Medical Technology and the Costs of the

Medicare Program

July 1984

NTIS order #PB85-146215
Recommended Citation:

Medical Technology and Costs of the Medicare Program (Washington, D. C.: U.S. Congress,

Office of Technology Assessment, (OTA-H-227, July 1984).

Library of Congress Catalog Card Number 84-601085

For sale by the Superintendent of Documents

U.S. Goverrnment Printing Office, Washington, D.C. 20402
Foreword

U.S. health care costs have escalated rapidly over the past 15 years, and medical

technology is a primary cause of the increase. A major focus of Federal policy makers’

concerns about rising health care expenditures is the Medicare program, which pays

for hospital and other acute-care health services for over 30 million elderly and disabled

Americans.

To aid in congressional efforts to contain Medicare costs, the House Committee

on Energy and Commerce and its Subcommittee on Health and the Environment and

the Senate Committee on Finance, Subcommittee on Health asked OTA to assess a broad

range of mechanisms to limit or reduce Medicare costs related to medical technology

without sacrificing the quality of health care delivered.

In addition, the committees requested a study of the proposed use of Diagnosis

Related Groups (DRGs) as Medicare’s inpatient hospital payment mechanism and several case studies of particular interest to the Medicare program. These are published

as separate volumes. This report focuses on the policy mechanisms to limit or reduce

Medicare costs related to medical technology but draws from the study of DRGs and

the case studies.

This assessment explores the dual relationship between medical technology and the

Medicare program: Medicare policies affect the adoption and use of medical technologies, and the patterns and levels of use of medical technologies significantly affect Medicare costs. It reviews specific Medicare policies—eligibility, benefits, payment, and beneficiary cost-sharing—that have had an influence on the adoption and use of medical

technology. It also examines the contribution of medical technologies to increases in

Medicare costs.

The report identifies several possible changes in Medicare policies that could be

used to influence medical technology adoption and use and to restrain Medicare program costs. These mechanisms fall into four general categories:

● Medicare’s coverage policy for individual medical technologies;

• methods of Medicare payment to hospitals;

• methods of Medicare payment to physicians;

Ž incentives for the adoption and use of technology that do not directly involve,

but may be related to, the Medicare payment mechanism (e.g., encouraging the

development of alternative cost-effective health care delivery systems).

This study was ably guided by an advisory panel, chaired by Stuart H. Altman.

In addition, a large number of persons in the Federal and State Governments and in

the health services research field were consulted. We are grateful for their many contributions. As with all OTA reports, however, the content is the responsibility of OTA

and does not constitute consensus or endorsement by the advisory panel or by the Technology Assessment Board. Key OTA staff involved in the assessment were Anne K.

Burns, Cynthia P. King, Lawrence H. Miike, Gloria Ruby, and Judith L. Wagner.

 JOHN H. GIBBON S

Director

iii
Advisory Panel on Medical Technology and Costs

of the Medicare Program

Stuart Altman, Panel Chair

Dean, Florence Heller School, Brandeis University

Frank Baker

Vice President

Washington State Hospital Association

Robert Blendon

Senior Vice President

The Robert Wood Johnson Foundation

Jerry Cromwell

President

Health Economics Research

Chestnut Hill, Mass.

Karen Davis

Johns Hopkins University

School of Hygiene and Public Health

Robert Derzon

Vice President

Lewin & Associates

Washington, D. C.

Howard Frazier

Center for the Analysis of Health Practices

Harvard School of Public Health

Clifton Gaus

Center for Health Policy Studies

Washington, D. C.

Jack Hadley

Urban Institute

Washington, D. C.

Kate Ireland

Chairman, Board of Governors

Frontier Nursing Service

Wendover, Ky.

Judith Lave

Graduate School of Public Health

University of Pittsburgh

Mary Marshall

Delegate

Virginia House of Delegates

Walter McNerney

Northwestern University

Morton Miller

President

National Health Council

New York, N. Y.

James Mongan

Executive Director

Truman Medical Center

Kansas City, Mo.

Seymour Perry

Institute for Health Policy Analysis

Georgetown University Medical Center

Robert Sigmond

Blue Cross of Greater Philadelphia

Anne Somers

Department of Environment and

Community and Family Medicine

Rutgers University

Paul Torrens

UCLA %hool of Public Health

Keith Weikel

Group Vice President

AMI

McLean, Va.

iv
OTA Project Staff —Medical Technology and Costs of the Medicare Program

H. David Banta* and Roger C. Herdman, * * Assistant Director, OTA

Health and Life Sciences Division

Clyde J. Behney, Health Program Manager

Anne Kesselman Burns, Project Director

Cynthia P. King, Analyst

Lawrence H. Miike, Senior Associate

Gloria Ruby, Analyst

Pamela J. Simerly, Research Assistant

Judith L. Wagner, Senior Analyst

Kerry Britten Kemp, Health and Life Sciences Division Editor

Virginia Cwalina, Administrative Assistant

Beckie I. Erickson, Secretary***

Brenda Miller, Word Processor/PC Specialist

Jennifer Nelson, Secretary’***

Mary Walls, Secretary*

Special Consultant

Robert A, Berenson

Principal Contractors

Benjamin Barnes, Harvard University

Montague Brown, Strategic Management Services

Mark Chassin, Rand Corp.

Gordon DeFriese, University of North Carolina

Linda Demlo, University of Iowa

Joanne Finley, Maryland State Department of Health

Irwin Litt

Matthew Menkin

Leonard Saxe, Boston University

William Stason, Harvard University

Paul Wortman, University of Michigan

“Until August 1983

‘‘S]nce December 1983

● “ ‘Since January 1984

● ‘‘ ‘Until January 1984

v
Contents

Chapter P’age

Glossary of Acronyms . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . ... viii

Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . ....ix

1. Introduction and Summary . . . . . . . . . . . . . . . . . . . . . . . . . .

Part One:

2. Medicare Policies Affecting Medical Technology . . . . . . . . . . . . . . . . . . . . .

3.The Impact of Medical Technology on Medicare Costs . . . . . . . . .

Part Two:

4.

5.

6.

7.

8.

A Framework for Change, ...,.... . . . . . . . . . . . . . . . . . . . . . . .

Specific Medical Technologies: Linking Coverage Policy and

Technology Assessment To Contain Costs . . . . . . . . . ..., . . . . . . .

Medicare Hospital Payment and Medical Technology . . . . . . . . . . . .

Medicare Physician Payment and Medical Technology ., ..., . . . . . .

Alternative Approaches to Changing Incentives for

Medical Technology Adoption and Use, , . . . ..,..., . . . . . .

Part Three:

9. Findings and Policy Options . . . . . . . . . .

Appendixes

A.

B.

c.

D.

E.

Method of the Study and Case Studies . . ..., . . . . ..., . . . . . .

.

.

3

23

43

67

73

. . 93

...11 5

. . 135

. 151

... , 173

Acknowledgments and Health Program Advisory. . . . . . . . . . . . . . . . . . . . 175

Selected Activities in Medical Technology Assessment . . . . . . . ..........177

Selected Alternatives to Traditional Health Care Delivery . . . . . . . . . ., .18 3

Decisionmaking by Medicare Contractors for Coverage

of Medical Technologies . . . . . . . . . . . . . . . . . . . . ,191

References. . . . . . . . ..., . . . . . . . . . . . . . . . . . . . . . . . . .................209

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..229

vii
Glossary of Acronyms

AAMC —Association of American Medical

Colleges

AAPCC —average adjusted per capita cost

ACC —American College of Cardiology

ACP —American College of Physicians

ACR —American College of Radiology

ACS —American College of Surgeons

ADAMHA —Alcohol, Drug Abuse and Mental

Health Administration (Public

Health Service)

AHA —American Hospital Association

AMA —American Medical Association

BC/BS –Blue Cross and Blue Shield

Association

CABG —coronary artery bypass graft surgery

CAPD —continuous ambulatory peritoneal

dialysis

CBA —cost-benefit analysis

CBO –Congressional Budget Office (U.S.

Congress)

CDC –Centers for Disease Control (Public

Health Service)

CEA —cost-effectiveness analysis

CEA/CBA —cost-effectiveness analysis/costbenefit analysis

CEAP —Clinical Efficacy Assessment Project

(ACP)

CHAMPUS —Civilian Health and Medical

CFA

CMSS

CON

CPI

CT

DATTA

DHHS

DRG

ECRI

ESP

ESRD

FDA

GAO

GPPP

HCFA

Program of the Uniformed Services

—capital facilities allowance

(U.S. Department of Defense)

–Council of Medical Specialty

Societies

—certificate of need

—Consumer Price Index

—computed tomography scanner

—Diagnostic and Therapeutic

Technology Assessment (AMA)

—Department of Health and Human

Services

—Diagnosis Related Group

—formerl y the Emergency Care

Research Institute

—economic stabilization program

—end-stage renal disease

—Food and Drug Administration

(U.S. Department of Health and

Human Services)

–General Accounting Office (U.S.

Congress)

—group practice prepayment plans

—Health Care Financing

Administration (U.S. Department of

Health and Human Services)

HCPCS

HI

HIAA

HIMA

HMO

ICF

ICU

IOM

IPA

JCAH

KPMCP

LOS

MCR

MDC

NAFEC

NCHCT

NCHS

NCHSR

NIH

NMCES

NMR

OASH

OCP

ODR

OHTA

OTA

PHS

PMC

P r o

PRO

ProPAC

—HCFA Common Procedure Coding

System

—Hospital Insurance (Part A) program

—Health Insurance Association of

America

—Health Industry Manufacturers

Association

—health maintenance organization

—intermediate care facility

—intensive care unit

—Institute of Medicine (National

Academy of Sciences)

—independent practice association

–Joint Commission for the

Accreditation of Hospitals

—Kaiser-Permanente Medical Care

Program

–length of stay

—Medicare cost report

—Major Diagnostic Category

—National Association of Freestanding

Emergency Centers

—National Center for Health Care

Technology (Public Health Service)

—National Center for Health Statistics

(Public Health Service)

—National Center for Health Services

Research (Public Health Service)

—National Institutes of Health (Public

Health Service)

—National Medical Care Expenditures

Survey

—nuclear magnetic resonance

—Office of the Assistant Secretary for

Health (Public Health Service)

–Office of Coverage Policy (Health

Care Financing Administration)

—Office of Direct Reimbursement

(Health Care Financing

Administration)

–Office of Health Technology

Assessment (National Center for

Health Services Research)

—Office of Technology Assessment

(U.S. Congress)

–Public Health Service (U.S.

Department of Health and Human

Services)

—patient management category

—preferred provider organization

—utilization and quality control peer

review organization

—Prospective Payment Assessment

Commission

. . . Vlll
PSRO —Professional Standards Review

Organization

PTCA —percutaneous transluminal coronary

angioplast y

QALY —quality-adjusted life-year

RAHC —Rochester Area Hospitals’

Corporation

SLE —systemic lupus erythymatosis

SMI —Supplementary Medical Insurance

(Part B) program

Glossary of Terms

Allowable costs: Hospital costs that are reimbursable

under the Medicare program.

Ancillary technology: Medical technology used

directly to support clinical services, including diagnostic radiology, radiation therapy, clinical laboratory, and other special services.

Assignment: An agreement by a physician to bill the

Medicare program directly and to accept Medicare’s

reasonable charge as full payment for his or her

services. If the physician does not accept assignment, the patient is billed by the physician and is

responsible for the difference between what Medicare will pay and what the doctor charges for a particular service.

Beneficiary cost-sharing: The general set of financing

arrangements whereby the consumer must pay

some out-of-pocket cost to receive care. (Also see

coinsurance, copayment, deductible, and premium. )

Budget neutrality: Specified by the Social Security

Amendments of 1983 (Public Law 98-21) to mean

that the aggregate payments for the operating costs

of inpatient hospital services in fiscal years 1984 and

1985 will be neither more nor less than would have

been paid under the Tax Equity and Fiscal Responsibility Act (Public Law 97-248) for the costs of the

same services.

Capital costs: Expenditures for capital plant and equipment used in providing a service. Under Medicare’s

prospective hospital payment system established by

the Social Security Amendments of 1983 (Public

Law 98-21 ), hospitals’ capital costs (depreciation,

interest, and return on equity to for-profit institutions) are treated as pass-throughs (i. e., are not subject to the new system’s controls).

Cavitation: A method of paying for medical care on

a fixed, periodic prepayment basis per individual.

Payment by “cavitation” implies that the amount

paid by the individual is independent of the number of services that individual has received.

Case mix: The relative frequency of admissions of

various types of patients, reflecting different needs

SNF —skilled nursing facility

SSOP —second surgical opinion program

TEAM —Technology Evaluation and

Acquisition Methods for Hospitals

(AHA)

TEFRA —Tax Equity and Fiscal Responsibility

Act of 1982 (Public Law 97-248)

TPN —total parenteral nutrition

for hospital resources. There are many ways o f

measuring case mix, some based on patients’ diagnoses or the severity of their illnesses, some on the

utilization of services, and some on the characteristics of the hospital or area in which it is located.

Certificate of need (CON): A regulatory planning

mechanism required by the National Health Planning Resources Development Act of 1974 to control large health care capital expenditures. Each

State is required to enact a CON law. CON applications by institutions are reviewed by local health

systems agencies, which recommend approval or

disapproval; they are denied or approved by State

health planning and development agencies.

Coinsurance: A form of beneficiary cost-sharing

whereby the insured pays a percentage of the total

cost of health services.

Conditions of participation: Requirements that a provider must meet in order to be allowed to receive

payments for Medicare patients. An example is the

requirement that hospitals conduct utilization

review.

Copayment: A form of beneficiary cost-sharing

whereby the insured pays a specific amount at the

point of consumption of health services, e.g., $10

per visit.

Cost-benefit analysis (CBA): An analytical technique

that compares the costs of a project or technological application to the resultant benefits, with both

costs and benefits expressed by the same measure.

This measure is nearly always monetary.

Cost-effectiveness analysis (CEA): An analytical technique that compares the costs of a project or of

alternative projects to the resultant benefits, with

costs and benefits/effectiveness expressed by different measures. Costs are usually expressed in

dollars, but benefits/effectiveness are ordinarily expressed in terms such as “lives saved, ” “disability

avoided, “ “quality-adjusted life years saved, ” or any

other relevant objectives. Also, when benefits/effectiveness are difficult to express in a common

ix
metric, they may be presented as an “array. ”

CEA/CBA: A composite term referring to a family of

analytical techniques that are employed to compare

costs and benefits of programs or technologies. Literally, the term as used in this assessment means

“cost-effectiveness analysis/cost-benefit analysis. ”

Coverage: In the Medicare program, coverage refers

to the benefits available to eligible beneficiaries,

distinguished from payment which refers to the

amount and met hods of payment for covered

services.

Deductible: A form of beneficiary cost-sharing in

which the insured incurs an initial expense of a specified amount within a given time period (e. g., $250

per year) before the insurer assumes liability for any

additional costs of covered services.

Depreciation: An estimate of the value of consumption of a fixed asset during a specific period of time.

Diagnosis Related Groups (DRGs): Groupings of diagnostic categories drawn from the International

Classification of Diseases and modified by the presence of a surgical procedure, patient age, presence

or absence of significant comorbidities or complications, and other relevant criteria. DRGs are the

case-mix measure mandated for Medicare’s prospective hospital payment system by the Social Security Amendments of 1983 (Public Law 98-21).

DRG payment: The system of prospective payment for

inpatient services by Medicare which was mandated

by the Social Security Amendments of 1983.

Effectiveness: Same as efficacy (see below) except that

it refers to ". . . average or actual conditions of

use. ”

Efficacy: The probability of benefit to individuals in

a defined population from a medical technology applied for a given medical problem under ideal conditions of use.

End-stage renal disease: Chronic renal failure that occurs when an individual irreversibly loses a sufficient amount of kidney function so that life cannot

be sustained without treatment intervention. Hemodialysis and kidney transplant surgery are two

forms of therapy.

Fee-for-service: A method of paying for medical care

on a retrospective basis by which each service actually received by an individual bears a related

charge.

Fee schedules: Set amounts of payment to physicians

for particular services, generally established by a

regulatory body.

Global budgeting: A method of hospital cost containment in which participating hospitals must share a

prospectively set budget. Methods for allocating

funds among hospitals may vary.

Health maintenance organization (HMO): A health

care organization that acts as both insurer and provider of comprehensive but specified medical services by a defined set of physicians to a voluntarily

enrolled population paying a prospective per capita fee (i. e., paying by “cavitation”).

Historical cost depreciation: An estimate of depreciation (see definition) based on the original cost of

the fixed asset.

Inpatient care: Care that includes an overnight stay

in a medical facility.

Length of stay (LOS): The number of days a patient

remains in the hospital from admission to discharge.

Medical technology: The drugs, devices, and medical

and surgical procedures used in medical care, and

the organizational and supportive systems within

which such care is provided.

Medicare: A nationwide, federally administered health

insurance program authorized in 1965 to cover the

cost of hospitalization, medical care, and some

related services for eligible persons over age 65, persons receiving Social Security Disability Insurance

payments for 2 years, and persons with end-stage

renal disease. Medicare consists of two separate but

coordinated programs-Hospital Insurance (Part A)

program and the Supplementary Medical Insurance

(Part B) program. Health insurance protection is

available to insured persons without regard to

income.

Medicare carriers: Medicare contractors that compute

reasonable charges and make Medicare Part B payments, determine whether claims are for covered

services, deny claims for noncovered services, and

deny claims for unnecessary use of services.

Medicare contractors: Blue Cross/Blue Shield plans or

commercial insurers that perform the Medicare program’s claims processing and payment functions at

the local level under the policy and operational

guidance of the Health Care Financing Administration. (Also see Medicare carriers, Medicare intermediaries. )

Medicare Economic Index: The index that the Medicare program uses to determine physicians’ prevailing charges, as specified by the Social Security

Amendments of 1972 (Public Law 92-603). Specifically, the prevailing charges are calculated by

multiplying the 1973 prevailing charges by the current index, which is promulgated annually for the

12-month period beginning July 1.

Medicare intermediaries: Medicare contractors that determine reasonable costs for covered items and services, make payment and guard against unnecessary

use of covered services for Medicare Part A

payments. Intermediaries also make payments for

home health and outpatient hospital services covered under Part B.

Medicare vouchers: A proposed administrative change

in the Medicare program in which each eligible person would be allowed a set amount of money to

purchase medical care and/or health insurance.

Medigap insurance: Private supplementary medical insurance covering Medicare deductibles and coX
insurance.

Outliers: Cases with unusually high or low resource

use. DRG outliers are defined by the Social Security Amendments of 1983 ( Public Law 98-21 ) as

atypical cases that have either an extremely long

length of stay or extraordinarily high costs when

compared to most discharges classified in the same

DRG.

Outpatient care: Care that does not include an overnight stay in the facility in which care is provided.

Part A (Medicare): Medicare’s Hospital Insurance program which covers specified inpatient services in

hospitals, post-hospital extended care, and home

health care services. Part A, which is an entitlement

program for those who are eligible, is available

without payment of a premium, although the beneficiary is responsible for an initial deductible

and or copayment for some services. Those not

automatically eligible for Part A may enroll in the

program by paying a monthly premium.

Part B (Medicare): Medicare’s Supplementary Medical Insurance program which covers medically

necessary physician services, hospital outpatient

services, outpatient physical therapy and speech pathology services, and various other limited ambulator-y services and supplies such as prosthetic devices

and durable medical equipment. Part B also cow

ers home health services for those Medicare beneficiaries who have Part B coverage only. Part B is

(optional and requires payment of a monthly premium. The beneficiary is also responsible for a deductible and a coinsurance payment for most covered services.

Pass-throughs: In a prospective per case payment system, pass-throughs are elements of hospital cost that

are paid on the basis of cost-based reimbursement.

For example, under Medicare’s new DRG payment

system, capital costs, direct teaching, and outpatient

services expenses are pass-throughs.

Per case payment: A type of prospective hospital payment system in which the hospital is paid a specific

amount for each patient treated, regardless of the

number and types of services or number of days of

care provided. Medicare’s DRC, payment system forinpatient servicrs is a per case payment system.

Preferred provider organization (PPO):A contract

agreement between providers (physicians or hospitals or both), patients, and insurers that medical

care will be delivered at a discounted price as long

as the patients use the “preferred providers, ” i.e.,

those who are among the contractors.

Premium: A form of beneficiary cost-sharing in which

the insured pays a specified amount within a specific time period (e. g., $14.60 per month) as the consideration paid for a contract of insurance.

Prevalence: In epidemiology, the number of cases of

disease, infected persons, or persons with disabilities

or some other condition, present at a particular time

and in relation to the size of the population. It is

a measure of morbidity at a point in time.

Price level depreciation: An estimate of depreciation

(see definition) based on the current replacement

value of the fixed asset.

Procedure (medical or surgical): A medical technology involving any combination of drugs, devices,

and provider skills and abilities. Appendectomy, for

example, may involve at least drugs (for anesthesia ), monitoring devices, surgical devices, and the

skilled actions of physicians, nurses, and support

staffs.

Professional Standards Review Organizations

(PSROs): Community-based, physician-directed,

nonprofit agencies established under the Social

Security Amendments of 1972 (Public Law 92-603)

to monitor the quality and appropriateness of institutional health care provided to Medicare and

Medicaid beneficiaries.

Prospective hospital payment: A hospital payment

method in which the amount that a hospital is paid

tor services is set prior to the delivery of those services and the hospital is at least partially at risk for

losses or stands to gain from surpluses that accrue

in the payment period. Prospective payment rates

may be per service, per capita, per diem, or per case

rates. Medicare’s DRG payment system for inpatient hospital services is a particular form of prospective payment.

“Reasonable and necessary”: Criteria used by the

Health Care Financing Administration or Medicare

contractors to determine what services are eligible

for Medicare coverage.

Reasonable charge: The amount (subject to a patient

deductible and coinsurance) Medicare will pay for

a physician’s service. The reasonable charge is the

lowest of: 1 ) the physician’s actual charge; 2) the

physician’s customary charge (the median of charges

filed by a physician during the previous year for

the service ); and 3 ) the prevailing charge (calculated

by multiplying the Medicare Economic Index by the

1973 prevailing charge which is the 7.5th percentile

of the distribution of customary charges of all area

physicians in 1972, weighted by the number of times

each physician billed for the service).

Recalibration: Periodic changes in relative DRG prices,

including assignment of prices to new DRCs.

Retrospective cost-based reimbursement: A payment

method in which hospitals are paid their incurred

costs of treating patients after the treatment has

occurred.

Technology assessment: A comprehensive form of policy research that examines the technical, economic,

and social consequences of technological applica -

tions, It is especially concerned with unintended,

indirect, or delayed social impacts. In health poicy, the term has also come to mean any form of

policy analysis concerned with medical technology,

xi
especially the evaluation of efficacy and safety. The by the Tax Equity and Fiscal Responsibility Act of

comprehensive form of technology assessment is 1982 (Public Law 97-248) to replace Professional

then termed “comprehensive technology assess- Standards Review Organizations. Hospitals are

ment .“ mandated to contract with PROS to review quality

Utilization and quality control peer review organiza- of care and appropriateness of admissions and

tions (PROS): Physician organizations established readmission.

xii
1.

Introduction and surnmary

A rational man acting in the real world maybe defined as one who decides

where he will strike a balance between what he desires and what can be done.

it is only in imaginary worlds that we Can do whatever we wish.

— Walter Lippmann
Contents

Page

Scope of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Organization of the Rest of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Medicare Policies Affecting Medical Technology . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The Impact of Medical Technology on Medicare Costs . . . . . . . . . . . . . . . . . . . . 9

Overview of Areas for Change in Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Specific Technologies: Linking Coverage Policy and

Technology Assessment To Contain Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Medicare Hospital Payment and Medical Technology. . . . . . . . . . . . . . . . . . . . . . 13

Medicare Physician Payment and Medical Technology . . . . . . . . . . . . . . . . . . . . . 15

Alternative Approaches to Changing Incentives for

Medical Technology Adoption and Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Policy Options.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.

Introduction and Summary — — — —

U.S. health care costs have escalated rapidly

over the past 15 years, and medical technology]

is a primary cause of the increase. Furthermore,

now that controlling health care expenditures has

become an issue of national prominence in the

public and private sectors, increasing attention is

being paid to the financial impact of the use of

new and existing medical technologies.

A major focus of Federal policy makers’ concerns about rising health care expenditures is the

Medicare program, which provides payment for

hospital and other acute care health services for

over 30 million elderly and disabled Americans.

Since 1974, Medicare expenditures have been increasing at an average annual rate of 19 percent

( 135). Largely because of the Medicare program,

the Federal share of national health expenditures

has risen continuously since the program’s inception in 1966. Medicare expenditures, which represented 48.9 percent of total Federal expenditures

for personal health care2 in 1970, represented 60.8

percent in 1982 (135). In 1982, Federal expenditures under Medicare totaled $52.2 billion. Of that

‘ OT/! deflnt~ mt,dlc al tcc hn<~l(~gy a> the drug~ dc~lc~+, .]nd surKI( ,]1 .]nd mt’cli( al pr(~cedurv uwd In me(lica] care .]ntl tht’ or~anlz,lt ion. il .ind suppt)rt]vc systt’rns with] n wh I( h th{’~’ art’ pr(~v]d(,d

L [)tr>(~n.~] h~d[th care expt, nd]turw ~re nit ion~] heal th ( ,irt’ (’~

pt’ndlturt’~ mlnu> .Idmlnlstr<]ti;’t c (jst~

\

Photo credfl E / du Ponf de Nemours & CCJ

n 1982, Medicare had over 30 mi II ion elderly

and disabled beneficiaries

amount, $36.3 billion went for hospital care, and

$11.4 billion went for physicians’ services (135).

Program expenditures in fiscal year 1984 are expected to reach $66.5 billion (340).

Medicare’s beneficiaries, elderly and disabled

Americans, are on average sicker than the general

population. Furthermore, they are disproportionately high users of health care services in general

and medical technology in particular. Every class

of medical technology—with the exception of obstetrical, pediatric, and possibly preventive interventions—is on average applied more often to

Medicare beneficiaries than to the population as

a whole. In 1980, those over the age of 65 accounted for 11.2 percent of the population but

31.4 percent of health care costs (265). Both percentages are expected to rise significantly in the

future because of the aging of the U.S. population.

To aid in congressional efforts to contain Medicare costs, the House Committee on Energy and

Commerce and its Subcommittee on Health and

the Environment and the Senate Committee on

Finance, Subcommittee on Health asked OTA to

assess a broad range of mechanisms to 1imit or

reduce Medicare costs related to medical technology. In addition, they requested a study of the

proposed use of Diagnosis Related Groups ( DRGs)

as Medicare’s inpatient hospital payment mechanism and several case studies of particular interest to the Medicare program. These are published as separate volumes. This report focuses

on the policy mechanisms to limit or reduce Medicare costs related to technology but draws from

the study of DRGs and the case studies.

The present assessment explores the dual relationship between medical technology and the

Medicare program: Medicare policies affect the

adoption and use of medical technologies, and the

patterns and levels of use of medical technologies

significantly affect Medicare costs. It reviews specific Medicare policies-eligibility, benefits, payment, and beneficiary cost-sharing policies—that

have had an influence on the adoption and use

of medical technology. It also examines the con3
4 ● Medical Technology and Costs of the Medicare program .———

tribution of medical technologies to increases in

Medicare costs.

OTA identified several possible changes in

Medicare policies that could be used to influence

medical technology adoption and use and to restrain Medicare program costs. These mechanisms

generally fall into the following categories:

●

●

●

●

changes in Medicare’s coverage policy for

specific technologies;

changes in the methods of Medicare payment

to hospitals;

changes in the methods of Medicare payment

to physicians; and

approaches to changing the incentives for the

adoption and use of technology that do not

directly involve, but may be related to, the

Medicare payment mechanism (e.g., encouraging the development of alternative costeffective health care delivery systems).

Because of the vast number of medical technologies being developed or used and the decentralized administration of the Medicare program,

technology-specific approaches are likely to be of

limited value in containing Medicare costs.’ For

that reason, broader approaches, many of which

involve the use of hospital or physician payment

mechanisms to change providers’ or consumers’

financial incentives to use medical technology, are

generally considered the major means by which

the cost-containment objectives of the Medicare

program might be achieved. The change in Medicare’s inpatient hospital payment system—from

retrospective, cost-based payment to prospective,

per case payment based on DRGs, as mandated

by the Social Security Amendments of 1983 (Public Law 98-21)–provides a striking example of

such an approach.

Other broad approaches do not involve the

payment mechanism directly but are usually considered in conjunction with payment mechanism

changes to alter the incentives for technology use.

These include stimulating competition among providers of health care by encouraging the development of alternative sites or organizations (e.g.,

3Technology-specific approaches may be particularly valuable,

however, in enhancing the adoption of socially valued technologies

that may be cost-raising.

health maintenance organizations) of health care

delivery. They also include administrative changes

in the Medicare program (e. g., merging Parts A

and B of Medicare) for the purpose of changing

incentives for technology adoption and use,

There are two additional broad approaches to

containing Medicare costs, but they are not discussed extensively in this report. The first approach is simply to limit the amount of money

available for Medicare. Applying such a financial squeeze would give providers and patients

strong incentives to adopt and use technologies

efficiently. However, applying such a limitation

to the Medicare program alone, while saving Federal dollars, would likely either shift costs to the

private sector or result in Medicare beneficiaries’

reduced access to certain technologies. The second approach is to use the conditions of participation for Medicare providers (i. e., requirements

providers must meet in order to be eligible to receive payment from Medicare) to change the incentives for technology use.

Several points should be kept in mind while

reading this report. These points are not presented

in order of importance, primarily because the

issues involved are intertwined.

First, the impact of medical technologies on

Medicare costs, or health care costs in general,

should not be assessed in isolation from the effect that such technologies have on quality of care.

The impact of cost-containing measures on both

quality and access is one of the most difficult policy issues to be faced, because the Medicare program was instituted to increase elderly persons’

access to acute care services. In order to control

Medicare costs in the long run, some restrictions

on quality or access are likely to be necessary.

Unfortunately, the rapid rate of growth in health

or Medicare expenditures cannot be stemmed

simply by eliminating technologies that do not

provide any benefit, because most technologies

do provide some benefit, however small or costly

the benefit may be (25).

Nevertheless, there is substantial evidence to

suggest that inappropriate use of medical technology is common and raises Medicare and health

system costs without improving quality of care.

Many surgical procedures seem to be overused in
C/7. 7 —Introduction and Summary ● 5

the United States compared to other countries

(26). Laboratory examinations and other diagnostic tests are used at high rates and at times

when not indicated by the suspected conditions

(90,120,296). Lengths of stay in the hospital are

higher in many cases than can be justified by medical evidence of benefit (3.50). Thus, one way to

reduce Medicare costs is to encourage the appropriate use of new and existing medical technologies.

Second, there are interactions between Medicare and the rest of the U.S. health care system.

Because of its size and scope, and because other

third-party payers often follow Medicare’s example, Medicare’s policies and procedures affect all

aspects of health care delivery, including financing, administration, organization, and personnel.

Furthermore, the program affects the content and

costs of health care by its influence on the development, adoption, and use of medical technology.

Nevertheless, it is important to keep in mind

that the Medicare program is only one of many

public and private institutions that influence the

development and diffusion of medical technology.

Other important influences are the Food and Drug

Administration, the National Institutes of Health,

manufacturers of drugs and medical devices, hospitals, private health insurers, and professional

medical societies, The long-term costs of the Medicare program are linked with those of the overall

health care system, and the leverage of using Medicare-specific policies to achieve Medicare costcontainment objectives may be limited.

Third, reimbursement policy by Medicare and

other third-party payers has contributed to the

rapid adoption and often excessive use of medical technology. Therefore, policymakers have

looked to changes in reimbursement policies to

alter the financial incentives for providers and

consumers to use medical technology. However,

reimbursement is only one of several factors that

contribute to the tendency to adopt and use medical technology. Other factors include public demand for sophisticated technologies, the desire of

physicians to do as much as possible for their patients, competition among hospitals to achieve

quality and prestige so as to attract patients and

physicians, the fear of malpractice suits, and uncertainties about what constitutes appropriate use.

Fourth, because of spillover effects from one

part of Medicare to another, policy mechanisms

involving only one part of the Medicare program

may have serious limitations in terms of containing Medicare costs or affecting technology adoption and use. Medicare’s DRG hospital payment

system, for example, excludes physicians’ services and outpatient care. These exclusions not only

provide incentives for the shifting of costs out of

inpatient hospital settings but leave physicians’

incentives to use medical technology unaffected.

Any cost-containment effort must take into account the fact that physicians play a central role

in determining what services are provided to patients in both hospital and other settings.

Fifth, what constitutes rational and appropriate adoption and use of medical technology depends on whether the question is being viewed

from a soaetal perspective, from the perspective

of the Medicare program, or from the perspective of individual providers or patients. A rational

decision to adopt or use a medical technology is

a decision based on the consideration of costs and

benefits. A decision by hospitals or physicians to

adopt a medical technology that improves the

quality of care provided to patients may also raise

the costs of the Medicare program. From the perspective of the providers or patients, such a decision may be entirely rational. However, the costs

and benefits to providers and patients are different

from those to the Medicare program. Thus, unless

the marginal increase in the benefit of improved

patient care justifies the marginal increase in costs

to the Medicare program, the decision may not

be rational for Medicare. Furthermore, what is

rational and appropriate from the standpoint of

Medicare is not necessarily rational and appropriate from the standpoint of society as a whole.

Sixth, the social and political climate today is

quite different from that in 1965, and now that

Medicare’s goal of improving access to health care

for the Nation’s elderly has been largely achieved,

the primary focus of policy makers is on containing Medicare costs. The principal intent of the

1965 legislation establishing the Medicare program

under Title XVIII of the Social Security Act (Public Law 89-97) was to increase elderly Americans’

access to acute care medical services by removing financial barriers, particularly to hospitaliza25-337 10 - 84 - 2
6 ● Medical Technology and Costs of the Medicare Program — — --— ———— —

tion (317). There was far less concern about the costs of the program have soared, and the prescost of services than about the problem of access. sures for cost containment have increased. Thus,

The concern about access was also prominent in the challenge that remains for Federal policy1972, when eligibility was extended by Congress makers today is to solve the problem of controlto disabled persons and people with end-stage re- ling Medicare costs without diminishing past

nal disease (ESRD). More recently, however, the success,

SCOPE OF THE REPORT

This report examines medical technology’s impact on Medicare costs and Medicare’s past and

future impact on the development and diffusion

of medical technology. Medical technology is the

major component of medical care. The incentives

that govern the provision of medical care services work in the same direction (and are of the

same magnitude) as those that govern the adoption and use of medical technology. In this report,

therefore, the term “medical technology” is sometimes used synonymously with “medical care” or

“medical services. ”

The bulk of the increases in health and Medicare costs in the past 20 years is attributable to

factors other than changes in the patterns and

levels of use of medical technology, such as general wage and price inflation and growth in the

size of the U.S. population age 65 and over. A

detailed examination of these factors, however,

is beyond the scope of this report.

