Don't Geographically Penalize Physicians, Says IOM Report

Value Index Would Not Differentiate Between High, Low Performers

August 13, 2013 02:38 pm James Arvantes

Congress should reject attempts to establish a geographically based value index for Medicare because the index would fail to differentiate between high- and low-performing physicians and other health care professionals within specific geographic areas, according to a new report issued by an Institute of Medicine (IOM) committee.

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The 178-page study report found wide and persistent variations in health care costs throughout the country. But in many cases, the cost variations occurred within specific, often narrowly defined, geographic regions, making a geographic value index "a poorly targeted mechanism for encouraging value improvement," says the report Variation in Health Care Spending: Target Decision Making, Not Geography(

Some members of Congress have proposed paying more to physicians and other health care professionals in low-cost areas such as San Francisco and less to physicians in high-cost areas such as Fort Lauderdale, Fla. But this approach would be unfair and would not change behavior, leading to a failure to improve health care, says the report.

Story highlights
  • The Institute of Medicine has released a report saying that the establishment of a geographically based value index for Medicare would be both inefficient and unfair.
  • A geographically based value index would fail to differentiate between high- and low-performing physicians, resulting in a poor mechanism for improving value, the report says.
  • The report also calls on Congress to continue testing innovative payment and delivery models, such as the patient-centered medical home and accountable care organizations.

"If you are going to penalize all of the providers in a high-cost area, you also would be penalizing some groups in that area who are very low-cost, efficient providers," says Gail Wilensky, Ph.D., a senior fellow with Project HOPE and a member of the IOM committee responsible for the study report. "It would be unfair, in addition to being inefficient."

Wilensky says changing incentives to reward physicians who provide efficient, low-cost care is a good idea, but trying to accomplish that goal on a geographic basis will not work because geographic areas themselves cannot be held accountable for health care decisions. Wilensky served as CMS administrator during the administration of President George H.W. Bush.

The report breaks out regions of the country that have the highest and lowest Medicare costs. "Within any of those areas, there are low-cost, efficient providers in high-spending areas and high-cost, low-efficiency providers in the low-spending areas," says Wilensky.

Former AAFP President Roland Goertz, M.D., M.B.A., of Waco, Texas, testified before an IOM committee in 2011 about the need to eliminate Medicare geographic adjustment factors in favor of a 50 percent to 60 percent incentive payment for primary care physicians. He says the IOM committee report "validates a number of the concerns that the AAFP has expressed."

Post-acute Care

The report attributes most of the cost variations to post-acute services, such as those provided by nursing facilities, home health care and long-term hospitals. In fact, the elimination of variation in post-acute care would reduce variation in total Medicare spending by 73 percent, the report says. Moreover, if there was no variation in acute care and post-acute care spending, total Medicare spending variation would fall by nearly 90 percent.

Wilensky points out that home health care, in particular, often lacks well-defined evidence-based protocols, which accounts for the greatest variations in cost. "When it comes to treating a hip fracture, the diagnosis is pretty clear and there is not a lot of variation in what should be done," says Wilensky. As a consequence, there is not a great deal of cost variation. But when diagnoses are not clear and clinical interventions vary, the likelihood of cost variations jumps dramatically.

In addition, Medicare and private-sector commercial spending do not correspond with one another and vary dramatically in some areas, according to the report. "The high-spending areas of Medicare are not necessarily the high-spending areas of the commercial market," says Wilensky. "I always assumed that might be the case, but I had not seen it demonstrated and was unaware of how clearly this is the case."

The differences largely are a result of how each sector is financed. In Medicare, the government sets the price, and cost differences are largely determined by use. In the private sector, however, regional cost variations are driven, in large part, by prices negotiated by hospitals, physicians and other health care entities and not by increased use of medical services.

Innovative Models

The report addresses the need to move from a volume-based to a valued-based health care system by calling on Congress to continue testing innovative payment and delivery models, such as the patient-centered medical home and accountable care organizations. These reforms "are directed at decision-making entities and provide incentives for health care providers to integrate care delivery, coordinate care with other providers, and share data on service use and health outcomes in real time," says the report.

During transition to these new models of care, CMS should evaluate the effect of reforms on value and use the findings to make ongoing improvements in the models, the report adds. If reforms improve the value of care, Congress should give CMS the flexibility to accelerate the transition from traditional Medicare to new payment models .