AAOS Bulletin - April, 2005

MedPAC recommendations signal changes

Issues include payment policies, specialty hospitals, imaging services, direct access

By Mary Ann Porucznik

The report to Congress by the Medicare Payment Advisory Commission (MedPAC) in March included several recommendations that, if implemented, would signal a significant shift between government regulators and health care providers. From linking pay for performance and quality to extending the moratorium on specialty hospitals and enabling the Secretary of Health and Human Services (HHS) to establish standards for providers who bill Medicare for performing and interpreting diagnostic imaging studies, these recommendations mark major shifts in the health care environment for orthopaedists and their patients.


MedPAC is an independent federal body that was established as part of the Balanced Budget Act of 1997. Its function is to advise Congress on issues affecting the Medicare program such as payment policies, access to care and quality of care. The Commission’s 17 members include physicians, policy analysts, health care executives and industry representatives. Each year, MedPAC is required to make two reports to Congress, in March and in June, as well as respond to requests from Congress on various subjects.

In its March 2005 report, MedPAC noted that “it is time for the Medicare program to start to differentiate among providers when making payments.” Initially, this differentiation was limited to Medicare Advantage plans and dialysis providers. But this year, MedPAC recommended that the program be extended to hospitals, home health agencies and physicians.

As another example of differentiation among providers, MedPAC also recommended that providers who perform imaging studies and the physicians who interpret them meet quality standards. Noting that the Medicare program is at a “crossroads,” MedPAC’s recommendations are designed to move it toward “value-based purchasing” as well as to send “clearer signals to providers about what the program wants to pay for.”

In earlier reports, MedPAC called for an extension of the moratorium on construction of specialty hospitals for an additional 18 months, until Jan. 1, 2007, and recommended retaining the current requirement for physician referral to physical therapy services.

Physician payment policies

MedPAC found that although access to care, physician supply and the relationship between private and Medicaid fees to physicians remained stable, the volume of physician services to Medicare beneficiaries continued to increase. Medicare is the largest single payer for health care services, responsible for about one fifth of the $1.44 trillion spent on U.S. personal health care in 2003. Total Medicare spending that year was $281 billion, or about $7,000 per beneficiary.

By a unanimous vote of those present (16 of the 17 commissioners), MedPAC recommended that Congress update payments for physician services by the projected change in input prices less 0.8 percent in 2006. This would result in a an adjusted increase of about 2.7 percent, as opposed to the 5.2 percent reduction that would go into effect under the current sustainable growth rate (SGR) formula.

In testimony before the Subcommittee on Health of the House Ways and Means Committee, MedPAC Chairman Glenn M. Hackbarth, JD, pointed out that the SGR approach has four basic problems. “It disconnects payment from the cost of producing services…It is a flawed volume-control mechanism…It is inequitable because it treats all physicians and regions of the country alike, regardless of their individual volume-influencing behavior…It treats all volume increases the same, whether they are desirable or not.”

Rather than rely on a formula, he continued, “MedPAC recommends a different course—one that involves explicit consideration of Medicare program objectives and differentiating among physicians.”

The MedPAC report notes that the volume of physician services provided to Medicare beneficiaries has grown steadily. It found that Medicare beneficiaries living in regions with higher rates of physician and hospital health care services do not experience better quality of care, outcomes or satisfaction than beneficiaries in other regions.

This may indicate some physicians are resource-intensive, using more diagnostic services and subspecialists and doing more minor procedures that are not likely to improve health outcomes, says MedPAC. For this reason, it suggests that HHS use Medicare claims data to measure the resource use of fee-for-service physicians. Results would be shared confidentially with the physicians so that they could assess their practices against those of other doctors.

In recommending the establishment of a “quality incentive payment policy for physicians in Medicare,” MedPAC argued that “quality incentives…could spur physicians to adopt information technology that improves care” and that “condition-specific process measures…based on physician claims would add no burden to physicians.” Use of information technology, certification and continuing education are among the structural measures under consideration. Claims-based process measures on conditions such as hip fracture and other orthopaedic conditions are currently being tested. MedPAC also noted that physician performance measurements should be linked to the quality scores of the hospital and other practice settings used by the physician.

