Geographic Adjustment in Medicare Payment Phase I: Improving Accuracy
Medicare is the largest health insurer in the United States, providing coverage for 39 million people aged 65 and older and eight million people with disabilities. In 2010, the program made up approximately 15 percent of the federal budget, at an estimated cost of $500 billion.
Although Medicare is a national program, it adjusts fee-for-service payments to hospitals, physicians, and other clinical practitioners according to the geographic locations in which they practice. This adjustment accounts for differences in the price of doing business, such as staff compensation and rent, that vary between urban and rural areas and by region.
There are disagreements about how best to adjust payments based on geographic location, largely because of the financial impact of the payment adjustments and differences of opinion on how to make the adjustments most accurate. Among other issues, critics cite inconsistencies in the definitions of payment areas and labor markets, concerns about the appropriateness of data used to calculate adjustments, and lack of transparency of the methods for making the adjustments.
After the U.S. House of Representatives called for a study by the Institute of Medicine (IOM) in Section 1157 of The Affordable Health Care for America Act, the Department of Health and Human Services and Congress sought advice from the IOM on how to improve the accuracy of the data sources and methods used for making the geographic adjustments in payments to providers. The IOM convened a committee of experts to assess the impact of geographic adjustment on the urban and rural workforce, beneficiaries’ access to care, and the ability of providers to give high-value, high-quality care.
Geographic Adjustment in Medicare Payment is a technical assessment of the data sources, methods, and payment areas used for the hospital wage index and the geographic practice cost indexes. The hospital wage index and the geographic practice cost indexes were created separately and have evolved independently over several years, but the IOM recommends an integrated approach that includes moving to a single source of wage and benefits data for both indexes, changing to one set of payment areas and labor markets, and expanding the range of occupations included in the index calculations.
The IOM also recommends developing a new source of data on the cost of office rent and applying the hospital wage index for facilities other than acute-care hospitals—for example, skilled nursing facilities and home health agencies—taking into account differences in patient mix and staffing.
Taken together, these recommendations will lead to improvements in payment accuracy, including a more streamlined and consistent payment process for a broader range of providers, and cost reporting will be less burdensome. Implementation will require a phased-in process that combines legislative, rule-making, and administrative actions as well as a period of public comment.
In April 2012, another report from the same committee will address the impact of geographic adjustment on workforce distribution in urban and rural areas, along with policy adjustments used to promote and preserve access to quality care for Medicare beneficiaries. That report also will consider the larger context of fee-for-service clinical practice, including a broad range of clinical practitioners.
The IOM committee focused on the technical accuracy of the current data sources and methods used for geographic adjustment, defining accuracy as the degree of closeness of measurement to the true value of whatever is being measured. The following general principles guided the committee’s discussions and analytic process for statistical comparisons and simulations:
Accuracy. Geographic adjustment for input price differences is intended to reflect the input prices faced by providers, not the costs incurred by providers.
Evidence for Adjustment. The continued use of geographic adjustment factors in Medicare payment is warranted.
Local Labor Markets. Geographic adjustment should reflect area-wide input prices for labor faced by employers operating in the same local market and should not be drawn exclusively from data on the wages paid by hospitals or health care practitioners.
Consistency. Consistent criteria should be used for determining the payment areas, data sources, and methods that are used in making the geographic adjustment for hospitals and practitioners.
Transparency. The geographic adjustment process should allow empirical review of the data and methods used to make the adjustments.
Separate Policy Adjustments. Medicare payment adjustments related to national policy goals should only be made through a separate and distinct adjustment mechanism, and not through geographic adjustment.