1

Introduction and Overview

BACKGROUND

Medicare is the largest payer of health care services in the United States, representing approximately 30 percent of total spending on hospital care and 20 percent of total spending on physician services (CMS, 2010). The program provides health coverage for more than 47 million Americans, including 39 million people aged 65 and older and 8 million people with disabilities (KFF, 2011).

Although Medicare is a national program, it adjusts fee-for-service payments to Medicare providers for geographic differences in the costs of providing care. Payments in high-cost areas are increased relative to the national average, and payments in low-cost areas are reduced. Medicare spending reached $525 billion a year in 2010 (CMS, 2010) so there is considerable interest in ensuring that payments are accurate in different parts of the country.

This is the second of two Institute of Medicine (IOM) reports to the Secretary of the Department of Health and Human Services (HHS) and the U.S. Congress addressing geographic adjustments in Medicare payment. The first report, Geographic Adjustment in Medicare Payment: Phase I: Improving Accuracy, focused on the accuracy of estimates of labor and other input costs in fee-for-service payments under Medicare Part A (hospitals) and Part B (physicians and other clinical practitioners) (IOM, 2011a).The first report recognized that some costs are beyond providers’ control and recommended continuation of the use of indexes to calculate geographic adjustments with several significant changes and simplifications. These include the use of one set of payment areas and one source of wage and benefits data for hospitals and practitioners; expanding the range of occupations used in making the geographic adjustments for employee compensation; and developing a new empirical model for adjusting practitioner payment. The report concluded that its recommendations, if implemented, would substantially improve the accuracy of Medicare’s geographic payment adjustments and render unnecessary the many exceptions and reclassifications that exist in the current payment system.

This report addresses Phase II of the IOM study of geographic adjustments in Medicare pay-



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1 Introduction and Overview BACKGROUND Medicare is the largest payer of health care services in the United States, representing approximately 30 percent of total spending on hospital care and 20 percent of total spending on physician services (CMS, 2010). The program provides health coverage for more than 47 million Americans, including 39 million people aged 65 and older and 8 million people with disabilities (KFF, 2011). Although Medicare is a national program, it adjusts fee-for-service payments to Medicare providers for geographic differences in the costs of providing care. Payments in high-cost areas are increased relative to the national average, and payments in low-cost areas are reduced. Medicare spending reached $525 billion a year in 2010 (CMS, 2010) so there is considerable interest in ensuring that payments are accurate in different parts of the country. This is the second of two Institute of Medicine (IOM) reports to the Secretary of the Depart- ment of Health and Human Services (HHS) and the U.S. Congress addressing geographic adjustments in Medicare payment. The first report, Geographic Adjustment in Medicare Payment: Phase I: Improving Accuracy, focused on the accuracy of estimates of labor and other input costs in fee-for-service payments under Medicare Part A (hospitals) and Part B (physicians and other clinical practitioners) (IOM, 2011a).The first report recognized that some costs are beyond pro- viders' control and recommended continuation of the use of indexes to calculate geographic adjustments with several significant changes and simplifications. These include the use of one set of payment areas and one source of wage and benefits data for hospitals and practitioners; expanding the range of occupations used in making the geographic adjustments for employee compensation; and developing a new empirical model for adjusting practitioner payment. The report concluded that its recommendations, if implemented, would substantially improve the accuracy of Medicare's geographic payment adjustments and render unnecessary the many exceptions and reclassifications that exist in the current payment system. This report addresses Phase II of the IOM study of geographic adjustments in Medicare pay- 13