The policy options presented in this report emphasize controlling costs by changing the incentives for technology adoption and use, primarily

through Medicare’s hospital and physician payment mechanisms. The report does not discuss

changes in Medicare eligibility or in the broad

Medicare benefit package. A serious problem

needing attention that this report does not address

is the widening gap between the Medicare beneficiary population’s needs and the benefit package

actually provided. Medicare’s benefit package was

modeled after insurance plans of the early part

of the century, when acute illness was the primary

concern and when most patients either got well

or died rather quickly (317). Some services critical to chronic disease—preventive measures,

custodial or long-term care, drugs in outpatient

settings, and many rehabilitative services—were

excluded from covered benefits, Ironically, as

Medicare has achieved its objective of improved

access to acute care services and mortality rates

among the Nation’s elderly have decreased, morbidity from chronic diseases has increased because

of the aging of the population. Thus, elderly individuals who cannot afford uncovered services

remain an underserved segment of the population,

This report does not consider how much money

is appropriate to expend on Medicare beneficiaries, That decision is essentially a political one. As

noted earlier, one way to cut Medicare costs, and

change the incentives for technology use and

adoption, is simply to cut money out of the system. The options presented in this report could

be implemented regardless of the political decisions about how much money is appropriate to

spend.

ORGANIZATION OF THE REST OF THE REPORT

The rest of this chapter presents a summary of Part One presents information on the interacthe report and briefly lists the issue areas for which tions between medical technology and Medicare.

there are policy options. The body of the report Chapter 2 discusses Medicare’s impact on the

is organized in three parts. adoption and use of medical technology. After
Ch. I—Introduction and Summary ● 7 — . . .. — — —

presenting a brief overview of general policies, the

chapter describes the specific Medicare policies

that have been important to the development and

diffusion of medicaI technology. In chapter 3, the

emphasis turns to medical technology’s impact on

Medicare costs. The chapter examines the patterns

of medical technology use experienced by the

Medicare population compared to the general

population. Then, it reviews the evidence on the

contributions of medical technology to general

health care costs and to Medicare costs. Those

contributions are discussed in the aggregate and

with respect to particular technologies.

Part Two contains chapters providing information about policies that have been and could be

taken to restrain the costs of medical technologies

in the Medicare program. Chapter 4 provides an

overview of the issues underlying the remaining

chapters. Chapter 5 reviews Medicare’s coverage

policy and process for individual medical technologies and discusses possible linkages between technology assessment and coverage for the purpose

of containing costs. Chapters 6 through 8 examine broader policies that have impacts on medical technology adoption and use. Chapter 6 analyzes the implications for medical technology of

current and potential methods of hospital payment. Chapter 7 presents a similar analysis of physician payment methods. It also includes a discussion on how physicians influence technology

use and how physician cost consciousness may

be enhanced. Chapter 8 presents information on

broad approaches (those other than direct MediSUMMARY

Medicare Policies Affecting

Medical Technology

The very existence of Medicare and other thirdparty payers expands the market for medical technologies and influences the quantity and kinds of

medical technologies that are used and the settings

in which they are used. Since the enactment of

the Medicare program in 1965, a great deal of legislation has been passed with the purpose of curbing the escalation in Medicare’s costs and controlling the diffusion of medical technology. To date,

care payment changes) to change the incentives

for medical technology adoption and use, primarily by stimulating competitive behavior among

providers.

Part Three (ch. 9) presents the main findings

and policy options of the study, organized by

issue area.

Appendix A describes the method used by OTA

to conduct the assessment and lists the background papers (including case studies) prepared

in conjunction with the project. Appendix B contains the acknowledgments and the membership

of the Health Program Advisory Committee. Appendix C provides information on public and private technology assessment activities. Appendix

D is a descriptive overview of selected alternatives to traditional health care delivery. Appendix E presents the results of a survey of Medicare

contractors.

A series of case studies was used to provide specific examples of issues and problems (see app.

A). The report makes reference to the case studies

throughout. The full cases themselves are printed

as separate volumes of OTA’s Health Technology Case Study Series. In addition, a technical

memorandum entitled Diagnosis Related Groups

(DRGs) and the Medicare Program: implications

for Medical Technology was prepared as part of

this study and published in July of 1983.

Finally, a summary booklet is available. It contains information similar to the following summary section and the chapter on policy options.

such efforts have been largely ineffective. Indeed,

Medicare’s policies concerning eligibility, benefits,

and payment have acted to promote technology

adoption and use.

Medicare’s eligibility policy has made more

medical technology available to millions of the

Nation’s aged and disabled people. When the program began in 1966, 19,1 million people aged 65

and over were eligible to enroll. By 1982, the number of Medicare enrollees had increased to 29.5

million. The increase in the size of the Medicare
8 ● Medical Technology and Costs of the Medicare Program

population is due largely to the growth in the size

of the elderly population, but some of it reflects

the extension of Medicare eligibility to people with

disabilities and ESRD on July 1, 1973.

Medicare’s benefit policy has had a profound

effect on the types and location of modern medical technologies. The Medicare law specifies broad

categories of benefits for which the program will

pay under two parts: Part A, the Hospital Insurance program, and Part B, the Supplementary

Medical Insurance program.4 The law excludes

most preventive services and certain other services, such as custodial and long-term care. Medicare’s benefit package has undergone few major

changes since the program’s beginnings.

Although the Medicare program covers a variety of services in a variety of settings, its benefit

package is concentrated primarily on acute care

technologies provided in institutional settings,

particularly those provided as inpatient hospital

services. In 1982, 66.3 percent ($34.5 billion) of

Medicare’s $52.2 billion in payments was for inpatient hospital services. There are numerous incentives inherent in Medicare’s benefit policy to

provide too many of some kinds of medical technologies and too few of others. Coverage of some

technologies (e.g., medical devices, drugs), for example, varies according to the characteristics of

the technology, of the user, and of the setting in

which the technology is used. In some cases, as

in treatment for alcoholism, Medicare’s benefit

policy has encouraged the development of a technology in an inpatient setting, despite the fact that

treatment in other settings maybe as effective and

is certainly less costly (348). Medicare’s exclusion

of benefits for some technologies, including assistive communications devices (351), has had an unfavorable influence on their development and diffusion.

A dramatic specific example of how Medicare’s

eligibility and benefit policies have affected the

4

Part A benefits include inpatient hospital care, post-hospital extended care services, home health services, and as of Apr. 1, 1982,

inpatient alcohol detoxification services. Part B benefits include medically necessary physiaan services, outpatient hospital services, outpatient physical therapy and speech pathology services, home health

services for those not eligible for Part A, and various other limited

ambulatory services and supplies (e. g., prosthetic devices and durable

medical equipment).

development and diffusion of costly medical technologies is provided in the case of technologies

used to treat ESRD. People with ESRD require

some form of dialysis or kidney transplantation

to prolong their lives. In 1972, before Medicare

eligibility was extended to persons with ESRD,

about 10,000 persons were receiving hemodialysis. By 1980, following the extension of eligibility,

50,000 were being dialyzed (359). There was also

a significant increase in kidney transplantation following implementation of the ESRD program

(359). Currently, an estimated 93 percent of the

U.S. population with ESRD are Medicare beneficiaries (195). Thus, Medicare policies can be clearly

identified as a major influence on the diffusion

of the technologies used in the treatment of ESRD.

.

..-

Photo credit Natlonal Kidney Foundation, Washington, D. C.

Medicare policies are a major influence on the

development and diffusion of hemodialysis and other

technologies used in the treatment of ESRD
Ch. 1—Introduction and Summary Ž 9 — .

Medicare’s payment policies have had the most

profound effect on medical technology adoption

and use of any of the program’s policies. For many

years, Medicare has paid hospitals and other institutional providers on the basis of reasonable

cost and paid physicians and other noninstitutional providers reasonable charges on a fee-forservice basis. Under both payment methods, providers receive more reimbursement when they use

more medical technology. Thus, these payment

methods offer providers little deterrent to the increased use of technology and little incentive to

choose less costly technology.

Although Medicare’s hospital payment system

is now in the process of change, 5

17 years of costbased hospital payment have shaped the health

care system today. The original Medicare legislation left the specific method of determining reasonable cost to administrative decisions. The

method adopted was very liberal in allowing hospitals considerable discretion in calculating the

costs attributable to Medicare (104). Thus, because hospitals have been assured of reimbursement by Medicare and by other third-party payers, they have had no financial reason not to

spend money on medical technology, especially

on socially valued technology,

Medicare’s method of paying physicians has

changed little since Medicare was enacted, although minor restraints have been imposed on the

rate of increase of physicians’ payment levels,

Most physicians’ incomes are determined by the

number and intensity of services delivered and the

fee received for each service. The use of technology by fee-for-service physicians is sensitive to

the additional revenue they receive (229).

In addition, although not intrinsic to the feefor-service payment method, physician payment

levels that Medicare has established for complex

and expensive medical technologies are usually

disproportionately high (235). In most instances,

the reimbursable charge for a technology was established at an early point in the technology’s

history. Although subsequent technological advances and higher rates of utilization may have

substantially reduced the time, judgment, skill,

and cost required to use the technology, this

change is not reflected in the physician’s fee or

Medicare’s reimbursement level. Furthermore, the

existing payment system provides incentives for

the use of “technology-intensive” medical care.

Under current fees, what are sometimes referred

to as “technology-oriented” services, such as diagnostic tests and surgical procedures, are valued

higher than “cognitive” services, such as taking

medical histories and counseling.

Medicare’s beneficiary cost-sharing provisions

were the only measures specifically included in

the original legislation to help moderate the unnecessary utilization of services. Although there

is little empirical evidence concerning the effect

of deductibles, copayments, and coinsurance on

the use of medical technology specifically in the

Medicare program, it is generally believed that

such cost-sharing has had little impact on technology use. Supplementary health insurance

(“Medigap”) is used extensively by Medicare beneficiaries, and it often substantially diminishes or

eliminates the burden of these cost-sharing requirements. Premium payments, another form of

cost-sharing, are clearly not an obstacle to the use

of services (28,253).

The Impact of Medical Technology on

Medicare Costs

Changes in the kinds of medical technologies

available and changes in the patterns of use of

technologies already available continually influence health care costs—at times moderating cost

increases and at times exacerbating them. How

medical technology contributes to health and

Medicare costs is a question that can be addressed

either in the aggregate or with respect to particular technologies or classes of technologies.

— The question from the aggregate perspective is

‘Medicare’s hospital payment method was changed by the Social whether changes in medical technology use as a

Security Amendments of 1983 (Public Law 98-121 ), which mandated whole have raised or reduced health care or Medithe phasing in beginning in October 1983 of a prospective per case care costs and, if so, by how much. The aggregate

inpatient hospital payment system based on Diagnosis Related

Groups (DRGs). The implications of DRG hospital payment are dis- perspective is useful, because it puts technology’s

cussed in a following section. relationship to costs into a policy perspective.
10 ● Medical Technology and Costs of the Medicare program —

The most widely used approach to estimating

technology’s aggregate contribution to health care

costs is to separate the change in total expenditures for health care into its component parts:

population or enrollment changes, overall wage

and price inflation, wage and price inflation in

medical care in excess of general inflation, and

changes in service intensity.6 Changes in technology use are included in the latter two measures,

although these measures also reflect other factors.

Using this general approach, OTA estimates

that increases in service intensity (labor and

nonlabor inputs) per capita accounted for 24 percent of the 93-percent increase in per capita hospital costs from 1977 to 1982. The increase in service intensity is due in part to an increase in the

hospital admission rate (a 5-year increase of 2.1

percent), but the overwhelming part of the increase is due to the provision of a greater quantity of services per hospital admission. Moreover,

OTA’s empirical and literature analysis supports

the general conclusion that changes in service intensity have contributed substantially to the

growth in hospital costs over the past 20 years.

Increasing intensity of care appears to be a less

important source of expenditure inflation in total

personal health care expenditures in the United

States than it is for the hospital sector alone. The

combined effect of increasing intensity of care and

increasing health care prices in excess of the Consumer Price Index accounts for only about 16 percent of the growth in per capita personal health

care expenditures between 1977 and 1982. During that 5-year period, however, these two technology-related components of cost together

increased real per capita personal health expenditures at an average annual rate of 2.8 percent.

It is possible to account for the components of

Medicare cost increases, but the interpretation of

the estimates is even more clouded than is the interpretation of increases in general health care

costs. Changes in program eligibility or in covered benefits can lead to dramatic changes in

. ——.—

“’Service intensity” reters to the quantity of inputs that go into

producing a given unit of health care. These inputs include labor,

supplies, materials, and equipment used in the provision of care.

Service intensity is associated wlth, but not identical to, medical

technology use.

measured service intensity that have little to do

with changes in medical technology but instead

represent a shift in the burden to payment for

services already available and used. Changes in

per capita service intensity do indicate how much

more or less Medicare is paying for now than at

some earlier date. Between 1977 and 1982, Medicare expenditures per enrollee increased 107 percent. OTA’s analysis indicates that nearly 30 percent of the increase in Medicare costs per enrollee

from 1977 to 1982 can be attributed to increased

use of covered services (25 percent) and increased

medical prices in excess of general inflation (3

percent). 7

Although none of the approaches to measuring technology’s aggregate contribution to health

care or Medicare costs is entirely satisfactory,

taken as a whole, the available evidence leads to

the conclusion that health care costs have increased in part because more is being done for patients today than ever before. More and better

trained personnel, more procedures, more drugs,

and more and higher priced equipment, materials,

and supplies are being used in the delivery of

health care to Medicare patients and to the population as a whole. So far, the trend toward “more”

does not appear to be abating. It is not just at the

margin, however, that there is an opportunity to

reduce Medicare costs. There are many opportunities to save health and Medicare costs by altering longstanding patterns of use of medical technology.

Furthermore, the aggregate approach to estimating medical technology’s contribution to

health care or Medicare costs is limited, because

it ignores the patient benefits associated with cost

increases or decreases, it does not take into account the underlying reasons for changes in medical decisions or practices, and it does not show

that cost-saving and cost-raising changes in technology are not scattered evenly across illnesses.

Summary statements about technology’s net influence on health care or Medicare costs mask the

7

The percent due to medical price inflation may be overstated,

and the service intensity percentage correspondingly understated,

because the amount Medicare actually pays for services (i. e., the

effective price) probably lies somewhat below stated prices.
Ch. 1—Introduction and Summary ● 1 1 — . . —

rich assortment of ways in which changes in medical technology shape the health care system, the

population’s health status, and its costs.

Thus, in order to provide insight into the

underlying reasons for change in medical decisions

or practices and to highlight the extent to which

the costs of the Medicare program are altered by

new technologies, OTA examined seven specific

technologies first introduced in the 1960’s or

1970’s: coronary artery bypass surgery, the drug

cimetidine, therapeutic apheresis, pneumococcal

vaccine, intensive care units, total parenteral nutrition therapy, and kidney dialysis.

All seven of the technologies have clear patient

benefits—in some cases, they are life saving—

but for all of the technologies, there is controversy

about the most appropriate indications for use.

Two of these technologies have been or may be

cost saving to Medicare, but five of them have

raised or have the potential to raise Medicare

costs, in some cases significantly. Above all else,

these technologies illustrate how exposed the Medicare program is to changes in medical technology that are largely beyond its control. The challenge to Medicare in the face of new technologies

that offer both patient benefits and higher costs

is how to encourage the most cost-effective use

of the most cost-effective technologies. The overall remaining issue is how Medicare policy can

be structured to bring about more cost-effective

use of both existing and new medical technologies.

Overview of Areas for Change

in Medicare

OTA’s discussion of potential areas for change

under Medicare is organized in two parts, corresponding to the two types of policy mechanisms

discussed previously. The first part—policies

directed at individual technologies—explores linking Medicare’s coverage policy and technology

assessment to contain costs. The second part—

policies providing broad incentives to encourage

appropriate adoption and use of technologies—

is divided into three sections: hospital payment,

physician payment, and alternative or systemwide

approaches to changing incentives.

Specific Technologies: Linking Coverage

Policy and Technology Assessment

To Contain Costs

A potential method of containing Medicare

costs is by influencing the diffusion (i. e., adoption and use) of medical technologies. It is generally agreed that Medicare’s coverage policy—

policy that governs the eligibility of services (technologies) for payment—has influenced decisions

about the purchase of some expensive, visible

medical technologies. The precise relationship between coverage policy and adoption of other

kinds of technologies or use of any technologies

remains speculative.

Although Medicare and other insurance plans

designate broad categories of services, such as inpatient services, as being covered, or eligible, for

payment, specific technologies, with few exceptions, require individual coverage decisions. Medicare coverage policy for particular technologies

not mandated by law has been decided on a caseby-case basis according to Section 1862 of Title

XVIII of the Social Security Act. Section 1862 prohibits Medicare payment for items and services

that are “not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member. ”

Medicare has refrained from establishing a

definitive interpretation of “reasonable and necessary” and has relied on a loosely structured and

decentralized mechanism to determine whether a

technology is covered. The criteria used to determine if a technology meets the broad statutory

language of “reasonable and necessary” are:

1 ) general acceptance as safe and effective, 2) not

experimental, 3) medically necessary, and 4 ) provided according to accepted standards of medical practice in an appropriate setting. Traditionally, coverage policy has been made in light

of Medicare’s principles of not interfering with the

practice of medicine and assuring beneficiaries a

free choice of providers.

Some coverage decisions are made at the national level by the central Health Care Financing

Administration (HCFA) office, while others are

made by regional HCFA offices. Most of the deci-
12 ● Medica/ Technology and Costs of the Medicare Program

— .

sions, however, are made by Medicare contractors, called intermediaries and carriers, who perform the Medicare program’s claims processing

and payment function at the local level under the

policy and operational guidance of HCFA. Although the details vary, the coverage process is

the same at the national level or at the contractor level. First, new technologies and new uses of

covered technologies are identified. Second, a

decision is made about covering the identified

technology for Medicare payment. The decisionmakers (contractors or HCFA) may receive advice, which usually involves an evaluation of the

safety and effectiveness of the technology. The

final step is implementing the coverage decision.

Because of the general language of Section 1862

and the absence of regulations or guidelines that

implement the section, Government officials and

Medicare contractors have had considerable latitude in determining which technologies are to be

covered for reimbursement. Contractors vary

widely in their identification of uncovered technologies, their decisions about the coverage of specific technologies, and their implementation of national coverage decisions (54,86,143,353). As a

result, some technologies may be covered and

paid for in one area and not in another. There

is no national or local listing of procedures that

are not covered (163).

Problems pertaining to the administration of

the coverage process that need attention include:

1) the inadequate identification of emerging and

outmoded technologies for coverage decisions;

2) the lack of uniformity in implementing national

coverage decisions; 3) the timelag involved in the

coverage process, including technology assessment; 4) the complex coding system and proliferation of codes; and 5) the incomplete dissemination of information. These problems all potentially raise Medicare’s costs, although some of

them (e.g., numbers 2, 3, and 5) may actually decrease Medicare expenditures.

Of particular interest to cost-containment efforts is Medicare’s policy of not explicitly considering cost or cost-effectiveness information in

making coverage decisions. Also of interest is the

fact that Medicare has refrained from a policy of

limiting coverage of particular technologies to restricted circumstances (e.g., institutions offering

specific services or having specialized equipment)

and to physicians with specific skills. Although

the notion of limiting coverage to selected sites

and providers has gained importance with the increasing development of sophisticated technologies that require particular expertise, Medicare’s

principles of refraining from interfering with medical practice and assuring beneficiaries a free

choice of providers appear to have limited its application. On the other hand, Medicare does limit

coverage of some technologies to appropriate

medical conditions. For example, therapeutic

apheresis is currently covered for six disease indications.

In theory, one way to use coverage policy to

assist in containing Medicare costs would be to

include cost criteria in technology assessments.

Cost-benefit analysis (CBA) and cost-effectiveness

analysis (CEA) are formal analytical techniques

for comparing the positive and negative consequences of alternative ways of allocating resources

(353). The methodological strengths and weaknesses of CBA/CEA and the potential for expanding their use in coverage decisions was discussed

in OTA’s 1980 report The Implications of CostEffectiveness Analysis of Medical Technology. A

methodological issue of particular importance to

beneficiaries of the Medicare program is whether

to include discounted future medical care costs

(due to longer lifespans for patients resulting from

the use of medical technology) as a direct cost of

a technology.

Incorporating cost criteria into an assessment,

however, would not necessarily lead to the identification of cost-saving technology, Achieving the

objective of identifying technologies that save or

raise costs to Medicare before they become established in medical practice is problematic. The technical complexity of determining the cost effects

of emerging and new technologies is compounded

by the problem of defining a cost-saving or costraising technology. Differences in perspective impede arrival at a universal definition of a costsaving or a cost-raising technology.

A new issue for Medicare is how to coordinate

coverage policy with the DRG hospital payment

system. Although the coverage process and the
Ch. l—introduction and Summary ● 1 3

.

process of adjusting DRG rates share a similar

“approval for payment” function, they differ in

that a coverage determination focuses on specific

technologies, while adjusting DRG payment rates

focuses on the larger entity of a diagnostic group,

which includes particular technologies. Moreover,

the DRG rate adjustment process must include

issues of cost as an integral issue, while the coverage process at present does not consider cost

issues. Nonetheless, the technology assessments

performed for the coverage and DRG rate adjustment processes no doubt will have similarities and

their coordination should be encouraged.

Medicare Hospital Payment and

Medical Technology

The retrospective, cost-based hospital reimbursement system under which Medicare operated

from 1966 until fiscal year 1983 was significantly

altered first by the Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 97-248) and then

by the Social Security Amendments of 1983 (Public Law 98-21), The latter mandated the phasing

in over a 3-year period of a prospective, per case

hospital payment system based on DRGs. The

new prospective payment system for inpatient

operating costs places hospitals at financial risk

but also enables them to keep whatever surpluses

can be generated.

Although capital, outpatient, and direct teaching expenses remain pass-throughs, s Medicare’s

DRG hospital payment system has radically

changed the financial incentives for the adoption

and use of specific medical technologies in hospitals. 9 Hospitals now have a financial incentive

to increase hospital admissions and decrease

lengths of stay. Some patients may be admitted

unnecessarily, others may be discharged too early,

and some may not get all the elective care in one

hospital stay. Thus, hospital admissions and readmission will need to be monitored,

The DRG payment system also provides hospitals with incentives to reduce the number and

‘Pass-throughs are those elements of cost that are not part of the

prospective payment system,

‘OTA’S technical memorandum entitled Diagnosis Related Groups

(DRGs) and the Medicare program: Implications for Medical Techno)ogv ( 343 I provides a detailed analysis of these incentives.

cost of ancillary services. Prior to the implementation of DRG payment, hospital administrators

had financial reasons to encourage physicians to

use available technologies. Now, hospital administrators will need to gain the support and cooperation of their physicians in order to keep their

inpatient care within the price range of DRG payments. Under the new system, hospital administrators are likely to discourage physicians from

using many high-cost technologies. In some cases,

the substitution of low-cost technologies for highcost technologies may result in a decline in quality

of care. Thus, quality of care remains an important issue under DRG payment. Congress has provided some control over quality of care by mandating the utilization and quality control peer

review organizations (PROS). Hospitals must have

signed agreements with these organizations in order to receive Medicare payments. One of the

responsibilities of the PROS will be to monitor

the potential admission /discharge/readmission

problem.

Despite the recent establishment of the DRG

hospital payment system, it is quite possible that

changes in hospital payment by Medicare will be

actively considered in the future. Part of the reason is that pressure for cost containment at the

Federal level may continue, and part is that individual States may enact hospital cost control

systems in which Medicare will agree to participate. Alternative approaches that have been suggested or applied by public or private payers and

that might be considered for implementation by

Medicare generally fall into four major categories:

● alternative hospital prospective payment

methods or modifications of Medicare’s DRG

hospital payment system,

● capital payment methods,

Ž limited provider contracts, and

. increased patient cost-sharing for hospital

services.

Congress has adopted DRGs for the Medicare

hospital payment system, but improvements of

DRGs and of the payment system should be pursued. Case-mix classification systems with more

desirable properties than DRGs may become

available in the future. Innovations in medical

devices, drugs, and medical techniques that raise

the quality of care for the Medicare population
14 . Medical Technology and Costs of the Medicare Program

-— .—— — — -.—— —— —— -.—

Photo credit University of Utah Med/ca/ Center

Updating the DRG hospital payment system will be

necessary to encourage the adoption of technologies

that raise the quality of care provided but also raise

hospital per case costs

but also increase hospital per case costs may not

be readily adopted unless DRG payment rates are

updated. Refinements of Medicare’s DRG-based

hospital payment system are anticipated in light

of the series of congressionally mandated studies

and the charge to the Prospective Payment Assessment Commission to recommend changes in DRG

relative weights and categories. Other approaches

to prospective payment of hospitals are certainly

possible, and the current Medicare law encourages

States to experiment with these as part of all-payer

systems. Innovative prospective payment methods such as per capita hospital payment and areawide global budgeting may hold promise in some

areas.

How Medicare will pay for hospitals’ investments in capital plant and equipment under DRG

payment is an issue that has yet to be resolved.

Traditionally, Medicare has reimbursed hospitals

for interest and historical cost depreciation expenses associated with all capital equipment. This

payment method has increased hospitals’ demand

for capital but has also made it difficult and costly

for some hospitals to obtain additional debt financing. Currently, under DRG payment, capital costs are treated as pass-throughs (i.e., reimbursed, as they always have been, as they are

incurred with no limit on the amount that a hospital can be paid). Of particular concern with a

capital cost pass-through under DRG payment is

the incentive for hospitals to adopt expensive capital equipment that reduces operating costs but

raises total costs per case. Congress has recognized

that capital costs are still a problem for Medicare,

and Public Law 98-21 requires the Department of

Health and Human Services to study how capital costs should be paid in connection with the

DRG hospital payment system.

Two possible alternatives to the pass-through

are to incorporate a flat rate for hospital capital

into the DRG rates and to build hospital-specific

capital allowances into the DRG system. Although the flat rate approach is generally more

efficient than pass-through capital payment, it

does raise questions of fairness among hospitals

and equity of access to medical technologies

among patients. In a flat rate payment system,

hospitals that in the past had lower ratios of capital to operating costs would receive more payment than they had in the past. The hospitalspecific approach would tend to reward those hospitals that were most highly capitalized in the past,

leaving those with less capital forever to receive

lower payments.

Two additional approaches to affecting the use

of medical technologies through hospital payment

are limited provider contracting and increased

beneficiary cost-sharing for hospital services. Both

methods have significant limitations. Limited provider contracts for hospital carel” would involve

selecting certain hospitals for the provision of inpatient care to Medicare beneficiaries. Overall,

although contracting may save program dollars,

it represents an abandonment of the principle of

assuring beneficiaries freedom of choice of prol~current]y, State Medicaid agencies may apply for waivers from

the freedom-of-choice provision of the Social Security Act, Most

waivers to date have been for case management systems that restrict the providers from whom a Medicaid beneficia~ can obtain

primary care, although California has adopted an approach of contracting with hospitals for inpatient care for Medicaid beneficiaries.
— —

viders on which Medicare was

subsidies of hospital care from

built and forces

other payers.

Medicare Physician Payment and

Medical Technology

Any cost-containment effort must take into account the fact that physicians are key decisionmakers with respect to the use of medical technologies. Physicians determine the amount of

medical services to be provided, when patients

need hospitalization, and when they need other

types of care.

There is substantial evidence to suggest that inappropriate use of medical technologies is common and raises costs without improving quality

of care. Such excessive use exists within the norms

of medical practice and across the spectrum of

technologies available to physicians. Physicians’

habitual behavior can cause excessive use of medical services. Until recently, medical education

trained physicians to do all they could for their

patients’ well-being without concern for the cost.

In response to restraints in their payment, physicians have changed the number and mix of services they provide. The practice of defensive medicine in response to fears of lawsuits may also

increase unnecessary use, and thus cost, of medical technologies.

Physician behavior with regard to the use of

medical technologies may be modified by financial incentives, educational programs, utilization

review programs, and other programs such as second surgical opinion programs. Studies show that

the results of different programs and interventions

vary both in effectiveness and longevity.

Changes in physician payment methods can

also influence physicians’ incentives for the use

of medical technologies. Physicians who are paid

on a fee-for-service basis have financial incentives

to see more patients more often and provide more

technologies. Physicians (or practice plans in

which they participate) paid on a per capita basis

have financial incentives to increase the number

of their patients but to keep the number of patient visits low (or nonexistent) and to use particularly low-cost technologies. The financial incentives under a fee schedule system depend on

Ch. 1—Introduction and Summary ● 1 5 —

the particular type of schedule adopted. Under fee

schedules based on patient visits, physicians have

incentives to schedule more visits but disincentives to use a large number of technologies (particularly those whose costs are high in relation to

the fee per visit received). Under fee schedules

based on episodes of illness, physicians have incentives to treat for more episodes but to keep

patient visits for each episode and the use of costly

technologies at a minimum.

Most changes in Medicare physician payment

methods would necessitate a reformulation of the

diagnostic and procedural codes for physician

services that are currently used by the program.

The present coding system makes it fairly easy

for physicians to adopt and use medical technologies. Furthermore, the large number of procedural codes makes it fairly easy for physicians to

bill for expensive services and to make expensive

coding errors.

Changes in Medicare’s physician payment

methods that could help contain costs for the

Medicare program by influencing the adoption

and use of medical technologies are of two general

types. One is requiring patients to assume more

responsibility for their health care costs, either

through increases in beneficiary cost-sharing or

a reduction in the types of benefits Medicare covers. It should be noted, however, that elderly beneficiaries already have greater out-of-pocket

expenses than the younger population, and increased cost-sharing may reduce their access to

health care. The second type of change invoIves

restraining the amount or changing the methods

of Medicare payment to physicians (e. g., by fee

schedules or freezes on current fee levels), Either

approach could result in cost savings for the Medicare program, but each would have different effects on the adoption and use of medical technologies and on access to medical care by Medicare

beneficiaries. Changing Medicare’s claim-by-claim

voluntary physician assignment policy11 would

—

1 IM~d]C~rQ ~rmits physicians the option of kng paid directly

by Medicare, called “accepting assignment, ” or being paid direct]}’

by the patient. If a physician does not accept assignment, the Medicare reasonable charge, which is paid directly to the patient, ma}’

be less than the physician’s actual charge, and the patient is responsible tor the difference between the two.
16 • Medical Technology and Costs of the Medicare Program

strengthen the implementation of the other

changes, although it might discourage some physicians from treating Medicare patients.

Alternative Approaches to Changing

Incentives for Medical Technology

Adoption and Use

Alternative approaches that could be used by

Medicare to foster the appropriate adoption and

use of medical technologies, and ultimately save

costs, include two general policy mechanisms: 1)

methods to foster competitive behavior by providers, and 2) administrative changes in Medicare.

These mechanisms include changes involving the

general health care system that Medicare could

embrace and changes in the structure of the Medicare program itself.

It is generally believed that increases in the costs

of the Medicare program and of the overall health

care system can be contained by the rational adoption and use of medical technologies, which includes using technologies in appropriate settings.

An important method of stimulating such adoption and use is to foster competitive behavior by

providers. In most cases, it is through policies encouraging the use of alternative sites and organizations for health care delivery that competitive

behavior is expected to occur. Alternatives to feePtIoto credit” National /Institutes of Health

Home health care as a substitute for an extended hospital

stay may be underutilized

for-service, solo physician office practices and

traditional inpatient hospital settings include site

alternatives, such as freestanding ambulatory surgery centers, emergency care centers, hospices,

hospital outpatient departments, home health

care, and nursing homes; and organizational alternatives, such as health maintenance organizations, the use of primary care gatekeepers, and

preferred provider organizations.

Long-range cost containment in the Medicare

program is constrained by the kinds of health care

delivery systems available and the limited influence that Medicare financing can have on the settings of care and kinds of technologies provided.

In recent years, the Medicare program has granted

exceptions to specific alternative sites of care (e.g.,

freestanding ambulatory surgery centers) and encouraged the demonstration and evaluation of

alternative organizations for health care delivery

(e.g., preferred provider organizations). Thus,

Medicare’s efforts in developing competition with

the types of care predominantly available have

been to identify and encourage other types of provider practices and modes of delivery. In the long

run, it is hoped, alternatives of these types will

lead to cost-effective health care.

A complementary approach to increasing competition among providers involves moving from

the current Medicare program structure to making available other types of health insurance coverage to beneficiaries. The most discussed possibility is the use of vouchers, wherein Medicare

beneficiaries would receive a specified amount of

money to purchase health insurance from the marketplace instead of participating in the traditional

Medicare program. Important decisions regarding

competition for policymakers in the Medicare program are: 1) the relative emphases to be placed

on the insurance versus the alternative delivery

systems approach, and 2) the pace of adopting

the various competitive approaches into Medicare. To increase the capability of Medicare to

embrace competitive approaches, the program

could undergo an administrative change—merging Parts A and B. Merging the two parts could

alleviate the financial problems of the Medicare

program and improve the quality of care for patients.
.

POLICY OPTIONS

The final chapter of this report presents policy

options for congressional consideration. Rather

than to recommend specific actions, OTA’S policy is to provide Congress with a series of alternative actions and discussions of the possible consequences of implementing them. The policy

options in this report are organized by the following issue areas:

● How can the Medicare coverage process for

specific technologies be improved?

● How can Medicare’s hospital payment system incorporate appropriate incentives for

Ch. I—Introduction and Summary ● 1 7 ——

●

●

generating

and use of

How can

method be

effective and efficient adoption

technology?

Medicare’s physician payment

used to improve incentives for

appropriate technology adoption and use?

What broad approaches, other than those

directly involving Medicare’s payment mechanism, could be used by Medicare to encourage the appropriate adoption and use of medical technology?

Findings and options related to each issue are presented in chapter 9.
Part One
2

Medicare Policies Affecting

Medical Technology

Life can only be understood backwards, but it must be lived forwards.

Soren Kierkegaard
Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Development and Diffusion Of Medical Technologies . . . . . . . . . . . . . . . . . . . . . . . . 23

Overview of Medicare Policies That Affect Medical . . . . . . . . . . . . . . 25

Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

LIST OF TABLES

Table No. Page

I. Limitations Placed on Medicare Payment Levels . . . . . . . . . . . . . . . . . . . . . . . . . . 26

2. Number of Elderly and Disabled Beneficiaries Enrolled in

Medicare by Type of coverage, selected Year From 1966 to 1982. . . . . . . . . . 27

S. Medicare Benefits and Limitations, as of January 1984 . . . . . . . . . . . . . . . . . . . . 28

4. ESRD Patient Population 1972 to 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

FIGURE .

Figure No. Page

l. A Model for the Development and Diffusion of Medical Technologies . . . . . . 24
2

Medicare Policies Affecting

Medical Technology

INTRODUCTION

Because of its size and scope and because other

third-party payers often follow its example, the

Medicare program is a major force in the structure and performance of the U.S. health care system. Medicare currently accounts for more than

35 percent of national health spending for hospital care and more than 18 percent of national

spending for physicians’ services (135). Furthermore, in fiscal year 1984, program spending is expected to increase by 16.3 percent to $66.5 billion (34o). Medicare’s policies and procedures

affect all aspects of health care delivery in the

United States, including financing, administration,

organization, and personnel. Medicare also affects

the content of U.S. health care by its influence

on the development and diffusion (i. e., adoption

and use) of medical technology.

