Reader Dan on Medicare Rates

Questions about establishing rates for Medicare Service can be approached in at least two ways according to this article:

These payment differences raise important questions about how Medicare should pay for the same procedure offered in different settings. Should payment rates vary based on cost differences between sites of care, or should they be uniform across settings? One option is to allow the rate to vary between sites of care and to base the setting-specific rate on the costs incurred by efficient providers in that setting. This is similar to Medicare’s current payment approach.11 A second option is to pay the same amount for the same service regardless of the setting, adjusting for the mix of patients. A uniform rate could be based on the cost of providing the service in the most efficient setting. Whichever option is chosen, it is important to understand how the health status of patients treated in each setting differs.
Basing payment on underlying costs. Under the first payment approach, payment variations by setting should reflect underlying cost differences among settings, such as differences in the mix of patients or providers’ cost structure. However, there is the potential for payment variations to instead be related to the separate development of each reimbursement system. Payment variations that are unrelated to differences in underlying costs could mean that the service is more profitable in one setting than another. Varying profitability could create financial incentives to shift services between settings, which might increase costs to Medicare and its beneficiaries.12

Because of the potential for differences in profitability, it is important to investigate whether payment variations reflect cost differences between the settings. Such an analysis would ideally be based on recent data on the costs incurred by efficient providers in each setting. In many cases, however, recent cost data are incomplete or unavailable. In the ASC setting, for instance, the most recent data on facility costs are from a survey conducted by the Centers for Medicare and Medicaid Services (CMS, then known as HCFA) in 1994. Thus, indirect measures of costliness also should be considered. Factors that affect the cost of providing care include regulatory requirements, productivity, infrastructure and medical equipment, staffing levels, types of procedures provided, and patients’ health status. It is presumably more costly to provide care to patients with more health problems. For example, surgical patients with comorbidities could require additional time in the operating and recovery rooms and more sophisticated monitoring during the surgery.

Basing payment on the most efficient setting. Even if payment reflects cost in each setting, one setting might be able to provide a given set of services more efficiently—at lower cost with equal or better outcomes. If so, Medicare might wish to pay a uniform rate across settings based on the costs of the most efficient setting. This policy would provide a financial incentive for services to shift to the most desirable setting while encouraging providers in other settings to become more efficient.13 If this approach were to be pursued, policymakers would need better data on the costs of care, treatment outcomes, and patients’ health status to determine the most efficient setting. Because patients’ prior health status affects both costs and outcomes, it is important to control for this variable when comparing costs and outcomes between settings.

A piece of the puzzle in setting rates.