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Appendix E Exchange of Letters Between House of Representatives Quality Coalition and Committee Chair Frank Sloan 189

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190 GEOGRAPHIC ADJUSTMENT IN MEDICARE PAYMENT

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APPENDIX E 191

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192 GEOGRAPHIC ADJUSTMENT IN MEDICARE PAYMENT December 22, 2011 The Honorable Bruce Braley The Honorable Jay Inslee The Honorable Betty McCollum The Honorable Ron Kind Dear Members of the Leadership of the Quality Care Coalition (QCC): As chair of the Institute of Medicine (IOM) Committee on Geographic Adjustment Factors in Medicare Payment, I am writing to respond to your letter of November 10, 2011, and to address questions that members of the QCC posed to Mr. Bruce Steinwald, committee member, and Dr. Margo Edmunds, IOM study director, during the November 15, 2011 meeting to discuss the committee's phase 1 report. I would like to take this opportunity to clarify the committee's statement of assumptions and principles that led to these recommendations and to offer some additional clarification about the ongoing analysis of the impact of the phase 1 recommendations on stakeholders. As described in Chapter 1 of the phase 1 report, the committee's technical and methodological approach to the study was evidence-based and grounded in the recognition that its primary charge in phase 1 of the study was to improve the accuracy of the adjustment factors and the methods and measures used to determine them.1 As described in the report, principles 3, 4, and 5 emphasized improving accuracy by reflecting market prices faced by all health care employers in local markets.2 As labor is the most important input for both hospitals and physician practices, the committee devoted an entire chapter (Chapter 2) of the phase 1 report to an examination of the factors that cause labor costs faced by providers to vary geographically. This perspective led the committee to recommend a change in the payment areas for physician payments from the 89 areas currently used, to 441 areas based on metropolitan statistical areas, which are currently used for the hospital wage index. If adopted, this change would not only promote consistency in the two payment indexes, but would also anticipate market changes leading to a more integrated health care delivery system. The committee recognizes that its recommended change in physician payment areas, if implemented, could result in a significant redistribution of physician and other clinical provider payments, particularly in the 34 states that currently have only one statewide payment area. In 1 Refer to page S-3, Box 5-1, Statement of Task, in Geographic Adjustment in Medicare Payment Phase 1: Improving Accuracy, Second Edition, in press. 2 See pages-5-6.

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APPENDIX E 193 carrying out its charge, the committee is currently overseeing an analysis by RTI International of the potential impact of the payment area change, as well as other recommended changes. The committee will identify areas where payments might decline and determine whether beneficiary access or other concerns might indicate the need for policy interventions. This approach is consistent with another phase 1 principle, that policy issues should be addressed directly rather than sacrificing the accuracy of Medicare payment adjustments. The committee's emphasis on local labor markets also led to its recommendation that the hospital wage index and the practice expense GPCI should include all occupations rather than the limited number currently in use. This will help to recognize changes in the mix of skilled employees over time, such as increased employment of information technology specialists. CMS has already adopted this recommendation, which was in the proposed rule for physician payment in 2012. However, the committee did not recommend changes to the Medicare Economic Index (MEI) or weighting factors in the Practice Expense GPCI. On one hand, the committee concluded that the evidence supporting regional, as opposed to national, weights was inadequate. On the other hand, the committee could not find a basis for recommending changes to the weighting factors in the data that were available that would improve the accuracy of Medicare payments. Finally, the committee understands that the QCC is dissatisfied with our recommendations on the occupational proxies and percentage calculation pertaining to the physician work GPCI. As noted in the phase 1 report and the November 15, 2011 meeting, the committee laid out a specific process for CMS to follow to conduct analysis and modify the work adjustment based on the analytical results. Rest assured, the committee would have been glad to conduct this analysis itself if it had had the necessary time and data. Although we appreciate your concern about the willingness and ability of CMS to follow the process spelled out by the committee, we understand that CMS has already begun a reassessment of the occupational proxies, as we recommended. As you know, the committee is conducting analyses and working on recommendations that will be contained in its phase 2 report, scheduled to be released in the spring of 2012. If you have any questions about the process being followed by the committee, please contact the study director, Dr. Margo Edmunds, at (202) 334-2397 or Dr. Roger Herdman at (202) 334- 1302. Sincerely yours, Frank A. Sloan, PhD Chair, Committee on Geographic Adjustment Factors in Medicare Payment

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