Despite its importance, however, the Medicare

program is only one of many institutions that affects the development and diffusion of medical

technology. Other institutions that affect the

direction and pace of technological change include

Federal agencies such as the National Institutes

of Health and the Food and Drug Administration

(FDA), as well as private organizations ranging

from manufacturers of drugs and devices, hospitals, private insurers, and professional medical

societies. 1 Some programs, such as the certificateof-need program, have been enacted to influence

medical technology but have not had the intended

impact.

This chapter analyzes the extent and limits of

Medicare’s contribution to the development and

diffusion of medical technology. It begins by

describing a model of the process of technological change and then considers the effects on this

process of Medicare’s eligibility, benefits, and payment (including beneficiary cost-sharing) policies.

The effect of medical technology on Medicare

costs, another important interaction between

Medicare and medical technology, will be considered in chapter 3.

I For an analysis of public and private sector roles in the development and diffusion of medical technology, see earlier OTA reports,

including Strategies for Medical Technology Assessment (3.s9) and

The Impact of Randomized Clinical Trials on Health Policy and M&-

ical Practice (352), as well as Toward Rational Technology In Alecficine by H. D. Banta, C. J. Behney, and J, S. Willems (241.

DEVELOPMENT AND DIFFUSION OF MEDICAL TECH NOLOGIES2

Broadly defined by OTA, medical technologies

are the drugs, devices, medical and surgical procedures used in medical care, and the organizational and supportive systems in which such care

is provided (341). In the past few decades, numerous and impressive changes have been made in

the types of medical technology available to the

——.—

‘The development and diffusion of medical technology are described in detail in previous OTA reports, including Assessing the

Efticacy and Safety of Lfedica] Technologies (341 ) and The Impact

ot Randomized Clinical Trials on Health Policy and Medical Pract)ce (352)

health care system. In the case of drugs, devices,

and procedures, many new technologies, new uses

of established technologies, and improvements on

technologies have been developed and marketed.

Furthermore, sophisticated managerial technologies, such as computer-based hospital information systems, are being purchased and used with

increasing rapidity. Alternatives to the traditional

modes and sites of health care delive~—the hospital and the physician’s office—that have proliferated recently include a variety of alternative

organizational arrangements, including hospital

23
24 ● Medical Technology and Costs of the Medicare Program

chains, hospital management corporations, freestanding emergency care centers, and ambulatory

care centers (see ch. 8).

The process of technological change occurs in

two stages: the development of a technology and

the subsequent diffusion of the technology into

medical practice (24). This process may be divided

into sequential steps within the developmental and

diffusion stages for the purpose of analysis, as

shown in figure 1. But the process of change is

often less linear and systematic than the generalized version depicted in the figure.

The development of medical technology occurs

in various sites and with a variety of funding

sources, depending on the type of technology.

While most of the basic biomedical research and

some applied research and technology developFigure 1 .—A Model for the Development

ment in this country is funded by the Federal

Government, the greatest portion of applied research and technology development is funded by

private industry. Much of modern medical technology is a combination of drugs, medical devices,

and human skills, and its development is very

complex and not well understood.

The role of Medicare and other payment systems in the development of drugs, devices, and

procedures has received little study.3 In theory,

however, payment systems can influence the development of some types of technology that are

produced by the private sector. In order for a

private firm to justify committing funds for the

.— —

‘The forthcoming OTA report, Federal Policies and the Medical

Devices Industry (345), will provide information on the role of payment systems in the development of medical devices.

and Diffusion of Medical Technologies
—

Ch. 2—Medicare Policies Affecting Medical Technology ● 2 5 ——.

research and/or development of a potential new

medical device, for example, the firm must perceive the existence of a market for the innovation

(345). A payment system that favors the adoption of new devices would help a firm make a decision to proceed with development. The development of technologies such as hospital information

systems may be subject to market influences as

well. Theoretically, Medicare’s new inpatient hospital payment system mandated by the Social

Security Amendments of 1983 (Public Law 98-21)

should stimulate the development of new hospital information technologies. It is clear that payment systems have played an important part in

the development of some new organizational patterns of medical care such as preferred provider

organizations or multihospital systems (325).

The diffusion of a medical technology into the

health care system has two phases: the initial

phase in which decisions are made to adopt the

technology, and a subsequent phase in which decisions are made to use the technology (24). Adoption has been studied far more by researchers than

use has and has also been the subject of much

greater direct involvement by the Government

(24). Decisions to adopt medical technology

within organizations such as hospitals are made

by physicians, hospital administrators, and purchasing departments. Decisions about using technology are primarily made by physicians, although patients’ decisions are also important. The

use of a technology is obviously dependent on its

adoption. The exact relationship between the two

phases, however, has not been established.

Before adoption (or rejection) can occur,

knowledge about a technology must be communicated to potential adopters (24). One focus of

studies on the adoption of medical technology,

therefore, is how knowledge about technology is

communicated. Research on communication about

drugs has led to the description of a two-step

model. The first step is the flow of information

from industry to those physicians who are opinion leaders. The second step is the transfer of information from the physician opinion leaders to

their followers through informal channels (324).

Recent research on the adoption of hospital information systems found a similar two-step model

(16).

Another focus of studies on the adoption of

medical technology is on the factors influencing

adoption. Such factors include the characteristics

of the technology (e. g., the complexity of understanding and using it), the characteristics of the

adopter (e. g., level of training in the case of physicians, organizational structure in the case of hospitals), and characteristics of the environment

(24). Third-party payment, including Medicare

payment, is one of the environmental factors

affecting medical technology adoption. Thirdparty payers pay more than 90 percent of all hospital expenditures, thus facilitating the adoption

of costly hospital technologies (24).

The factors affecting the use of technology include physician training, increasing physician

specialization, concerns about malpractice suits,

industry promotion of its products, the organization of medical care, and payment for medical

services (24). Unfortunately, however, the degree

of their influence is not known. How physicians

behave in their use of medical technologies and

how payment methods and other characteristics

of the health care system influence their behavior

are questions addressed in chapter 7.

OVERVIEW OF MEDICARE POLICIES THAT AFFECT

MEDICAL TECHNOLOGY

The principal intent of the 1965 legislation that 1965, there was less concern about the cost of the

established Medicare under Title XVIII of the services than there was about the problems of acSocial Security Act (Public Law 89-97) was to in- cess, primarily because there was little reason for

crease elderly persons’ access to medical services concern. After the inception of the program, howby removing financial barriers to such services, ever, the costs of Medicare escalated dramatically,

particularly to needed hospitalization (317). In as did all health care costs. Thus, most of the
26 ● Medical Technology and Costs of the Medicare Program — — ——

Medicare legislation enacted after 1965, with the

exception of laws increasing the numbers and

kinds of populations eligible for Medicare (see section on eligibility), has been passed with the intention of holding down Medicare’s cost increases

(see table 1). Efforts to control costs to date have

met with little success.

One of the factors that contributes to Medicare

costs and to health care costs as a whole is the

adoption and use of medical technology. How the

adoption and use of medical technology influences

the cost of the Medicare program will be discussed

in chapter 3. This chapter provides an overview

of Medicare’s eligibility, benefits, and payment

(including beneficiary cost-sharing) policies and

briefly describes the influence of each of the policies on the adoption and use of medical technology. 4

Eligibility

To increase elderly persons’ access to mainstream health care services, the Medicare law

mandated eligibility for insurance benefits, including specific technologies, for most Americans

65 years and over. Eligibility was extended to disabled persons and most persons with end-stage

renal disease (ESRD) on July 1, 1973, by the Social

4As noted in ch. 1, “medical services” is often used interchangeably

with “medical technology” in this report.

Table 1 .—Limitations Placed on Medicare

Payment Levels

Public Law 92-603 (Social Security Amendments of 1972):

● Limits on hospital routine operating costs

● Use of a Medicare Economic Index i n Iimiting rises i n

physician fees

● Authority for prospective reimbursement experiments

. A Professional Standards Review Organization to

review medical necessity of services

Public Law 97-35 (Omnibus Reconciliation Act of 1981):

● Limitation on Part B premiurn increases suspended for

1 year so that premiums could be increased to

comprise 25 percent of Part B costs

Public Law 97.248 (lax Equity and Fiscal Responsibility Act

of 1982):

● Per case Iimit on operating costs in hospitals, with

potential to keep some of the savings as an incentive

● Extension of Iimits on hospital routine operating costs

to ancillary services

Public Law 98-21 (Social Security Amendments of 1983):

• Diagnosis Related Groups (DRGs) for hospital payment

SOURCE Office of Technology Assessment

Security Amendments of 1972 (Public Law 92-

603). Largely because of increases in the number

of Americans who are 65 and over, the size of the

Medicare population has increased substantially

since the program’s inception (see table 2). This

trend is expected to continue.

As of July 1, 1982, Medicare beneficiaries numbered close to 30 million people, about 12.7 percent of the U.S. population. Because of the size

and characteristics of the population eligible for

Medicare benefits, there is a substantial market

for medical technology. By definition, Medicare

enrollees are either aged or disabled and thus are

disproportionately high users of health services

in general and of medical technology in particular (see ch. 3). Elderly people represent 90 percent of Medicare beneficiaries (see table 2).

Chronic conditions, most often conditions of middle and old age, require medical services for long

periods of time (273). The elderly population visits

physicians and uses hospitals and nursing homes

(organizational medical technologies) much more

often than the younger population (194). In 1982,

for example, people aged 65 or over represented

only 11 percent of the noninstitutionalized population but accounted for 29.8 percent of the hospital short-stay days of care (408). The older the

elderly individual, the more health care services

are provided, particularly hospitalization and

skilled nursing care (328). And the proportion of

older individuals in Medicare’s elderly population

is increasing. In 1966, 37 percent of Medicare’s

elderly enrollees were 75 years or older; in 1981,

however, the figure was 41 percent (328).

Disabled people represent only 11 percent of

Medicare enrollees (see table 2). Nevertheless,

their eligibility for Medicare benefits has affected

Medicare expenditures for services (328). The

Congressional Budget Office estimates that in

1984, Medicare payment for a disabled person will

be $2,136, while payment for an elderly enrollee

will be $1,773 (328). The patterns of use of health

care services by the disabled, however, have not

been studied (328).

People with ESRD require some form of dialysis

or kidney transplants to prolong their lives. Medicare’s ESRD population represents 0.26 percent

of Medicare enrollees (see table 2). An estimated

93 percent of the U.S. population with ESRD is
Ch. 2—Medicare Po/icies Affecting Medica/ Technology ● 2 7 — .

Table 2.—Number of Elderly and Disabled Beneficiaries Enrolled in Medicare by

Type of Coverage, Selected Years From 1966 to 1982

Number of

Total number of Number of Number of elderly and disabled

Medicare elderly b

disabledcbeneficiaries

Enrollment yeara

beneficiaries beneficiaries beneficiaries with ESRDd

1966 . . . . . . . . . . . . . . . . -

19,108,822 19,108,822 — —

1973 . . . . . . . . . . . . . . 23,545,363 21,814,825 1,730,538 N A

e

1974 ., . . . . . . . . . . . 24,201,042 22,272,920 1,928,122 18,564

1979 ... . . . . . . . 27,858,742 24,947,954 2,910,788 60,608

1982 ... ., . . . . . . 29,494,219 26,539,994 2,954,225 76,117

.— aEnrOllment year begins Jul Y ‘

bAll beneflclarles aged 65 and over, including those with end-stage renal dtsease

CAll beneficiaries under age 65, including those with end-stage renal disease

dEnd.stage renal disease

‘NA — I nformat!on not available

SOURCE U S Department of Health and Human Services, Health Care Flnanctng Admlnlstratlon,1s%6.1979 Data Notes Persons Enro//ed for Medtcare, 1979, HCFA publ Ication No 03079 (Baltimore, Md HCFA, January 1981); and H A Silverman, Med!care Program Stat! stlcs Branch, Health Care Flnanc!ng Administration, personal communication, August

1983

enrolled in Medicare (195). Thus, Medicare policies can be clearly identified as a major influence

on the diffusion of the technologies used in the

treatment of this disease. The effects of Medicare

benefits and payment policies in this area are discussed further below.

Benefits

Title XVIII of the Social Security Act specifies

the broad categories of benefits for which the

Medicare program will pay under the two parts:

Part A, Hospital Insurance, and Part B, Supplementary Medical Insurance.5 Part A’s primary

purpose is to provide insurance against the costs

of inpatient hospital care. Other benefits include

payment for post-hospital extended care services,

home health services, and, as of April 1, 1982,

inpatient alcohol detoxification services (see table

3). Part B covers medically necessary physician

services, outpatient hospital services, outpatient

physical therapy and speech pathology services,

and various other limited ambulatory services and

supplies, such as prosthetic devices’ and durable

medical equipment (see table 3). Part B also covers home health services for those Medicare beneficiaries who have Part B coverage only. Part A

is an entitlement program and is available without payment of a premium to those eligible. G Participation in Part B is voluntary and requires

payment of a monthly premium. ’ Except for individuals who choose not to participate in Part

B, premiums are deducted automatically from

social security checks. In 1982, 99 percent of the

elderly and 92 percent of the disabled people enrolled in Part A were also enrolled in Part B (328).

Although Medicare pays for a wide variety of

services in a variety of settings, Medicare’s benefit package is concentrated primarily on acute care

technologies provided in institutional settings,

particularly those provided as inpatient hospital

services. Of Medicare’s $52.2 billion in payments

for 1982, $34.6 billion (66.3 percent) was for inpatient hospital services (135,151). In 1978, Medicare paid for almost 75 percent of the elderly’s

hospital bills; other public sources paid for almost

13 percent, and the remaining 12 percent was paid

for by private health insurance (7 percent) or

directly by the patient (5 percent) (124). Medicare’s impact on hospital use can be seen from

examining hospital discharge rates. From 1965 to

1982, the discharge rate for persons 65 years and

over (i. e., Medicare beneficiaries) from acute care

hospitals increased 36 percent. The discharge rates

for other age groups during the same period, how-

‘The Medicare law speclfles broad categories of services, such as

hospital inpatient services, that the program will pay for or “cover.”

It also lists a number of specific services that it will not cover. HCFA

or hledicare contractors decide the coverage status ot particular technologies not mentioned in the legislation. For a full discussion of

coverage pOIICYr for such specific technologies, see ch. s.

bIndividuals not e] igible for Part A include those who work for

a nonprofit organization that has chosen not to join Social Secu -

rit y, those who work for a foreign employer overseas, the President of the United States, and others.

“The Part B premium was $14. bO month as of Jan. 1, 1984, and

IS due to increase on Jan. 1, 1Q85,
28 . Medical Technology and Costs of the Medicare Program —-—-—.— — —

Table 3.— Medicare Benefits and Limitations, as of January 1984

Kind of care —

Part A

Medicare pays Beneficiary pays Comments

Hospitalization 1.60 days

61-90 days

91.150 days

After 150 days— no coverage

Same as hospitalization

1-20 days

21.100 days

After 100 days—no coverage

Unlimited visits

Reasonable costs

Initial deductible ($356)

Daily copayment ($89)

Daily copayment ($1 78)

Same as hospitalization

Nothing

Daily copayment ($45)

Nothing

Deductible and copayments are adjusted

annually

150 days of coverage includes a Iifetime reserve

of 60 days that can be used only once

Psychiatric Only 190 days of coverage, usable only once

Skilled nursing facility a —

Home health servicesb

Beneficiary must be eligible for Part A

Part B

SMI basic premium= $14 60/mo

Home health services Nothing

Physician and other medical

service s

Unlimited visits

Reasonable costs

Beneficiary eligible for Part B only

800% of approved charges after deductible

is met

Pneumococcal vaccine and those

required for treatment and ordered

by physician

Manual manipulation of the spine

Nothtng

Jaw surgery and setting

Nothing

Noth!ng

Nothing

Nothing

Those needed to substitute for an

Internal body organ, I e., heart

prostheses. Also artificial limbs and

eyes, arms, legs, back, and neck braces

If rented, help w!th approved charges,

if bought, monthly payments until

Medcare’s share IS paid or equipment

no longer necessary If equipment is for

long term use, payment is made in a

lump sum

Dressings, splints, and casts

Initial yearly deductible ($75)

Deductible does not apply

—

lmmunlzatlons —

Chiropractors’ services

Most routine foot care

Dental car e

Denture s

Hearing and eye exams

Eyeglasses and hearing aids

Routine physical exams

Prosthetic devices

All other costs

All costs

All other costs

Total costs

Total costs

Total costs

Total costs

All other costs

—

Durable medical equipment —

All other costs (i e , common

first aid supplies)

First three pints or replacement

All costs above $250/yr

Medical supplie s

Blood .,

Outpatient mental illness

Outpatient physical therapy or

speech patholog y

For all but first three pints

$250/yr

As treatment

In doctor’s office, 60°/0 of approved

charges after deductible

From physical therapist, $400/yr

maximum

From clinic, home health agency, or

other agencies, 800/0 of approved

charges after deductible

$75 deductible

20% coinsurance

All costs above $400/yr

—

$75 deductible

20% coinsurance

End-stage renal disease

treatmen t 80% of approved charges.

Hospital outpatient dialysis

$131, treatment

Independent clinic dialysis:

$127treatment

Home dialysis $127/treatment

Prospectively per day, the following

—Routine home care ..$4625

—Continuous home care”

Total cent care rate $35867

For 8 hrs cent care 11956

Hourly rate 1494

— Inpatient respit e

c rat e 55.33

—General inpatient care rate 27100

$75 deductible, 20°10 coinsurance Coverage ends 12 months after the month

maintenance dialysis treatment stops or

36 months after month of kidney transplant

Hospice 5°/0 of cost to program for

—Drugs and blologicals (per

drug) (not to exceed $5 per

prescription)

–Inpatient respite care (per day)

(not to exceed inpatient

hospital deductible)

Beneficiary also pays Medicare deductibles and

coinsurance payments, and the difference

between reasonable and actual charges on

unassigned claims for covered services other

than hospice care Hospice coverage consists

of two 90-day periods and one 30.day period, to

be taken in that order
ever, either decreased, remained the same, or increased slightly (see ch. 3 ).8

Medicare’s benefit policy has favored the development of some technologies in an inpatient

setting. For example, Medicare coverage emphasizes treatment for alcoholism provided in traditional acute care institutional settings, rather than

that provided in the freestanding inpatient alcoholism facilities that have developed over the last

15 years or in outpatient alcoholism treatment

centers. As a result, a substantial network of inpatient alcoholism treatment facilities has developed, despite evidence that outpatient treatment

may be as effective and certainly is less costly

(348 ).9

Since Medicare’s enactment, practically all of

the Nation’s elderly have gained access to services provided in hospitals and to a lesser extent

to services provided in ambulatory settings (81).

Some analysts contend that the quality of life for

Medicare beneficiaries has improved with access

to inpatient hospital services such as surgical services. The frequency of certain surgical procedures

that improve the functional status of the elderly,

such as cataract operations and arthroplasty, 10 has

increased dramatically as a result of Medicare

(91 ,92). Furthermore, U.S. mortality rates, which

had been reaching a plateau in the early 1960’s,

resumed their decline in the 1970’s (406). From

1968 to 1977, death rates for elderly men declined

at an average annual rate of 1.5 percent and for

elderly women at an average annual rate of 2.3

percent (406). The decline in U.S. death rates is

almost twice the decline in Canada and European

rates over the same period (81 ). The beginning

of the sharp decline in mortality rates among older

people in the United States was coincident with

Medicare’s enactment. Some analysts have attributed the decline to improved medical care treatment (284 ), and more specifically, to the services

available under the Medicare program (92).

— ..—

‘This example ]llu\trates the [ncreaw in hospital ser~ices tor elderly

people relatlve to the general population, It does not, however,

clemon~tratc an ]ncrease In h[)sp]tal services relat]ve to outpatient

care

“The Etfec t)~enes~ and (-osts of /41( oh{)llsm Tre~tment OT A

Health Techn{~l<~gy ( ase Study ff22 [348}, an~l}zes the reimbursement issue~ concerning the treatment (JI alc oholl~m In depth

“’Arthr(~plast] 1s plastl( ~urger}’ of a Iolnt or jolnt~ or the t(>rm.~-

t]on of movable )oint~

Ch, 2—Medicare Policies Affect/rig Medical Technology ● 2 9 —. —

At the same time that the mortality rates from

many diseases, including heart disease and diabetes, have been falling among the elderly, however, the prevalence of such diseases has increased.

The reason may be that improved medical treatment of acute episodes of these conditions decreases mortality rates and thereby increases the

prevalence of these conditions as chronic illnesses.

The prevalence of other major illnesses—atherosclerosis, cancer, emphysema, cirrhosis, osteoarthritis—has also increased among the elderly

(128). Chronic conditions require long-term care

more than episodic acute care. Long-term care for

the elderly requires social services as well as health

services. Indeed, there is a school of thought that

considers medical services to have a subsidiary

role in long-term care (137). Thus, the most

appropriate role of Medicare, a health insurance

program, with respect to chronic conditions and

long-term care is a matter of debate.

Medicare’s benefits do not include all healthrelated services. Section 1862 of Title XVIII of the

Social Security Act specifies that, notwithstanding

other provisions of the title, “no payment may

be made under part A or part B for any expenses

incurred for items or services . . . which are not

reasonable and necessary for the diagnosis or

treatment of illness or injury or to improve the

functioning of a malformed body member. ” Section 1862 specifically excludes Medicare coverage

of many preventive services (including routine

physical checkups; eyeglasses and examinations

for the purpose of prescribing or fitting eyeglasses;

hearing aids and examinations for hearing aids;

and immunizations other than pneumococcal vaccinations, which were added as a benefit in 1981),

custodial care, most cosmetic surgery and dental

services (except for special cases that require

hospitalization), personal comfort items, and orthopedic shoes.

In part because of funding disapprovals by

Medicare and other third-party payers, assistive

communication devices, used in the rehabilitation

of persons disabled by severe speech impairments,

are little used (351). Although Medicare covers

such devices under Part A (i. e., for use only while

11 see the f{ ~rt hc~)m 1 nX OTA report T(>C }1 n( ~1(~~>}’ and A~W In .

Arncr]c~ ( summer 1984 ~ t[]r a detailed dlscusilon ot long-term care

I nc I uding technol [)g}, and f Inancl ng ] ssues
30 ● Medical Technology and Costs of the Medicare Program

the person is actually in the hospital) so as to

enable nonvocal patients to communicate with

hospital and skilled nursing facility staff (351), it

does not cover these devices under Part B because

of an administrative decision that the devices are

not prosthetic devices needed for the functioning

of a malformed body member. Not only has sales

volume been lower than anticipated, but innovations in the field appear to have been held back,

in part, by the lack of coverage by Medicare and

other insurers (351).

Clearly, many medical technologies have been

developed and diffused without Medicare coverage. One example is eyeglasses and vision aids,

In 1977, among those 65 years of age and older,

193 per 1,000 population purchased glasses or

contact lenses or had them repaired. The major

source of payment, 78.8 percent, was the family

(394). Whether there would be greater adoption

and utilization by the elderly of vision aids such

as eyeglasses and contact lenses if the technologies

were covered by Medicare is not known.

Payment

For many years, reimbursement by Medicare

has been based on reasonable costs in the case of

hospitals and other institutional providers and

reasonable charges on a fee-for-service basis in the

case of physicians and other noninstitutional suppliers of services. Under these payment methods,

providers receive greater reimbursement when

they use more technology, so they have little financial incentive to use technologies judiciously,

with consideration of their costs and benefits. In

particular, cost-based reimbursement policy has

been instrumental in facilitating the acquisition

by hospitals of sophisticated, capital-intensive

technology (24),

In an attempt to change the financial incentives

to provide hospital care, the Social Security

Amendments of 1983 (Public Law 98-21) changed

the basis of Medicare payment for inpatient hospital services from retrospective cost-based reimbursement to prospective payment based on

Diagnosis Related Groups (DRGs).12 The DRG

LzsW discussion section ior an overview and ch. 6 for a detailed

discussion of Medicare’s current hospital payment system and its

expected effects (}n medical technology,

prospective payment system does not apply to all

hospitals or to many other segments of the health

care delivery system. The system is still being implemented, and it is too early to evaluate its effects. Medicare’s method of paying physicians and

other noninstitutional suppliers of services on the

basis of reasonable charges has changed little since

Medicare was enacted.

Payment for Hospital Services

Box A describes Medicare’s traditional method

of payment for hospital services. The Medicare

law passed in 1965 specified that Medicare pay

hospitals the reasonable cost of providing services to beneficiaries. The method or methods to

be used in determining reasonable cost were left

to administrative decisions. Since Medicare purchased only a portion of each hospital’s costs, the

costs attributable to Medicare patients (“allowable

costs”) had to be calculated. Like Blue Cross,

Medicare adopted a method that allowed hospitals considerable discretion in calculating attributable costs (104). Under Medicare’s costbased payment method applied to inpatient services, there was no financial reason for a hospital

not to spend money on technology, because it was

assured of reimbursement.

There have been a number of changes in the

rules and guidelines in attempts to moderate Medicare’s hospital expenditures, but such attempts

have had only qualified success. Until 1982, the

single most important innovation in the Medicare

hospital reimbursement system was the 1974 implementation of “Section 223” limits (see Box A).

Although the objectives of Section 223 were to

moderate the rate of increase in Medicare’s hospital outlays (362), the results were disappointing. The new limits affected only a few high-cost

hospitals and were relatively easy to circumvent

by reclassifying formerly routine services into

ancillary (and therefore chargeable) items, Section 223 limits may also have encouraged the

spread of intensive care unit beds (32). The limits

may have encouraged hospitals to increase lengths

of stay. Finally, the limits never pertained to capital costs (depreciation, interest, and in the case

of for-profit hospitals, return on equity). Hospitals were paid depreciation based on actual historical expenditures and interest payments as incurred.
.—

Ch. 2—Medicare Policies Affecting Medical Technology ● 3 1

.—

Box A.—Retrospective Cost-Based Reimbursement to Hospitals Under Medicare

Under Medicare’s traditional hospital payment method, which is currently being replaced by DRG

payment, hospitals are to be reimbursed the necessary costs incurred in the support of patient care facilities and activities for Medicare beneficiaries. * Each hospital is required to submit to Medicare through

local contractors known as intermediaries a cost report with the full costs of each revenue-generating

department. Allowable costs (i.e., costs Medicare will pay for) are determined by:

1. calculating a ratio of Medicare beneficiary charges to total patient charges for each ancillary department in the hospital and then applying this to total allowable charges to determine Medicare’s share;

2. calculating a separate average per diem cost for general routine services and for each special care

unit in the hospital; and

3. calculating Medicare costs for malpractice insurance and self insurance fund contributions and

summing the calculations.

Medicare intermediaries audit the cost reports to determine whether the costs are allowable (340).

In verifying whether a cost is allowable, the intermediaries employ the “prudent buyer” principle, i.e.,

the costs should not exceed what a prudent and cost-conscious buyer would pay for a given item or service.

In addition to operating costs, allowable costs include the depreciation cost on buildings and equipment used to render care covered by Medicare. Depreciation is based on the original cost of the building

or equipment with special rules in place for assets purchased before 1966. Medicare does not require

hospitals to set aside the amount allowed for depreciation to replace the depreciated asset (funding of

depreciation). Other allowable costs are the interest on current and capital indebtedness, the net cost

of approved educational activities, and the return on equity capital of for-profit hospitals. Bad debts,

charity, and courtesy allowances for the most part are not allowable costs. Research costs that are over

and above those related to usual patient care are among other categories of costs excluded from allowable

costs.

The Social Security Amendments of 1972 (Public Law 92-603), among other things, imposed caps

known as “Section 223 limits” on allowable inpatient operating costs in order to moderate the rate of

increases in Medicare’s hospital outlays. Beginning in 1974, allowable inpatient routine operating costs

per patient day were capped by an amount equal to 120 percent of the mean of such costs in a similar

group of hospitals. Between 1975 and 1982, the cap was gradually reduced to 108 percent of the mean

cost per day in the peer group hospitals.

● This method remains in place for those hospitals not yet under DRG payment and for excluded hospitals and hospital units.

Cost-based treatment of capital costs, which remains to this day, provides no disincentive for

hospitals to adopt the capital-intensive technologies that they wish to adopt. The inclusion of

depreciation cost as an allowable cost means that

the cost of the equipment and buildings is passed

through the hospital to the Medicare program.

The treatment of capital costs by Medicare has

also facilitated the ability of hospitals to borrow

capital with little risk. Low-cost borrowing has

made it easier for hospitals to purchase buildings

and equipment than it would be if the hospitals

found it necessary to generate capital for such expenditures internally. Medicare’s traditional approach to capital investment is seen in another

capital-related provision. Profitmaking hospitals

can include a reasonable return on equity (capital invested and used in providing patient care)

as an allowable cost. Thus, with limited financial constraints, it has been to some hospitals’

advantage to increase their technological capability in response to demand rather than through a

process of assessment of need, however defined,

Until very recently, the organization of the hospital industry has also provided incentives for

technology adoption.
32 • Medical Technology and Costs of the Medicare Program — —— .—

In August 1982, Congress made some major

revisions in Medicare’s traditional cost-based

reimbursement system for hospitals by passing the

Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA) (Public Law 97-248). Among other things,

TEFRA imposed a hospital-specific limit on the

amount of inpatient operating costs per case that

Medicare would reimburse (see Box B). Medicare’s

inpatient hospital payment method was changed

more dramatically when the Social Security Amendments of 1983 (Public Law 98-21) mandated the

phasing in over a 3-year period beginning in October 1983 of a new inpatient hospital payment

method based on a national set of per case prices

for patients in 470 separate DRGs (see Box B).

The DRG prices will apply to virtually all shortterm acute-care general hospitals in the United

States. Capital costs will continue to be paid as

under the old system until the end of the transition period. At the time Congress passed the 1983

amendments, it contemplated, but did not specify

the method for, the incorporation of payment for

capital into the DRG pricing system.

Payment for Physicians’ Services14

Except for the imposition of minor restraints

on the rate of increase of physicians’ upper limit

payment levels, Medicare’s method of paying physicians and other noninstitutional suppliers of

services for charges on a fee-for-service basis has

changed little since Medicare was enacted. Box

C provides a description of this payment method.

Most charge-based payment by Medicare—over

70 percent in 1982—is made to physicians for care

provided in ambulatory and institutional settings

(338).

Under Medicare’s current method of payment

for physician services, most of the charge for a

service is passed through to the beneficiary, who,

in turn, is protected from some part of the charge

by Medicare. ’5 This method of physician payment

———.

I Jsee OTA’s technica] memorandum entitled Diagnosis Refakd

Groups (DRGs) and the Medicare Program: Implications for Medical Techno/ogJ~ (343) for further discussion of Medicare’s new hospital payment system.

Iisee Ch, 7 for a detailed discussion of physician payment and

medical technology,

“The effect of Medicare’s beneficiary cost-sharing policy on technology is discussed in a following section.

encourages the use of medical technology by providers, particularly if the charge-to-cost ratio is

high. When payment is based on a fee paid for

each service, physicians’ revenues are determined

to a large extent by the number and intensity of

services delivered and the fee received for each

service. The use of technology by fee-for-service

physicians is sensitive to the additional revenue

they receive (229).

Medicare’s method of paying physicians also

gives them an opportunity to acquire and use expensive, technically sophisticated technology in

their offices. When a technology is provided as

an office service, the physician’s capital investment in the technology may be incorporated into

the charge to the patient for the service. In 1980,

18.9 percent of the 1,471 operational computed

tomography (CT) scanners, were in private offices and clinics (347). At the time, scanners were

expensive. Even the so-called lower priced models

of head scanners listed from $95,000 to $200,000

(347).

Although no payment method automatically

provides incentives for one technology over

another, any payment method can be structured

to do so. The payment levels that Medicare and

other third-party payers have established under

the charge-based method of paying physicians

provide incentives for the use of new and often

expensive technologies. As noted in Box C, Medicare carriers refer to relative value systems when

establishing charges for new technologies.lb In

most instances, the reimbursable charge was established at an early point in the history of the

technology (52). Although later technological advances and higher rates of utilization may have

substantially reduced the time, judgment, skill,

and cost required to use the technology, this

change is not reflected in the physicians’ fee level

or Medicare’s reimbursement level (235). Furthermore, the payment level that Medicare has established for complex and expensive technology is

—.

l~Relative “a]ue systems establish a quantitative but nonmonetary

scale on the worth of one procedure as compared to all other procedures (315). For example, if administration of a measles vaccine

had a relative value of 2,2 and the conversion factor is 10, then the

payer would pay the physician a maximum of $22 for the immunization.
Ch. Z—Medicare Policies Affecting Medical Technology ● 3 3

Box B.—Prospective Per Case Payment to Hospitals Under Medicare

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Public Law 97-248) made major

revisions in Medicare’s retrospective cost-based hospital reimbursement system. In addition to extending the existing “Section 223 limits” (see Box A) to include ancillary and special care unit operating costs,

TEFRA imposed a hospital-specific maximum limit on the amount of inpatient operating costs per case

that would be reimbursed. The new approach, which became effective in October 1982, has two key

elements: 1) the limit is determined either by the hospital’s own per case cost in a previous year or the

average per case cost of similar hospitals; and 2) the hospital stands to gain a small portion of per case

savings it can generate. TEFRA put no limit on capital costs (depreciation and interest), direct teaching

expenses, or outpatient services. These remained “pass-through” items, i.e., items not subject to the new

system’s controls.

A more sweeping revision of Medicare’s hospital payment system was signed into law in April 1983.

The Social Security Amendments of 1983 (Public Law 98-21) mandated the phasing in over a 3-year

period of a prospective payment system for inpatient hospital services. Payment is to be based on a

national set of per case prices for patients in 470 Diagnosis Related Groups (DRGs). DRGs are a set

of patient classes developed to reflect differences in resource needs among different kinds of patients.

Several types of hospitals (psychiatric, long-term, children’s, and rehabilitation hospitals) and hospital

units (psychiatric and rehabilitation units operating as distinct parts of acute care hospitals) are excluded

from the prospective payment system and will continue to be reimbursed on the basis of reasonable

costs. Capital costs and the costs of direct medical education remain pass-through items.

Under the DRG system, Medicare payment is made at a predetermined, specific rate for each

discharge. During the 3-year transition period, which began in October 1983, a declining portion of the

total prospective rate is to be based on hospital’s historical costs in a given base year, and a gradually

increasing portion is to be based on a blend of federally determined regional and national rates. Beginning in the fourth year, Medicare payment for inpatient care will be based on a set of national DRG

rates. The price for a DRG will be adjusted for the hospital’s urban or rural location and area wage

rate. For 1984 and 1985, the prospective payment system must be “budget neutral,” i.e., payments may

not be greater than nor less than the payments that would have been paid under TEFRA.

The DRG prospective payment system applies to all inpatient discharges from short-term acute care

general hospitals in the United States except for a small number of cases (set by statute as 6 percent

of the total) with unusually long lengths of stay or high charges. The rate of payment for these “outlier”

cases will be increased by the estimated cost of care during the extended stay.

The initial set of DRG prices is based on the 1981 average inpatient operating cost per case for each

DRG in a 20 percent sample of Medicare claims. The law requires that the DRG prices be updated regularly

in two ways. First, an overall annual rate of increase is applied to all DRGs to keep pace with the general

level of inflation and rate of technological change in the economy. Second, the relative weights (i.e.,

the ratio of one weight to another) must be assessed and recalibrated at least once every 4 years, with

the first recalibration scheduled for October 1985. The recalibration must reflect changes in treatment

patterns, technology, and other factors that alter the relative use of hospital resources among DRGs.

