Proposal Would Radically Alter Medicare Payments

Federal health officials on Wednesday unveiled a controversial proposal to recalculate the rates at which physicians are paid under Medicare--a plan that could profoundly alter how and where many doctors practice and the size of their incomes.

The system, which seeks to base Medicare payments on the true costs of physicians’ services rather than simply on what they charge, would move to reduce a perceived bias in favor of high-tech procedures over such services as disease prevention and health promotion.

Some surgeons stand to lose if the system is adopted; family practitioners stand to gain. Supporters hope the new approach might discourage unnecessary operations while encouraging doctors to spend more time with their patients.

The proposal was drawn up by a team of Harvard University economists under contract to the federal agency that administers Medicare. It would have to be approved by Congress before it could be applied to Medicare, which accounts for about 20% of all physician income.

But private insurers, equally interested in controlling costs, are also considering adopting parts or all of the system. If they do, the proposed approach could eventually affect most of the nation’s 500,000 practicing physicians.

For that reason, the 3,000-page study released Wednesday is expected to set off a nationwide debate involving the federal government, insurance companies, consumer groups and doctors, perhaps pitting one specialist against another.

Physicians reacted circumspectly Wednesday to the long-anticipated report.

The American Medical Assn. expressed concern about the study’s complex methodology and the validity of its statistics. The association intends to send the report to physician groups nationwide for scrutiny over the next three months.

“If it is then found to be appropriate, for the first time we will have a legitimate foundation upon which to judge the appropriateness of a physician’s fees,” said Dr. James Todd, a surgeon and executive vice president of the AMA.

In announcing the report, a spokesman for the Reagan Administration was cautious in his assessment of the proposal’s cost-control potential.

Dr. William L. Roper, administrator of the Health Care Financing Administration, which paid for the study, called it a pioneering work. But he quickly cast doubt on its ability to cut government spending on Medicare, and said it was “not the magic bullet.”

‘Competitive Market’

“I am skeptical about the notion of an administered price payment system for doctors,” Roper said at a press conference. “I’m in favor of . . . using a competitive market instead of getting a bunch of smart people together and figuring out what the prices ought to be.”

The proposal, developed over the last 30 months, is part of a broader, congressionally mandated effort to control the skyrocketing costs of the $83-billion-a-year Medicare health insurance program for the elderly and disabled.

Medicare outlays have increased by 15.5% annually since 1975. They now amount to about 8% of the federal budget. Controlling Medicare, experts say, is central to controlling overall health care expenditures, now 11.2% of the gross national product.

For that reason, Congress appointed a special commission in 1986 to recommend reforms in the way Medicare pays physicians. One of the commission’s first acts was to endorse the idea of a fee schedule, one model for which was released Wednesday.

Most sharply affected would be family practitioners, ophthalmologists and thoracic surgeons. Family practitioners could receive 60% to 70% more revenue from Medicare; ophthalmologists and thoracic and cardiovascular surgeons could make 40% to 50% less.

Rates Would Change

Reimbursement for so-called evaluation and management services, such as office and hospital visits, would increase under the new system. Rates for surgery and other so-called invasive procedures, such as colonoscopy, would drop.

Such shifts in incentives could alter some practice patterns, encouraging physicians to reduce invasive procedures and to increase evaluation and management. The net result might be more time spent with each patient in counseling and disease prevention.

“Even though physicians’ incomes might not be reduced, such a change in practice pattern could reduce rates of surgery, invasive diagnostic tests, and hospital use,” the Harvard researchers wrote in articles published today in the New England Journal of Medicine. “One possible outcome might be a reduction in the overall cost of health care.”

Currently, reimbursement under Medicare relies on so-called “customary, prevailing and reasonable” rates--rates based on what the physician has charged previously for each service and what other physicians in the community charge.

That system has allowed deep differentials to develop among rates for services and among regions and specialties. Many of those inequities are not justified by differences in the costs of providing those services, the Harvard study found.

Get Higher Rates

For example, invasive procedures are currently compensated at more than twice the rate of evaluation and management services--even when the latter involve comparable or greater investments of time, training, equipment and other resources, the study found.

Similarly, imaging and laboratory services pay better than evaluation and management. Radiological services, such as X-rays, pay better than office visits. Physicians receive more for evaluation and management in hospitals than for the same services in their offices.

Such distortions are not simply inequitable, discriminating against some specialties and discouraging physicians from entering those fields, some experts say, but also create incentives for inappropriate treatment and contribute to escalation of health care costs.

“You can be reimbursed a reasonable sum of money for performing a technical procedure to cure a problem that might have been prevented had people had adequate counseling,” said Dr. Joseph F. Boyle, executive vice president of the American Society of Internal Medicine.

Try to Measure Resources

To rectify those distortions, the Harvard team attempted to measure the resources required for thousands of different medical services--the total work performed, extent of training, and practice costs, such as malpractice premiums, personnel and equipment.

Total work included time, mental effort, judgment, technical skill, physical effort and psychological stress. The researchers began with one procedure, rated 100, then asked several thousand physicians to rate other services on the same scale.

Costs included such things as liability insurance premiums, which are much higher for obstetricians and thoracic surgeons than for internists and family practitioners. Costs of equipment and staffing were also taken into account.

The resulting scale, called a relative value scale, is a listing of numerical ratings, not dollar values for services. If the scale is adopted by Medicare or other third-party payers, they would have to develop a formula for converting those ratings into fees.

William Hsiao, the economist who headed the study, has acknowledged that the system has limitations. For example, it does not take into account the severity of an individual patient’s condition or variations in the quality of different doctors’ work.

Dr. W. Gerald Austen, a professor of surgery at Harvard, said the American College of Surgeons sees a related shortcoming in the study: “It ignores the value of a physician’s service to the patient as a basis for establishing the relative values of services.”

Todd of the AMA predicted that physician support for the proposal will depend upon what they conclude about the validity of its methodology. Physicians will “respond in a responsible fashion” if they believe the government will not abuse the proposal, he also said.

Hearings to Be Held

The plan now goes to the congressionally appointed Physician Payment Review Commission, which will hold public hearings on it throughout the country over the next six months. The commission will then prepare legislation for introduction in Congress.

Dr. Philip Lee, chairman of the commission, has described the development of a fee schedule as a way for physicians to regain professional autonomy that many doctors say has been jeopardized by increasing public and private attempts to control costs.

“Congress absolutely intends to change the present system,” Lee said this month at a meeting of the American Group Practice Assn. in San Diego. “It’s very clear that if the fee-for-service system is to survive in this country that a fee schedule is essential.”

Janny Scott reported from Los Angeles and Laurie Duncan from Washington.