Soviet Style Medicare Payments Lock out Both Better and Cheaper Alternatives

Nov 30, 2009

Have you visited a MinuteClinic or other retail health clinic? This approach to health care is transparent (prices clearly posted and generally cheaper than physician visits), convenient (located in a pharmacy or other retailer), and customer-friendly (walk-in appointments easy to find).

So why are these clinics, which customers love, struggling?

The answer is surprisingly simple: Medicare (and by proxy, other health insurers) have created a payment system that starves innovators because:

they can’t charge more for providing better service
there’s no reward for customers who select a cheaper service
they can’t even bill customers for innovations that achieve better results and reduce the need for further services

The Centralized Structure of Medical Payments:

Medical payments are based on the Soviet-style assumption that all physicians provide services that are essentially equivalent– the core payment model uses a central committee to define what can be paid for and how much. This has led us to a system that has undervalued relationships, quality, and service and systematically overvalued procedures and specialty care vs. primary care. How this works is outlined below:

Medicare pays physicians for services based on submission of a claim using one or more specific CPT® codes. Each CPT® code has a Relative Value Unit (RVU) assigned to it which, when multiplied by the conversion factor (CF) and a geographical adjustment (GPCI), creates the compensation level for a particular service. — American College of Radiation Oncology

Defining where payments come from can be pretty confusing to average people, as you can see from the sentence above. The formula that defines payment for a submitted claim is:

submitted CPT code for visit => (assigned RVU x F/NF factor) x CF x GPCI = payment

Confused yet? Let’s break it down

Claim: After your visit, the physician submits a “claim” to the insurance company/ government to have them reimburse an agreed upon amount for the billable services provided during the visit
Certified Procedural Terminology (CPT) code: The CPT code defines the services a physician is allowed to bill, and are maintained by the American Medical Association. CPT codes define the interactions that a physician may bill an insurance company. We’ll explore the limitations of these definitions below
Relative Value Unit (RVU): The RVU is a number assigned to each CPT code to assign a relative definition of productivity to each code (and amount paid for performing them). Different numbers are assigned to procedures performed in a Facility (F) vs. not in a facility (NF). Per Kevin, MD, a colonoscopy CPT code may be weighted at 8 RVU while a 15 minute office visit receives 0.7 RVU. Thus, the colonoscopy is reimbursed at 11 times the rate of the office visit. The low RVUs assigned to primary care have led to primary care physicians having significantly lower income than specialists.
Conversion Factor (CF): The dollar figure assigned to each RVU, ~$36 in 2009. This number is set by statute (the Sustainable Growth Rate) and limited to an overall budget, which can be changed by act of Congress. The higher the overall spend, the lower the CF without an act of Congress. This Congressional change in the CF has been referred to as the “Doc Fix” and in 2010 would avert a 21% reduction in physician fees, with an expected impact of $245B over 10 years.
Global Practice Cost Index (GPCI): Geographic adjustment for the cost of providing care in different parts of the country

How the Centralized Payment Structure Locks out Innovators

1. Physicians can’t charge more for better service:

Ever wonder why physicians make you come into the office rather than make house calls, deliver phone consultations, answer questions via email, or any use other familiar modern-day approach? The tight definitions for the services provided and paid for (the combination of CPT codes and the RVUs used to pay for each) has arbitrarily rewarded more complex office visits and eliminated payment for other approaches of delivering service. It also has rewarded specialists over primary care and resulted in a shortage of Primary Care Physicians relative to higher-paid specialists. Medicare also specifically prohibits patients for paying for better service through its prohibition of “balance billing“. Why should a physician donate their time to provide un-reimbursed house calls, emails, or phone consults? We’ve seen that they don’t outside of a few exceptions who are forced to donate more of their time for work performed on behalf of the government at rates already below the cost of providing them.

2. Customers see no reward for choosing a cheaper option:

The perverse other side of fixed rates is that the customer, who is charged up front with premiums, and who pays set amounts for the service coded doesn’t benefit from choosing a cheaper alternative. Why would you care to find the physician charging 25% less for an equivalent service (because they found a faster or cheaper method of getting the same results)? The answer is that people don’t — they don’t even know what the prices for the services are (even after they receive their EOB (Explanation of Benefits)

3. Innovators who achieve better results up-front (and reduce the need for future services) reduce their own revenue:

I interviewed a hospital executive who dramatically reduced the rate of birth injuries occurring in their delivery rooms (they took their rate from 3-4 in 10,000 births to 0 over ~60,000 births). By saving families the suffering related to their injured baby’s stay in the Neo-natal Intensive Care Unit (NICU), they were rewarded by a $5M cut in their reimbursement (because they did not need to deliver those services). Rather than scaling these services, innovators who accomplish these higher quality revenue-reducing approaches face the wrath of hospital executives who need to stem the bleeding before it closes the entire facility.

In future posts, we’ll explore how RVUs and CPTs are set by committees and why this prevents higher value alternatives and has destroyed primary care.