A Prospective Payment Assessment Commission established by the law is responsible for making recommendations regarding the annual payment increase and recalibration and for evaluating any such

adjustments made by the Secretary of the Department of Health and Human Services.

Public Law 98-21 requires the Medicare program to participate in any State-legislated alternative

prospective payment program that: covers at least 75 percent of the State’s population; makes provisions for competitive health plans; assures the Federal Government that access to hospital care for Medicare and Medicaid beneficiaries will not decline; and assures the Federal Government that hospital costs

will not be higher under the State program. Thus, it encourages States to experiment with hospital payment systems that cover third-party payers in addition to Medicare and differ from DRG payment.
34 ● Medical Technology and Costs of the Medicare Program .

Box C.—Charge-Based Reimbursement to Physicians Under Medicare

Title XVIII of the Social Security Act specifies that payments for physician services under Part B

of Medicare are to be made on the basis of reasonable charges, The criteria for determining reasonable

charges are described in both statute and regulations. The criteria are applied by Medicare contractors

known as carriers in determing the reasonable charge for each service provided in the absence of unusual

medical complications or certain other circumstances.

Medicare carriers maintain records of the services provided and the charges billed by physicians

in an area. Then they develop individual and areawide statistical profiles of physician charges. The reasonable charge is the lowest of a physician’s actual charge, a physician’s customary charge, or the area’s

prevailing charge. The actual charge is a physician’s billed charge for the service provided. The customary charge is the median of the charges filed by a physician during the previous year for the service.

Until 1976, the prevailing charge was the 75th percentile of the distribution of customary charges of

all area physicians the previous calendar year, weighted by the number of times each physician billed

for the service.

The calculation of prevailing charges was changed by the Social Security Amendments of 1972 (Public

Law 92-603), which placed limitations on the yearly increases in prevailing charge levels beginning

1976. The amendments established a Medicare Economic Index that limits the rate of increase in physicians’ fees to the rate of increase in their costs. Prevailing charges are now calculated by multiplying

the 1973 prevailing charges by the current index (35). The index is promulgated annually for the 12-

month period beginning July 1.

Prevailing charges vary widely from community to community, and in some areas, different payment levels are calculated and applied to general practitioners and specialists.

When there is no reliable statistical base for determining a physiaan’s customary charge or the prevailing charge for a medical procedure in the area, Medicare carriers may use a relative value system

(235). Medicare carriers refer to relative value systems when establishing charges for new procedures,

since the systems describe and code particular physician services.

Medicare permits physicians the option of being paid directly by Medicare, called “accepting assignment,” or being paid directly by the patient. Assignment is accepted on a bill-by-bill basis. If a physician

accepts assignment, he or she bills the program directly and is paid Medicare’s reasonable charge. If

a physician does not accept assignment, the Medicare Medicare charge, which is paid directly to the

patient, may be lower than the physician’s actual charge, and the beneficiary is responsible for any difference between the two. In all cases, the beneficiary is responsible for 20 percent coinsurance on the

reasonable charge (see Box D). The assignment rate has declined from a high of 61.5 percent in 1969,

leveling off at about 50 percent (118). 1

usually disproportionately high. Relative value

scales place higher values on “technology-oriented” procedures and devices than on other services, such as cognitive procedures and office visits

(235).

Payment for Treatment of

End-Stage Renal Disease

The Social Security Amendments of 1972 mandated payment under Medicare’s ESRD program

for both hemodialysis and kidney transplantation.

Before the ESRD program was established in 1973,

there were few freestanding dialysis centers, and

most hemodialysis was performed in hospitals or

in patients’ homes. The original Medicare regulations pertaining to ESRD included financial disincentives for home dialysis as compared to facility dialysis. 17 By 1977, there were 895 approved

17FOr ~XamP]e, Out.of-pmket costs were required for home ~alYsis

supplies and equipment, and reimbursement was not provided for

the services of a home dialysis assistant nor for renting equipment,

ordering supplies, and other bookkeeping requirements. Home dialysis patients also incurred out-of-pocket costs for home modification and higher electric and water bills.
— .-

Ch, 2—Medicare Policies Affecting Medical Technology ● 3 5

‘ / /

Photo credit: Nationa/ Kidney Foundation, Washington D. C.

Payment and coverage policies for end-stage renal disease

technologies have fostered their use

dialysis centers in the ESRD program (262), and

the percentage of patients on home dialysis had

decreased significantly (see table 4). Some of the

decrease in home dialysis may have been due to

the stresses on family life, which led patients to

use facility dialysis when Medicare coverage became available. Other factors contributing to the

increased use of facility dialysis included the personal philosophy of the physician or hospital

treating the patient, increased age and morbidity

of dialysis patients that reduced their suitability

for home dialysis, and the for-profit status of a

significant percentage of dialysis facilities.

The number of patients receiving kidney transplants increased strikingly in 1973 (see table 4).

After 1973, the number grew at a slower pace and

then plateaued between 1977 and 1978 because

of the lack of improvement in graft success rates,

a decreased donor pool, and financial disincentives for undergoing transplantation that were in

the Medicare regulations. When the financial disincentives, including termination of benefits the

12th month after transplant surgery, were removed in 1978, the number of transplants started

to increase (359).

Escalating costs of Medicare’s ESRD program

were addressed in two revisions to the original

Table 4.—ESRD Patient Population, 1972 to 1982

Number of Percentage ‘of

Number of hemodialysis patients on

Year kidney transplants” patients home dialysis”

1972 . . . . . . . . . . . . . . . 1,993 (2,852) -

10,000 40 “/0

1973 ., ... . . ... ... ... 3,017 11,000 35.9

1974 ... . . . . . . . . . . . . . . . . . 3,190 18,875 32.7

1975 ... . . . . . . . . . 3,730 22,000 28

1976 . . . . . . . . . . . . . . . . . . . . 3,504 30,131 23,7 (13)

1977 ., . . . . . . . . . . . . . . . . 3,973 32,435 11.6 (20)

1978 ., ., . . . . . . ... . . . . 3,949 36,463 12.4

1979 . . . . . . . . . ... ... 4,271 45,565 13,0(10)

1980 ... . . . . . . . . . . . . 4,697 50,000

1981 ., . . . . . . . . . . . . . . . . . . 4,885 NA

1982 ., ... . . . . . . . . . . . 5,358 NA

aN um bers I n parent hesls reflect confl ictl ng reports i n the I I terature

bNA_lnformatlon not available
36 ● Medical Technology and Costs of the Medicare Program — —

law. The End-Stage Renal Disease Program Amendments of 1978 (Public Law 95-292) established a

prospective reimbursement method to encourage

efficiency and cost effectiveness. To encourage

home dialysis by eliminating the 20-percent coinsurance requirement and to avoid high equipment rental payments, one of the provisions provided for reimbursement by Medicare of the full

costs (100 percent) of home dialysis equipment,

installation, maintenance, and repair.

The Omnibus Budget Reconciliation Act of

1981 (Public Law 97-35) discontinued 100-percent

reimbursement for home dialysis equipment but

called for further changes to promote home dialysis. Under regulations implementing the law,

each dialysis facility receives a certain payment

rate per treatment, adjusted for geographic wage

differences, regardless of whether the treatment

is furnished in the facility or supervised in the patient’s home. Dialysis facilities have to accept the

prospective payment rate as payment in full. Physicians receive a monthly cavitation payment that

is equal for home dialysis and facility dialysis

(111).

Financial incentives favoring one dialysis location over another are related to the difference between reimbursement rates and unit costs. The difference between reimbursement rates and unit

costs creates strong disincentives for performing

hemodialysis in hospital dialysis centers, moderate

incentives to perform hemodialysis in independent centers, and very strong incentives for home

dialysis supervised by either hospital or independent centers. The strong incentive for home hemodialysis could be moderated somewhat if unit

costs rise as a result of the need for more home

health aides for sicker patients or those without

much family support.

Average physician cavitation fees under the

1983 composite rate formula will increase from

$1,848 per year to $2,208 per year (+ 19 percent)

for home dialysis, and decrease from $2,640 per

year to $2,208 per year ( -– 16 percent) for center

dialysis, Thus, changes in cavitation rates for physician supervision of dialysis also heavily favor

home dialysis over center dialysis (344).

Beneficiary Cost-Sharing

“In one sense . . . Medicare can be said to have

been designed to increase utilization” (318). Yet

cost-sharing provisions were included in the

original Medicare legislation as a possible moderating influence on the unnecessary utilization

of services (322). Box D describes the beneficiary

cost-sharing provisions of the Medicare program.

The premise behind deductibles, copayments,

and coinsurance is that price deters patients from

seeking care and thereby lessens the use of unnecessary services. Furthermore, once beneficiaries

decide to seek care, price is considered to influence patients and providers to choose less expensive technologies.

Premium payments, another form of costsharing, are not considered an obstacle to the use

of services (28,253). premium cost is too far

removed from the use of a technology to affect

patients’ or physicians’ behavior at the time of its

use.

A number of studies of populations not in the

Medicare program suggest that cost-sharing restrains the use of medical services (30,138,244,

245,246,255,259,260,261,299). When beneficiaries must immediately pay for part of the cost

of additional services, they choose to use fewer

services than when fully insured, Low-income

groups, in particular, are deterred from using services as a result of cost-sharing (30,299).

Early results of a large, well-designed and executed study—the Rand National Health Insurance Study (247)—substantiate the above findings. Individuals enrolled in health insurance plans

with high coinsurance rates (50 or 95 percent, similar to income-related catastrophic coverage) were

less likely than individuals enrolled in plans with

no coinsurance or a low coinsurance rate (25 percent) to visit a physician and to be admitted to

a hospital. Individuals in plans with higher col~For a genera] discussion of cost-sharing and the adoption and

use of medical technology, see the OTA assessment A4ed’cal Technolog,v Under Proposals To Increase Cornpetit]on In Health Care

(355).
Ch. 2—Medicare Policies Affecting Medical Technology ● 3 7 ———.— — — —-

Box D.—Beneficiary Cost-Sharing Under Medicare

Beneficiaries’ expenses in the Medicare program consist of deductibles and copayments under Part

A (Hospital Insurance) and premium payments, deductibles, and coinsurance under Part B (Supplementary Medical Insurance). Those over 65 who are not automatically entitled to Medicare (e.g., those who

work for a nonprofit organization that has chosen not to join Social Security) can participate by monthly payments of the actuarial cost of coverage.

Part A deductibles and copayments are calculated on the basis of a benefit period (a benefit period

begins when a beneficiary enters a hospital and ends when the beneficiary has been out of a hospital

or skilled nursing facility for 60 days in a row). During each benefit period, Part A will pay for 90 days

of inpatient hospital care of which the beneficiary has to pay the first $356. After 60 days of inpatient

hospital care, the beneficiary is required to pay a daily copayment of $89 until the 90th day of care.

If more than 90 days of care are required in any one benefit period, the beneficiary can draw upon a

lifetime reserve of 60 days that requires a copayment of $178 per day. Part A also requires a beneficiary

copayment of $45 per day for the 21st through 100th day in a skilled nursing facility.

Under Part B, the beneficiary is responsible for the first $75 of approved charges in a calendar year

and coinsurance of 20 percent for the remainder of approved charges. If a physician does not accept

assignment (agree to accept the level of reimbursement calculated by Medicare in exchange for direct

payment of Medicare’s 80-percent share), the beneficiary is financially responsible for the difference between the charge billed by the physician and the allowable charge determined by Medicare.

In 1966, premiums contributed half of Part B revenues, while general revenues subsidized the other

half. Subsequent legislation limited increases in the premiums to no more than the percentage increase

in Social Security cash benefits. By 1978, the percent contribution of premiums to meet Part B program

costs had fallen to below 25 percent (134).

The Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35) and the Social Security Amendments of 1983 (Public Law 98-21) suspended the limitation on Part B basic premium increases for the

period between July 1, 1983 and January 1, 1984. During this period, premiums increased so that they

represent 25 percent of program costs. Premiums rose from $13.50/month on July 1, 1983, to $14.60/

month on January 1, 1984.

insurance rates also had a lower number of physician visits. There was no significant difference

in hospital spending per hospital admission.

Applying results of available studies of costsharing on different age and sex groups to the

Medicare beneficiaries may not be appropriate.

There is evidence that the influence of cost-sharing

on hospital use is sensitive to the age and sex of

the patient (243). There are crucial differences in

health status and health practices between the

Medicare population and others. Not surprisingly,

even before Medicare was enacted, the elderly

used hospitals more than others. For example,

from July 1962 to June 1964, those 65 years and

older represented 9 percent of the population, but

used over 25 percent of hospital days (318).

Little empirical evidence is available on the effects of deductibles, copayments, and coinsurance

specifically in the Medicare program on the adoption and use of technology. However, a study of

the use of supplementary health insurance by

Medicare beneficiaries provides some insight into

how Medicare’s cost-sharing policy has affected

the adoption and use of technology (199), Public

and private supplementary (Medigap) health insurance is used extensively by Medicare beneficiaries. In 1976, 63 percent of aged Medicare beneficiaries had some form of private supplementary

health insurance and 14 percent had public supplementary coverage, primarily from Medicaid (6

percent had both public and private supplementation). Only 29 percent had no supplementary

insurance.

25-337 0 - 84 - 4
38 ● Medical Technology and Costs of the Medicare program

—- — . —

The study found that supplementary insurance

increased the use of both hospital and physician

services by elderly Medicare beneficiaries (197).

Supplementary health insurance greatly increased

the use of inpatient hospital services by elderly

Medicare beneficiaries with or without chronic

health problems. Most of the gains in utilization

of hospital services came from the admission of

more people into hospitals rather than from increases in length of stay. The investigators suggest that the “Part A deductible (approximately

equal to the average charge for an inpatient hospital day) represents a significant barrier to the

utilization of hospital services by the elderly”

(199).

The effect of cost-sharing under Part B of Medicare on the use of physicians’ services depended

on whether the elderly Medicare beneficiary did

or did not have a chronic health problem (approximately 78 percent of the elderly Medicare population have a chronic health problem). Part B costsharing provisions did not deter individuals with

chronic health problems from seeking health care

from physicians (199). On the other hand, the Part

DISCUSSION

Medicare policies—payment policies, in particular—have influenced the adoption and use of

some medical technologies, Cost-based hospital

reimbursement, with pass-through for capital expenditures, has not discouraged hospitals from

purchasing new technologies. Payment for physician services and technologies at hospitals and

other health care delivery sites provided financial

incentives for their use without careful consideration of their impacts on costs.

Medicare payment policies generally have

assured hospitals that they would be paid for the

cost of new technologies. This assurance has had

a direct effect on hospitals’ decisions to adopt new

technologies. Russell found that adoption of cobalt therapy, for example, was influenced by Medicare (289). In addition, since hospitals have fewer

nonpaying patients since the inception of Medicare and Medicaid, they are not losing as much

B deductible and coinsurance provisions had a

decided effect on the use of physicians’ services

by elderly Medicare beneficiaries without chronic

conditions.

Thus, it appears that cost-sharing under Medicare “leads to significantly lower levels of hospital and physician utilization than would have prevailed in the absence of the program’s deductibles

and coinsurance” by some members of the elderly

Medicare population (199). The more fundamental question of whether cost-sharing affects the use

of necessary services by the elderly requires health

status data. A recent Rand study of nearly 4,000

people found that there were only small differences at the end of the study between the health

status of those people with “free care” (no costsharing) and people who were required to pay a

portion of their medical bill (various levels of costsharing were aggregated for the analysis) (49).

However, the study population was limited to individuals between the ages of 14 and 61 without

any disability, making the applicability of its findings to Medicare beneficiaries questionable (270).

money to bad debt, so they are better risks for

loans. Thus, the presence of Medicare patients

also has an indirect effect on hospitals’ decisionmaking regarding adoption of medical technologies.

The use of medical technologies is largely the

responsibility of physicians. Under Medicare policies of retrospective, charge-based reimbursement,

physicians have had no financial constraints on

the number of such technologies provided. Instead, they have known that the hospital gained

revenue for each test or procedure, Medicare’s

coverage policy excludes payment for items that

are “not reasonable and necessary” for diagnosis, treatment, or improved functioning of a malformed body member. This has allowed physicians much flexibility in their medical technology

use (see chs. 5 and 7). Under the new Medicare

DRG prospective hospital payment system, with
Ch. 2—Medicare Policies Affecting Medical Technology ● 3 9

its incentives to reduce ancillary services, hospital administrators will have to work more closely

with physicians regarding use of technologies.

It is important to remember that physicians

have always been important actors in both the

adoption and use of medical technologies. In addition to purchasing new technologies for their

office practices, physicians are often the ones who

suggest the purchase of new technologies to hospital administrators or boards of trustees. In their

decisions, the administrators or boards may consider the importance of the individual physicians

in admitting patients and the various specialties

competing for the technologies, as well as the cost

of the new equipment and its benefits to patients.

They also may consider the extent to which the

physicians use the technologies already available.

The DRG hospital payment system may change

the impact of Medicare on technology. Use of hospitalization and tests and procedures during hospital stays are constrained under the new system.

Efforts to control costs during hospitalizations

may extend to the adoption of technologies that

will lower hospital costs per case. More technologies may be moved out of inpatient settings to

ambulatory settings, where Medicare payment has

not yet changed. Such movement depends on the

development of specific technologies, also (e. g.,

those used in freestanding ambulatory surgery

centers—see ch. 8).

Thus, the Medicare program has influenced

technology adoption and use. Yet, the strength

of this influence has been limited by the fact that

it is only one payer among several. Where Medicare beneficiaries make up a large portion of the

patient population, such as in hospitals, Medicare

policies have more impact. Medicare’s influence

with physicians—because physicians are the

strongest factor in technology adoption and use

decisions—needs to be strengthened in order to

contain program costs and to rationalize technology decisions.
3

The Impact of Medical Technology

on Medicare Costs

There is no gathering the rose without being pricked by the thorn.

Bidpai
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Medicare Beneficiaries’ Use of Medical Technology . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Medical Technology’s Aggregate Impact on Medicare Costs . . . . . . . . . . . . . . . . . . 45

The ’’Intensity of Care’’ Approach to Measuring Technology’s

Contribution to Health Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Other Estimates of Technology’s Contribution to Health Care Costs. . . . . . . . . 51

Conclusions From the Aggregate Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Selected Medical Technologies and Medicare Costs... . . . . . . . . . . . . . . . . . . . . . . . 53

Coronary Artery Bypass Graft Surgery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Cimetidine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Therapeutic Apheresis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Pneumococcal Vaccine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Intensive Care Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Total Parenteral Nutrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Hemodialysis for Chronic Renal Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

LIST OF TABLES

Table No. Page

S. Discharges From and Days of Care in Short-Stay Non-Federal

Inpatient Hospitals by Patient Age, Selected Years From 1973 to 1982..... . 44

6. Operative Procedures in Short-Stay Hospitals by Patient Age, 1973-80 . . . . . 44

7. Use of Ambulatory Physician Visits With Specified

Diagnostic Services by Age, 1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

8. Decomposition of Hospital Costs, 1977-82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

9. Summary of Studies of Hospital Cost Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . 49

10. Increase impersonal Health Care Expenditures, 1977-82 . . . . . . . . . . . . . . . . . . 50

11. Real Medicare Expenditures per Enrollee, 1977 and 1982... . . . . . . . . . . . . . . . 51

12. Days of Care for Ulcer Disease for Patients Discharged From

Short-Stay Hospitals, 1977-79 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

13. Operations for Ulcer Disease for Patients Discharged

From Short-Stay Hospitals, 1977-79 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3

The Impact of Medical Technology

on Medicare Costs

—. .

INTRODUCTION

Changes in the kinds of medical technologies’

available and changes in the patterns of use of

technologies already available continually influence health care and Medicare costs—at times

moderating cost increases and at times exacerbating them. As noted in the previous chapter,

various factors affect the adoption and use of

medical technology. This chapter examines the

patterns of medical technology use experienced

by the Medicare population compared to the general population. Its primary purpose, however,

is to explore the nature and size of medical technolo~yrs contribution to health care and Medicare

cost s .

How medical technology contributes to health

care and Medicare costs is a question that can be

addressed either from an aggregate perspective or

from the standpoint of particular technologies or

classes of technology.

The question from the aggregate perspective is

whether changes in medical technology use as a

whole have raised or reduced health care or Medicare costs and, if so, by how much. This perspective is useful, because it puts technology’s relationship to costs into a policy perspective.

Changes in the use of medical technology reflect

changes in the behavior of medical decision makers. Quantitative estimates of technology’s aggregate contribution to health care costs, therefore,

reflect the importance of changes in medical decisions, which can be presumed to be influenced by

policy, relative to changes in other, less controllable factors such as population growth or general wage and price inflation.

The aggregate approach is limited, however,

because it ignores the patient benefits associated

with cost increases or decreases, it does not take

into account the underlying reasons for changes

in medical decisions or practices, and i t does not

show that cost-saving or cost-raising changes in

technology are not scattered evenly across illnesses. In short, it offers no way of knowing

whether any particular technology-related rate of

change in health care or Medicare costs is too high

or too low.

Analyzing how specific technologies or classes

of technology affect health care or Medicare costs

can be more enlightening, particularly when the

information that results is combined with data on

efficacy and patterns of adoption and use. Analyses of the cost implications for Medicare of seven

specific medical technologies are provided in this

chapter.

MEDICARE BENEFICIARIES’ USE OF MEDICAL TECHNOLOGY

By definition, Medicare enrollees are either aged

or disabled. Furthermore, they are disproportionately high users of health care services in general

and of medical technology in particular (126).

Although a high proportion of health care expenditures for the elderly is for nursing homes and

other long-term care services, it is important to

recognize that the elderly are high users of services provided in hospitals, where medical technology is concentrated. Age-specific hospital discharge rates for selected years from 1973 to 1982

are shown in table .5. Not only has the number

43
44 . Medical Technology and Costs of the Medicare Pro9ram

— .—. —— . - — — — —

Table 5.—Discharges From and Days of Care in Short-Stay Non”Federal Inpatient Hospitals by Patient Age,

Selected Years From 1973 to 1982

—

Discharges per 1,000 population

— —.——

Average annual Percent change

Age

—. —-—

1973 1975 1978 1979 1980 1981 1982 percent change 1973 to 1982

<15 . . . . . . 70.8

— .

71,5 68.8 70.8 71,8 72. 9 71:2 0.1% –

0-.6 0/0

15-44 . . . . . . . 154.4 155.4 155,1 151.8 151.3 148.7 145.0 –0.6 –6.0

45-64 ., . . . . . 182.3 194.7 193,1 192.4 196,0 195.3 195.5 0.7 7.2

› 65 . . . . . 341.8 359.3 381.9 361.5 405.2 396.5 398.8 1.5 16.7

All ages . . . . . . 154.0 158,8 159,8 156.9 161,9 160.2 167.9 0.9 9.0

Days of care per 1,000 population —— Percent change

Age 1973 ‘– 1978 1979 1980 1973 to 1980

of discharges per 1,000 population increased dramatically for the elderly population, but in the

period from 1977 to 1982, the number increased

more rapidly for the elderly than for other segments of the population, Furthermore, once in the

hospital, elderly people experience longer lengths

of stay than do younger people.2 It is interesting

to note, however, that the covered clays of care

for the Medicare population increased only 4.6

percent between 1973 and 1980.

In the hospital, elderly patients use many medical technologies more frequently than the rest of

the population. Table 6 presents age-specific data

on surgical operations in short-stay hospitals between 1973 and 1980. In 1980, the rate of surgery

among the elderly was 61 percent higher than the

rate in the population as a whole. Furthermore,

from 1973 to 1980, it increased by 37 percent,

while the rate for the population as a whole increased only 22 percent (.5).

Table 6.–Operative Procedures in Short-Stay Hospitals by Patient Age, 1973-80

(rate per 1,000 population)

Age 1973 1974 1975 1976 1977 1978 1979 1980

<15 . . . . . . . . 41.9 42.2 40.5 41.0 41,0 37.6 37.2 36.0

15-44 . . . . . . . . . . 96.4 99.8 101.5 99.5 104.7 100,6 125.7 121.3

45-64 . . . . . . . . . . . 113.2 117.3 123.3 122.5 124.6 119.0 121.3 122.8

>65 . . . . . . . . 140.7 145.9 154.8 154.9 165.9 172.2 183.4 193.2

All agesa . . . . . . 89.5 92.9 95.4 95.4 99.7 97.0 110.5 109,9 — —

aBeCaUSe of rounding, the sum of procedures for all ages may not total

SOURCE: I N Haug and R Seeger (eds ), Socio-Economic Factbook for Surgery 1982, Surgical Practice Department, American

College of Surgery, 1982
Ch. 3—The impact of Medical Technology on Medicare Costs ● 4 5 —. — —— — — —

care units (161 ). The available evidence seems to

indicate that the representation of the elderly is

the same or only slightly greater in ICUs than it

is in the hospital as a whole (354). Thus, while

the elderly are likely to require more intensive care

than other segments of the general population,

once in the hospital they appear to be placed in

ICUs no more often than the nonelderly population (3.54). Once in an ICU, however, elderly patients generally receive more interventions than

other patients (57). According to Knaus, the key

factor influencing the use of resources once a patient is in an ICU is acute and chronic health

status, not age in and of itself (190). Elderly patients in ICUs are simply sicker than other ICU

patients.

The more frequent and intensive use of specific

medical technologies by elderly patients translates

into a greater representation of the elderly among

high-cost patients within the hospital. Thus, for

example, a 1976 study of almost 27,000 patients

in three short-term hospitals found that 23.8 percent of the patients were over 65 years of age, but

41 percent of the high-cost patients’ were over 65

(437). Furthermore, the National Medical Care Expenditures Survey conducted in 1977 found that

the mean charge per hospital admission was

$2,198 for patients 65 or older compared to $1,251

for the nonelclerly population, a difference of $947

(395). The difference reflects not only the greater

use of specific medical technologies by the elderly

but also the longer inpatient stays generally experienced by the elderly (10.3 days per admission

compared to 7.1 days in the general population

in 1977) (39.5). In 1977, the average daily rate for

a semiprivate room was approximately $91 (180).

Thus, of the $947 extra charge per stay, about

$503 can be attributed to the extra use of ancillary technologies by the elderly and the rest to

the longer length of stay.

The general pattern of high use of medical technology by the elderly extends beyond the hospital to ambulatory care settings as well. As shown

in table 7, the rate of ambulatory visits to physicians for diagnostic services is higher among

elderly persons than among other segments of the

population. Interestingly, however, the rate of Xray testing in patients who do visit a physician

for diagnostic reasons is not higher in the elderly.

The elderly are also relatively high users of prescription drugs, despite the fact that Medicare

does not pay for outpatient prescription drugs.

In 1977, about 75 percent of the population 65

or older had at least one prescription compared

to 58 percent of the general population (398). Furthermore, during the decade preceding that year,

the intensity of use of prescriptions by Medicare

Part B beneficiaries had increased (147). Finally,

the use of medical equipment and supplies outside of hospitals and nursing homes was more

than twice as frequent in the elderly as in the general population (397).

It is hardly startling that elderly people use

more health care services and medical technologies

in the aggregate and use them more intensively

than the rest of the population. The importance

of this fact lies in its implications for the Medicare program. Changes in types of medical technologies available or the patterns and conditions

of the use of such technologies are likely in the

aggregate to have strong effects on the costs of

the Medicare program precisely because of the intensity with which Medicare enrollees use technology. The next section attempts to explore the

extent of that impact.

MEDICAL TECHNOLOGY’S AGGREGATE IMPACT ON

MEDICARE COSTS

In order to investigate the aggregate contri- in the ways in which technologies are used in the

bution of changes in medical technology (i. e., practice of medicine) to Medicare costs, one must

changes in the kinds of technologies available and first examine the impact of technology on over-
Table 7.–Use of Ambulatory Physician Visits With Specified Diagnostic Services by Age, 1977

Annual number of visits per 1,000 population Percent of persons with at least one visit

Total population Visits with any Visits with Visits with Visits with any Visits with Visits with

Age (in thousands) diagnostic services X-ray laboratory tests diagnostic service X-rays laboratory tests

<6 years . . . . . . . . . . . . . . . . 18,216 746 119 528 39.1 7.9 30.9

6 to 18 years. . . . . . . . . . . . . . . . . 50,647 652 204 355 34.1 12.7 21.7

19 to 24 years . . . . . . . . . . . . . . . . 22,299 1,211 231 654 46.9 13.4 26.5

25 to 54 years. . . . . . . . . . . . . . . . 78,472 1,327 262 565 51.5 16.0 24.4

55 to 64 years. . . . . . . . . . . . . . . . 20,180 1,614 307 673 55.4 18.1 27.0

>65 years . . . . . . . . . . . . . . . . . 28,284 1,881 254 971 56.0 15.9 34.0

All ages . . . . . . . . . . . . . . . . . . . 212,098 1,189 236 574 46.6 14.4 25.8

SOURCE: L. F Rossiter and C M Horgan, “Unequal Financial Incentives for Diagnostic and Preventive Health Care, ”

Medical Care Section, Los Angeles, Caif., November 1981

paper prepared for 109th Annual Meeting of the American Public Health Association, I

1

I

I

I
.—

Ch. 3— The Impact of Medical Technology on Medicare Costs ● 4 7

all health care expenditures. There are several

methods for measuring technology’s contribution

to health care costs. The most common method

is the “intensity of care” approach.

The “Intensity of Care” Approach to

Measuring Technology’s Contribution

to Health Costs

The intensity of care approach involves dividing a change in total expenditures for health care4

into its constituent parts:

● population or enrollment changes,

Ž overall wage and price inflation,

• wage and price inflation in medical care in

excess of general inflation, and

Ž changes in “service intensity. ”

Changes in technology use are included in the latter two measures, although these measures also

reflect other factors.

Service intensity refers to the quantity of inputs that go into producing a given unit of health

care. Such inputs include labor, supplies, materials, and equipment. Labor intensity refers to the

quantity of personnel used to produce a unit of

health care. Nordabor intensity refers to the quantity of materials and supplies as well as the capital plant and equipment used in producing the unit

of health care.

Although changes in service intensity have been

labeled the “technology factor” (132), service intensity is not synonymous with medical technology use, To understand both the usefulness and

limitations of estimates of changes in service intensity, it is helpful to consider how measures of

intensity are related to the changes in medical

technology whose effects are desirable to identify.

One way to relate service intensity to the use

of technology is to examine how hypothetical

changes in medical technology would be likely to

alter the operations, and thus costs, of health care

institutions. The introduction of a new device in

a hospital, for example, often involves both capital (nonlabor) and some operating (both labor

and nonlabor) costs for its application and main-

.—— -———

‘Th ]> approach may a Is{) be used for one or more I)! the major

c(~m p(men ts ot hea 1 t h care C(Y+IS

—

tenance. If the device is more sophisticated than

the average technology in the hospital, it may require more highly trained technicians, thus driving up the average wages of hospital personnel.

But the services provided by the device might substitute for other services, thereby reducing labor

and nonlabor costs in other areas. Or the new device may have negligible effects on hospital operations and simply be a product improvement,

with a concomitant increase in product price. 5

Finally, a new device may draw into the hospital

patients who would otherwise not be hospitalized,

thereby increasing admissions and the routine (labor and nonlabor) costs associated with a hospital stay as well as the costs of the service itself.

Of course, these admissions might reduce the costs

of other sectors of health care, such as ambulatory

care or drugs.

These observations suggest that the effects of

changes in medical technology on health care costs

must be traced through the changes’ specific effects on hospital costs and other components of

health care costs. Changes in hospital costs due

to technological change are reflected in two

measures:

service intensity, or the quantity of inputs per

admission and the frequency of hospital admissions; and

the technical sophistication of inputs as reflected in changes in the input prices (or

wages) relative to general price level changes.

Thus, changes in technology affect service intensity, but they also affect another component of

hospital cost.

Each of these components of hospital cost is also

affected by forces unrelated to technology. For

example, both the quantity of labor used in the

hospital and the average wage paid to hospital

personnel may be driven up because hospitals

have inadequate incentives to be efficient or because the hospital work force has been recently

unionized (131). The price and quantity of medical equipment, materials, and supplies might also

A new IL]]]} pr(>gramm.?hle card]ac pacemaker, tor example,

W(JU ld be more expens] ve than more trad i t] ona 1 pacemah er~, but

I t woLJld have II t tie etfect on the hospital ~ co~ts (~t pacemaker ]n -

w>rt] on the t L] 11 ellec t c>n hosplta] cost would be the ] ncreased pr]ce

of the pacemaker retlect in~ Its enhanced c apabil]tics
48 . Medical Technology and Costs of the Medicare program

. ——

increase relative to general inflation because of

inadequate incentives for efficiency in the hospital sector: Finally, hospital admissions are altered

by changes in the incidence of illness and the general aging of the population, among other things.

Thus, the components of hospital cost likely to

be affected by changes in medical technology are

also likely to be influenced by other factors.

It appears, then, that the separation of health

care cost increases into their components provides

at best an oblique view of the contribution of

changes in medical technology use to costs. The

aforementioned caveats having been noted, the

evidence on the components of hospital and health

care cost (or expenditure) inflation is presented

below,

Several analysts have divided changes in hospital costs into their constituent parts, including

service intensity (3,117, 126,419,430). Waldman

(419) estimated that increases in service intensity

(i.e., labor, supplies, and equipment) accounted

for about one-half of the annual change in the

daily cost of hospital care between 1951 and 1970.

Studies of increases in hospital costs per day

through the mid-1970’s found similar results (3,

116). Feldstein and Taylor (117), for example,

found that slightly less than one-half of the rise

in average daily hospital costs between 1955 and

1975 was due to an increase in the intensity of

services delivered per day. Altman and Wallack

(3) found that roughly one-third to one-half of

the annual increase in daily hospital costs between

1971 and 1976 was the combined result of an increase in the intensity of services and an increase

in the price of hospital inputs relative to general

wage and price inflation.

Freeland and Schendler’s recent analysis of the

283-percent increase in national expenditures for

hospital care over the period 1971 to 1981 found

that 59 percent of the increase could be explained

by overall inflation in the economy and growth

in the U.S. population (126). The remaining 4 1

percent of the increase in national expenditures

for hospital care was due to three technologyrelated factors:

. increased hospital admissions per capita (8.6

percent );

•increased intensity, or input use, per admission (20.8 percent); and

● increased hospital input prices in excess of

general inflation (11.7 percent).

From 1971 to 1981, these three factors raised national expenditures for hospital care about 157

percent.

Table 8 presents data on hospital cost increases

for the period 1977 to 1982. OTA estimates that

increases in service intensity (labor and nonlabor

imputs) per capita accounted for 24 percent of the

93-percent increase in per capita hospital costs

during the most recent 5-year period. A small part

of this effect is due to the higher admission rate

(a 5-year increase of 2.1 percent), but the overwhelming part of the intensity increase is due to

higher intensity per hospital admission.

