IOM concludes that geographically based value index for Medicare won't save money

July 25, 2013

Congress should not adopt a geographically based value index for Medicare because health care decisions are not made at the regional level, but rather at the physician or organizational level, an Institute of Medicine (IOM) committee concluded in a report released Wednesday.

The findings in the 178-page study called for by the Affordable Care Act, and entitled ""Variation in Health Care Spending: Target Decision Making, Not Geography,"" reiterate the committee's preliminary observations in an interim report released earlier this year: Because individual physician performance varies, an index that is based on regions is not likely to encourage more efficient behavior among providers and is unlikely to improve the overall value of care.

Using a geographic value index to adjust payment based on aggregate measures of spending and quality would unfairly punish low-cost providers in high-spending regions; unfairly reward high-cost providers in low-spending regions; and not improve care. The report is part of a study mandated by Congress in response to the 2009 fight between urban and rural states over regional spending in Medicare payments.

The IOM study was part of a negotiated deal led by the California Medical Association (CMA) during the federal health reform debate. At that time, CMA spoke against the Medicare value index as proposed, saying that the approach would reduce doctors’ pay based on performance measures beyond their control, such as local costs (rent and nurse wages) and the health status of patients.

Some members of Congress had proposed a value-index based on the Dartmouth Atlas studies, which would have rewarded physicians spending less than the national average per Medicare beneficiary and cut payments to physicians spending more than the national average. This proposal would have reduced Medicare payments to California physicians by more than 15 percent, using the Dartmouth methodology.

CMA successfully argued against those payment cuts, and Congress ordered IOM to study the issue and make recommendations.

CMA testified before IOM on several occasions, telling the committee that while the Dartmouth Atlas studies show big variations in Medicare spending region to region, they do not adequately weight for other crucial factors that account for these differences, such as costs to practice medicine in different regions and differences in patients' income levels, ethnicities and health histories.

According to the IOM report, initial observations show Medicare cost variations are not consistent for a given region, and differences are seen to exist among different hospitals within a single region or among different physicians within a group practice.

In its report, the group debunked some widely held beliefs about geographic variations in health spending. It found that the 10 local areas with the lowest Medicare spending per beneficiary — after adjusting for local wages and prices and the health of patients — were all in New York, California and Oregon. The areas included Rochester, Sacramento, Buffalo and the Bronx.

The panel found that the 10 areas with the highest Medicare spending per beneficiary were all in Florida, Texas and Louisiana. They included Miami, Houston, Baton Rouge and Fort Lauderdale. Although Medicare doesn’t currently (but they will in 2015) alter physician pay based on regional differences in spending, it does make adjustments based on differences in the costs associated with providing medical care. In areas where average office rents, staff salaries, equipment costs and other expenses are higher, Medicare pays practices higher rates for the same services. In a separate report in 2011, IOM recommended that Congress draft a new Medicare map for geographic pay adjustments to physicians that it said would reflect these practice costs more accurately.

CMA has argued that Medicare payments should be based on individual and physician group data, not general physician behavior in a region.

Contact: Elizabeth McNeil, (800) 786-4262 or emcneil@cmadocs.org.



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