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14 GEOGRAPHIC ADJUSTMENT IN MEDICARE PAYMENT ment. It begins with an analysis of the impact of implementing the Phase I recommendations on hospital and practitioner payments and considers the implications for beneficiaries' access to care in different geographic areas. It next reviews evidence of geographic differences in access, quality, and the distribution of the health care workforce, and then reviews evidence about the effectiveness of various programs and policies that have sought to influence the supply and distribution of the clinical workforce. After discussing some of the larger payment policy issues considered by the committee, the report offers six recommendations for policy changes that would improve access to care for beneficiaries and address workforce data and policy gaps. Taken together, the Phase I and II reports seek to increase the likelihood that the geographic adjustments to Medicare payment reflect reasonably accurate measures of input price differ- ences, and are consistent with the national policy goals of creating a payment system that rewards accessible and high-quality health care for all beneficiaries. CONCEPTUAL APPROACH TO GEOGRAPHIC ADJUSTMENT In July 2010, HHS commissioned the IOM to produce a report on how to improve the accuracy of the data sources and methods used for making geographic adjustments to fee-for- service Medicare payments. The statement of task for the 2-year study was developed by the IOM and the Centers for Medicare & Medicaid Services (CMS) on behalf of the Secretary of HHS, using language that came directly from Section 1157 of the Affordable Health Care for America Act (HR 3962) (see Box 1-1).1 During the first phase of this study, the IOM Committee on Geographic Adjustment Factors in Medicare Payment (the committee) developed a set of general principles to guide its delibera- tions (see Box 1-2). The committee made a clear distinction between its technical responsibilities under the statement of task to improve the accuracy of the data sources and methods used to make geographic adjustments, and its responsibilities under the second part of the statement of task to evaluate the impact of the adjustment factors on workforce supply and distribution, beneficiary access to quality care, and population health. Principle 7 from the Phase I report (see Box 1-2) summarizes the committee's agreement that geographic adjustment should be used only to improve technical accuracy of Medicare payments and that policy objectives, such as equitable access to primary care and specialty services in high- and low-cost areas, should be addressed through separate and distinct measures. The committee agreed on the importance of focusing its deliberations on issues that reflected geographic variation and Medicare payment policy. Specifically, the committee sought empirical evidence of geographic differences in access to appropriate levels of care for Medicare beneficiaries, quality of care provided to beneficiaries, and provider supply and distribution. 1 A second IOM study was commissioned by HHS based on language from Section 1159 of the House bill. That study addresses variation in health care spending, utilization, and quality across the country for individuals with Medicare, Medicaid, private insurance, or no insurance. Specifically, the IOM committee is examining how variation may or may not be related to factors such as (1) the cost of care, the supply of care, quality of care, and health outcomes; (2) diversity within patient populations, patients' current state of health, access to care, insurance coverage, and patients' preferences for their care; (3) market characteristics such as hospital competition, supply of services, public health spending, and the malpractice environment; (4) physicians' decisions on what care to give and the availability of reli- able medical evidence to guide those decisions; and (5) how a geographic area is defined. To address unnecessary variation in Medicare spending, the IOM will recommend changes to specific Medicare payment systems that would promote high-value care. To this end, the IOM will consider alternative health care delivery and payment mechanisms, including a value index based on measures of quality and cost that payers could use to promote high-value services. The study was initiated in December 2009 and the report will be released in March 2013.

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INTRODUCTION AND OVERVIEW 15 BOX 1-1 Statement of Task An ad hoc committee will conduct a comprehensive empirical study on the accuracy of the geographic adjustment factors established under Sections 1848(e) and 1886(d)(3)(E) of Title XVIII of the Social Security Act and used to ensure that Medicare payment fees and rates reflect differences in input costs across geographic areas. Specifically, the committee will E valuate the accuracy of the adjustment factors. Evaluate the methodology used to determine the adjustment factors. Evaluate the measures used for the adjustment factors for timeliness and frequency of revisions, for sources of data and the degree to which such data are representative of costs, and for operational costs of providers who participate in Medicare. Within the context of the U.S. health care marketplace, the committee will also evaluate and consider T he effect of the adjustment factors on the level and distribution of the health care workforce and resources, including o Recruitment and retention taking into account mobility between metropolitan and nonmetropolitan areas; o Ability of hospitals and other facilities to maintain an adequate and skilled work- force; and o Patient access to providers and needed medical technologies; The effect of adjustment factors on population health and quality of care; and The effect of the adjustment factors on the ability of providers to furnish efficient, high-value care. A first report will address the issues surrounding the adjustment factors themselves, and then a second report that evaluates the possible effects of the adjustment factors will follow. The reports, containing findings and recommendations, will be submitted to the Secretary of HHS and the Congress. Payment policies and programs to improve access through changes in workforce supply and distribution were also assessed. The evidence review is presented in Chapter 3, "Evidence of Geographic Variation in Access, Quality, and Workforce Distribution," and Chapter 4, "Programs and Policies to Improve Access and Quality of Care for Beneficiaries." Chapter 5 presents some additional policy considerations discussed by the committee throughout its deliberations, and Chapter 6 presents the committee's recommendations. Defining Terms The committee agreed that the Phase II report should be framed around a conceptual model for reviewing evidence based on recognized and standard definitions of some very broad terms, such as access, quality, workforce, primary care, and shortage areas. As presented in Box 1-3,