The results of the aforementioned analyses are

summarized and compared in table 9. The estimated growth in the intensity of hospital inputs

clearly depends on the time period studied and

the denominator unit. However, all five analyses support the conclusion that the intensity of

hospitals’ services has contributed substantially

to the growth in hospital costs over the past 20

years.

When the components of growth of total personal health care expenditures in the United States

are considered, increasing intensity of care appears to be a less important source of expenditure inflation than it is for the hospital sector

alone. Table 10 shows estimated growth in real

per capita personal health care expenditures between 1977 and 1982 (when population growth

and general price inflation, as measured by the

Consumer Price Index, are taken into account).

The combined effect of increasing intensity and

increasing health care prices in excess of the Consumer Price Index is a relatively small proportion

(about 16 percent) of the increase in per capita

personal health care expenditures during the 5-

year period. Nevertheless, these two technologyrelated components of cost together increased real

per capita health care expenditures at an average

annual rate of 2.8 percent during the period.

It is possible to account for the components of

Medicare cost increases over an appropriate time
Ch. 3— The Impact of Medical Technology on Medicare Costs ● 4 9 —— ——

Table 8.– Decomposition of Hospital Costs, 1977-82

— —.

Percent

change

1977-1982

103,1 ’70

5

8

Average

annual

percent change

15.2%

1,1

1.5

Difference

1982 – 1977

$53,229

11,774

2,935

1977

1. Total hospital costs (millions) ... . . . ., . . $51,64 7

2. Total U.S. population (thousands) . . . . . . . . 219,760

3. Total adjusted hospital admissions (thousands) 39,012

4. Total full time equivalent employees

(thousands) ., ., ... . . . . 2,573

5. Consumer Price Index (1977= 100) ... . . . . . 100

1982

$104,876

231,534

41.947

3,306

159.3

733

N A

b

29

NA

5,1

NA

Service intensity per adjusted admission:

6. Hospital costs per adjusted admission . . $1,324

7, Nonlabor costs per adjusted admission . . . $563

8. Nonlabor inputs per adjusted admission (7/5) $563

9. Labor costs per adjusted admission ., . . . . . $761

10. Index of hospital labor costs per full time

equivalent employee (1977 = 100) . . 100

11, Labor inputs per adjusted admission (9/10) ., $761

12. Change in labor and nonlabor inputs per

adjusted admission (8+ 11) ., . . . . ., . . . . . NA

$2,500

$941

$591

$1,421

$1,176

$378

$28

$660

89

92

21

87

13,6

13,9

3.8

13.3

156

$910

NA

19

NA

3.6

NA 177 NA NA

Service intensify per capita:

13. Hospital costs per 1,000 population . . . $235

14 Nonlabor costs per 1,000 population ., . . $100

15 Nonlabor inputs per 1,000 population (14:5) . . $100

16. Labor costs per 1,000 population . . . . . ., $135

17, Labor inputs per 1,000 population (16 / 10) . . $135

18, Change in labor and nonlabor inputs per capita

(15+17) ., . . . . ., . . . . NA

aAd~ “~t~d ~cj~l$~lons I nclUdeout pat I ent vlslts, wh! c h are weighted I n equ Ivalen t un Its

bNA—Not applicable

Data sources

1 Most data derived from American Hosp!tal Association Hosp/ta/ Staf/sf/cs table 6, 1978 and 1983 editions

2 Population data from U S Department of Commerce U S Sfat{sttca/ Absfracf

3 Consumer Price Index found I n U S Department of Health and Human Services National Center for Health Stat! stlcs Hea/th —Un/fed Sfafes 1982 DH HS publlca

t!on No (PHS) 83 1232 (Hyaltsvllle Md DHHS December 1982]

SOURCE Off Ice of Technology Assessment

$453

$196

$123

$257

$164

$218

$96

$23

$122

$29

93

95

23

92

21

14.0

14.3

4.2

14.0

4.1

NA 52 NA NA

Table 9 .—Summary of Studies of Hospital Cost Inflation

Source and study period covered — .

Freeland & -

Feldsteln Altman & Wallack Schendler OTA

1955-75 1971-76 1971-81 1977-82

Waldman

1951-70

Hospital cost per patient day:

Annual average percent change 8.6% per year

Proportion due to service

Intensit y 50 %

1 20/0 per year 17.1 0/0 per year — —

480/o 30.6 to 50.5% — —

Hospital cost per admission:

Annual average percent change ., — — — 1 3% per year 13.2$ per year

Proportion due to service

intensit y — — — 20,8 % 15 0/0

Hospital cost per capita:

SOURCE Off Ice of Technology Assessment
1,

2.

3.

4.

5.

6.

7.

Table 10.—lncrease in Personal Health Care Expenditures,a 1977-82

—

Average annual

Percent Percent Percent Percent Percent percent change

1977 1978 change 1979 change 1980 change 1981 change 1982 change 1977-82 —

Total personal health care

expenditures (billions) . . . . . . . . . $148.7 $166.7 12.1 0/0 $188.9 13.30/0 $219.4 16.1 ‘/0 $255.0 16.2%

U.S. population (millions) . . . . . . 220 222 0.9 225 1.4 227 0.9 229 0.9

Personal health care

expenditures per capita. . . . . . . . $657.9 $750.9 11.1 $839.6 11.8 $996.5 15.1 $1,113.5 15.2

Consumer Price Index . . . . . . . . . 100.0 107.6 7.6 119.9 11.4 136.1 13.5 150.0 10.2

Medical care index (1977=100)

(12-month period ending

September) . . . . . . . . . . . . . . . . . . 100.0 108.5 8.5 118.3 9.1 131.0 10.7 146.1 11.5

Real personal health care

expenditures per capita

(3 / 4) . . . . . . . . . . . . . . . . . . . . .. $675.9 $697.9 3.3 $700.3 0.3 $710.1 1.4 $742.3 4.5

Real health inputs per capita

$286.9 12.50/o 14.0”/0

22 1.3 1.1

$1,236.6 11.0 12.8

159.3 6.2 9.8

162.2 11.0 10.2

$776.3 4.6 2.8

$762.4 0.1 2.4
Ch. 3—The Impact of Medical Technology on Medicare Costs ● 5 1

interval, but the interpretation of the estimates

is more clouded than it is for general health care

costs. Changes in program eligibility, such as the

inclusion of disabled people in 1972, or in covered benefits, such as the expansion of home

health care benefits in 1980, can lead to dramatic

changes in measured service intensity that have

little to do with changes in medical technology

but instead represent a shift in the burden of payment for services already available and used.

Changes in per capita service intensity do indicate

how much more or less of health care services

Medicare is paying for now than at some earlier

date. Table 11 provides per capita estimates for

1977 and 1982.

The data presented in table 11 indicate that

most of the 107-percent increase in Medicare expenditures per enrollee between 1977 and 1982 is

due to general price inflation. But 25 percent of

the increase in Medicare expenditures per enrollee

from 1977 to 1982 is due to Medicare’s payment

for more services per enrollee, and another 3 percent is due to the increased prices of medical services in excess of general price inflation. b Thus,

nearly 30 percent of the increase in Medicare costs

per enrollee from 1977 to 1982 can be attributed

to two technology-related components of costs.

— ———

‘The percent due to medical price inflation may be overstated,

and the ~ervlce inten~ity percentage correspondingly understated,

because the amount Medicare actually pays for’ services (i e., the

et fectlve price) probably I ies somewhat below stated prices,

Table 11.—Real Medicare Expenditures

per Enrollee, 1977 and 1982

1977 1982

1. Medicare expenditures per

enrollee . . . . . . . . . . . . . . . . . . . . . . . $927.54 $1,925.40

2. Consumer Price Index

(1977=100) ... ... ... . . . . . . . . . . 100.00 159.30

3. Medical care price index

(1977=100) . . . . . . . . . . . . . . . . . . . . . . 100,00 162.40

4. Real Medicare expenditures per

enrollee (1 + 2) ., ... . . . . . . . . . . . $927.54 $1,208.66

5. Real Medicare inputs per

enrollee (1 + 3) ... . . . . . . . . . . . . . . $927,54 $1,185.59

Data sources

U S Department of Health and Human Serwces Health Care Financing Ad

ministration, The A4edcare and Medicaid ~atabooir, 1987, HCFA publication

No 03156 (Baltimore, Md HCFA, April 1982) U S Department of Health and

Human Servtces, Health Care Ftnancmg Adm{nlstratton, Of f{ce of Statistical

Information, personat communication, Sept 1, 19&3, U S Department of Corn.

merce, Bureau of Labor Statlstlcs, personal communication, Sept 1, 1983

SOURCE Off Ice of Technology Assessment

Other Estimates of Technology’s

Contribution to Health Care Costs

The service intensity approach has its limitations as a way of estimating technology’s contribution to health care costs. A few analysts have

used different approaches and data bases to look

at the question.

Redisch (267), for example, analyzed cost and

operating data for a sample of about 1,500 hospitals and found that approximately 40 percent

of the rise in operating costs per admission resulted from the increased use of eight types of

ancillary services, all of which must be ordered

by the physician. (The services were pathology,

nuclear medicine, anesthesiology, pharmacy, laboratory, diagnostic X-ray, therapeutic X-ray, and

blood bank. ) Whether the increased use of ancillary technologies in the hospital has corresponded

to reductions in the cost of other kinds of health

care, however, is unknown.

Several analysts have used a “residual approach” to measure the impact of technological

change on hospital or health care expenditures.

In this approach, expenditures over time are regressed on a number of variables influencing supply or demand for health care services. ’ The unexplained residual of changes over time is then

assumed to measure the effect of technological

change.

In a study of hospital costs from 1962 to 1968,

Davis (82) found that 38 percent of the total annual increase in hospital cost per admission was

unexplained by variables reflecting supply and demand conditions. This residual translates into a

2-percent annual increase in hospital expenses per

admission attributed to technological change.

Other analysts have used the residual approach

to estimate the impact of technological change on

total health care costs (130,231). In one study,

which covered the period 1930 to 1975, Mushkin

and colleagues (231) estimated that technological

change reduced total health care expenditures at

— —

“[n the regression process, each variable receives a weight that

represents the rvlative degree to which that \’arlable explains (w contributes to the change in expenditure. Some percent ot the change

cannot be explained by the variables. This percent is called the rc’-

sldual.
52 ● Medical Technology and Costs of the Medicare Program

an annual rate of 0.5 percent. In a similar study,

which covered the period 1947 to 1967, however,

Fuchs (130) found that technological change raked

expenditures at an annual rate of 0.6 percent.

The difference in the findings of these two

studies could, as Mushkin claimed, be due to differences in the periods studied or the variables

chosen for study. Altman and Wallack (3) have

pointed out significant limitations of the approach

used in both studies. One limitation is the sensitivity of any residual estimate to the variables chosen for inclusion. In Altman and Wallack’s words,

“even relatively small errors in specification [of

the variables chosen] or in the statistics used to

estimate the model can lead to the conclusion that

technology has had a positive impact on rising

health care costs when the true result is negative,

or vice versa” (3). An even more important limitation of the approach is the narrow interpretation

of technological change embodied in the residual.

A major portion of the increased use of medical

technology may well be attributed to demandrelated factors such as the growth of third-party

payment or personal income over the periods of

study. Since these variables were included as

variables in the regressions, the contribution to

health care costs of changes in medical technology is underestimated. In short, the residual approach gives too narrow a view of just how

changes in the quantity, quality, kinds, and settings of use of medical technology have influenced

health care costs.

Another useful approach to looking at technology’s impact on health care costs is to focus on

a specific illness and to document the array of

medical practices and procedures used to treat the

condition at two different times. The costs of

treating the illness using the practices current in

each time period can be estimated, and the difference in these costs can be considered the effect

of technological change on the cost of illness,

However, it should be noted that this approach

does not account for changes in the rates of use

of treatments. Furthermore, only a few conditions

can be studied because of the high cost of this kind

of analysis. Trends detected in studies of a few

illnesses certainly do not represent all illnesses and

may not even represent the most important ones.

——. .

Scitovsky and McCall (298) took this approach

to explain the net increase from 1964 to 1971 in

the average cost of treatment for eight conditions:

otitis media, forearm fracture, appendicitis, maternity care, breast cancer, pneumonia, duodenal ulcer, and myocardial infarction. In almost

every instance, there were both cost-raising and

cost-saving changes in treatment. However, the

authors noted that the costs of treatment of conditions requiring hospitalization rose at a considerably faster rate than those of conditions

treated on an ambulatory basis. Among the factors leading to higher costs were shifts to more

expensive drugs, increases in the number of laboratory tests per case, and the use of more

miscellaneous inpatient and outpatient services.

The most dramatic cost increases occurred in the

treatment of myocardial infarction, traceable principally to the increased use of ICUs during the

time period. a The increase in the cost of treating

this condition was greater than the decrease in the

costs of five other illnesses combined. Of course,

the net effect on health care costs would depend

on the relative frequency of the various conditions

in the population.

Conclusions From the

Aggregate Studies

Although none of the approaches to measuring technology’s aggregate contributions to health

care cost is entirely satisfactory, taken as a whole,

the available evidence leads to the conclusion that

U.S. health care costs have increased in part because more is being done for patients today than

ever before. More and better trained personnel,

more procedures, more medicines, and more and

higher priced equipment, materials, and supplies

are being used in the delivery of health care to

Medicare patients and to the Nation as a whole.

And, the trend toward “more” is not abating. The

intensity of service use continues to increase.

Despite the net increase in service intensity, the

evidence also demonstrates the variation in tech-

‘For more information, see the forthcoming case study in OTA’S

Health Technology Case Study Series entitled Intensive Care LJnits

(lCUS): Costs, Outcomes, and Decitionmaking (354), prepared by

Robert A, Berenson, M.D.
Ch, 3—The Impact of Medical Technology on Medicare Costs ● 5 3

nology’s effects on costs. In the past 5 years, the treating some illnesses has declined as a result of

hospital sector appears to have experienced rela- technological change, while that of others has intively greater increases in intensity than has the creased dramatically. Thus, summary statements

health care sector as a whole. And, as Scitovsky about technology’s net influence on health care

and McCall’s (298) research illustrates, cost-raising or Medicare costs mask the rich assortment of

and cost-saving changes in technology are not ways in which changes in medical technology

scattered evenly across illnesses. The real cost of shape the health care system and its costs.

SELECTED MEDICAL TECHNOLOGIES AND MEDICARE COSTS

To highlight the extent to which the costs of

the Medicare program are altered by new technologies, this section describes seven technologies

first

ines

care

●

•

●

●

●

●

●

introduced in the 1960’s or 1970’s and examtheir actual and potential impact on Medicosts. The seven technologies are:

coronary artery bypass graft surgery,

the drug cimetidine,

therapeutic apheresis,

pneumococcal vaccine,

intensive care units,

parenteral nutrition therapy, and

kidney dialysis.

All seven of the technologies have clear patient

benefits—in some cases, they are even life saving—but for all of them, there are uncertainties

about the most appropriate indications for use.

Five of the technologies have raised or could raise

Medicare’s costs, in some cases significantly. Two

have saved or could save Medicare costs. Above

all else, these seven technologies illustrate how exposed the Medicare program is to changes in medical technology that are largely beyond its control. In the face of new technologies that offer both

patient benefits and higher costs, the challenge for

Medicare may be how to encourage the use of

those that are most cost effective.

Coronary Artery Bypass Graft Surgery

Coronary or arteriosclerotic heart disease, often

caused by narrowing and blocking of the arteries

that supply blood to the heart, is the number one

cause of death in the United States. In 1982, heart

disease was responsible for approximately 500,000

deaths (408). Furthermore, in 1968, this disease

was the most frequent condition diagnosed for patients at the time of discharge from hospitals in

this country (198).

Coronary artery bypass graft surgery (CABG),

a procedure in which a graft is used to bypass a

constricted portion of the coronary artery and

thus to improve oxygen supply to the heart muscle, has become the primary surgical approach to

treatment of coronary artery disease (53). Since

coming into practice in the early 1970’s, the procedure has diffused quite rapidly: approximately

25,000 operations were performed in the United

States in 1973; at least 70,000 in 1977; 86,000 in

1979; 100,000 in 1980 (266); and 170,000 in 1982

(87,341). The rate of CABG in the United States

has been estimated to be from 4 to 10 times as

high as that of the United Kingdom, although the

incidence of coronary artery disease is similar in

the two countries (266,297),

Data from a 15-institution registry of patients

undergoing evaluation for suspected coronary artery disease during the period from 1974 to 1979

reveal that 10 percent of such patients were 6 5

years of age or older (186). About 15.2 percent

of the bypass procedures performed in Maryland

in 1980 were on patients 65 or older (68). However, 1982 data from the National Hospital Discharge Survey suggests that almost 30 percent of

all such procedures were performed on those 65

years of age or older (87).

Almost all evaluations of CABG have shown

that the surgery is more effective than medical

management in relieving angina pectoris (a condition characterized by severe chest pain). After

surgery, angina is lessened in 80 to 90 percent and

totally relieved in 60 to 70 percent of patients. The

available data can be interpreted as suggesting that

surgery is far more effective than medical manage25-337 n - 84 - 5
54 • Medical Technology and Costs of the Medicare Program

ment in improving that aspect of quality of life

(266). Two clinical evaluations have demonstrated

the life-extending properties of CABG in patients

with coronary artery disease involving three vessels or the left main coronary artery, but the lifeextending properties of the procedure are more

uncertain when only one or two arteries are involved and when left ventricular function is severely restricted (422). Recently, the results of a

clinical trial covering 15 medical centers revealed

that CABG has not been shown to extend life in

patients with mild or no chest pain and should

probably be delayed until chest pain increases.

The trial included patients under 65 years of age

who did not have narrowed left main coronary

arteries and who had mild or moderate chest pain,

or those who had had at least one heart attack

already but no chest pain. The investigators found

no difference in mortality between medical and

surgical management. Patients with surgery had

greater relief from chest pain and better exercise

tolerance, but the surgical group was hospitalized

more often. Perhaps most telling, chest pain gradually worsened in both groups, and since a second operation is more hazardous than the first,

the investigators concluded that “there is no penalty for waiting. ” The investigators estimate that

about 25,000 of the 170,000 CABG procedures

performed in 1982 would be contraindicated by

these findings (192),

CABG itself is costly, estimated at approximately $15,000 to $20,000 in 1981, including hospital and surgical fees (422). But, the surgery also

saves part of the costs of medical management of

coronary artery disease and avoids the cost of

treating heart attacks that are prevented by the

surgery. When these savings in medical costs are

taken into account, the net costs associated with

CABG surgery range from $10,000 to $19,000,

depending on the presenting condition of the patient (422).

If the age distribution of bypass surgery patients

in the United States follows that reported by the

National Hospital Discharge Survey, then approximately 50,000 procedures were performed on

Medicare’s aged population in 1982. This would

imply that the procedure cost the Medicare program and its beneficiaries approximately $500 million to $950 million in that year.9 At this cost,

Medicare buys for some elderly patients substantial benefits in the form of improved quality and

extra years of life. For a substantial minority (estimated at 15 percent or 7,500 procedures), the procedure may offer little in the way of improvement.

Thus, an estimated $75 million to $142 million

of the 1982 expenditures by or on behalf of Medicare patients for CABG surgery may have been

unnecessary. Even disregarding these potentially

excess costs, CABG has had a substantial impact

on annual Medicare costs.

Cimetidine

Peptic ulcer disease is a relatively common illness with important ramifications for Medicare.

In 1976, about 620,000 hospital discharges in the

United States were for peptic ulcer, representing

a rate of about 175 per 100,000 people (432). Furthermore, over 25 percent of the hospital stays

for peptic ulcer involved surgery (433). The incidence of peptic ulcer disease increases with age

(119). In 1978, fully 40 percent of hospital days

of care for ulcer disease were for those 65 years

or older (see table 12). In addition, the rate of

ulcer-related surgery was twice as high for the

elderly as for the general population (see table 13).

In 1975, the total direct and indirect costs of ulcer

disease in the United States were roughly estimated to be in the neighborhood of $2 billion

(121).

In August 1977, a new drug was approved for

use in the United States for the short-term treatment of duodenal ulcers. *O This drug, known as

cimetidine, acts by blocking stimulation of gastric

acid secretion. Clinical evidence has demonstrated

that cimetidine promotes healing of ulcers compared to placebo (121).

Several analysts have investigated cimetidine’s

impact on the use of health services. Studies in

the United States and abroad have documented

9A1though not all of the costs of an incflvidual surgery occur during the year in which the procedure is performed, the estimate is

reasonably accurate for the Medicare population as a whole,

l~ln 1976, duodena] ulcers accounted for approximately One-half

of all hospitalized peptic ulcer cases in the United States. Gastric

and unspecified ulcers accounted for the other half.
Ch, 3— The Impact of Medical Technology on Medicare Costs ● 5 5

Table 12.— Days of Care for Ulcer Disease for Patients Discharged From

Short-Stay Hospitals, 1977-79 (per 100,000 population)

1977 1978 1979

All › 65 All >65 All >65

ICDA code ages years ages years ages years

531 —Stomach ulcer . . . . . . . 524.6 2,119.5 484.1 2,186.0 412.3 1,773,3

532—Duodenal ulcer . . . . 751,3 2,554.1 636.9 2,220.2 559.7 1,955.5

533—Peptic ulcer . . . . . . . . .. 294,4 940.4 263.9 871.4 248.4 708.5

534—Gastrojejunal ulcer ... . . . 30.5 140,5 37.3 90,3 30.7 105,3

Data sources

U S Department of Health and Human Services, National Center for Health Statistics, “Detailed Diagnosis and Surgical

Procedures for Patients Discharged From Short Stay Hospitals United States “ for years 1977 1978 and 1979 (Hyattsville,

Md DHHS)

SOURCE Off Ice of Technology Assessment

Table 13.—Operations for Ulcer Disease for Patients Discharged

From Short-Stay Hospitals, 1977-79 (per 100,000 population)

1977 1978 1979

All z 65 ‘Al l >65 All › 65

ICDA procedure ages years ages years ages years

46,2—Partial gastrectomy ., . . ... 24.1

——

77.7 18.5 37.7 4.0 8.1

46.8—Vagotomy. ... . . . . . 21.5 46,9 13,6 26.2 1.8 8.1

Data sources

—

U S Department of Health and Human Services National Center for Health Statistics, “Detailed Dtagnosis and Surgical

Procedures for Patients Discharqed From Short Stay Hospitals United States, ” for years 1977 1978, and 1979 (Hyattsvllle

Md DHHS)

SOURCE Off Ice of Technology Assessment

reductions in duodenal ulcer surgery rates immediately following the introduction of cimetidine

in 1977. Fineberg and Pearlman (122) estimated

that in 1978 the number of surgeries in the United

States was 21,000 to 31,000 less than would have

been predicted from the trend prior to 1977. In

1979 and 1980, the number of procedures was

below the expected rate (but there was no statistical significance) (122,312 ). Thus, cimetidine

may delay surgery to a greater extent than it

replaces it. 1 1

The introduction of cimetidine coincided with

a dramatic decrease in the rate of hospitalization

for peptic ulcer disease in young adults (15 to 44

years old). There was only a modest decrease in

the rate for all patients in the United States between 1977 and 1978 (432). This fact suggests that

the elderly population may not have experienced

a substantial reduction in hospitalization as a result of the drug’s availability.

———- ———-

L J lt IS Im p{~ti a rlt t o note th~ t the e~pectw.i surgery’ rate in the

Absence 01 the c I met id ne was calculated on the basis t)f a declining

l]rwar tImc’ trend It I\ que~t]onabl(” whether such d trend wou]d normal IV c(lnt i nue as ratt~ of >ur~er-y dw I ine to low levels One might

c’xp(’[ t iu rgt>rv rat e> t () I evel ot t a t some p(~] n t I n t ] me

A recent analysis reported on the impact of

cimetidine on the costs of ulcer disease in Rhode

Island (272), Although this study was limited by

the available data, the researchers had access to

hospital charges for patients undergoing ulcer surgery. Ulcer surgery rates declined in Rhode Island

after the introduction of cimetidine, and a proportion of this decline was ascribed to cimetidine’s

availability. The authors estimated that this reduction in surgery meant statewide savings in

medical care of between $185,000 and $450,000,

depending on the extent to which it can be

assumed that a reduction in surgery keeps ulcer

patients out of the hospital.

The evidence on the economic evaluation of

cimetidine reviewed above highlights the impact

that a single drug can have on the patterns of hospital and medical care. It also demonstrates the

difficulty of determining whether these changes

in patterns of use save health care or Medicare

costs without the passage of enough time to monitor such changes. Today, physicians prescribe

cimetidine for a variety of indications that are not

among those approved by the Food and Drug Administration, including prevention of gastrointes-
56 ● Medical Technology and Costs of the Medicare Program

tinal bleeding in hospitalized patients (63,290).

The economic impact of cimetidine in these areas

has not been investigated, yet it could surpass the

effects of cimetidine in treating ulcer disease.

Therapeutic Apheresis12

Therapeutic apheresis is not a new procedure,

but the extent of its use has grown rapidly during the past 5 years. It is a procedure in which

a patient’s plasma or blood cellular parts or both

are separated and then removed from the blood

and most often replaced by substitute plasma or

a related physiological solution. It is believed that

abnormal or harmful substances or cells are thereby removed, leading to a cure or arrest of disease.

At present, apheresis is primarily accepted as an

acute therapy in a small group of relatively obscure diseases, and the number of patients undergoing treatment is approximately 20,000 (183).

Results reported in the scientific literature have

been dramatic, and apheresis is being used to treat

an increasing number of medical conditions. Skepticism over the validity of such claims along with

the high costs of apheresis, however, have

touched off recent controversies over this procedure’s use.

From 1977 through 1980, procedure volume increased more than 700 percent, from around 5,000

to over 40,000 procedures per year. In the late

1970’s, the rate of growth far outpaced the estimates. For example, the now defunct National

Center for Health Care Technology originally estimated its use in 1979 at “hundreds of procedures.

It turned out to be around 16,000. A lot of people were doing it but not reporting it” (95).

The costs of apheresis have become a particularly volatile issue. Each treatment costs between

$400 and $1,200. Furthermore, each patient requires a number of treatments, usually varying

between 5 and 15. (Sometimes as many as 30

treatments are needed initially, but the number

tapers off with time, ) Estimates of current national

expenditures on apheresis therapy range from $3.2

million to $240 million. If apheresis therapy is extended in the future to the wider array of diseases

—— —

“This section is based on a case study prepared for this project

by OTA, entitled The Satet_y, Ef/icacv, and Cost Effectiveness ot

Therapeutic Apheresis (349).

to which it has been only experimentally applied

thus far, total national treatment costs could range

from $650 million to over $7 billion per year (349).

In 1981, the Health Care Financing Administration (HCFA) issued the first national instructions on the coverage of apheresis under Medicare. Only a small group of relatively rare diseases

were listed as acceptable indications for the procedure. These included: myasthenia gravis; leukemia; and macroglobulinemia and hyperglobulinemias, including multiple myeloma (382). In

1983, a few additional uses were added to the list,

including thrombotic thrombocytopenic purpura

as a last resort treatment; life-threatening rheumatoid vasculitis; life--threatening forms of Goodpasture’s syndrome, when the patient has not responded to more conventional forms of therapy;

and glomerulonephritis, when the patient has not

responded to more conventional forms of therapy (74). Moreover, Medicare coverage of apheresis has been limited only to procedures performed

in the hospital inpatient or outpatient setting.

The ultimate cost of therapeutic apheresis to the

Medicare program will depend on whether coverage is extended to new indications and on the

distribution of the affected diseases in the elderly

population. By far the largest potential cost will

arise if therapeutic apheresis is used for those who

suffer from rheumatoid arthritis, which afflicts an

estimated 5 million to 7 million people in the

United States. Most observers believe that apheresis would be used on patients who have failed

to respond to traditional forms of therapy. At

present, the consensus of professional opinion is

that apheresis for treatment of rheumatoid arthritis is an experimental therapy (349). Clinical

evaluation of the use of this procedure in rheumatoid arthritis has been limited, but one controlled

study found no statistically significant differences

between the short-term response of patients receiving apheresis together with drug therapy and

the response of patients receiving drug therapy

alone (287).

Pneumococcal Vaccine

An estimated 10 to 35 percent of all cases of

pneumonia are bacterial infections caused by

pneumococci (358). There are over 80 known
Ch. 3—The Impact of Medical Technology on Medicare costs ● 57

serotypes of pneumococcal bacteria (293), but a

much smaller number is responsible for the majority of pneumococcal pneumonias in the world.

Vaccines for various combinations of pneumococcal serotypes have been produced at different

points in time since the turn of the century, but

in 1978, a vaccine offering protection against 14

serotypes of pneumococcal bacteria responsible

for about 70 to 85 percent of pneumococcal infections was introduced into commercial production

(18). At the time of the vaccine’s introduction, immunizations were specifically excluded as Medicare benefits by Section 1862 of the Social Security Act.

The ultimate potential for the pneumococcal

vaccine is uncertain because of a lack of knowledge about the incidence of pneumococcal pneumonia in various population groups, the distribution of pneumococcal serotypes in these

pneumonias, and the effectiveness of the vaccine

in various patient groups, particularly high-risk

groups (18,168). It is unknown, for example,

whether a reduction in pneumococcal infections

of the 14 types contained in the vaccine will be

met with a concomitant increase in the incidence

of other types of pneumococcal pneumonia, especially in high-risk patients (31). Since estimates

of economic costs must rely on estimates of these

rates, they are themselves subject to a great deal

of uncertainty.

In 1979, noting these data and methodological

problems, OTA performed a cost-effectiveness

analysis of a pneumococcal vaccination program

(358). OTA’s analysis compared the net societal

medical care costs and health effects (measured

in terms of quality-adjusted life-years) that would

result from vaccination. Under the base case set

of assumptions, vaccination would increase net

medical care costsl3 for vaccinees in all age groups,

but would also yield health benefits that could not

be obtained through treatment. Furthermore, vaccination of the elderly (those 65 years of age and

older) was relatively cost effective in comparison

to many existing health programs.

‘‘OTA s ana]ysls lnclucled the cl]scounted value 01 tuture meclcal care costs arising from increased IIfe expectancy among vaccinees

Working largely with data provided by OTA,

the Congressional Budget Office analyzed the

likely impact of covering the pneumococcal vaccine as a Medicare benefit on Medicare expenditures (331). That study found that a vaccine benefit would be cost saving to Medicare after 3 to

5 years, depending on the assumptions made

about vaccination rates, levels of reimbursement

for vaccination, and the inclusion of medical costs

arising from increased life spans.

Partly as a result of these analyses, Congress

amended the Social Security Act to allow Medicare coverage of pneumococcal vaccination. At

present, it appears that vaccination rates in the

Medicare population are low, and estimates of

Medicare cost impacts are not available (305). 1

’

Intensive Care Units

The ICU is an example of a technology which

has proliferated widely despite the absence of

studies of efficacy or cost effectiveness. Because

of the difficulty of separating the intensity of care

from the setting in which it is provided, it is difficult to know whether intensive care would be

as effective if provided on the general hospital

floor as in the physically and administratively separate ICU. For many medical problems, however,

treatment in an ICU has become the standard

method of treatment.

A recent National Institutes of Health sponsored consensus panel concluded that it is impossible to generalize about whether ICU care

improves outcome for the varied ICU patient population. The panel agreed that ICU intervention

is unequivocally lifesaving for some conditions,

particularly where there is an acute, reversible

problem, such as drug overdose or major trauma.

It was less certain about the effectiveness of ICU

care in other conditions, particularly in the presence of a severe, debilitating chronic illness, such

as cancer or cirrhosis of the liver (409).

Despite the uncertainty about the indications

for ICU care, almost 80 percent of short-term gen-

— —14 For more information, see OTA’S forthcoming technical memorandum Update on Federal Activities Regarding the Use of Pneurnococcal Vaccine, C) TA-TM-H-23 (Washington, D C.: U S. Government Printing Office, May 1984).
58 ● Medical Technology and Costs of the Medicare Program

eral hospitals have at least one ICU (354). Large

hospitals are likely to have two or more ICUs,

organized along specialty lines. Overall, 5.9 percent of total hospital beds in non-Federal, shortterm community hospitals in 1982 were beds in

adult intensive and coronary care units (9). In

1980, 7 percent of hospital Medicare charges were

for intensive and coronary care units (161). This

figure understates the full costs of ICU care because it does not include the ancillary charges for

patients. In any case, it is a representation of

charges instead of costs, which may be higher.

It is estimated that the costs of adult intensive and

coronary care unit care represent over 15 percent

of total hospital inpatient costs, or $4,742.5 million in 1982 (354). Inclusion of the other types of

specialized ICUs, such as neonatal and burn care

units, would bring the percentage up to about 20

percent of total hospital costs, or almost 1 percent of the Nation’s gross national product.

According to 1979 Medicare data, 18 percent

of Medicare discharges included a stay in intensive or coronary care units (160). From reports

from individual hospitals, it appears that the

representation of the elderly Medicare population

in ICUs is about the same as in the hospital as

a whole (354). Age alone does not appear to be

a significant factor limiting use of ICUs in the

United States. It is noteworthy that in other countries, ICU patients have a significantly lower mean

age (354).

The literature on the outcomes of ICU care has

demonstrated consistently the inverse relationship

between the cost of ICU care and the likelihood

of survival. The sickest ICU patients, many of

whom do not survive their hospital stay, consume

a disproportionately high share of ICU costs,

Under Medicare’s cost-based hospital reimbursement system, the high-cost patients were not particularly burdensome financially to the hospital.

However, under Medicare’s recently initiated prospective payment system for inpatient hospital

care, many of these long-stay, high-cost ICU

patients will become financial losers to the hospital (354).

Total Parenteral Nutrition

Total parenteral nutrition (TPN) refers to the

intake of nutrients directly into the bloodstream,

circumventing the digestive tract (14). Its primary

use is in eliminating malnutrition in patients who

cannot adequately digest food or whose nutritional needs are elevated because of disease or injury.

To receive TPN, a patient must have his or her

nutritional needs assessed by a doctor or dietician

and must have a catheter implanted in a large

vein.

Clinically, a patient must be on TPN for a variety of reasons, most commonly inflammatory

bowel disease (e.g., Crohn’s disease), ischemic

bowel infarction, and cancer-related problems, including damage due to radiation therapy (158).

Indications for the use of TPN have been the subject of considerable discussion in the medical profession in the last 5 years. Some physicians advocate the use of TPN to bolster patients before

surgery and to improve cancer patients’ tolerance

to therapy. Others suggest that TPN has little influence on the outcome in these cases and may

actually promote tumor growth (139,181).

Before the late 1960’s, prolonged maintenance

of patients with digestive dysfunction was not

possible. The development of TPN came about

through advances made in four areas: improved

knowledge of human nutritional needs, improved

surgical procedures, improved catheter composition and design, and improved infusion control

devices. The development of volumetric infusion

pumps, especially the cassette-type electronic

pump introduced in 1974, was the watershed for

safe and reliable infusion that made overnight

parenteral feeding practical.

TPN can be delivered either in the hospital or

in the home. Before 1979, all home TPN patients

were treated as hospital outpatients. In that year,

a private firm, Home Health Care of America,

entered the market, offering a package of supplies

and services (189). Today there are some 30 to

40 commercial home TPN providers, several of
Ch. 3—The Impact of Medical Technology on Medicare Costs ● 5 9 ——————

which are owned by firms that manufacture solutions and supplies (37).

