Changing the Way Physicians are Paid: Report of the National Commission on Physician Payment Reform

(Health Affairs Blog, March 4, 2013)

By Bill Frist and Steven Schroeder

The loud cries warning that rising health care costs are going to destroy the nation’s economy have been shouted so often that the will to move firmly in any one direction has almost halted. We’ve all heard them: health care costs are unsustainable, excessive spending is fueling our nation’s debt, and despite high costs, health outcomes are behind much of the world and aren’t improving.

The way doctors are paid is one of the most significant drivers of escalating health care costs. The National Commission on Physician Payment Reform, which we chair, was formed by the Society of General Internal Medicine to provide the public and private sector with recommendations for transforming the way we pay doctors in order to rein in spending and improve quality.

On Monday, after a year of intensive study, the 14-member Commission issued a blueprint for exactly how to move the nation toward a physician payment system that will yield better results for payers and patients.

Addressing Physician Payment

Numerous proposals have been put on the table to stop the well-documented rise in health care expenditures. Recent plans have included raising the eligibility age for Medicare, turning to high deductible plans, reducing physician reimbursement, and limiting services available to those with coverage. Such proposals have escalated as calls to reduce the nation’s overall debt have dominated lawmakers’ agendas and the feared sequestration has gone into effect with cuts that directly impact the medical community.

But many of these ideas are short-sighted, making cuts that will yield savings now, but not keep costs from continuing their upward spiral or improve patient care. In fact, many of them could harm patients. Any effort to overhaul the current system must start by addressing the core structural problem: our physician payment system and its misaligned incentives.

The Commission calls for drastic changes to the current fee-for-service payment and urges a rapid transition to new payment models, shifting the US to a blended payment system that rewards value over volume.

Accelerating Adoption Of New Payment Models

Although the effectiveness of mechanisms such as bundled payments, financial risk sharing, pay for performance, and other experiments in reducing costs and improving quality are not yet proven, the Commission believes that the nation must move swiftly to adopt these promising models.

The Commissioners judged that five years would be an appropriate length of time to test these new models and incorporate them into increasing numbers of practices, with the goal of broad adoption by the end of the decade. A five-year transition period would give physicians and health care organizations adequate time to make needed changes to their models of care, such as install electronic medical records or change billing systems.

It would also enable CMS time to further evaluate the experiments currently underway to test accountable care organizations, patient-centered medical homes, and other alternative delivery and payment mechanisms. Yet, the Commission believes that the nation cannot wait until definitive results come in to activate these new payment and delivery models.

During this transition period, we should start implementing new payments models for the care of people with multiple chronic conditions, including behavioral health disorders. Use of fixed payments should also begin now for in-hospital procedures, such as heart attacks and joint replacements, and their follow-up. These are areas where significant potential exists now for cost savings and better quality.

Fixing Fee-For-Service

The Commission is fully aware that ACOs and bundled payments are not a panacea; many of these models still pay individual physicians on a fee-for-service basis. What we don’t want is old wine in new bottles — we need to ensure that the current skewed fee-for-service incentives aren’t incorporated into these new models.

That’s why the Commission makes a number of recommendations for immediate changes to the current fee-for-service system that will yield cost savings and improve patient care, including the following:

Include a component of quality or outcome-based performance reimbursement in all fee-for-service contracts.  UnitedHealthcare reports that the 250,000 physicians participating in its Premium Designation program — whose compensation depends in part on their meeting quality measures — have significantly lower complication rates for stent placement procedures and knee arthroscopic surgery, and have 14 percent lower costs, than specialists not in the program.  WellPoint has obtained similar results in its pilot programs.

Increase reimbursement for evaluation and management (E&M) services. The current fee-for-service system places a higher value on high-technology care than preventive measures.

For both Medicare and private insurers, annual updates should be increased for evaluation and management codes, which are currently undervalued. Updates for procedural diagnosis codes, which are generally overvalued and thus create incentives for overuse, should be frozen for a period of three years. During this time period, efforts should continue to improve the accuracy of relative values, which may result in some increases as well as some decreases in payments for specific services.

The undervalued evaluation and management services at issue are often those that provide preventive health and wellness care, address new or undiagnosed problems, and manage chronic illnesses. The current skewed physician payment system causes a number of problems, such as creating a disincentive to spend time with patients with complex chronic conditions; leading physicians to offer care for highly reimbursed procedures rather than lower-reimbursed cognitive care; and neglecting illness prevention and disease management. High reimbursement for procedures also subtly nudges specialists such as gastroenterologists and pulmonologists away from E&M services and toward doing procedures.

Moreover, physicians doing diagnostic or therapeutic procedures earn considerably more than physicians who mainly evaluate and manage patients — even those with multiple chronic conditions.  In 2011, a radiologist, on average, earned $315,000 a year, while a family doctor on average earned $158,000. 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.

While the discussion about reimbursement has generally focused on services performed by primary care physicians, the real issue is not one of relative payment of specialists versus primary care physicians but, rather, of payment for E&M services as contrasted with procedural services.  These include E&M services provided by, among others, cardiologists, endocrinologists, hematologists, infectious disease specialists, neurologists, psychiatrists, and rheumatologists.

Eliminate higher payment for facility-based services that can be performed in a lower-cost setting.  Recently, there has been a trend to reimburse medical services performed in outpatient facilities at a lower rate than those same services when provided in hospitals. For example, Medicare pays $450 for an echocardiogram done in a hospital and only $180 for the same procedure in a physician’s office. It makes no sense to pay extra for an in-hospital procedure that can be done more cheaply in an ambulatory facility.

Make payment mechanisms for physicians transparent so physicians are reimbursed roughly equally for equivalent services, regardless of market power. In recent years, the pace of hospital-system consolidation has accelerated. Because of their increased market share, large health care systems can negotiate higher reimbursement for services provided by their physicians than can physicians working independently or in smaller practices.  Large hospital systems are buying up independent practices, threatening the viability of independent physicians and raising the cost of health care.

This has led to a situation where private payers often pay different rates for the same physician services, depending on the market power of the physician group. Payments by private payers for medical services should be transparent to the public.

Abolish Medicare’s Sustainable Growth Rate (SGR). Simply stated, the SGR has not worked in practice and shows no prospect of ever working. The practice of setting expenditure targets one year and ignoring the consequences of exceeding them the next year makes no sense.  Moreover, setting a spending cap without addressing the underlying issues of the volume and price of services and health outcomes is a short-term answer. Since the SGR is based on the aggregate payment for physicians’ services by Medicare, there is no incentive for individual physicians to try to hold down costs, and those who do are, in effect, penalized.  It is the Tragedy of the Commons.

There is wide agreement that the SGR should be eliminated — a decision made easier by the fact that the Congressional Budget Office recently reduced the cost of doing so to $138 billion.  However, there is still little agreement on how to pay for it. We contend that the funds can be found entirely by reducing overutilization of medical services within Medicare.

A Time To Act

The chorus of voices that shouted loudly and repeatedly about the need to rein in health care costs should be commended. But those same voices should now unite around a solution. From where we sit it starts with moving away from stand-alone fee-for-service payment. The Commission’s recommendations put us on that path.

Bill Frist, a physician, is a former Republican senator from Tennessee and Senate majority leader, and Steven Schroeder is a professor of health and health care in the department of medicine at the University of California, San Francisco. The two men co-chair the National Commission on Physician Payment Reform, which has issued a report providing recommendations aimed at controlling health spending by changing the way doctors are paid.

This article was originally featured in the Health Affairs blog