From the California Med.Assoc News Letter  6/13/2011

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IOM study finds inequities in Medicare's geographic payment formula

The data that Medicare relies on to adjust for geographic variation in costs to pay physicians and hospitals is flawed and leads to inaccurate payments, according to a report recently released by the Institute of Medicine (IOM). This represents a huge victory for the California Medical Association (CMA) and will go a long way toward ensuring that California physicians are reimbursed accurately for the differences in geographic practice costs.

"San Francisco and Los Angeles are two of the most costly cities in which to practice medicine," says CMA President James G. Hinsdale, M.D. "Recognizing those cost differences and adjusting payments accordingly will allow adequate care for seniors in many parts of California. The California Medical Association applauds the time and effort that IOM put into this careful analysis."

CMA has for years been urging Congress to reform the flawed and outdated geographic payment regions. CMA testified before the IOM on this issue last fall. The costs of running a physician's practice differs substantially across the country and failing to take that into account in Medicare payments is a big mistake that harms senior citizens' access to care, CMA said in its testimony.

Geographic adjustments to Medicare payments are intended to accurately and equitably cover regional variations in wages, rents, and other costs incurred by physicians and hospitals. The study found, however, that almost 40 percent of hospitals have been granted exceptions to how their adjustments are calculated, strongly suggesting that the mechanisms underlying the adjustments are inadequate.

The IOM committee concluded that the rationale for fine-tuning Medicare payments based on geographic variations in expenses is sound and should be continued. However, the report urges fundamental changes to the data sources and methods used to calculate the adjustments and increase the accuracy of the payments.

One such change recommended by the committee would be to place physicians and hospitals into the same Metropolitan Statistical Areas (MSAs), which reflect regional costs more accurately than the outdated payment localities that are currently used to determine reimbursement. In California, for example, the physician payment localities haven't been updated in more than 12 years, leaving many recently urbanized counties inappropriately grouped into payment localities with lower-cost (mostly rural) counties.

"This recommendation represents an enormous victory for California physicians and their patients who have been advocating for CMS and Congress to update the payment regions for a decade," Hinsdale added. Under the current system, 14 recently urbanized California counties are still designated as rural and are consequently underpaid by up to 13 percent annually.

Additionally, the committee recommended that Congress standardize the labor markets and the wage and benefits indexes used to adjust Medicare payments for hospitals and physicians. Importantly, IOM also recommended that public policy goals, such as improving access to care in rural physician shortage areas, should be addressed, but not through the Medicare geographic payment formula.

Health care reform legislation passed and signed into law last year directed IOM to study regional differences in Medicare costs and spending. This report is the first of three to be issued by the committee. A supplemental report that discusses physician payment issues further will be issued this summer. A final report to be released in 2012 will present the committee's evaluation of the effects of the adjustment factors on health care quality, population health, and the distribution of the health care workforce.

CMA urges Congress and the Centers for Medicare & Medicaid Services to implement these data-driven policies as soon as possible to improve Medicare payment accuracy and access to care.

Contact: Elizabeth McNeil, (415) 882-3376 or emcneil@cmanet.org.

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