Analysis: Senate Budget Bill Would Increase Medicare Red Tape

Published January 1, 2006

New reimbursement reporting and compliance rules for physicians participating in Medicare went into effect on January 1 as part of the budget reconciliation bill that passed the House on December 19. At press time, the Senate was expected to pass the bill before adjourning for the holidays.

‘Quality’ Reporting Proposed

As outlined in Section 6110 of the Senate Deficit Reduction Omnibus Reconciliation Act of 2005, the new rules create a “values-based purchasing” provision in the Medicare program. That provision ties Medicare physician payments, as well as payments for other medical professionals, to new “quality” reporting and compliance requirements, reducing a doctor’s payment by as much as 2 percent for certain services if the doctor or other professional fails to report “quality-related” data.

Also included under the “values-based” purchasing provision are hospital inpatient services and the services of home health agencies and skilled nursing facilities.

The proposed reduction in payments to noncompliant physicians and providers (1 percent in the first year and 2 percent thereafter) will establish a funding pool to be redistributed the following year to physicians and other medical providers that do comply. The Congressional Budget Office (CBO) estimates the provision will reduce total Medicare spending by $4.5 billion over five years between 2006 and 2010.

Little Evidence for Policy

The professional literature on values-based purchasing shows limited evidence of value in this approach.

A recent article, “Early Experience with Pay for Performance from Concept to Practice,” by Harvard University’s Meredith B. Rosenthal and colleagues, in the October 12, 2005 Journal of the American Medical Association, attempted to fill the void of published research on this physician payment strategy. The accompanying JAMA editorial (“Pay for Performance Research: How to Learn What Clinicians and Policy Makers Need to Know,” by R. Adams Dudley, M.D.) rightly noted there have been “only nine randomized controlled trials of Pay for Performance … reported in the literature.” A review by the Agency for Healthcare Research and Quality (AHRQ) cited in the Rosenthal study concluded “little unequivocal data” supported this approach.

Of particular interest in Rosenthal’s study is the observation that a group of Pacific Northwest physicians who were not operating under a pay for performance bonus system scored higher than the California physicians who were. Hence, financial bonuses are likely a superfluous source of motivation when compared with other factors motivating typical physicians treating patients.

These other motivators include the desire to help another human being who is suffering, pride in one’s work, use of one’s skills to meet the challenge of the individual medical case, and the desire to maintain a sterling reputation in one’s community. And if these are not strong enough motivators, medical malpractice attorneys are looking over doctors’ shoulders as they treat their patients.

Would Undermine Quality

In the literature relating to the Medicare “pay for performance” scheme (see, for example, “Pay for Performance or Compliance? A Second Opinion on Medicare Reimbursement,” Heritage Foundation Backgrounder No. 1882, October 5, 2005), study after study suggests there are various problems with this approach.

These include the lack of evidence for the usefulness of government-imposed guidelines, overemphasis on process in the payment system, the subversion of physicians’ professional judgment in individual patient care, the undermining of personalized health care, inhibition of medical innovation, the threat of unproductive “gaming” in the payment system, and a weakening of the traditional doctor-patient relationship.

Makes Radical Changes

The new rules establish, in effect, government guidelines for the practice of medicine and tie Medicare payments to physician compliance with those guidelines. That constitutes a radical break from the original Medicare policy that prohibited federal officials from interfering in the practice of medicine.

The new system is pregnant with perverse incentives. Physicians will have every incentive to enroll in “obedience school” and carefully tend to the bureaucracy’s paperwork and government guidelines to secure higher reimbursement in a tight fiscal environment, which will soon get tighter as the baby boom generation starts to retire.

By diverting the focus of doctors and other medical professionals from appropriate, patient-centered medical care, the Medicare “values-based purchasing” provision will likely create new incentives for physicians and other medical professionals to game the system in unproductive ways. While doctors are fulfilling their reporting requirements, giving the government the data the government wants, real quality could decline even though the measured indicators look good.

Free Market Approach Needed

The new rules will not do what they are intended to achieve. The flawed physician payment system is driven by outdated administrative formulas. It needs real reform, meaning changes that reflect the real market conditions of supply and demand for medical services. In the provision of services, there is no greater mechanism than a free market in rewarding quality and providing benefits.

In a new Medicare system, one driven by consumer choice and competition, patients themselves could pick a health plan that imposed “quality reporting” requirements on doctors. But that would be a matter of consumer choice, not government edict. In imposing the new rules, Congress has made the already irrational Medicare physician payment system even worse.

Richard Dolinar, M.D. ([email protected]) is a senior fellow with The Heartland Institute and a consultant to the pharmaceutical industry.

For more information …

For more information, see Richard Dolinar, M.D. and S. Luke Leininger, “Pay for Performance or Compliance? A Second Opinion on Medicare Reimbursement,” Heritage Foundation Backgrounder No. 1882, October 5, 2005, available online at