Physician Payment Major Determinant of Costs, Says Study

New Report Calls for Fundamental Changes in How Physicians Are Paid

March 28, 2013 03:45 pm James Arvantes Washington –

The nation's health care system will not be able to control escalating health care costs without moving from a volume-based to a value-based physician payment system, according to a new study( issued by the National Commission on Physician Payment Reform.

[Stethoscope wrapped around U.S. currency]

The commission's report points out that the United States spends nearly $3 trillion a year on health care, about 18 percent of the nation's gross domestic product and more than any other developed country. Yet, this "enormous investment has not produced a commensurate improvement in the nation's health," says the study, which was released during a March press briefing here. "At its best, American health care is unsurpassed anywhere in the world."

However, the study adds, "the health status of Americans pales in comparison to other nations." The United States ranks 37th in health status behind Oman, Morocco, Paraguay and other nations, according to a report from the World Health Organization( In addition, a recent Institute of Medicine (IOM) study( found that, "Americans … are, on average, in worse health than people in other high-income countries."

story highlights

  • The nation will not be able to control rising health care costs without fundamental physician payment reform, says a new study issued by the National Commission on Physician Payment Reform.
  • The study report makes 12 recommendations intended to serve as a blueprint to move from a volume-based to a value-based health care system as a way to more effectively control health care costs.
  • Among other recommendations, the study calls for the elimination of the sustainable growth rate and fundamental changes to the AMA/Specialty Society Relative Value Scale Update Committee.

The commission's report cites several reasons for the high cost of health care in the United States, including the prevailing fee-for-service payment system and a reliance on technology, expensive care and subspecialists. It also says Medicare pays more for the same service or procedure when done in a hospital setting rather than an outpatient setting.

"While physician salary and related expenses account for 20 percent of health care spending, the decisions (physicians) make influence an additional 60 percent of spending," the report says. "Our nation cannot control runaway medical spending without fundamentally changing how physicians are paid, including the inherent incentives built into the current fee-for-service pay system."

Thus, the report calls for drastic changes to the current fee-for-service system and a five-year transition to a physician payment system that rewards quality and value-based care. To achieve that goal, the report issues 12 recommendations that provide a blueprint for transitioning to new systems of care.

The recommendations also address Medicare physician payment, calling for the elimination of the sustainable growth rate (SGR) formula, for example, and fundamental changes to the AMA/Specialty Society Relative Value Scale Update Committee (RUC) to make the committee more representative of the medical profession as a whole and to make its decision-making process more transparent. The RUC acts as an expert panel and makes recommendations to CMS on the relative values of CPT codes.

Moving to a Value-Based System

The first three recommendations propose a "rapid transition away from fee-for-service payment." At the same time, however, the recommendations note that "fee-for-service will remain relevant for some time given that many delivery and payment models being tested under the (Patient Protection and) Affordable Care Act, such as accountable care organizations (ACOs) and bundled payments, still pay individual doctors on a fee-for-service basis."

As a consequence, "it will be necessary to continue recalibrating fee-for-service payments to encourage behavior that improves quality and cost effectiveness and penalize behavior that misuses or overuses care."

Six of the report's recommendations provide a plan for transitioning to a value-based, blended payment model during the next five years by focusing on increasing payments for evaluation and management (E/M) services, reducing disparities in payment for the same physician services regardless of specialty or setting, and promoting bundled payment and capitation.

"For both Medicare and private insurers, annual updates should be increased for evaluation and management codes, which are currently undervalued," the report says. "Updates for procedural diagnosis codes should be frozen for a period of three years, except for those that are demonstrated to be currently undervalued."

The report decries "the disproportionately high number of procedural specialists and the relative lack of cognitively focused physicians," saying that this disparity is a "direct result of a payment system adopted by Medicare and mimicked by private insurers that values time for services provided under procedure codes more highly than time provided under evaluation and management codes."

"In 2011, a radiologist, on average, earned $315,000 a year, while a family doctor, on average, earned $158,000," the report says. "This has led medical students -- many of whom leave school heavily in debt -- away from the E/M specialties and toward the higher-paying procedural and imaging specialties."

The sixth recommendation specifically says fee-for-service contracts "should always incorporate quality metrics into the negotiated reimbursement rates," and the seventh recommendation says "fee-for-service reimbursement should encourage small practices (those having fewer than five providers) to form virtual relationships and thereby share resources to achieve higher-quality care."

SGR Repeal

The report was issued only a few weeks after the Congressional Budget Office revised the cost of repealing the SGR from $245 billion to $138 billion, which has renewed hopes that Congress finally will repeal the flawed formula this year. In calling for elimination of the SGR, the study says that the $138 billion needed to offset the cost of an SGR repeal "can be found entirely by reducing overutilization of medical services within Medicare."

To bolster that point, the report cites a 2011 IOM study that says the health care system spends more than $3 trillion in excess medical costs as a result of unnecessary services, inordinately high prices, missed prevention opportunities and fraud.

The commission's final recommendation addresses the composition and operation of the RUC, saying that both "are seriously flawed." According to the report, the RUC's composition is skewed toward the procedural and highly technological specialties, raising concerns that "it overvalues those specialties and undervalues cognitive specialties."

The study also takes note of the RUC's operating procedures, saying that its meetings largely are closed to the public and that RUC members sign confidentiality agreements. The RUC also does not make individual voting records and meeting transcripts available to the public. "Moreover, critics contend that since (the majority of) the RUC's recommendations have historically been adopted by CMS, it should be considered a federal advisory committee and subject to the sunshine requirements and the oversight mandated by the Federal Advisory Committee Act," the report says.

AAFP Response

AAFP President-elect Reid Blackwelder, M.D., of Kingsport, Tenn., praised the report's findings, saying they are largely in sync with the AAFP's positions and perspectives.

"This report strengthens our ongoing and constant call for re-evaluation of primary care," said Blackwelder, who attended the press conference announcing the release of the study. "It also allows us to continue to press for some important changes."

For example, the AAFP actively lobbies on behalf of a blended payment model to better recognize and compensate family physicians for the services and value they bring to the health care system. The AAFP also leads national efforts to replace the SGR with a more equitable payment system.

In the meantime, the AAFP, like the commission's report, has expressed concern that the actions of the RUC are biased toward subspecialist procedures rather than E/M services, leading to an undervaluation of primary care. In 2011, the AAFP formed the Primary Care Valuation Task Force to identify solutions to a system that has contributed to inequitable and devalued payment for primary care. The task force concentrated on finding ways to more appropriately appraise the worth of E/M services, which are the most common services provided by primary care physicians.