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16 GEOGRAPHIC ADJUSTMENT IN MEDICARE PAYMENT BOX 1-2 Principles from the Phase I Report 1.Evidence for adjustment. The continued use of geographic adjustment factors in Medicare payment is warranted to reflect geographic variations in input prices. 2.Accuracy. Geographic adjustment for input price differences is intended to reflect the input prices faced by providers, not the costs incurred by providers. 3.Local labor markets. Geographic adjustment should reflect area-wide input prices for labor faced by all health care 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. 4.Consistent criteria. 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. 5.Consistent rationale. Changes in the current system of geographic adjustment should be based on a clear and consistent rationale. 6.Transparency. The geographic adjustment process should provide sufficient information to allow transparency and empirical review of the data and methods used to make the adjustments. 7.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. SOURCE: IOM, 2011b. wherever possible, the committee adopted previous definitions from other IOM committees because they have been so widely adopted by federal agencies and the health policy commu- nity. For example, the Agency for Healthcare Research and Quality (AHRQ) defines accessible care for Medicare beneficiaries as services that are readily available and yield the most favorable outcomes (2010).2 For purposes of analyzing the payment impact on primary care, the committee used the CMS definition of specialties eligible for primary care payment bonuses. These include physi- cians in general internal medicine, family practice, pediatrics, and geriatrics as well as clinical nurse specialists, nurse practitioners, and physician assistants (when billed under a supervising physician).3 Based primarily on data availability, the committee's assessment of the supply and distribution of primary care and specialty services was focused on physicians, nurse practitio- ners, and physician assistants. Other members of the health care workforce, including dentists, pharmacists, physical therapists, technicians, and medical assistants, were not included in the evidence review even though they may bill Medicare and are considered as part of the Medi- care workforce. The committee made a distinction between "medically underserved" populations and medically underserved areas because of its focus on evidence related to Medicare beneficiaries. To describe geographic areas in which there are inadequate numbers of health professionals 2 The AHRQ definition is based on the definition of the 1993 IOM Committee on Access. 3 CMS requires that 60 percent of Medicare billings for eligible practitioners must be for primary care services such as office-based and other outpatient visits, but that requirement was not applied in these analyses.