In either setting, hospital or home, TPN is an

expensive long-term therapy. A study at the

Cleveland Clinic found that costs to the hospital

for home TPN were about one-fourth of TPN

costs in the hospital, but even in the home, the

average per-patient first-year costs were estimated

at $21,465 (in 1978 dollars) (421 ). The most important factor in cost was the quantity of disposable supplies, including nutritional solutions,

which accounted for almost 90 percent of the total

cost. Other studies have estimated costs of a typical home TPN patient to be about $40,000 to

$45,000 per year (158,189,301).

Medicare coverage of TPN delivered to hospital inpatients has never been at issue. TPN provided in a hospital setting has been covered as a

Part A hospital benefit since the technology was

developed. In 1977, HCFA began to cover home

TPN on the advice of the Public Health Service.

At that timer HCFA did not anticipate home TPN

as a major expense; it was expected that only

about 10 patients per year would need home coverage and that most of these patients would not

live long (56). Because intravenous nutrients are

classified as drugs and are therefore not individually reimbursable under Medicare’s Part B,

HCFA declared the whole home TPN system a

prosthetic device, and therefore subject to Part

B coverage. In 1981, HCFA tightened the requirements for home TPN, listing seven diagnoses for

which it was appropriate. Other indications can

be approved on a case-by-case basis {62,184).

All persons eligible for Medicare and participating in the Part B program are covered for home

TPN supplies. Persons younger than 65 and not

otherwise eligible can receive Medicare coverage

if their need for home TPN renders them unable

to work, but over half of home patients consider

themselves fully functional once they receive the

needed nutrition (241 ), TPN covered under Part

B is reimbursed on the basis of reasonable charges,

but because there have been relatively few home

TPN patients, it has been difficult to establish

charge screens. As with other Part B services, TPN

at home is subject to the deductible and coinsurance provisions of Medicare.

The use of home TPN has undergone tremendous growth in recent years, much of which was

stimulated by the increase in coverage by Medicare and other insurers. For example, a registry

maintained by the New York Academy of Medicine reported a 103-percent increase in the number of patients on home TPN between 1979 and

1981 (241). It has been estimated that about 200

TPN patients were discharged to the home in 1978

(301), while estimates for 1983 are around 4,000

home patients (37). It is unknown to what extent

this increase represents a substitution of home

TPN for inpatient nutrition services and to what

extent it represents a net increase in the number

of patients receiving TPN.

The home parenteral nutrition registry estimates that about 22 percent of patients receiving

home TPN in 1979 were Medicare enrollees (241).

If the cost estimate of $40,000 per year for TPN

in the home is accepted, and if it is assumed that

22 percent of the 4,000 patients on home TPN are

Medicare beneficiaries, then Medicare currently

pays in the neighborhood of $28 million per year

for home TPN. 15 A lack of data precludes estimation of the total cost to Medicare of providing

TPN in the hospital, but it is likely to be greater

than that for home TPN.

Although over $28 million in annual Medicare

expenditures for a technology that extends life is

small in relation to total Medicare expenditures

($52.2 billion in 1982), this case illustrates the extent to which the impact on Medicare cost of a

new technology can be grossly underestimated at

the time coverage is introduced.

Hemodialysis for Chronic Renal Failure

Hemodialysis represents the classic case of a lifesaving technology whose development dramatically affected the costs of Medicare. Although

hemodialysis has been available since 1945 for

temporary treatment of acute and reversible renal

failure, its application to patients with end-stage

renal disease (ESRD) was first made possible in

1960, when Quinton and Scribner developed a

subcutaneous arteriovenous shunt (a plastic tube

connected to an artery and a vein in the arm or

‘

5

(0,22 x 4,000 x $40,000 x 0.80).
60 ● Medical Technology and Costs of the Medicare Program —.—.— —— — . - ——. —. .— —. .

leg) (271). Without the shunt, filtering the blood

as often as necessary was not possible on a longterm basis because the blood vessels would collapse. In the early 1960’s, hemodialysis became

accepted as a life-extending therapy for victims

of chronic kidney failure.

The cost of hemodialysis for ESRD varies with

the setting in which treatment is provided. One

study estimated that the costs of dialysis in 1980

were approximately $25,000 per patient year for

in-center treatment and $13,000 per patient year

for home treatment after the first year (279).

Because of the high costs and the obvious lifeextending properties of both hemodialysis and its

Hemodialysis is a lifesaving medical technology that has

affected the costs of the Medicare program

CONCLUSIONS

The evidence presented in this chapter was intended to illuminate how changes in medical technology alter the cost of the Medicare program.

Although its aggregate impact on Medicare costs

cannot be estimated precisely, medical technology has clearly added to the costs of the Medicare program and to health care costs as a whole.

Today, Medicare is buying more services for its

beneficiaries than ever before, and the pressure

to adopt new beneficial but cost-raising technologies continues. Despite this conclusion, the increase in the provision of services to Medicare

competitor,

began in the

kidney transplantation, a debate

mid-1960’s over who should be responsible for paying for treatments of patients

with ESRD. The debate culminated in 1972 with

the passage of the Social Security Amendments

(Public Law 92-603), which extended Medicare

coverage of treatment for ESRD to over 90 percent of the ESRD population. Factors that led to

the congressional decision to pay for ESRD treatment included a recognition that the alternative

to life sustainment by dialysis or kidney transplantation was death, that ESRD treatment was very

expensive, and that there occurred 7,000 to 10,000

uremic deaths a year because of the limited availability of dialysis facilities.

In 1972, 40 patients per million population were

receiving long-term hemodialysis treatment in the

United States, almost entirely under the auspices

of nonprofit organizations. The number now exceeds 200 per million population (a fivefold increase) and is one of the highest in the world

(96,269).

The cost of Medicare’s ESRD program grew

from $250 million in 1974 to an estimated $1.8

billion in 1982 (378), greatly exceeding original

congressional estimates of the potential costs

(279). In 1979, benefit payments for ESRD exceeded 5 percent of total Medicare expenditures

and were fully 10 percent of expenditures from

the Supplemental Medical Insurance fund of Medicare, although renal patients constitute only 0,2

percent of the Medicare population (38,279).

beneficiaries and inflation in the price of medical

care represent less than a third of the 107-percent

increase in Medicare expenditures per capita from

1977 to 1982. Increases in enrollment and general

price inflation account for the bulk of Medicare

expenditure inflation.

The descriptions of the seven new medical technologies provided in this chapter highlight the difficulty of predicting at the outset how technological change in medicine is likely to affect Medicare

costs in the future. New technologies are and will
Ch. 3—The /mpact of Medica/ Technology on Medicare Cosfs ● 6 7

. . —. . — .

continue to be developed regardless of Medicare’s

policies. Some of them substantially prolong life

or improve its quality for Medicare beneficiaries.

Application of new technologies to the Medicare

population can have large and unanticipated impacts on Medicare expenditures. But the cases

demonstrate quite clearly that the extent of impact on Medicare program expenditures depends

on whether Medicare chooses to cover a technology, and if it chooses to, to influence the conditions under which it is used.

It is important to note that changes in service

intensity are measures of the incremental effects,

not the cumulative effects, of technology on total

Medicare costs. It is not just at the margin that

there is an opportunity to reduce Medicare costs

by altering the patterns of technology adoption

and use; there are many opportunities to save

costs by altering longstanding patterns of use of

medical technology. It might be desirable to have

the new cost-raising but life-extending technologies widely adopted and used and the use of

many existing ineffective technologies substantially reduced. The issue for the remainder of this

report is how Medicare policy can be structured

to bring about the most cost-effective use of both

new and existing medical technologies.
Part Two
4 ●

A Framework for Change

No great improvements in the lot of mankind are possible, until a great

change takes place in the fundamental constitution of their modes of thought.

John Stuart Mill
Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Organization of the Following Chapters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.

A Framework for Change

INTRODUCTION

The following chapters

..———

examine policies that

have been or could be used to restrain the costs

of medical technologies in the Medicare program.

Several points underlie the analyses in these

chapters.

First, the impact of medical technologies on the

costs of medical care should not be assessed in

isolation from the effects that such medical technologies have on patient care. The impact of costcontaining measures on quality and access is one

of the more difficult policy issues to be faced, because the Medicare program was instituted on a

payment basis that had few controls on costs.

Now that costs are a primary concern of Federal

policy makers, some restrictions on quality and

access are 1ikely to occur. Nevertheless, there is

substantial evidence to suggest that inappropriate

use of medical technology is common and raises

costs without improving quality of care.

Methods of controlling the costs of medical

technologies can vary widely and have varying

impacts. Direct methods, for example, are methods that are intended to control the use of specific medical technologies on a technology-bytechnology basis. Such methods could be used:

1 ) to control the actual adoption or use of particular technologies{ as in the coverage process

that assesses specific technologies before they are

approved for payment; or 2 ) to provide information on the costs of technologies so that payment

for their use could be more reasonably related to

their costs. Indirect methods include methods that

use the payment mechanism to provide broad incentives to medical care providers not to overutilize medical technologies and to make patients

more cost conscious in their use of medical services. Indirect methods are now considered the major means thr(~ugh which long-term cost-containment objectives might be achieved. Particularly

when used in conjunction with indirect methods,

however-, some direct methods, such as review of

capital spending, utilization rev iew, and some

other types of technology assessment activities,

may also be valuable.

Second, there are interactions between Medicare and the rest of the U.S. health care system.

Because of its size and scope, the Medicare program’s policies and procedures affect all aspects

of health care delivery, including financing, administration, organization, and personnel. Furthermore, the program affects the content and

costs of health care by its influence on the development, adoption, and use of medical technology. Medicare’s leverage in the health care system is partly due to the fact that Medicare alone

finances over one-third of the country’s hospital

care, the setting where technology use is concentrated (1.5). It is also partly due to the fact that

other third-party payers often follow Medicare’s

example.

Nevertheless, it is important to keep in mind

that the Medicare program is only one of many

public and private institutions that have an influence on the development and diffusion of medical technology. Other important influences are

the Food and Drug Administration, National Institutes of Health, manufacturers of drugs and

medical devices, hospitals, private health insurers,

and professional medical societies. Thus, for example, the leverage of using Medicare-specific

payment policies to influence the development

and diffusion of medical technology may be

limited.

Third, because of spillover effects from one part

of Medicare to another, policy mechanisms involving only one part of the Medicare program

may have serious limitations in terms of containing costs or affecting the adoption and use of technology. Medicare’s hospital payment system

based on Diagnosis Related Groups (DRGs), for

example, excludes physician services and outpatient care. These exclusions provide financial incentives for the shifting of technologies and costs

6 7
68 • Medical Technology and Costs of the Medicare Program — —— ——

out of inpatient hospital settings, while leaving

physicians’ incentives to use medical technology

unaffected. Any cost-containment effort must take

into account the fact that physicians play a central role in determining what services are provided

to patients, both in hospital settings and in nonhospital settings. Most –if not all—cost-containment strategies depend on the ultimate influence

of physicians for them success. Cost-containment strategies can be targeted directly at physicians—although such strategies are regarded by

most observers as short-term and inadequate

approaches—or they can be directed at the practice of medicine through changes in the organizational and financial arrangements under which

physicians provide care. For the success of strategies that depend on incentives rather than on direct regulation, it is essential that physicians

believe that the incentives are advantageous.

Fourth, the social and political climate today

is quite different from that in 1965, and now that

Medicare’s goal of imprcwing access to health care

for the Nation’s elderly has been largely achieved,

the primary focus of policy makers is on containing Medicare costs. The intent of the original

Medicare law (Public Law 89-97) was to increase

elderly persons’ access, by removing financial barriers, to mainstream medical services, particularly

to needed hospitalization (318). The concern

about access to medical services was also prominent when disabled persons and those with endstage renal disease were added to the list of eligible beneficiaries. There was far less concern about

the cost of the services than there was about the

problems of access, primarily because there was

little reason to be concerned. Early principles in

addition to improving access included assuring

beneficiaries freedom of choice of providers and

not interfering in the practice of medicine. Unfortunately, Medicare’s adherence to these original

principles has contributed to the current cost

crisis. Today, in part because the original goals

have been largely—though certainly not entirely—attained, the overriding goal for policymakers

is to solve the problem of controlling Medicare

costs. The challenge is to achieve that goal without diminishing past success.

The aforementioned points are closely intertwined. The relationship between cost containment and its effects on quality and access to medical care is but one example. Equally problematic

is the widely held belief that specific policies that

could be implemented in the short-term and directed at specific segments of the health care system will provide only temporary relief in medical care cost inflation. On the other hand, longterm success is increasingly dependent on broad

but still untested ideas of the kinds of strategies

(e.g., “competitive” systems, alternative delivery

sites and organizations) that could lead to adequate cost containment. One fundamental dilemma, therefore, is whether policy makers can be

precise about cost-containment processes for

which the desired outcomes are quite limited,

while still exploring the kinds of processes that

would lead to the desired long-term or broader

cost-containment outcomes.

ORGANIZATION OF THE FOLLOWING CHAPTERS

Chapter 5 examines the potential of linking

Medicare’s technology-specific coverage policy

with technology assessment activities as a means

of influencing the adoption and use of specific

medical technologies for the ultimate purpose of

containing Medicare program costs. In the past

few years, assessment of the health effects—i.e,,

safety and efficacy —of some technologies has

become part of the process of arriving at coverage decisions. Two current issues are whether

costs should be considered in Medicare coverage

decisions and whether coverage of new technologies should be limited to specific sites and providers. This chapter provides information on the

Medicare coverage process and technology assessment as practiced in the public and private sectors, and analyzes the strengths and limitations

of the current coverage process, technology assessments, and possible linkages between the two

processes. It also discusses the role of coverage
Ch. 4—A Framework for Change ● 6 9

—

policy and technology assessment under Medicare’s DRG hospital payment system.

Chapter 6 discusses the implications of the DRG

hospital payment system’ for the adoption and

use of medical technologies. These implications

are varied and to some extent unknown. Much

will depend on the way in which the system is implemented and the refinements that will follow.

DRG payment 1evels, especially relative to the

speed with which hospitals can reduce costs, will

have a major effect on the ability of hospitals to

adopt new medical technologies. The way in

which capital is paid for will also be an important influence in determining how much and what

kinds of new technologies are adopted. Chapter

6 also includes a discussion of alternative approaches to hospital payment and of the implications of these approaches for medical technology.

Chapter 7 describes the Medicare physician

payment system and analyzes the impact of proposals to limit physician payment or increasing

beneficiary cost-sharing under Part B on medical

technology adoption and use. Physicians determine the amount of medical services provided and

decide when patients need to be hospitalized, discharged, or provided other types of institutional

and noninstitutional care. This chapter examines

evidence of excessive use of technologies and

methods of enhancing cost consciousness among

physicians. Such methods include programs to

help ensure appropriate technology use by physicians that might be incorporated in the Medicare program. For example, the law authorizing

DRGs also puts into place a mechanism for quality

assurance and utilization review by requiring hospitals to contract with regional peer review organizations.

‘The recent changes in Medicare’s hospital payment system established by the Social Security Amendments of 1983 (Public Law 98-21)

are more exterwvely discussed in OTA’S July 1983 technical memorandum LAagnosis Related Gwups (DRGs) and the A4edicare Program. Implications tor Nfedical Technolog~r (343).

Except for the imposition of minor restraints

on the rate of increase of payment levels, Medicare’s charge-based method of payment for physicians’ services under Part B has been little

changed since 1966. This method provides financial incentives to physicians for increased technology use by the- way that fees are set and by

the coding system used. The achievement of the

cost-containment objectives of the DRG-based

payment system for hospital services could be partially impeded through movement of some technologies and services out of the hospital setting.

For that reason, the law establishing the DRG system requires that data necessary to compute the

amount of inpatient physician charges based on

DRGs be collected and that the Department of

Health and Human Services report to Congress

on the prospects of including physicians in DRG

payment. The possibility that changes in Medicare payment for physicians’ services may lower

beneficiaries’ access to medical care is also examined, principally through an analysis of the implications of changing physician assignment policy in the Medicare program.

Chapter 8 explores mechanisms other than hospital or physician payment that Medicare could

use to foster the appropriate adoption and use of

medical technology. These include stimulating

competition among providers of health care by

encouraging the development of alternative sites

and organizations of care such as health maintenance organizations, home health care, and ambulatory surgical centers, and the use of vouchers

and other methods.

Examination of these four areas—current Medicare coverage policy and related technology assessment activities, changes in hospital payment,

changes in physician payment, and other methods to encourage the appropriate adoption and

use of medical technology-lead to the final chapter of this report. Thus, chapter 9 presents OTA’S

conclusions and policy options.

25-337 0 - 84 - 6
5

Specific Medical Technologies;

Linking Coverage Policy and

Technology Assessment

To Contain Costs

Indeed, what is there that does not appear marvelous when it comes to r

our knowledge for the first time?

Pliny the Elder
Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Medicare Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Coverage Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coverage Policy Under Medicare’s DRG Hospital Payment

Evaluating Technologies for Coverage Decisions . . . . . . . . . . .

Current Activities . . . . . . . . . . . . .

Analytic Methods of Comparing

Cost-Saving Technology . . . . . . .

Discussion

Table No.

14.

15.

16.

Sources

Making

Sources

Costs and Benefits . . . . . .

LIST OF TABLES

of Information Used by Medical Consultants in

Coverage Decisions . . . . . . . . . . . .

of Coverage Questions Submitted

Reported Coverage Decisions

Figure No.

2.Model of Coverage

by Medicare

FIGURE

73

73

74

76

82

84

84

85

86

88

Page

. . . . . . . . . . 78

Process for Individual

Page

Medical Technologies.. 76
5

Specific Medical Technologies: Linking

Coverage Policy and Technology

Assessment To Contain Costs

—..

INTRODUCTION

The introduction of a new technology sometimes has large and unanticipated impacts on

Medicare expenditures (see ch. 3). The extent of

impact depends on whether Medicare chooses to

cover (i. e., pay for) the technology, and, if it

chooses to cover it, to specify the conditions of

its use. Coverage policy, i.e., policy that governs

the eligibility of services (technologies) for payment, has been a significant factor in hospitals’

decisions regarding the purchase of expensive, visible medical technology (24,289). The relationship

between coverage policy and adoption of other

kinds of medical technology or the use of any

medical technology remains speculative.

Title XVIII of the Social Security Act specifies

broad, general categories of medical and health

services (e. g., hospital services and physicians’

services) and some specific items (e. g., home dialysis supplies, pneumococcal vaccine) that the

Medicare program will cover (see ch. 2). It also

lists a number of specific services and items that

the program will not cover. For the most part,

however, decisions about which technologies

Medicare will pay for are made at the national

level by the Health Care Financing AdministraDEFINITIONS

Coverage is generally defined as “the guarantee against specific losses provided under the terms

of an insurance policy. ” The term is frequently

used interchangeably with benefits or protection.

Coverage also means “the extent of insurance offered by a policy” (33.5). Insurance plans (including Medicare) specify, to varying degrees of precision, the benefits they will pay for. Thus, coverage

tion (HCFA) or at the local level by Medicare contractors.

In the past few years, rapid technological development has led to an increasing need for decisions

by Medicare and other third-party payers about

the coverage of specific technologies. Many coverage decisions are based on an assessment of the

health effects of the particular technology. For the

most part, these assessments are not rigorous. Indeed, it is estimated that only 10 to 20 percent

of technologies used in medical practice have been

shown to be efficacious by controlled trials (341).

Evaluation of the nonmedical effects, for example, economic and social effects, of specific technologies is usually not part of an assessment for

coverage purposes.

This chapter discusses the possibility of refining Medicare’s coverage policy, for example, by

using appropriate technology assessments, as a

means of influencing the diffusion of medical technology. Changes in Medicare’s coverage policy

for specific technologies may provide an incremental approach to controlling Medicare costs.

refers both to the broad categories of benefits specified in the law or in a plan as well as to the specific services actually provided and paid for. In

the Medicare program, coverage is distinguished

from payment or reimbursement: coverage refers

to benefits available to eligible beneficiaries, and

payment refers to the amount and methods of

payment for covered services (434).

73
74 . Medical Technology and Costs of the Medicare Program ——..——

"

. . . [Technology assessment is simply a

broader form of policy research than is commonly

conducted. The goal of technology assessment,

as of all policy research, is to provide decisionmakers with information on policy alternatives,

such as allocation of research and development

funds, formulation of regulations, or development

of legislation” (23). A comprehensive assessment

MEDICARE COVERAGE

The basis for decisions by HCFA or Medicare

contractors regarding the coverage status of medical technologies not otherwise specifically mentioned in Title XVIII of the Social Security Act

is Section 1862. Section 1862, among other things,

prohibits payment by Medicare for any expenses

incurred for items and services which are not “reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed-body member. . . .“ The

provision applies “notwithstanding any other provisions” of the title.

Coverage policy for specific technologies is expressed in the development, issuance, and implementation of coverage decisions. Such policy is

made in light of Medicare’s twin principles of not

interfering with the practice of medicine and of

assuring beneficiaries a free choice of providers.

For the most part, questions regarding Medicare

coverage status arise with respect to new technologies or new applications of covered technologies,

although occasionally, the coverage status of covered, established technologies is reexamined. The

focus of this chapter is on the Medicare coverage

process for new technologies and new uses of covered technologies. 1

There is a basic contradiction between Medicare’s stated intention of not interfering with the

practice of medicine and the delivery of health

care and its coverage policy that judges technologies to be used in medical practice. A decentralized approach to the coverage process attempts

to minimize the contradiction by accepting the

‘The term “new technologies” henceforth refers to both new technologies and new uses of established technologies.

examines the technical, economic, social, and legal

consequences of technological applications. A less

comprehensive assessment of a medical technology may focus only on the health effects of the

technology. The typical meaning of the term

“technology assessment” in health policy today

is an evaluation of a technology’s efficacy and

safety and sometimes costs.

premise that medical practice varies from one geographic area to another.

Some Medicare coverage decisions for specific

technologies are made at the national level by

HCFA’s central office. Most of the decisions, however, are made by Medicare contractors who perform the Medicare program’s claims processing

and payment function under the policy and operational guidance of HCFA. Medicare contractors,

called intermediaries and carriers, are either Blue

Cross/Blue Shield plans or commercial insurers.

On the U.S. mainland, 84 intermediaries administer Part A (institutional services) of the Medicare program, and 61 carriers administer Part B

(physicians services) (see app. E).2 HCFA’S 10 regional offices assist contractors with coverage

decisions and transmit information between

HCFA’s central office and Medicare contractors.

Because of the general language of Section 1862

and the absence of regulations that implement the

section, HCFA officials and Medicare contractors

alike have had considerable latitude in determining which technologies are to be covered for reimbursement.

Medicare coverage policy is continuously

evolving and is developed and implemented in a

decentralized manner. National policy has developed largely as a result of questions from individual contractors about whether they should

pay for specific technologies (366,435). HCFA informs contractors about the coverage status of

‘There are two governmental bodies that perform similar functions: the Office of Direct Reimbursement and the Group Health

Plan Operations Staff in the Bureau of Program Operations. HCFA

is moving to contract out the intermediary functions of the Office

of Direct Reimbursement to regional intermediaries.
Ch. 5—Specific Medical Technologies: Linking Coverage Policy and Technology Assessment To Contain Costs ● 75

—.. — ———

some specific technologies through transmittal letters and a Medicare manual. However, HCFA's

coverage instructions have no standing in law or

regulation, so the contractors’ compliance is essentially voluntary (366).

There is variation among Medicare contractors

in a number of areas (54,143,353, and app. E):

their identification of specific medical technologies that are not covered,

their decisions about the coverage of specific

technologies, and

their implementation of national coverage

decisions made by HCFA.

Because of the variation among contractors, some

technologies may be covered and paid for in one

geographic area and not in another. There is no

national or local listing of procedures that are not

covered (163).

Part of the variation stems from the absence

of precise definition of “reasonable and necessary. ” There are, however, specific criteria that

are applied to a technology to determine if the

technology meets the broad statutory language

of “reasonable and necessary. ” These criteria are

Photo credit The University of Utah Medical Center

The Jarvik 7 artificial heart is an example of an

experimental technology that has not been

approved for Medicare coverage

found in program instructions prepared by HCFA

and sent to the Medicare contractors. The technology must be (435):

generally accepted as safe and effective,

not experimental,

medically necessary, and

provided according to accepted standards of

medical practice in an appropriate setting.

Of particular interest to cost-containment efforts is that Medicare’s policy is to exclude the

explicit consideration of cost information in making coverage decisions. 3 At one point, in the context of a proposed regulation to define the meaning of “reasonable and necessary” more clearly,

HCFA debated establishing criteria and standards

for taking nonmedical factors, including economic

factors, into account in making coverage determinations (268). Active consideration ended with

the change in administration in 1981.

Another important point is that Medicare has

refrained from a policy of limiting coverage of

particular technologies to restricted circumstances

(e.g., to institutions offering specific services or

having specialized equipment, or to physicians

with specific skills). Although the notion of limiting coverage has gained importance with the increasing development of sophisticated technologies that require particular expertise, the dictum

of refraining from interfering with medical practice appears to be foremost.4

On the other hand, Medicare does limit coverage of some technologies to appropriate medical

conditions. Thus, for example, in August 1981,

HCFA announced the coverage of specific types

of therapeutic apheresis for three conditions but

‘A dramatic exception was heart transplantation A\ a result of

the controversial nature of the technology, including economic,

social, ethical, legal, and moral concerns, the evaluation and subsquent coverage decis]on has been delayed for additional research

evidence, Including cost-etfect]veness data ( 107)

‘There appears to be a lessening of adherence t(> the concept (>i

not coven ng technologies for Ilmited s] t ua t ) ~~n~ Al t ht~ugh nt~ policy change has been announced, the coverage c~f aphere~ls, whlc h

became effective on Jan 31, 1983, is limited to the performance ot

apheresis only in the inpatient or outpatient h(wpltal setting (74)

Also, in luly 1~83, klCFA released covera~e instru~t]<~n~ to hfL>dlcare cent ractors that lim] ts payment t (}r a technology to Its use in

a specific setting and by spec]f]c providers. C]o.sed loop blood glu{ (we

control devices will be paid for only if used In a hospital inpatient

setting under the direct]on of special]}’ trained medical pers[>nnel

l<~r insulin dependent diabetes during crisis intervention (383)
76 . Medical Technology and Costs of the Medicare Program

— — — —

denied coverage of apheresis for other indications. Identification of New Technologies and

Three additional disease indications were added New Uses of Technologies

in 1983 (349).

The Coverage Process

Medicare’s coverage process is depicted in figure 2 and described in detail below. The coverage process is generally (except for details) the

same at the national and contractor levels. First,

a new technology or new use of a covered technology is identified. Second, a decision is made

about covering the identified technology for MediThe identification of a new technology for a

coverage determination may be done by a Medicare contractor, by one of HCFA’s 10 regional offices, or by HCFA’s central office. Medicare contractors use general guidelines distributed by

HCFA. In the last few years, the guidelines have

been made broader and more general. HCFA assumes that Medicare contractors are familiar with

medical and hospital practices and thus relies on

the contractors’ knowledge and experience (173).

care payment. The third and final step of the proc- Medicare contractors use various methods for

ess, implementing the coverage decision, is mainly identifying new technologies, In the recent past,

the contractors’ responsibility. claims review appeared to be the primary method

Figure 2.— Model of Medicare’s Coverage Process for Individual Medical Technologies

Stage 1:

Identification of new

technologies and new

uses of technologies

Stage Ii: National decisions

Coverage decisions about technologies

Local decistions about

technologies on

Individual claims

of safety and efficacy and medically necessary and

experimental status appropriately delivered

Stage Ill:

Implementation of

coverage decisions
Ch. 5—Specific Medical Technologies, Linking Coverage Policy and Technology Assessment To

for identifying uncovered technologies. A 1983

survey of Medicare contractors, the results of

which are presented in appendix E, however,

found that most contractors learn about new technologies for which coverage questions might be

raised through inquiries from providers and manufacturers prior to the submission of claims. Other

important sources of information about new technologies are the drug and device approval lists

from the Food and Drug Administration (FDA)

and announcements from HCFA. Some contractors keep informed about new developments

through the medical research literature, or contacts with medical specialists, or supplier demonstrations and mailings.

The claims form, despite the use of other tools,

is still an essential, albeit imperfect, identification

tool. The claims review process, described in appendix E, was established for paying bills, not for

identifying technologies. Furthermore, under

HCFA’s current allowances for administrative

costs, Medicare contractors are financially constrained to limit their review process.

The claims form for hospital services under

Medicare’s traditional cost-based hospital reimbursement methods is not designed to identify new

technologies. This claims form groups services

under broad headings, such as radiology and

pathology, and provides little information about

specific technologies (291 ). Furthermore, under

cost-based reimbursement since 1981, HCFA has

required intermediaries to examine only a 20-

percent sample of inpatient hospital claims (384).

On the claims form for physician services, a

Part B service, the physician is required to supply

information about the use of specific surgical and

medical technologies. New technologies are recognized by the absence of code numbers, by the

presence of codes that are not recognized, or occasionally, by the excess charges for a type of service (54 and app. E). Because of the nature of the

claims form and the fact that almost all the forms

for physicians’ services are reviewed, it is commonly assumed that carriers, the contractors who

—

The cla]ms term and the clalms rev]ew pr(jc~ss under hl~~lcare s

1>1<(; pa}ment method are not sufficiently established for comment

at t hl~ time As n{lted In ch 2, some hosplta[s and some hospital

unlt~ \\rill cont]nue to be paid under N!edicares cost-bawd reimbursement method

Conta/n Costs ● 7 7

—

administer Part B of Medicare, are more likely

to identify uncovered technologies from claims

forms than are intermediaries. It should be noted,

however, that carriers may overlook new technologies because of inefficiencies in the review

process and a high number of coding errors. It

is also possible for physicians and hospitals to

code new procedures under codes for established

procedures (54).

Some observers indicate that intermediaries, the

contractors who administer Part A, can identify

high-cost technologies. If a hospital or other inpatient facility exceeds a set level of expenditure

for a particular type of service, the intermediary

may examine the medical record and identify an

uncovered technology. Intermediaries may compare annual Medicare cost reports (MCRs) from

year to year to compare expenditures for groups

of services. At times, hospitals have recorded a

specific uncovered technology on the MCR, as

well (17). On the whole, however, specific technologies are not identified on the MCR, which is

reviewed for financial purposes and not technological use.

Most Medicare contractors in the 1983 survey

presented in appendix E were reasonably well satisfied with existing methods for identifying new

technologies and reported that this was not a serious problem for them. Some contractors mentioned a need for greater cooperation between national medical and insurance associations and

governmental agencies in supplying information

about new technologies to facilitate the identification process.

Coverage Decisions

Coverage decisions are made by Medicare contractors and by HCFA’s central office. Local decisionmaking is informal and has no standing in law

or regulation. National coverage decisions are

made informally, as well, and the decisionmaking process has no regulatory status (114).

Medicare contractors, advised by their medical consultants, decide most of the coverage issues

that are raised in their own geographic area. Indeed, less than 1 percent of the 250 million claims

processed in fiscal year 1983 were sent to HCFA’s

central office for coverage decisions (88). Most
78 ● Medical Technology and Costs of the Medicare Program—

questions are not of national interest. Furthermore, the contractors view their function as paying claims as quickly as possible and are disturbed

by the delays in referring questions centrally (366).

Although a special office dealing with coverage

issues, the Office of Coverage Policy in the Bureau of Eligibility, Reimbursement, and Coverage, was established in HCFA as a result of a 1979

memorandum, it does not appear that the pattern

of decisionmaking has changed significantly (61),

When considering coverage questions, most

medical consultants to contractors appear to rely

on similar sources of reformation, including

HCFA regional offices, colleagues in other insurance companies or Blue Ckoss/Blue Shield plans,

and State or national medical or specialty societies

(see table 14).

Most of the questions raised during claims review pertain to whether a particular technology

was medically necessary in the case under review

and whether the technology was furnished in an

appropriate manner and setting, Sometimes, however, the broader issue of general coverage arises,

i.e., whether the technology should be covered

under any circumstance. National coverage questions are to be referred to HCFA’s central office

(435). Nonetheless, some contractors’ medical

consultants make decisions about national coverage issues.

Because of variation in the types of coverage

questions that Medicare contractors consider and

their decisions about any one question, the specific package of covered services varies from contractor to contractor. The 1983 survey of Medicare contractors found variation in coverage

decisions made by medical consultants of Medicare contractors (see app. E).

In an attempt to modify differences and inconsistencies in Medicare benefits in its region,

HCFA’s Boston Regional Office issued a bulletin

in 1978 to Medicare intermediaries and carriers

describing a “general approach that should be

taken with respect to determining coverage of new

or unusual procedures which the Medicare Bureau

either has not categorized as covered or uncovered, or on which [it has] not advised [them] that

a national coverage policy decision is currently

pending” (388). The bulletin emphasized the expeditious use of medical consultants and suggested

the referral of general issues to HCFA’s regional

and central offices. Although the guidelines described in the bulletin are not enforceable, the Boston Regional Office believes that contractors in

the Boston region have improved their coverage

process and that the improvement has resulted

in greater consistency in covered benefits in the

area (73).

HCFA’s central office issued a similar directive

to contractors nationwide in 1981 concerning its

expectation that contractors refer coverage issues

of national interest to the office (384). However,

referral is not required by statute or regulation,

and HCFA’s request is not uniformly honored.

The current locus for coverage questions within

HCFA is the Office of Coverage Policy. If medical advice is needed in order to arrive at a coverage decision, the question is presented to HCFA’s

Physician Panel, The panel may then request tech-
Ch. 5–Specific Medical Technologies: Linking Coverage Policy and

—

Technology Assessment To Contain Costs ● 7 9

nology evaluations from the Office of Health

Technology Assessment (OHTA), ’ which has

taken over the coverage responsibilities of its

predecessor, the National Center for Health Care

Technology (NCHCT) (386).

After conducting an assessment on the safety,

efficacy, and clinical effectiveness of a technology (399), OHTA may recommend to HCFA that

a technology not be covered by Medicare or that

it be covered with or without restrictions. The

coverage decision is made by HCFA, which subsequently notifies its contractors and State Medic- ——-

‘iOHTA 15 located In the National Center for Health Services Research In the Publlc t{ea]th Service It should not be confused with

the cclngres~lonalCXt]ce of Technology Aw.essment (OTA).

aid agencies. In almost all cases, HCFA accepts

OHTA’s recommendation.

In the late 1960’s and throughout most of the

1970’s, the vast majority of coverage questions

received at HCFA’S central office were submitted

by the regional offices (381). From 1978 to 1982,

however, the proportion of questions submitted

by the regional offices declined (see table 15).

After 1979, other parties, particularly manufacturers, increased their participation in the coverage process. In 1978 and 1979, there were no direct inquiries from drug or device manufacturers,

but during 1981, 25 percent of the coverage questions submitted to HCFA’s central office were

from producers of medical technologies (see table

Table 15.—Sources of Coverage Questions Submitted to HCFA’s Central Office

————. . —.

1979

9

(32,1 0/0)

(17:9%)

(3,61/o)

5’

(17,9 %

1

(3.60/. )

28

(100% —

1981

.

