jordan Rau