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INTRODUCTION AND OVERVIEW 17 BOX 1-3 Definitions Used in This Report Access: "The timely use of personal health services to achieve the best possible health out- comes" (IOM, 1993). Health Professional Shortage Area (HPSA): An administrative designation by the Health Re- sources and Services Administration that identifies areas with a low or insufficient primary care, dental, or mental health workforce (HRSA, 2012). Primary Care: "The provision of integrated, accessible health care services by clinicians who are accountable for addressing a large majority of personal health care needs, developing a sustained partnership with patients, and practicing in the context of family and community" (IOM, 1996). Quality: "The degree to which health services for individuals and populations increase the likelihood of desired health outcomes and are consistent with current professional knowl- edge" (IOM, 1990); and the six aims of quality improvement are to provide care that is "safe, effective, patient centered, timely, efficient, and equitable" (IOM, 2001). Workforce: Broadly speaking, the health care workforce includes all health professionals and other workers who contribute to the delivery of care and indicate they work in the health care industry (Baker Institute, 2012). The Medicare workforce includes physicians, nurses, and other health professionals who can bill Medicare for services, and the workers who sup- port them (e.g., receptionists, clerks, nursing assistants). This report focuses primarily on physicians, nurses, physician assistants, and others who are eligible for bonus payments to practice in HPSAs. SOURCES: Baker Institute, 2012; HRSA, 2012; IOM, 1990, 1993, 1996, 2001. to meet local needs, the committee used the definition of Health Professional Shortage Areas (HPSAs) adapted by CMS for purposes of implementing the primary care bonus payment pro- gram (CMS, 2012a). The primary care bonus payments became effective January 2011, and CMS requires that primary care services account for at least 60 percent of the practitioner's Part B allowed charges (CMS, 2012b). In contrast, the geographically based HPSA bonus payments are made automati- cally to practitioners who furnish services to Medicare beneficiaries within eligible ZIP codes (CMS, 2012b). Generally speaking, however, HPSAs are geographic areas, or populations within geographic areas, that lack sufficient practitioners to meet the health care needs of the area or population. The designations are used to identify areas of greater need so resources can be better directed to those areas (CMS, 2012b). The committee chose to focus on the need for primary care as the foundation of the health system's continuum of care for beneficiaries (IOM, 1996), including those who require care coordination from multiple specialists because of multiple chronic conditions and those who live in medically underserved areas where there are shortages of health professionals.

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18 GEOGRAPHIC ADJUSTMENT IN MEDICARE PAYMENT Addressing the Committee's Charge After defining basic terms, the committee discussed the nature and extent of the relation- ship between Medicare payment policy and the nation's ability to ensure a sufficient workforce to provide access to care that meets the health care needs of Medicare beneficiaries. As will be discussed in Chapter 3, the health care workforce is unevenly distributed across the country, as are the Medicare beneficiaries themselves.4 The committee viewed its charge for Phase II of the study as having two components. The first component was to identify the payment impact of the recommendations made in the first report and to better understand how access may vary across geographic areas, particularly metropolitan and nonmetropolitan areas. The second component was to identify variations in health care supply and other access problems (across geographic areas or specific populations) and consider the evidence for whether and how payment policy can affect these problems. Defining the relationship between payment policy and workforce distribution is difficult, given the lack of empirical evidence linking payment to the supply of practitioners and to access and utilization of care by beneficiaries. Payment systems may affect access to care in numerous ways, some intended and some not. The Phase I report focused on geographic adjustments but acknowledged that there are other aspects of payments that might also have geographic consequences even though they are not, strictly speaking, geographic in nature. In addition, many nonpayment policies and programs have been created to address access through other means than payment incentives. In Phase I, the committee realized early in its deliberations that health care labor markets are a critical element of geographic factors affecting the costs of delivery of health care services. In Phase II, the committee also quickly appreciated the role of the health care workforce in patient access to high-quality health care services. While the health care delivery system com- prises a wide range of institutional and noninstitutional providers, all rely on the presence of a well-trained workforce to deliver the services that are both needed and timely. Thus, this report emphasizes the composition and geographic distribution of physicians, nurse practitioners, physician assistants, and other health care workers as the key factor in determining whether acceptable access is realized in different parts of the country. Throughout its deliberations, the committee discussed several related questions in different contexts. These questions provide the foundation for the report and the conceptual framework in the next section. First, to what extent is the health care workforce distributed appropriately across different types of metropolitan and nonmetropolitan areas to maintain beneficiaries' access to appropriate levels of care? Second, how do Medicare's payment policies either help or hinder appropriate workforce distribution and access to needed health care service? Third, what policies are in place to encourage a more appropriate distribution of workforce resources, and how effective are they? Finally, what additional policies could either augment or replace existing policies to improve access to appropriate levels of health care services? 4 Medicare beneficiaries make up 15 percent of the population nationwide. In six states (Mississippi, Montana, North Dakota, South Dakota, Vermont, and Wyoming) up to 60 percent of Medicare beneficiaries live in rural areas (KFF, 2010).