1982

(through

November)

(24% )

(6.9:/o)

(3,41%)

(6:0/0)

29

(99.60/o )

aF~ur of these ~ue~tlon~ arose from the Blue Cross/Blue Shield Med!cal Necessity prolecf

Data sources Hea(th Care Flnanclng Admlnlstratlon Infernal data sheets and HCFA staff

SOURCE Off Ice of Technology Assessment
80 ● Medical Technology and Costs of the Medicare Program

. ———.———. — ——.. — —. ——.—.—

15). The now defunct NCHCT may have been

partially responsible for the increase in manufacturers’ questions, because it referred the manufacturers’ inquiries it received to HCFA (258).

HCFA files show that questions about coverage

for a particular drug or device in some cases were

submitted at approximately the same time by both

the manufacturer and an interested provider.

The Health Industry Manufacturers Association

(HIMA) has spent considerable effort in educating its members about health coverage and reimbursement (385). Such attempts may be a significant factor in stimulating manufacturers’ interest

in requesting coverage. For a few years, HIMA

encouraged manufacturers to go directly to

HCFAsS central office to obtain coverage for their

products and service. In the past year or two,

HIMA has suggested that its members contact

contractors, particularly carriers, because of its

perception that the time required for making and

releasing coverage decisions and the number of

denials at the national level has increased. The

decline in direct inquiries for coverage to HCFA’s

central office—from 25 percent of the total number of inquiries in 1981 to 10.3 percent in 1982–

may reflect the change in strategy.

Implementation of National Coverage Decisions

There is no formal mechanism for implementing Medicare coverage decisions made at the

national level, For the most part, HCFA’s function is limited to disseminating the decision to contractors and providers through various sources,

including HCFA’s regional offices, instruction

manuals, and transmittal letters. Government involvement is largely confined to cases of fraud

and abuse.

As noted earlier, Medicare contractors have no

legal responsibility to adhere to the coverage decisions made by HCFA’s central office, The manual instructions, including the coverage index appendix, and the letters to the contractors are

usually considered interpretive rules and thus not

legally enforceable (366),

Nonetheless, the contractors’ claims review

process is an unofficial and limited means of implementing national coverage decisions. Claims

requesting payment for noncovered services and

claims with incompatible diagnostic and procedure codes are usually referred to the contractors’

nurse reviewers, and if necessary, to physician

consultants (see app. E). However, no distinction

can be made between those technologies that are

not covered because a coverage question has not

been raised and those technologies that are not

covered because they have been denied coverage.

Until recently, little empirical evidence was

available about the contractors’ role in implementing national coverage decisions. A recent survey

of the implementation of Medicare nursing home

benefits by intermediaries found the use of skilled

nursing facilities by Medicare beneficiaries to vary

considerably from one State to another, a variation that reflected wide differences in the interpretation and administration of rules governing

nursing home coverage (314), The researchers

concluded that the wide variation was due to the

complexity of Medicare coverage rules and to

Medicare’s decentralized administration,

The 1983 survey of Medicare contractors mentioned above (see app. E) came to somewhat similar conclusions. The survey found considerable

variation in the implementation of HCFA transmittals among contractors. This variation was apparently not related to certain characteristics of

the contractors, including insurance type (Blue

Cross/Blue Shield or commercial), geographic location, or claims volume.

Part of the variation in implementation of coverage decisions appears to result from what is

perceived as a lack of clarity in HCFA’s coverage instructions. Fifty-five percent of the Medicare contractors surveyed in 1983 said they were

always or almost always able to implement HCFA

transmittals concerning the coverage status of particular technologies without obtaining further interpretation. However, 45 percent of the contractors reported that the transmittals sometimes,

rarely, or never could be implemented without

further interpretation (app. E).

Some contractors also indicated they were not

given sufficient time for implementing national

coverage decisions, sufficient information about

technologies undergoing assessment, or revisions

in coverage policy. As noted earlier, HCFA’s current policy is based on the premise that contrac-
Ch 5—Spec/f/c Med/ca/ Techno/og/es L/nk/ng Coverage Po/icy and Technology Assessment To Conta/n Cosfs ● 81

————. ——

tors’ have sufficient knowledge and expertise to

allow for general coverage instructions. Nonetheless, some contractors are not content with the

policy and said that the content of HCFA’s instructions could be improved by including more

specific criteria and by eliminating ambiguous

terms, such as “chronic” and “necessary” (app. E).

The 1983 survey of Medicare contractors also

examined decisionmaking by Medicare contractors regarding the coverage of specific technologies.

7 It found various degrees of variation

.—- The +tud} was exploratory} and descriptive, with many method(llC~KICal I]mltat l[~ns ~ we app E I The questions about individual

t(’c hnol<~~les were intended to ascertain what the contractor’s polIC le~ gener~ 11 \ were WI th re~pect to covera~e The telephone lntervit~w.ers re+ea rc hers d]d n<~t use the v.’(]rd ‘ I rnplemen ta t ]on and d]d

not check on the degree ttj wh]ch contractors adhere to HCFA pol -

IC $’ gu [de] I nw 1 ncieed mo~t col’erdge l\5uances allow tor varia t ion

d;pend]ng cm further invest] gat]on of the cla]m and the circumstances

among contractors in their coverage of technologies included in the survey (app. E).

The study technologies were categorized according to HCFA coverage status: 1 ) explicit coverage by HCFA, 2) HCFA coverage with qualifications, 3) no explicit HCFA policy, 4) implicit

denial of coverage by HCFA, and 5) explicit denial

of coverage by HCFA (see table 16). The variation in coverage was least in instances in which

HCFA had explicitly approved coverage. Table

16 shows that some contractors covered technologies in this category with qualifications when

Table 16.– Reported Coverage Decisions by Medicare Contractors

No explicit HCFA policy—contractor decides (local option):

Chelation therapy: rheumatoid arthritis . . . . . . . . . . 3.8 81.1 1.9 13.2

Streptokinase at cardiac catheterization: AM I ... . 30.2 45.3 151 9.4

Chemonucleolysis: herniated disc ., ., ., . . . . 64.0 10,0 14,0 12.0

HCFA denies, but not explicitly:

Biofeedback: intractable pain . . ., ., ... ... ... 9.3 55,6 31,5 3.7

PTCA: two or more coronary arteries . . . . . . . . . 19,2 51.9 19.2 9.6

Apheresis: systemic lupus erythymatosis ., ... ... . 18.0 60.0 14,0 8.0

HCFA explicitly denies:

Chelation therapy: atheroscleros~s ... ., ... ... ... . . . — 87.0 3.7 9.3

Pacemaker: sinus bradycardia without symptoms . . . . . 13.0 44,0 29.6 13.0

24-hour blood pressure monitoring: automatic

(policy effective 7/83) . . . . . . . . . . . . . . . . . . 8.3 52.1 27.1 12.5

24-hour blood pressure monitoring: semiautomatic or

patient activated ., ... . . . . . . . . . . . . . . . 4.2 77,1 8.3 10.4

EEG monitoring: open heart surgery ... ... . . 15,4 71.2 9.6 3.8

Topical oxygen therapy: decubitus ulcers ... . ... 7.8 86,3 5.9 —

SOURCE L K Dernlo G T Hammons, J M Kuder,et al Report of a Study on Declslonmak!ng by Medicare Contractors for Coverage of Medical Technol Ggles

prepared for the Off Ice of Technology Assessment U S Congress Oct 28, 198.3
82 ● Medical Technology and Costs of the Medicare Prog

.—— -

there were no qualifications imposed by HCFA,

However, this practice reflects not a lack of compliance with H-CFAsS policy, but rather caution

on the part of contractors to assure that HCFA's

criteria were met.

From table 16, it would appear that there is significant variation among the technologies in the

second category, i.e., those that HCFA covers

with qualifications. However, most of the variation exists because of the three infusion device

technologies included in the category. When the

survey was conducted, policies concerning infusion devices were undergoing review, and there

was considerable uncertainty among contractors

as to the current coverage status of the devices.

If one eliminates the infusion device therapies

from the category, the variation decreases considerably (app. E),

Coverage decisions on technologies for which

HCFA had explicitly denied coverage showed

more variation than one might expect, That may

be an artifact of the particular technologies included in the survey or may indicate a reluctance

on the part of the contractors surveyed to flatly

deny coverage without further investigation of the

claim. Variation is, predictably, much greater for

technologies for which contractors have made

local coverage decisions and those for which

HCFA intends to be denied but for which there

is no explicitly stated policy (app. E).

In most instances, the majority of the contractors complied with HCFA’S directives. Yet compliance was sufficiently diverse among the contractors as to result in variation. In general, the

variation can be attributed to differing impressions on the part of the contractors about the coverage status of the particular technology, which

may result from unclear or complex HCFA coverage policy, a change in policy, or a policy in

the formation stage; the inherent complexity of

clinical medicine and the difficulty of precisely

matching a claim for a specific patient with a general policy written to cover many patients; and

limitations of the study –e.g., the findings reflect

responses to a hypothetical situation at one point

in time.

ram

Coverage Policy Under Medicare’s DRG

Hospital Payment System

In October 1983, fo]lowing enactment of Public

Law 98-21, Medicare began phasing in prospective hospital payment system using Diagnosis

Related Groups (DRGs) as the case-mix measure.8

Federal regulations (114) state:

. . prospective payment legislation did not

change Medicare coverage or eligibility rules currently in effect . . . as a result, national coverage

rules continue to be applicable. These rules will

continue to be applied by intermediaries with

assistance from PROS [utilization and quality control peer review organizations] and PSROs [professional standards review organizations] where

appropriate.

DRG payment is not applicable to psychiatric hospitals, rehabilitative hospitals, pediatric hospitals,

long-term hospitals, psychiatric and rehabilitative

units operating as distinct parts of acute care hospitals, and physician services-provided in or out

of the hospital. Thus, Medicare coverage for these

institutions and services remains unaffected by the

change in payment method.

Although the regulations require that coverage

rules remain, the structure of DRGs places little

emphasis on individual technologies. Thus, under

DRG payment for inpatient services, HCFA will

rarely be able to discern the use of particular technologies. Multiple combinations of drugs, devices,

and procedures are possible within almost all

DRG categories; specific technologies are not

easily evident from DRG classification, For the

most part, only a few of the 470 DRGs mention

particular technologies. With few exceptions, specific drugs and medical devices were not variables

in the construction of DRGs as a patient classification system, Drugs are not specified in any of the

470 DRGs, and only one medical device, the pacemaker, is specified as or part of a DRG. Although

the first major subdivision within most of the 23

major diagnostic categories (MDCS) of the classification system is “the presence or absence of an

“See chs. 2 and 6 for further discussion of the DRG hospital payment method,
Ch. 5—Specific Medical Technologies; Linking Coverage Policy and Technology Assessment To Contain Cosfs ● 8 3

— —— .—. . . . — —— —.-. . — — —

operating room procedure” (389), the specific type

or types of surgical procedures are not explicitly

mentioned in most DRGs. Except for a few, such

as heart transplantation surgery (DRG 103), coronary bypass (DRGs 106 and 107), and perhaps

arthroscopy (DRG 232), the DRGs that describe

most surgical procedures, e.g., pelvic procedure

(DRG 334), are so general that many different surgical techniques could be used to carry them out

(32).

The inability to identify the use of particular

technologies under Medicare’s DRG hospital payment method does not differ markedly from the

situation under Medicare’s previous retrospective

cost-based hospital payment method. As noted

above, inpatient hospital claims forms and MCRs

under cost-based reimbursement do not specify

the use of individual technologies.

There are, however, several ways under DRG

hospital payment to identify uncovered individual

technologies that may raise hospitals’ costs. For

example, outlier cases, cases involving either an

extremely long length of stay (LOS outlier) or

extraordinarily high costs (cost outlier) when compared to most discharges in the same DRG, will

be reviewed in their entirety for noncovered or

medically unnecessary or inappropriate days or

services (11 4). Outlier cases may occur precisely

because new and costly technologies were used

in the care of the patient. If a new technology is

not covered, outlier payments will be denied.

New technologies will also be recognized during the process of adjusting DRG rates for all hospitals. Indeed, updating DRG weights appears to

offer the most significant opportunity for identifying new technologies for coverage purposes. The

decision to adjust DRG rates can therefore be considered a quasi-coverage decision itself.

Changes in DRG relative weights or prices will

be made, in part, to reflect technological change.

Because the DRG rate adjustment process includes

identification of new technologies, it is reasonable

that some of the techniques, including technology assessments, used in the process will be similar

to those used for supporting coverage decisions.

Indeed, the Prospective Payment Assessment

Commission (ProPAC) has been given broad

powers to assess medical technology and the

appropriateness of medical practice patterns in developing its recommendations for DRG rates. ProPAC’s role is only advisory; HCFA makes the decision concerning the appropriate payment rate

for hospital services.

Thus, both the coverage process and the process of adjusting DRG rates share a similar “approval for payment” function. They differ in that

a coverage determination focuses on specific technologies, while adjusting DRG payment rates focuses on the larger entity of a diagnostic group,

which may include particular technologies. A

more important difference is that the coverage

process rarely considers costs, while the DRG rate

adjustment process must include cost as an integral issue. Nonethelessr the technology assessments performed for both processes may be similar. The potential for duplication is not to be

ignored. The processes seem to be sufficiently similar to warrant coordinated Government effort.

Whether technologies will be subject to a double review of safety and efficacy for payment purposes will depend on the approach chosen to update DRG rates. Irrespective of approach, it is

reasonable to assume that hospitals’ adoption of

cost-raising technologies will be made evident to

HCFA for DRG payment and for coverage determinations, However, some approaches to updating DRG rates, such as through outlier cases,

would not surface cost-saving technologies. In addition, specific technologies will not be identified

on the DRG hospital claims form, so the use by

a hospital of a new, uncovered technology that

lowers per case costs will not become known to

HCFA through hospital claims review. HCFA intends to rely on physician claims and other

sources for information to stimulate the initiation

of a technology assessment solely for coverage

purposes. As in the past, many technologies may

go unnoted.
84 ● Medical Technology and Costs of the Medicare Program — - — —

EVALUATING TECHNOLOGIES FOR COVERAGE DECISIONS

Current Activitiesg

Before arriving at coverage decisions, both

Medicare contractors and HCFA’s central office

have medical technologies evaluated, The evaluations performed for contractors by medical consultants are usually informal and have limited influence on the diffusion of medical technologies.

The evaluations performed for HCFA’s central office affect the diffusion of technologies nationwide. The primary factors considered in such assessments are safety and effectiveness. Because

cost criteria are not included as factors in assessments for Medicare coverage decisions, expensive

technologies are eligible for coverage without regard to cost effectiveness.

At present, the body that is responsible for

evaluating the medical and scientific aspects of

medical practice for HCFA is NCHCT’s successor,

OHTA. OHTA responds to HCFA’s simple inquiries about the regulatory and research standing of particular technologies by providing information obtained from the responsible Public

Health Service (PHS) agency. It also conducts

“full” assessments at the request of HCFA with

the objective of providing HCFA with the most

current and scientifically valid information on

which to base coverage decisions.

The OHTA assessment process follows the

process established by NCHCT. OHTA reviews

the scientific literature and obtains opinions from

experts in the public and private sector and then

synthesizes the information it receives.

In conducting its evaluations, OHTA uses

numerous sources for information. 10 If the evaluation concerns drugs or certain medical devices,

prior evaluations by FDA provide some indications of safety and efficacy; for procedures, however, there is no comparable mechanism. For a

drug to be covered under Medicare, FDA approval is required. The use of drugs, however,

is not usually questioned by HCFA. Drugs are

covered for payment when provided in an inpa-

—.—. —

‘%ee app, C for a detailed discussion of the Government and private sector assessment activities,

‘“For a discussion of OHTA’S method of evaluating medical technology, see app, C.

tient setting and their use is not monitored by

HCFA; hardly any drugs are covered for payment

when provided in an outpatient setting.

OHTA’S evaluations are confounded by definitional problems. The definitions of safety and effectiveness, for example, differ among Government agencies. Thus, FDA considers a medical

device to be effective when, on the basis of wellcontrolled investigations or other valid scientific

evidence, the device is shown to have the effect

claimed by the manufacturers under the manufacturer’s specified conditions of use (21 U.S.C.

260c(3)). On the other hand, HCFA judges the effectiveness of a medical device in terms of its

ability to improve health. Thus, some devices approved by FDA for marketing purposes are not

covered by HCFA for payment (435),

There are other definitional problems. Coverage decisions about technologies of national interest are based on criteria of “general acceptance”

and “stage of development. ” If a technology is

generally accepted by the medical community as

being safe and effective (“general acceptance”) and

is perceived to have moved beyond experimental

status to clinical application (reasonable “stage of

development”), then it is considered “reasonable

and necessary. ” However, the terms used in the

criteria are not defined precisely.

Applying the criterion of “general acceptance”

to a new technology is difficult, because a new

technology has usually been used by only a small

fraction of the medical community. In such cases,

coverage decisions are based on scientific evidence

and professional judgment of safety and effectiveness. Yet standards for adequate proof of safety

and effectiveness have not been established (435).

The criterion of reasonable “stage of development” also creates problems in evaluating a new

technology for coverage. Technologies do not

progress neatly from research to development to

clinical phases but more often are used simultaneously as research and investigational tools and

in medical practice (359). The distinction between

an experimental and emerging technology may be

arbitrary. Some contend, for example, that Medicare reimbursement was approved for kidney
Ch. 5—Specific Medical Technologies: Linking Coverage Policy and Technology Assessment To Contain Costs ● 85

transplantation when the survival rate was less

than it is now for liver transplantation, which is

not reimbursed (43).

Following its evaluation, OHTA sends its assessment and a recommendation based on the

assessment to HCFA. The recommendation summarizes the evidence and PHS’ conclusions about

the safety and clinical effectiveness of the technology under review. The assessment is not made

public routinely upon its completion; the recommendation is not released until HCFA has made

its decision on the issue (58).

For the most part, OHTA has not explicitly

considered cost and cost effectiveness in its evaluations, although the Memorandum of Understanding between HCFA and PHS does not preclude

this possibility (410). ProPAC is given powers to

assess the cost effectiveness as well as the safety

and efficacy of new and existing medical and surgical procedures, but its primary responsibility is

to recommend changes in DRG payment rates.

Although ProPAC is specifically mandated to

assess medical practice in making its recommendations, it is unknown at this time how extensive

its assessment activities will be.

In addition to the Federal Government, the private sector is involved in assessing technologies.

Insurers and other organizations use technology

assessments for coverage and other determinations

(e.g., payment, purchasing, and management decisions). Indeed, the present approach to medical technology assessment is characterized by

multiple participants from the public and private

sectors and by uncoordinated activities (359). The

private and nonprofit sectors have increased their

involvement in the past 2 years. However, many

OF the assessments that are conducted are limited

to specific organizational objectives and have

limited value for national policy decisions. Safety

and efficacy are usually used in technology assessments; economic, legal, social, and ethical criteria

are sometimes used.

Analytic Methods of Comparing Costs

and Benefits

Although evaluating the safety and efficacy of

medical technology has protected patients from

risky, unproven, and ineffective services (359),

the need for evacuation of the economic effects

of medical technology is becoming increasingly

important as Medicare and health care costs in

general continue to escalate.

In theory, the chance of containing Medicare

costs through coverage policy would be increased

by including not just safety and efficacy criteria

but cost and cost-effectiveness criteria in Medicare coverage decisions. The general value of

formal analytic techniques for comparing costs

and benefits, referred to collectively as costeffectiveness analysis /cost-benefit analysis

(CEA/CBA), ll in decisionmaking about the use

of medical technology was addressed in OTA’s

1980 report The Implications of Cost-Effectiveness

Analysis of Medical Technology (353). That report also identified the methodological strengths

and weaknesses of the techniques and the potential for initiating or expanding the use of CEA/

CBA in reimbursement coverage programs.

CEA/CBA potentially can be more valuable for

decisionmaking under a constrained budget, when

tradeoffs have to made directly, than when constraints are nonexistent or very indirect (as in most

current reimbursement programs). In neither case,

however, would CEA/CBA necessarily function

as an effective cost-constraining mechanism or

tool. Under a budget system, the budget itself

would be the constraining mechanism. Under a

nonconstrained system, since no direct tradeoffs

are required, no direct limit on expenditures is set.

Nevertheless, CEA/CBA might change the mix

of expenditures (353). Medicare’s DRG hospital

payment system, while not a fixed budget, provides more constraints than the previous costbased reimbursement system.

CEA/CBA can be conducted from a variety of

perspectives, including that of the individual, the

family, the hospital, the insurer, or society. Many

researchers agree that societal perspective is

desirable for policy decisions. When private or

program benefits or costs differ from social bene-
86 ● Medical Technology and Costs of the Medicare Program

fits and costs (and if a private or program perspective is appropriate for the analysis), the differences

should be identified (353).

The inherent conceptual and methodological

strengths and weaknesses of CEA/CBA are addressed at length in previous OTA reports (353,

359) and later publications (347,420). A methodological issue of particular importance to the

Medicare program in performing CEA/CBAs is

whether to include discounted future medical care

costs (due to longer life spans for patients resulting

from the use of a medical technology) as a direct

cost of the technology. Extending the life span of

patients who are 65 years and older increases the

chance that they will become high-cost consumers

of medical care. Elderly people are particularly

prone to chronic diseases. 12 And, about 80 percent of health care resources in the United States

are used for chronic disease (321).

One can argue that future medical care expenditures should be included in an analysis of a technology’s influence on medical care costs. Both

public and private insurers are interested in how

the use of a technology will affect their future expenditures. It is important to recognize, however,

that reducing the measured benefits of a technology by the extra medical costs attributed to longer

life biases the analysis against the technology.

People consume medical care and other goods and

services as long as they live. “To reduce benefits

by a part or all of the value of this consumption

may lead to the erroneous conclusion that prolongation of life is not worthwhile especially when

consumption exceeds production” (417).

Another methodological issue that is of special

interest to the Medicare program is whether the

human capital approach should be used in valuing life in the analysis of a technology. The human

capital approach values life in terms of earning

potential; health outcomes are valued in terms of

the economic productivity they permit (420). Because of its emphasis on economic productivity,

the human capital approach values the lives of

young people more than the lives of elderly peo-

. —— ___ ---

“About 1 {Jut of 1040- to SO-year-old people has a chronic disease; by age 65, appr[>ximately 2 people out of 10 have a chronic

disease; after 75 years of age, the number increases to 4 out of 10;

and by age 90, almost Q of every 10 people have d chronic disease

( lb4 ).

—

pie. The bias of the approach is most explicit in

CBA. CEA, however, has built-in value judgments, i.e., once money is allocated to save lives,

the value of life is implied. In CBA, the analyst

must choose a value to complete the analysis; in

CEA, the policymaker chooses the value, albeit

indirectl y (353).

It is important to bear in mind that CEA/CBA

does not necessarily or easily take into account

social values, moral judgments, legal implications

or political realities. Thus, it does not easily or

commonly address issues of equity and distribution.

The power of CEA/CBA is diluted in many instances not only by methodological problems but

by a lack of efficacy data on which to base costeffectiveness calculations. Some of the difficulties

associated with these techniques will diminish

with time, but others will not. An analysis rarely

can account for the vast range of applications of

a specific technology and the technology’s unpredicted effects. The setting of care, volume of

use, and the practice of medicine also influence

the cost effectiveness of a technology.

Despite its limitations, CEA/CBA provides an

analytical basis for integrating the economic

aspects of a decision about medical technology

with the health aspects. It can be very helpful in

assisting the policy maker in structuring a problem and understanding its ramifications. As Fuchs

says, “given the will and the mechanism . , .

CEA/CBA offers the most rational human basis

for effective, efficient allocation” (129).

Cost-Saving Technology

Definitional Complexities

The technical complexity of determining the

cost effects of emerging and new technologies is

compounded by the problem of defining a costsaving or cost-raising technology. Differences in

perspective impede arrival at a universal definition of a cost-saving or a cost-raising technology.

The disparity in perspective may bring about conflict between parties because of the limited supply

of resources for medical care. 13 If resources are

] ‘Costs of medical services are the economic resources (e.g., equipment, supplies, professional and nonprofessional labor, and the use

of buildings) consumed in the provision of those services (423).
Ch. 5—Specific Medical Techno/ogies Linking Coverage Policy and Technology Assessment To Contain Costs ● 87

— ——.—— ——.— — —

used by one party, they are not available for use

by another.

The question is: From whose perspective should

the cost effects of a technology be examined? Are

the cost implications of a technology to be considered from the perspective of the individuals,

the hospital, the insurer, one Government program, the entire Government, society as a whole,

or others? Each party has its own view of the cost

effects of a particular technology, because health

expenditures affect each differently. A technology that is considered cost saving by one may be

considered cost raising by another. An associated

question is: Is a cost-saving technology one that

saves costs in the present or in the future?

For purposes of this study, a cost-saving technology might best be defined as a technology that

saves Medicare program costs. Yet this definition

dces not distinguish between Medicare costs and

societal costs—a distinction that may be required

for policy decisions. Does the definition imply that

the development, adoption and use of technologies that save Medicare program costs but raise

societal costs should be encouraged or discouraged? One rationale for the Government’s role in

the health care system is “the promotion of the

allocation of resources in the collective interest

of the population of patients and potential patients” (423). Those who act on the belief that

“Government agencies that plan and regulate the

distribution of medical services may be viewed

as agents for society” (423) would discourage technologies that decrease Medicare program costs but

increase societal costs. Those who act on the belief

that “Government agencies develop bureaucratic

and organizational objectives that may not be

consonant with the broader public interest” (423)

would encourage technologies that decrease Medicare costs but increase societal costs.

Developing Criteria for Identifying

Cost-Saving Technologies

Considering the difficulties in defining a costsaving or cost-raising technology, it is not surprising that research on developing criteria to

identify cost-saving technologies is in an early

stage. One type of technology that can be identified as cost saving is a technology that substitutes exactly or very nearly for another and is also

cheaper. The Shouldice method of hernia repair,

for example, both substitutes for other methods

of repairing hernia and is performed less expensively (166).

On the other hand, while it is generally accepted

that the automated clinical chemical analyzer substitutes for previous nonautomated chemical tests,

it is not clear whether the automated analyzer is

producing more units of a formerly performed

service or instead is producing a new type of laboratory analysis. Such distinctions, although often

subtle and difficult to identify or measure, are

crucial in analyzing the cost implications of technology.

Another problem in developing criteria is that

the cost implications of a technology vary with

the technology’s stage of development: an assessment performed at one time may yield a different

result when performed at another time. Technologies change over time. The dosages of a drug

may be refined. New generations of devices replace old ones. Surgical procedures are modified.

New, unanticipated uses, particularly for diagnostic technologies, are discovered. 14 Thus, the

indications for using the technology change and

its potential benefits and costs change over time.

Furthermore, the cost implications of a particular technology depend on the setting of care. For

example, computerized energy management and

bacterial susceptibility testing allegedly save hospital costs, but only if the size of the hospital and

its volume are large enough to justify the investment (418), Thus, a technology that saves costs

in one hospital may raise costs in another. Because

of the variation among hospitals, reports about

the cost-saving nature of one or another technology may be only partially accurate and have to

be interpreted cautiously.

—

1’For example, the computed tomography fCT) scanner, a high

capital investment instrument, was thought in the I Q70’s to Increase

the per unit cost of services (3), The current notion is that the CT

scanner in fact may lower the per unit cost of health ser~ice> b>

substituting for expensive, invasive procedures (420 ~ If used apprm

pnately, the CT scanner has the potential for decreasing health care

costs, but It may increase health care costs when used inappropriately

(347).
88 ● Medical Technology and Costs of the Medicare Program

Attempts have been made to categorize technologies in hopes that distinctions can be made

among types of technologies on the basis of expected costs and benefits (283). If all technologies

within a category had similar pressures on cost

and delivered similar benefits, a coverage policy

could be designed using a categorical approach

(283). Technologies with a common medical purpose (e.g., therapy) have some characteristics in

common, and CEAS are conducted with them in

mind. For example, the analysis of a treatment

DISCUSSION

In the past, coverage policy has had important

potential, but limited opportunity, to contain

Medicare program costs by influencing the diffusion of medical technology. The Medicare provision that a technology must be covered before

it can be paid for, however, may have protected

beneficiaries from the indiscriminate adoption and

use of technology and possibly from some unsafe

and ineffective medical technologies.

The deliberate use of Medicare coverage to influence the adoption and use of medical technology, however, has been limited by several factors. These include Section 1801 of the Social

Security Act, which prohibits Federal interference

in the practice of medicine and the manner in

which services are provided; the imprecise phrase

“reasonable and necessary” governing the introduction of technology into the Medicare program;

the decentralized mechanism for promulgating

and implementing Medicare coverage policy; and

the wide discretion allowed individual contractors in making coverage decisions.

Inadequacies in the current Medicare coverage

process contribute to the circumscribed role of

coverage policy in the rational diffusion of appropriate technology (26). The current coverage process does not ensure identification of all important

new technologies that are introduced into the

Medicare program or those covered technologies

whose safety and efficacy has not been proved.

Indeed, the universe of new technologies that are

introduced into the Medicare program through

contractors’ coverage decisions is not known. The

technology considers the effect of the technology

on morbidity, disability, and/or mortality. But,

it is difficult to identify the cost implications of

such characteristics. There are, as well, characteristics not held in common among all technologies in a medical purpose category that may affect costs. A method that is sufficiently sensitive

to predict the cost implications of a particular

technology based on its medical purpose category

has not yet been developed.

possibility that some new technologies are not

identified but are paid for cannot be ignored.

Medicare contractors vary in whether they cover

(and then pay for) some particular technologies

and in the extent to which they refer technologies

to HCFA’S central office for national coverage

decisions. The absence of formal, legally binding

requirements that contractors comply with national coverage decisions leads to the lack of uniform implementation of such decisions and a disparity in the coverage of technologies across the

country.

Tightening the coverage process would no

doubt save money for Medicare and would provide for a more rational diffusion of medical technology, It might also ensure equal access to the

same technologies by Medicare beneficiaries. With

respect to centralization, however, caution is necessary. A nationally controlled coverage process

might not take into account the unique needs of

all patients and could be administratively expensive. Thus, a decision to reduce variation in coverage policy and increase the explicitness and uniformity of Medicare benefits would require careful

judgment and balance. Reconciling a more centralized coverage system with the independent

practice of medicine could be a potential political problem.

The current process of evaluating medical technology at the national level may need modification in order to achieve the more rational diffusion

of technology. Although the safety and effectiveness of technologies that are brought to the na-
Ch, 5—Specific Medical Technologies: Linking Coverage Policy and Technology Assessment To Contain Costs ● 8 9

_——— — ———

tional level for coverage decisions are evaluated

more rigorously there than at the contractor’s

level, the information available for an evaluation

is often limited. The amount and type of data

available vary for drugs, devices, and procedures.

New drugs are subject to FDA’s premarket approval requirements, and data on their safety and

efficacy are usually available. For a drug to be

considered for coverage, it must have FDA approval. (There is, however, no monitoring of drug

use in hospitals. ) Medical devices, depending on

their classification, are subject to general controls,

performance standards, or premarket approval requirements for safety and effectiveness by FDA. ’5

However, few clinical trials have been performed

on new medical devices submitted for coverage

approval. Also, FDA’s definition of effectiveness

differs from that used for coverage. Analytic data

on medical and surgical procedures, which are not

subject to FDA regulatory requirements, are even

less available than data on medical devices.

The guidelines used by OHTA to evaluate the

safety, efficacy, and clinical effectiveness of medical technology stress the value of basing coverage judgments on information derived from controlled clinical trials or other well-designed clinical

studies. Unfortunately, there is a dearth of such

information—information from clinical trials of

any type was available for only 2 of 12 full assessments published by OHTA in 1982 (352). Furthermore, even when such information is available,

it often has limited value for coverage purposes.

Very few clinical trials are designed to compare

competing technologies. Most assess only one

technology. Comparing the results of studies is

often misleading because patient populations and

study designs differ markedly. Few trials use in- —-

“For more lnformat]on, see OTA s forthcoming report Federal

Poiicles and the ,Nledjca) Devices lndustr}r (345).

dividuals 65 years and older in the study population. Furthermore, few trials deal with questions

about indications for use of a technology, and

their results are not available soon enough to be

included in a coverage decision. The lack of quantitative data is one force behind the statute (Public Law 98-21) that allows HCFA to fund controlled clinical trials of concern to the Medicare

program.

Medicare may have further constrained the potential of coverage policy to influence the diffusion of technology by not limiting the coverage

of certain technologies to specific providers and

specific sites of care and by not explicitly considering costs in coverage decisions. In theory, one

way to use coverage policy for containing program costs would be to include cost criteria in the

assessment of medical technologies. But it appears

that incorporating cost criteria into an assessment

does not necessarily lead to the identification of

cost-saving technology. Not only is a cost-effective technology not necessarily a cost-saving technology, but many experts contend that the definitional and methodological uncertainties of CEA/

CBAs have not been sufficiently resolved for the

use of these techniques as allocation tools. These

techniques cannot provide decisions but can aid

decisionmaking when used in conjunction with

other kinds of information (353).

Finally, the relationship between coverage policy and DRG hospital payment needs further exploration. The importance of coverage policy will

be only marginally diminished by DRG payment.

Furthermore, the newly created ProPAC will

assess DRG payment rates in association with the

technologies that might be incorporated into those

DRGs—an activity that represents the first explicit

merging of costs and effectiveness in the Medicare program.
6

Medicare Hospital Payment anti

Medical Technology

Probably every new and eagerly expected garment ever put on since clothes

came in, fell a trifle short of the wearer’s expectation.

Charles Dickens
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Prospective Payment of Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Evolution of Prospective Payment Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Key Features of Prospective Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Effects of Prospective Payment on Medical Technology . . . . . . . . . . . . . . . . . . . . 97

Medicare’s DRG Payment System and Medical Technology . . . . . . . . . . . . . . . . 98

Per Capita Prospective Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......100

Areawide Global Prospective Budgeting:

The Rochester Area Hospital’s Corp. . . . . . . . . . . . . . . . . . . ................101

Capital Payment Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........102

History of Capital Payment Under Medicare . . . . . . . . . . . . . . . . .. ... ... ... ..102

Capital Payment Understate Prospective Payment Programs . . . . . . . . . ......103

Capital Payment Alternatives Under DRG Payment . . . . ...................104

Limited Provider Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..108

Increased Beneficiary Cost-Sharing for Hospital Services . . . . . . . . . ............108

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........................110

LIST OF TABLES

Table No. Page

17. Sources of Hospital Revenue, 1980. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

18. Mandatory State-Level Hospital Prospective Payment Programs

as of June 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

19. Impact of Technological Innovation on Per Case Costs

Under DRG Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............106

FIGURE

Figure No. Page

3. Options for Capital Payment Under Medicare’s

DRG Hospital Payment System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......104
6

Medicare Hospital Payment and

Medical Technology

INTRODUCTION

In 1982, over 70 percent of Medicare’s payments was for hospital care (135 ). Furthermore,

$34.6 billion (66.3 percent) of Medicare’s $52.2

billion’ expenditures was for inpatient hospital

care (135,151), and between 1967 and 1982, Medicare program expenditures for inpatient hospital

services increased at an annual rate of 19.2 percent (151 ,392). Given the importance of expenditures for hospital care in the Medicare budget,

it is not surprising that both Congress and the executive branch have had a longstanding interest

in controlling the growth of Medicare expenditures for hospital care.