The Alliance for Specialty Medicine—a coalition of 13 specialty medical societies that includes the AAOS—also addressed the pay-for-performance issue in subsequent hearings before the House Ways and Means Committee’s Subcommittee on Health. In his statement on behalf of the Alliance, the American Urological Association’s William F. Gee, MD, emphasized that “any type of system that rewards providers by improving patient care and outcome should not be subject to budget neutrality or be used as a physician volume ‘control’…measures will need to be specialty-specific…[and] developed by the physician community.”

Imaging studies

Medicare spending for imaging services under the physician fee schedule grew by more than 60 percent, from $5.7 billion in 1999 to $9.3 billion in 2003. Noting that the per-beneficiary average annual growth rate in the use of fee schedule imaging services was nearly double the rate for all other services (10.1 percent vs. 5.2 percent), MedPAC focused specific attention on the quality and growth of these services.

MedPAC’s recommendations included:

• Setting standards for imaging providers and interpreters

• Measuring physicians’ use of imaging services

• Improving coding edits to reduce the technical component payment for multiple imaging services performed on contiguous body parts

• Strengthening the rules that restrict physician investment in imaging centers

Although surgical specialty offices were the least likely to have problems with the quality of their equipment, technical staff or other features, MedPAC noted that the use of imaging services may facilitate the diagnosis of an abnormality “(e.g., of the back and knee) that frequently never affects the health of the patient. Detection often causes patient anxiety and leads to follow-up testing and treatment” with only a slight chance of improving outcomes. “In these circumstances,” MedPAC concluded, “the costs of imaging services may outweigh the potential benefits.”

Robert H. Haralson III, MD, MBA, AAOS executive director of medical affairs, attended Congressional hearings on imaging services. “Orthopaedic surgeons are one of the medical specialty groups most affected by this issue,” he said. “Performing the images in our offices and correlating them with findings on physical examinations is crucial to the care of our patients.”

As a member organization of the Coalition for Patient-Centered Imaging (CPCI), the AAOS believes that imaging in the hands of experienced, qualified specialists is safe, appropriate, of the highest quality and critical to the emerging demand for outcomes-based disease management. The CPCI called for cost-effectiveness studies on the value of imaging versus its cost before Congress considers any policy that would discourage or restrict specialties from providing appropriate imaging services.

In addition, the AAOS and the CPCI strongly oppose any attempt to remove or limit the in-office ancillary exceptions protected by the Stark Laws.

Specialty hospitals

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 imposed an 18-month moratorium (due to expire on June 8, 2005) on construction of new physician-owned specialty hospitals. It also directed MedPAC to report to Congress on issues of cost, access and impact of specialty hospitals within the larger community, compared to community hospitals.

According to the MedPAC Report released on March 1, 2005, an analysis of Medicare cost reports and inpatient claims from 2002 (the most recent available) found that:

• Patients in physician-owned specialty hospitals have shorter lengths of stay compared to patients undergoing the same procedure in community hospitals.

• Costs for Medicare patients were similar in both specialty and community hospitals.

• Specialty hospitals tend to concentrate on particular diagnosis-related groups (DRGs) and to treat patients with less severe cases.

• Specialty hospitals tend to have a lower share of Medicaid patients than community hospitals.

• Specialty hospitals have had limited financial impact on local community hospitals.

MedPAC also reported “many of the difference in profitability across and within DRGs that create financial incentives for patient selection can be reduced by improving Medicare’s inpatient prospective payment system for acute care hospitals.” Based on its analysis, MedPAC made five recommendations to Congress, including extending the current moratorium until Jan. 1, 2007.