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INTRODUCTION AND OVERVIEW 19 Conceptual Framework More than half of Medicare beneficiaries have one or more chronic conditions, such as diabetes, hypertension, or kidney disease, and they often receive care from multiple clinicians (Schneider et al., 2009). Of the 1 million practitioners eligible to bill the Medicare program for services delivered to beneficiaries, half are physicians. This half accounts for 90 percent of fee-for-service billing. The other half of the practitioners are nurse practitioners, physical thera- pists, podiatrists, clinical psychologists, and other professionals, who account for 10 percent of Medicare billing (MedPAC, 2011).5 There is a growing body of evidence that shows improved outcomes for beneficiaries when their practitioners coordinate care and function in collaborative teams (e.g., Naylor et al., 2011), and a previous IOM committee described care coordination as "foundational" to quality improvement (IOM, 2011b). There are many perspectives on what constitutes acceptable access to high-quality health care services. According to one definition, "health care quality is getting the right care to the right patient at the right time--every time" (Clancy, 2009). According to another definition, quality of care means being consistently safe, timely, effective, efficient, equitable, and patient centered (IOM, 2001). In theory, if these aims are achieved, access to care will be achieved that is both effective and efficient. In practice, there are many influences on access that reflect local market and delivery system characteristics and that show a significant degree of geographic variation. The committee therefore decided to focus its attention on the factors related to Medicare's hospital and physician payment systems that may influence geographic differences in beneficiary access, and to discuss the implications of workforce distribution and mix for access to appropriate levels of care. However, the committee recognizes that geographic adjustment, while important, is a relatively small part of the Medicare payment system, and beneficiary well-being is also affected by the multipayer environment in which care is provided. The components of the larger envi- ronment and policy context for the study are reflected in Table 1-1. Because geographic adjustment is part of a multipayer and heterogeneous delivery system environment, the committee's report is not limited to Medicare payment policies; it also consid- ers the important role of other federal agencies and private organizations in training, recruiting, and retaining qualified practitioners across the country to provide quality care for Medicare beneficiaries. RESULTS OF IMPACT ANALYSES FROM PHASE I RECOMMENDATIONS The impact analyses were designed to determine the impact of the proposed changes in the hospital wage index and geographic practice cost indexes, and the direction and extent of their effects on provider payments. As will be described in Chapter 2, the committee found that the aggregated effects of its Phase I recommendations were generally small for the large majority of hospital and physician services. In aggregate, the payment simulations showed that 88 percent of Medicare discharges from hospitals and 96 percent of physician payments differed less than 5 percent in either direction (increase or decrease). However, the committee recognizes that percentages that may seem small net real differences in payments for clinical services and hospital margins. At the end of Chapter 2, the committee provides examples of 5 Because claims data analyzed by Medicare Payment Advisory Commission (MedPAC) typically reflect physician billing, these statistics may underestimate the amount of direct contact other health professionals have with patients.