MedPAC noted that “the financial impact on community hospitals in the markets in which physician-owned specialty hospitals are located has been limited…community hospitals competing with specialty hospitals have demonstrated financial performance comparable to other community hospitals.”

In fact, the MedPAC report noted that in some cases, competition with specialty hospitals prompted improvements in community hospitals, getting them to pay more attention to hospital operations and physician relationships. Constructive improvements cited in the report included extending service hours, improving operating room scheduling, standardizing operating room supplies and upgrading equipment.

Despite these positives, the MedPAC report found that physician-owned specialty hospitals tended to “treat patients who are generally less severe cases (and hence expected to be relatively more profitable than the average).” It also said that they tended to have lower shares of Medicaid patients than community hospitals.

MedPAC also recommended that HHS re-examine the issue of gainsharing arrangements between physicians and hospitals. In recent months, the HHS Office of Inspector General has given approval to several gainsharing arrangements developed with specific safeguards. MedPAC noted that the prohibition on gainsharing can “undermine the incentive for hospitals and physicians to cooperate in efforts to reengineer clinical care and change physician practice patterns.” In its report on specialty hospitals, MedPAC proposed gainsharing opportunities as an alternative to starting physician-owned specialty hospitals.

In December 2004, the AAOS Board of Directors approved a position statement on specialty hospitals. While the statement supports the development of specialty hospitals, it also cautions that physicians should put the interests of patients above their own financial interests and fully disclose all ownership interests in a specialty hospital.

Direct access

Despite MedPAC’s recommendation against permitting direct access to physical therapists, Congress is currently considering such legislation. In December 2004, MedPAC reported that the current system of requiring a physician referral ensures that physical therapy services are medically appropriate and necessary, helping to control these costs within the Medicare program.

MedPAC found “several compelling reasons” to retain the requirement. For example, it found that the requirement does not impair access to service and is consistent with coverage rules for other services and with private payer strategies. And, according to the report, “Given the multiple, often chronic, medical care needs of many beneficiaries, the physician oversight requirements are a reasonable way to help beneficiaries receive medically appropriate care.”

In mid-March, however, the Medicare Patient Access to Physical Therapists Act of 2005 was introduced in both the House and Senate. The bill would amend the Social Security Act to permit a “qualified physical therapist” to evaluate and treat Medicare beneficiaries without a physician referral requirement.

The AAOS opposes such legislation and has forwarded a copy of the MedPAC report to key legislators. For information on how you can express your viewpoints on this and other legislation, visit the AAOS Washington office Web site, http://www.aaos.org/dc


• Report to the Congress: Medicare Payment Policy, MedPAC, March 2005. Available at: http://www.medpac.gov/publications/congressional_reports/Mar05_TOC.pdf

• Report to the Congress: Physician Owned Specialty Hospitals, MedPAC, March 2005. Available at: http://www.medpac.gov/publications/congressional_reports/Mar05_SpecHospitals.pdf

• Report to the Congress: Eliminating Physician Referrals to Physical Therapy, MedPAC, Dec., 2004. Available at: http://www.medpac.gov/publications/congressional_reports/Dec04_PTaccess.pdf

• House Ways and Means Committee, Subcommittee on Health, Hearing on Medicare Payments to Physicians, Feb. 10, 2005. Testimony available at: http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=376&comm=1

• House Ways and Means Committee, Subcommittee on Health, Hearing on Managing the Use of Imaging Services, March 17, 2050. Testimony available at: http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=392&comm=1

• House Ways and Means Committee, Subcommittee on Health, Hearing on Measuring Physician Quality and Efficiency of Care for Medicare Beneficiaries, March 15, 2005. Testimony available at: http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=390&comm=1

• House Ways and Means Committee, Subcommittee on Health, Hearing on Physician Owned Specialty Hospitals, March 8, 2005. Testimony available at: http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=386&comm=1

AAOS Position Statements

Principles of Medicare Reform

In Office Diagnostic Imaging Studies by Orthopaedic Surgeons

Specialty Hospitals

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