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20 GEOGRAPHIC ADJUSTMENT IN MEDICARE PAYMENT TABLE 1-1 Policy Context for Evidence Review Cross-Cutting Issues: Equity and Value Types of Care Components of Chronic Condition Quality Care Primary Care Specialty Care Management Effectiveness Safety Timeliness Patient centeredness/ family centeredness Access Efficiency Foundational Care coordination Health systems infrastructure capabilities SOURCE: Adapted from IOM, 2011b. providers in different geographic areas who would experience a larger impact if the Phase I recommendations were implemented. In approaching this report, the committee sought to identify vulnerable geographic areas, such as HPSAs, that might experience a disproportionate impact if the Phase I recommendations were implemented. After reviewing the findings from each component of the impact analyses, the committee discussed whether other existing policies could mitigate potential adverse effects of payment reductions. To the extent possible, the choice of policies was based on the commit- tee's review of the evidence of effectiveness of various programs described in Chapter 4. The committee also recognized that some policies and programs have not been fully implemented or evaluated, and members agreed to consider some additional options where evidence was not current or otherwise incomplete. Particularly because the committee's Phase I recommendations about improving payment accuracy appeared to place some providers in shortage areas at an added disadvantage, the committee included analysis of the potential impact of its recommendations on high-risk and vulnerable populations and of other public programs designed to address shortages, as part of its charge. While that analysis was not explicitly mentioned in the statement of task, the com- mittee viewed it as a necessary part of its assessment of the impact of its Phase I recommenda- tions. The committee thus sought to develop recommendations to help strengthen access and improve efficiency, particularly in vulnerable areas. REFERENCES Baker Institute Policy Report. 2012. Health reform and the health care workforce. Houston, TX: Rice Uni- versity, James A. Baker III Institute for Public Policy. http://bakerinstitute.org/publications/HPF-pub- PolicyReport51-Web.pdf (accessed March 5, 2012). Clancy, C. 2009. What is health care quality and who decides? Statement of Carolyn Clancy before the Subcommittee on Health Care, Committee on Finance, U.S. Senate, March 18, 2009. http://www. ahrq.gov/news/test031809.htm (accessed February 15, 2012).

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INTRODUCTION AND OVERVIEW 21 CMS (Centers for Medicare & Medicaid Services) Office of the Actuary. 2010. National health expenditure projections 2010-2020. Forecast summary and selected tables. https://www.cms.gov/NationalHealth ExpendData/downloads/proj2010.pdf (accessed January 27, 2012). CMS. 2012a. Overview of HPSA/PSA (physician bonuses). https://www.cms.gov/hpsapsaphysicianbonuses/ (accessed January 27, 2012). CMS. 2012b. Health Professional Shortage Area (HPSA), Physician Bonus, HPSA Surgical Incentive Payment, and Primary Care Incentive Payment Programs. http://www.cms.gov/Outreach-and-Education/Medicare- Learning-Network-MLN/MLNProducts/downloads/HPSAfctsht.pdf. HRSA (Health Resources and Services Administration). 2012. Shortage designation: Health Professional Shortage Areas and Medically Underserved Areas/Populations. http://bhpr.hrsa.gov/shortage (accessed March 15, 2012). IOM (Institute of Medicine). 1990. Medicare: A strategy for quality assurance. Vol. 1. Washington, DC: National Academy Press. IOM. 1993. Access to health care in America. Washington, DC: National Academy Press. IOM. 1996. Primary care: America's health in a new era. Washington, DC: National Academy Press. IOM. 2001. Crossing the quality chasm: A new health system for the 21st century. Washington, DC: National Academy Press. IOM. 2011a. Geographic adjustment in Medicare payment phase I: Improving accuracy. Washington, DC: The National Academies Press. IOM. 2011b. Future directions for the healthcare quality and disparities reports. Washington, DC: The National Academies Press. KFF (Kaiser Family Foundation). 2010. Medicare chartbook, 4th ed. http://www.kff.org/upload/8103.pdf (accessed July 3, 2012). KFF. 2011. Total number of Medicare beneficiaries, 2011. http://www.statehealthfacts.org/comparetable. jsp?ind=290&cat=6 (accessed March 12, 2012). MedPAC (Medicare Payment Advisory Commission). 2011. Assessing payment adequacy: Physician and other health professional services. Presentation prepared by Cristina Boccuti and Kevin Hayes for January 13, 2011, MedPAC meeting. Naylor, M. D., L. H. Aiken, E. T. Kurtzman, D. Olds, and K. B. Hirschman. 2011. The importance of tran- sitional care in achieving health reform. Health Affairs 30(4):746-754. Schneider, K. M., B. E. O'Donnell, and D. Dean. 2009. Prevalence of multiple chronic conditions in the United States Medicare population. Health and Quality of Life Outcomes 8:82.

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