Not only are hospitals important to Medicare,

but the Medicare program and its methods of payment are crucial to hospitals. In 1982, Medicare

accounted for 35 percent of hospitals’ revenues

(15). In 1980, as shown in table 17, Medicare and

Medicaid together accounted for an estimated 42

percent of the revenues of a sample of short-term

non-Federal hospitals. Because Medicaid hospital payment has traditionally followed the Medicare method in most States, the level and method

of payment adopted by Medicare governs a sizable share of the total revenue of many U.S. hospitals. How Medicare chooses to pay hospitals—

—

‘Th IS $52 2 hi 11 ion Includes adml nlstrat ive expenses as well as bend It payments d $50.9 bill i{)n ( 135 I

Table 17.—Sources of Hospital Revenue,a 1980

—

Revenue source Percent of total revenue

Medicare, . . . . . . . . . . .”. . . . . . . . . 34.1 “/0

Medicaid ., ., . . . . . . . . . . . . . . . . 7.8

Blue Cross . . . . . . . . . . . . . . . . . . . 16.1

Commercial . . . . . . . . . . . . . . . . . . . . . 22.4

Other government sources . . . . . . . 2.3

All other revenueb ., . . . . . . . . . . . . . . 17,3

aBa~~d on ~ ~arnple of 4,98g non. Federal notfor-profl t short. term 9eneral

hospitals

blncludes opera(lng nonpattent care, and nonoperating revenues

SOURCE J Feder J Hadley, and R Mullner, Poor People and Poor Hospitals

Impl!catlons for Publlc Policy “ J Hea//h %hf Po//cy Law forthcoming

what it will pay for, how much it pays, and how

it computes the level of payment —is therefore an

issue of primary importance to hospitals, to the

Medicare program, to communities, and to Medicare beneficiaries. Furthermore, hospitals are the

major provider of medical technology, particularly sophisticated capital-intensive diagnostic and

therapeutic procedures. Hospitals provide these

technologies to both inpatients and outpatients.

Changes in Medicare’s hospital inpatient policy

are therefore likely to affect the availability of

medical technology for both kinds of patients.

As described in chapter 2, the Social Security

Amendments of 1983 (Public Law 98-21) mandated a change in Medicare’s inpatient hospital

payment system from a retrospective, cost-based

system to a prospective system of payment based

on per-case prices for patients in 470 separate

Diagnosis Related Groups (DRGs). DRGs are a

set of patient classes developed to reflect differences in resource needs among different kinds

of patients. Medicare’s DRG hospital payment

system is to be phased in over a 3-year period

beginning in October 1983. The initial set of DRG

prices is based on the 1981 average inpatient operating costs per case for each DRG in a 20-percent

sample of Medicare claims. The prices will be updated regularly and will be adjusted for each hospital’s urban or rural location and area wage rate.

They will apply to virtually all short-term acutecare general hospitals in the United States. Under

DRG payment, the hospital-specific maximum

limit on the amount of inpatient operating costs

per case that will be reimbursed will continue to

be designated by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Public Law 97-

248). Capital expenditures (depreciation and interest and return on equity for for-profit hospitals), direct teaching expenses, and expenses for

outpatient services will remain “pass-through”

items (i. e., items not subject to controls) as they

93
94 Ž Medical Technology and Costs of the Medicare Program

.———

were under TEFRA until the end of the transition

period. Congress contemplated, but did not specify the method for, the incorporation of payment

for capital into the DRG pricing system at the end

of the 3-year period.

This chapter describes and analyzes how the incentives in Medicare’s DRG prospective hospital

payment system may affect medical technology

adoption and use. Despite the recent establishment

of the new hospital payment strategy for Medicare, it is quite possible that other approaches to

hospital payment will be actively considered in

the future. Part of the reason is that pressure for

cost containment at the Federal level may continue, and part is that individual States may enact

hospital cost control systems in which Medicare

will agree to participate. Four alternative approaches to hospital payment that have been suggested or applied by public or private payers

which might be considered for implementation by

Medicare are considered in this chapter:

● alternative prospective payment programs

and modifications of Medicare’s current DRG

system,

Ž capital payment methods,

● limited provider contracts, and

. increased beneficiary cost-sharing for hospital services.

The alternatives discussed in this chapter pertain only to payment of hospital care. They are

not mutually exclusive, but are separated for ease

of discussion.2 Broader alternatives to the current

Medicare payment methods, such as Medicare

vouchers, which integrate payment for hospital

services with that for other health care services,

are discussed in chapter 8. Nevertheless, it is

worth noting here that strategies based on the continued independence of payment for hospital services from that of other health care services represent a limited field of opportunity for reform of

Medicare payment.

‘For example, capital payment must be considered for all hospital

payment alternatives.

PROSPECTIVE PAYMENT OF HOSPITALS

Evolution of Prospective

Payment Programs

The Medicare program is not the only thirdparty payer that has used retrospective, cost-based

payment for hospital care over the years. In 1976

and 1981, for example, about one-half and onethird, respectively, of the Blue Cross plans reimbursed hospitals retrospectively on the basis of

their costs (8,153). Furthermore, until 1981, State

Medicaid programs were required to follow Medicare’s principles of reimbursement for hospitals

unless they applied for, and received, a waiver

from the Federal Government for an alternative

system.

In the late 1960’s, however, some States and

private third-party payers began the search for

alternatives to retrospective, cost-based reimbursement, and alternative payment schemes,

broadly termed “prospective payment,” appeared

in State and voluntary programs throughout the

1970’s. Prospective payment programs vary widely, but they all have two features in common:

● the amount that a hospital is paid for services is set prior to the delivery of those services; and

● the hospital is at least partially at risk for

losses, or is able to gain from surpluses that

accrue during the payment period, or both.

The litmus test of whether a payment system is

prospective is the extent to which a hospital’s own

decisions will alter the payment rate. Medicare’s

DRG payment system for hospitals is a particular type of prospective payment. The DRG system represents the culmination of years of experimentation with alternative forms of prospective

payment by the States and private third-party

payers.
Ch. 6—Medicare Hospital Payment and Medical Technology ● 9 5 — .—

The development by States of early prospective payment systems was spurred primarily by

rising insurance premiums and Medicaid budgets.

In several States, severe financial crises prompted

their immediate implementation (155). Federal

support of State-run prospective payment experiments was authorized by the Social Security

Amendments of 1972 (Public Law 92-603), which

gave added impetus to their development. Four

States—Maryland, Massachusetts, New Jersey,

and New York—have been granted waivers from

Medicare’s current payment system. These waivers give the State’s rate-setting agencies the authority to set Medicare rates.

The oldest prospective payment program, sponsored by Blue Cross of Indiana, began in 1959 and

remains in existence today. The first Blue Crosssponsored prospective payment plans were voluntary programs in which participating hospitals’

upcoming budgets were reviewed and approved

by an appointed committee. The Blue Cross plan

would then pay its share of the budgeted costs,

rather than actual costs. Despite the fact that these

systems were (or are) voluntary, hospitals were

encouraged to participate because of the importance of Blue Cross as a source of revenues. The

negotiated hospital budgets sometimes covered

self-pay and commercially insured patients as well

as patients in the Blue Cross plan. As might be

expected given their voluntary nature and limited

coverage, however, the Blue Cross-sponsored

budget review programs have not been particularly successful in moderating cost increases (311).

State-mandated prospective payment programs

have varied widely in their methods of payment

and in the payers covered. The earliest State-run

prospective program began in New York in 1970

and covered Medicaid and Blue Cross3 (154). By

1979, there were 13 State-legislated prospective

payment programs in effect throughout the United

States (7), but the participation of hospitals was

mandatory in only 10. These State programs

evolved as their shortcomings were uncovered and

as the crisis in hospital costs grew. Thus, current

State-run prospective payment programs not only

———.—..——

‘hled]care ]mned the program In 1980, and hospital charges made

to sell-pay patients and commercial lnsurancv companies were trozen In 1978

— — ——.—

vary among themselves at present but also do not

resemble their earlier forms.

In 1981, under the Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35), State Medicaid programs were given expanded authority to

deviate from Medicare reasonable cost reimbursement methods. As a result, several Medicaid programs have recently enacted prospective payment

systems. Some of these Medicaid programs are

part of statewide systems; other Medicaid programs have their own prospective payment

systems,

Table 18 summarizes the status of mandatory

State-level hospital prospective payment programs as of June 1983. At that time, 10 States had

a State-legislated program, and another 17 States

had a Medicaid-only hospital prospective payment program. Other States had State or local

prospective payment programs in which participation and/or compliance was voluntary. One

unique approach to hospital payment, discussed

later in this chapter, is used in the Rochester,

N. Y., area. Bills for the establishment of hospital rate-setting programs are currently under active consideration in six States: Florida, Pennsylvania, Ohio, Illinoisr Indiana, and Wisconsin.

Key Features of Prospective

Payment Systems

The details of program administration vary

widely among prospective payment plans, Nevertheless, there are five components of prospective

payment design that are likely to affect the incentives of hospitals to produce services and use technologies, and ultimately to influence the cost of

hospital and health care. These are discussed

below:

Payers covered-The more payer classes covered by the prospective payment program,

the more likely it is that the system will modif y a hospital’s decisions regarding the availability and use of services.

Unit of payment—All prospective payment

programs set hospital rates either explicitly

or implicitly on the basis of one of five units

of payment: 1 ) per service rates; 2) per diem
96 ● Medical Technology and Costs of the Medicare Program

x

Table 18.—Mandatory State-Level Hospital Prospective Payment Programs as of June 1983

Medicaid-only State-legislated Medicare participating in Medicaid participating in

program program State-legislated program State-legislated program

Alabama . . . . . . . . . . . . . . . . . .

—

x

California. . . . . . . . . . . . . . . . . . x

Colorado . . . . . . . . . . . . . . . . . . . . x

Connecticut . . . . . . . . . . . . . . . . . . .

Florida . . . . . . . . . . . . . . . . . . . . . . . x

Georgia . . . . . . . . . . . . . . . . . . . . . x

Idaho . . . . . . . . . . . . . . . . . . . . . . . . . x

Illinois . . . . . . . . . . . . . . . . . . . . . . . x

Kentucky . . . . . . . . . . . . . . . . . . . . . . x

Maryland . . . . . . . . . . . . . . . . . . . . . . x

Maine . . . . . . . . . . . . . . . . . . . . . . . . . x

Massachusetts ., . . . . . . . . . . . . . . x

Michigan . . . . . . . . . . . . . . . . . . . . . x

Minnesota a . . . . . . . . . . . . . . . . . . . . x

Mississippi . . . . . . . . . . . . . . . . . . . . x

Missouri . . . . . . . . . . . . . . . . . . . . . . x

New Jersey . . . . . . . . . . . . . . . . . . x x

New York . . . . . . . . . . . . . . . . . . . . x x

North Carolina . . . . . . . . . . . . . . . . x

Pennsylvania. ....,. . . . . . . . . . . x

Rhode Island . . . . . . . . . . . . . . . . x x

Utah . . . . . . . . . . . . . . . . . . . . . . . . . x

Virginia . . . . . . . . . . . . . . ..., ., . x

Washington. . . . . . . . . . . . . . . . . . . . x x

Wisconsin . . . . . . . . . . . . . . . . . . . . . x x

Total numberof States . . . . . . . . 17 10 — 4 5

aMi””~sOta’S system IS mandato~ [n the sense that Blue Cross will not pay more than allowed rates

SOURCE” US Department of Health and Human Services, Health Care F!nanclng Adm!nlstratlon, unpublished data, May1982, and R Lyman, US Department of Health

and Human Servtces, Health Care Flnanctng Admlnlstrat!on, personal communication, June 20, 1983

x

x

x

x

x

x

rates; 3)per castrates (per admission rates);

4) per case rates with adjustme,~ts for case

mix; 4 and 5)per capita rates. Set prices for

individual services give hospitals incentives

to produce these services efficiently but also

give them incentives to provide more services to each patient (.389). A fixed payment

for each day of stay establishes incentivesto

reduce the number of services offervd per day

but to increase lengths ofstay aswell. There

is strong empirical evidence that these effects

from afixedrate ofpayment perdiem actuallyoccur (431). Afixedrate of payment per

admission encourages low use of resources

per stay and short lengths of stay but also

establishes incentives for hospitals to increase

admissions and to engage in “cream-skim-

———.-—.—.—

‘Case mix—The relative frequen( y of various types of patients,

reflecting different needs for hospital resources, There are many ways

of measuring case mix, some based on patients’ diagnoses or the

severity of their illnexes, some on the utilization of services, and

some on the characteristics of the hospital or area in which it is located (343),

●

●

ming” to avoid more serious (and costly) patient types. Per case rates that vary by type

of case, as in the Medicare DRG payment

system, reduce but do not eliminate the incentive for cream-skimming but leave intact

the incentive to increase admissions. Per capita rates, on the other hand, reduce the incentive to admit patients but encourage hospitals to agree to serve only healthier groups,

Scope of coverage—Prospective payment

programs vary according to the elements of

hospitals’ costs covered in the rates. The inclusion or exclusion of capital costs, teaching

costs, and outpatient services in the prospective rate are important determinants of how

the hospital and other providers behave, and

ultimately how medical technologies are

used. Hospitals have an incentive to shift

services from cost categories with prospectively set limits to those that are still treated

as “pass-through” items.

Extent to which a hospital’s own costs determine the level of payment—To be truly pro-
Ch. 6—Medicare Hospital Payment and Medical Technology ● 9 7

. . .—

spective, a payment system should render a

hospital unable to increase the level of payment by increasing its own costs. If the current payment rate depends on the hospital’s

past costs, with a 1- or 2-year lag, then the

system is not very independent of the hospital’s own cost experience, and the incentives in cost-based reimbursement will predominate. On the other hand, if the rate is

set on the basis of the hospital’s own costs

in a base year with infrequent updating except for general inflation indexing, the relationship between cost and prospective price

is effectively severed. Likewise, the use of

comparative cost data from other hospitals

to establish a hospital’s payment limit also

severs the link between the hospital’s own

past behavior and its prospective rate and

will give the hospital more incentive to contain costs.

● Program stringency—Under any particular

payment method, a program can be either

generous or restrictive. A stringent program

is one in which the payment level is low relative to the cost of providing services. Program stringency is a function of numerous

aspects of a program’s design. For example,

a program may or may not allow hospitals

to keep any surpluses generated as a result

of cost-saving behavior, or it may penalize

hospitals more or less severely when costs run

above the prospective level. Although overall program stringency is difficult to measure precisely, a rough indicator is the ratio

of net revenues to total expenses from those

patients covered under the prospective payment program. If the ratio is high, then the

program is relatively generous; if it is low,

then the program is stringent. Under a stringent method, the hospital must cover operating losses with cash from gifts, depreciation allowances, or revenues from other

sources.

Some have argued that program stringency

is the most important factor in the effectiveness of prospective payment programs in reducing hospital costs (64). The stringency of

the program is likely to affect the ability of

the hospital to generate capital from both internal and external sources. Hospitals operating under more stringent programs therefore would be likely to face higher capital

costs, which in turn would affect the adoption of capital-intensive medical technologies.

Effects of Prospective Payment on

Medical Technology

There is evidence to suggest that in recent years,

some State-1evel mandatory prospective payment

programs have had a moderating influence on

hospitals’ costs (36,64,309,310). A recent study

of 15 State or areawide hospital rate-setting programs found that the rate of increase in total expenses per hospital admission was reduced by approximately 2 to 5 percent between 1969 and 1978

in seven States with mandatory programs (64).

Apparently, prospective payment programs need

time to mature before they begin to influence hospital costs (310). Using national data for the period

1969-80, Sloan estimated that mandatory State

prospective payment systems ultimately reduce

hospital expenses per adjusted admission by an

average of 13 percent relative to States without

such systems (309).

That prospective payment can reduce hospital

expenditures does not necessarily imply that the

use of medical technologies will decrease. In fact,

one would expect prospective payment to have

different kinds of effects on different technologies

(see ch. 3). One indirect method of examining hospitals’ technology choices under prospective payment is to study the effect of prospective payment

on a related measure: hospitals’ choices of labor

and nonlabor inputs to the production of services. If prospective payment makes hospitals more

efficient producers of services, both a reduction

in the total value of inputs and substitution among

different kinds of inputs should be observed.

Studies of the impact of prospective payment

on hospitals’ use of labor have documented both

a decrease in the total number of hospital employees and a substitution of less expensive for more

expensive personnel in States with strong ratesetting systems (132, 179, 187). There is no evidence on whether hospitals reduce nonlabor

inputs under prospective payment systems or

whether such systems lead to substitution between
98 ● Medica/ Technology and costs of the Medicare Program

capital- or material-intensive inputs and personnel.

There is some evidence regarding the effect of

prospective payment on the provision of medical services. As part of a comprehensive study of

nine State-legislated hospital rate-setting systems,

Worthington and Piro (431) found that programs

that pay hospitals on the basis of a per diem rate

all produced an increase in the average length of

stay and the occupancy rate, This result would

be expected from a per diem rate-setting system,

because the longer the patients stay, the more revenue the hospitals receive. Although a per diem

rate-setting program would also be expected to

encourage increases in inpatient admission rates,

no such admission effects were found in this

study. These results suggest that manipulating

hospital admission rates may be more difficult

than increasing the length of hospital stay for patients already admitted. Taken as a whole, however, the results do suggest that decisionmakers

in hospitals respond in predictable ways to financial incentives for the use of hospital services.

A related question with important long-run implications for medical technology is whether prospective payment influences the extent and speed

of hospitals’ adoption of new technologies. Studies

of the impact of hospital prospective payment

programs on the adoption of new capital equipment or “technology-intensive” services suggest

that prospective payment can have an effect on

technology adoption and that the nature of the

effect depends on both the specific attributes of

the program and the characteristics of the new

technology.

Joskow (182), who analyzed the effect of ratesetting programs on the availability of computed

tomography (CT) scanning in hospitals, found the

number of CT scanners in a State in 1980 to be

negatively related to the number of years that ratesetting had been in effect in the State. s Hospital

rate-setting also led to a shift in the location of

CT scanners to physicians’ offices.

Cromwell and Kanak (77) recently analyzed the

impact of 15 State rate-setting programs on the

availability of 13 different services in the hospi- —.

5

The analysis controlled for possible impacts of other types of

hospital regulation, including certificate-of-need (CON) laws.

tal between 1969 and 1978. New York’s ratesetting program, a restrictive program that pays

per diem rates, had the most consistently negative effects on the availability of all types of services. New Jersey’s pre-DRG prospective payment

system also appeared generally to reduce the

availability of complex services. Other States’ programs showed no consistent impact on service

adoption. It is interesting to note that the service

upon which rate-setting had the largest and most

widespread negative effect is social work, a laborintensive, not equipment-intensive, hospital

service.

In still another study of hospital payment and

technology diffusion, Wagner, et al. (418), investigated the impact of prospective payment in

three States (New York, Maryland, and Indiana)

on the adoption of five new pieces of capital

equipment: electronic fetal monitoring, gastroendoscopy, volumetric infusion pumps, automated

bacterial susceptibility testing, and computerized

energy management systems. The first three technologies probably raise the daily cost of care, although their effect on the average cost per case

is unknown. The latter two are investments in

cost-saving equipment. The New York rate-setting

system was found consistently to lead to adoption of fewer units of cost-raising technologies and

to increase the probability of large hospitals’

adopting cost-saving equipment. However, the

prospective payment programs in Maryland and

Indiana showed no such consistent effects on hospitals’ adoption behavior.

Together these studies imply that prospective

payment does affect the adoption of new technology in predictable ways but that much depends

on the strength and design of the program. New

York’s system, the oldest and most restrictive ratesetting program, has clearly altered the extent of

availability of new technology. Other systems

may be too new, too small, or too generous to

show long-run consequences.

Medicare’s DRG Payment System and

Medical Technology

Features of Medicare’s DRG prospective hospital payment system currently being implemented create strong incentives for hospitals and
Ch. 6—Medicare Hospifa/ Payment and Medica/ Technology ● 9 9

other providers to use and adopt technologies in

ways that are different from those under costbased reimbursement. Although the DRG hospital payment system does not include payers other

than Medicare, the per case payment approach

provides incentives to hospitals both to reduce the

amount of resources expended per stay and to

selectively encourage admissions. b These incentives are strengthened because the payments hospitals receive for treating patients are essentially

unaffected by the hospital’s own costs and because

the system puts hospitals entirely at risk for losses.

During the 3-year period of the DRG system’s

implementation, several key elements of hospital expenses, including capital, teaching, and outpatient expenses, will continue to be paid as passthroughs. Inputs that are passed-through become

less expensive to the hospital relative to inputs

subject to controls and theoretically should be

used more by hospitals. To discourage hospitals

from increasing capital expenditures in anticipation of future controls, the Social Security

Amendments of 1983 (Public Law 98-21) deliberately left uncertain whether capital expenditures

for new projects begun in the first 3 years of the

law’s implementation would or would not be included in prospective per case limits at the end

of the 3-year period.

Although there is no empirical evidence on the

effect of the new DRG inpatient hospital payment

system, it is possible to describe how the incentives inherent in the system may alter the use of

medical technologies. First, however, it must be

stressed that financial incentives are but one of

several influences on hospitals’ decisions to adopt

and use technologies. DRG payment will not have

a uniform effect on medical technologies, and in

some instances, technologies will be subject to

conflicting incentives. In general, the following

can be concluded:7

— —

Under DRG payment, the number and intensity of ancillary procedures provided to inpatients can be expected to decrease overall,

but the use of ancillary procedures that can

be shown to lower the cost per case can be

expected to increase.

The settings of technology use are likely to

be influenced by DRG payment, but the incentives work in conflicting directions and

are sensitive to the key features of program

design. For example, in the absence of a

method for excluding very low-cost patients

from the DRG pricing system, DRG payment

encourages inpatient admissions for simple

procedures. It remains to be seen which incentive will dominate for which procedures.

DRG payment will encourage the movement

of technologies, particularly those for posthospital care, into the home and other nonhospital sites of care.

DRG payment is likely to influence the specialization of services, but the magnitude and

direction of these effects is unknown. The incentives to reduce costs encourage concentration of capital-intensive technologies in

fewer institutions. Conversely, increasing

competition among hospitals for physicians

and patients may create incentives for the

widespread acquisition of some technologies.

A change in technology product mix is likely

to result from downward pressure on the

price and quantity of supplies and, if capital

Photo credit E. I. du Pent de Nemours & Co

DRG payment will affect the settings of medical

technology use. Some services provided formerly in the

hospital will be provided in increasing numbers on an

outpatient basis
100 ● Medical Technology and Costs of the Medicare Program

——- —— —. —— — — — — —

is included in the DRG rate, capital equipment. Greater prociuct standardization can

be expected as more expensive models and

procedures are eased out of the market

through competition,

It is also possible to describe the incentives

regarding the adoption of new technologies and

the discarding of old technologies under DRG

payment. Many observers have pointed out that

per case payment systems in which future levels

of payment are largely independent of the hospital’s own historical costs create incentives for

hospitals to adopt cost-saving technologies-i. e,,

technologies whose adoption decreases the hospital’s total cost per case. Given that technologies

are neither cost saving nor cost raising independent of the context in which they are used, however, the same technologies are not likely to be

adopted by all hospitals, The introduction of new

capital-intensive cost-saving technologies in a

DRG payment environment is likely to encourage specialization among hospitals as small hospitals become unable to reap the cost-saving benefits

of some investments. Some technologies that depend on high volume to be cost saving might be

provided to smaller hospitals on a contract basis

by large hospitals or independent laboratories.

The feasibility of such contractual arrangements

would vary depending on the specific uses of technology and the geographical and competitive environment in which the hospitals operate.

The financial incentive to introduce new costraising technologies (i. e., technologies whose

adoption increases the hospitals’ total cost per

case) is lessened, but not eliminated, under DRG

payment compared to cost-based payment. Under

cost-based payment, the additional hospital costs

of new technologies are covered; hospitals therefore have no financial incentives not to adopt such

technologies. Under DRG payment, a hospital’s

adoption of new cost-raising technology is not met

with an automatic increase in revenues to cover

the additional cost. New technology will have to

compete with alternative uses of hospital funds,

such as employee wage and benefit increases or

additional nursing staff. New technology may be

at an additional disadvantage relative to other

uses of funds because of the relative uncertainty

about its benefits in the early stages of diffusion

(282). The implications are obvious: with limited

resources, hospitals will need to assess new technologies more closely and ration resources more

carefully.

Nevertheless, the introduction of promising

new technologies, even those that are cost raising to the hospital, will be attractive to hospitals

as they compete for physician loyalties and, ultimately, the admissions they represent. For example, despite its high capital and operating cost,

nuclear magnetic resonance imaging, a new medical imaging technology still in the investigational

phase, may be highly desirable to hospitals who

seek to protect their admissions base from encroachment by other hospitals. The importance

of this incentive as a constraint on the incentive

not to adopt new technologies is unknown. Thus,

although DRG payment does not imply that technological change will approach a standstill, the

directions of such change are likely to be altered.

Overall, the adoption of technologies that are cost

raising to the hospital is likely to decline by an

unknown quantity.

Per Capita Prospective Payment

Per capita prospective payment to hospitals

refers to an array of methods for paying rates to

hospitals in advance based on the number of enrolled or covered individuals rather than on the

services provided, days of care, or admissions.

A single organization consisting of one or more

hospitals takes responsibility for providing all

covered hospital benefits to the beneficiary during a specific period of time in exchange for a fixed

rate of payment. Beneficiaries may or may not

be limited in their choice of place of hospitalization. Under free choice plans, the hospital receiving the per capita payment would have its payment reduced by the payments made to other

hospitals for services to the beneficiary. Presumably, the hospital receiving the per capita payment has a financial incentive to see to it that the

amount and intensity and, therefore, the cost of

hospital care is reduced.

Per capita hospital payment is one of the oldest

types of hospital payment mechanisms (303). This

approach emerged from individual hospitals’ efforts in the 1920’s to stabilize their revenue
Ch. 6—Medicare Hospital Payment and Medical Technology . 101

sources. As the notion of beneficiary free choice

gained prominence with nonprofit health insurance plans, however, payment of hospitals on a

unit-of-service basis became the norm. Thus, for

almost 20 years—from 1946, when the last individual hospital per capita payment plan closed

down, until 1964 when the Colorado Blue Cross

plan initiated such a program in one county—

per capita payment of hospitals was nonexistent

in the United States (303). The Colorado Blue

Cross program lasted 18 months but was abolished with the emergence of Medicare and Medicaid (303).

In 1980, the Blue Cross and Blue Shield Association, with funding from the John A. Hartford

Foundation, initiated two demonstrations of per

capita hospital payment involving beneficiary free

choice (90). In 1982, 10 hospitals in 2 States (North

Dakota and Massachusetts) began receiving per

capita payments in an effort to demonstrate that

per capita payment would lead to more efficient

provision of hospital care (90). Individual hospitals in these demonstrations have no control over

the beneficiaries “assigned” to them. The assignments are made either by the beneficiaries themselves or by the Blue Cross plan. Per capita rates

vary with beneficiary characteristics and are based

on the hospitalization experience of each group.

Thus, an attempt is being made to avoid the problems of cream-skimming—the tendency of hospitals to avoid serving sicker populations—and

adverse selection —the tendency of high-risk beneficiaries to seek out more comprehensive and

costly care.

Unlike per case prospective payment, per capita hospital payment is designed to encourage

hospitals to reduce the rate of admission to

hospitals and to expand the use of pre- and posthospital care outside of the inpatient setting. Since

beneficiaries in the demonstrations maintain the

right to choose freely their hospitalization site, the

success of the program appears to hinge on the

degree of cooperation between hospitals and

physicians in managing the hospital resources efficient y.

Data are not yet available on the effect of the

demonstrations on the use of hospital and other

health care services or on hospital costs. However, two observations can be made about the applicability of such an approach to Medicare. First,

implementation of per capita payment (especially

with free choice of provider) depends on the availability of excellent patient-based data systems

through which estimates of per capita costs can

be made. Second, the process of “assigning” beneficiaries to “home” hospitals may be feasible in

certain communities but may not be universally

feasible. Especially when beneficiaries maintain

the freedom to choose their place of care, per capita hospital payment may depend for success on

the existence of specific hospital market environments.

As with any prospective payment system that

encourages hospitals to become more economical in the provision of services, per capita payment runs the risk of discouraging hospitals from

providing needed care. In this case, the risk is to

underadmit as well as to underprovide services

while in the hospital. Finally, per capita payment

would be 1ikely to affect the adoption of medical

technologies in ways that are similar, but not identical, to the expected effects of DRG payment. For

example, whereas DRG payment encourages hospitals to adopt new technologies which will bring

in new admissions, per capita payment has the

opposite effect.

Areawide Global Prospective Budgeting:

The Rochester Area Hospitals’ Corp.

Nine hospitals in the Rochester, N. Y., area have

been experimenting since 1980 with a global prospective budgeting approach to hospital payment

(40,280). The nine member hospitals of the Rochester Area Hospitals’ Corp. (RAHC), accept a cap

on the aggregate revenues they can receive each

year. The areawide revenue cap is developed from

the member hospitals’ actual costs in a base year

(1978) with adjustments for inflation and technological change in subsequent years. Individual

hospitals’ budgets are allocated from the total in

a similar fashion, but some of the revenues are

withheld in a special fund to adjust for the cost

of increases in admissions and for new equipment

or facilities approved by both RAHC and the

State. The RAHC board has the responsibility for

distributing these special funds among hospitals
702 . Medical Technology and Costs of the Medicare Program

—————— —-— —— —-— — ————

(319). The hospitals are collectively responsible

for keeping expenses within the global budget; if

areawide admissions increase to the point that the

special fund is exceeded, the hospitals must share

in absorbing the excess costs.

The experimental global budgeting program in

Rochester clearly involves negotiation among hospitals in dividing up available funds for service

expansion and modernization. Whether the concept can survive in the long run remains to be

seen, In any case, Rochester has some special attributes that make it a particularly fertile environment for such an experiment. First, the hospitals’ market area is relatively self-contained and

well defind. A global budgeting approach would

not be feasible where market areas are not easily

defined. Second, the Rochester area has a long

history of business, community, and hospital support for areawide planning (319). An earlier experiment funded by the Federal Government,

which included a larger area of New York State

CAPITAL PAYMENT METHODS

The use of new medical technology often depends on hospitals’ making investments in capital facilities and equipment. Hospitals’ willingness

and ability to make these investments in “equipment-embodied technology” (233) are influenced

by the third-party hospital payment system. Consequently, an important issue with respect to the

diffusion of medical technology is how Medicare

pays for hospital capital.

It is important to recognize that the effects of

any capital payment method depend on the larger

payment system of which the capital payment

method is a part. Thus, for example, a particular

approach to capital payment would have different

effects on the use of medical technologies under

a cost-based reimbursement system than under a

prospective payment system. The history of payment for capital under Medicare’s traditional costbased hospital reimbursement system and under

State prospective payment systems is described

below. Also discussed below are capital payment

options under Medicare’s DRG prospective payment system, which is currently being impleas well as Rochester, collapsed (319), probably

because these two factors were not present.

If successful, Rochester’s global budgeting approach would represent an application of allocation of health care resources through a political

process. There is clearly an incentive for each hospital to increase its admissions at the expense of

others, but without access to funds for new services, the member hospitals may be effectively constrained from doing so. It is not clear how rationing resources on a community level would affect

specialization of services or regionalization of facilities. Evidence on the effects of the Rochester

experiment is not available at this time. The potential for such an approach as a method for rationing hospital technologies may be great in a

few areas of the country where social, political,

and demographic conditions are right, but for the

reasons given above, it is not likely to be viable

as a general approach to hospital payment,

mented. The capital payment method under DRG

prospective payment was left unresolved in the

Social Security Amendments of 1983 (Public Law

98-21), so detailed examination of the implications

for medical technology of various capital payment

approaches under DRG payment is both important and timely.

History of Capital Payment

Under Medicare

Medicare’s cost-based hospital reimbursement

system has had strong effects on hospitals’ capital acquisition decisions. Traditionally, Medicare

has reimbursed hospitals for interest and historical cost depreciation expenses associated with all

capital equipment purchases, regardless of whether the equipment was purchased or leased. In

theory, when combined with cost-based reimbursement of operating costs, this approach to

capital payment encourages hospitals to invest in

new facilities and equipment and to finance as

much as possible through debt. If a hospital per-
Ch. 6–Medicare Hospital Payment and Medical Technology ● 103

— — — — — —

sistently “funds” payments for depreciation (i. e.,

establishes a separate fund that cannot be used

for operating expenses), cost-based reimbursement

provides the cash necessary to amortize whatever

level of debt the hospital incurs. If all hospital

revenues were derived from cost-based payers,

capital, as well as all other inputs, could be used

in unlimited quantities.

The situation was more complicated in practice. Some experts have claimed that Medicare’s

cost-based payment system did not pay its fair

share of hospital costs, because it did not pay for

a share of bad debts and charity care attributable

to patients other than Medicare beneficiaries (71).

Consequently, hospitals with high burdens of unpaid care and large numbers of Medicare and

Medicaid beneficiaries have incurred deficits. Such

deficits could only be accommodated by the cash

flow generated through depreciation payments or

other sources of cash such as unrestricted gifts or

non-patient-care revenues. Hospitals with a high

proportion of patients covered by insurance plans

paying on the basis of charges have had an advantage over others, because they could recover the

costs not covered by Medicare for these patients

by raising their charges. Other factors being equal,

hospitals with a high proportion of patients subject to cost-based reimbursement are likely to receive lower bond ratingsa than other hospitals

(70). Thus, while cost-based reimbursement under

Medicare increased hospitals’ demand for capital,

over time it has also made it more difficult and

costly for some hospitals to obtain additional debt

financing.

Capital Payment Under State

Prospective Payment Programs

With exceptions noted below, those responsible for designing State prospective payment programs have been reluctant to deviate from costbased reimbursement for capital. Even New

York’s otherwise restrictive rate-setting program,

for example, continues to treat capital expenses

as pass-throughs, much as in the Medicare system (154). Payment for capital in some States has

—

n &)nd rat lng 1s an assessment oi the credit worthiness of a hosp] -

tal by a rating agency such as Standard & Poor’s Corp. or Moody’s

Investors Service

been even more generous than under Medicare.

Washington, Massachusetts, and Minnesota have

used price level depreciation rather than historical cost depreciation (76). Maryland and New

Jersey calculate a capital facilities allowance for

buildings and fixed equipment that provides cash

sufficient to pay off existing debt and to accumulate a down payment for replacement or additions. In all of these cases, the hospital’s payment rate depends on its own capital expenditures.

States have generally looked to the direct regulation of capital expenditures through certificateof-need (CON) laws as a capital rationing device.

CON laws require that hospitals receive approval

from a State health planning agency for major

capital investments, Although there is a general

consensus that capital expenditure regulation as

implemented in the States has not been effective

in reducing the level of capital expenditures

(69,414), most rate-setting programs assume that

the appropriateness of capital investments will be

judged through CON.

The only deviations from cost-based reimbursement of capital have been Maryland’s and New

Jersey’s approach to payment for major movable

equipment (e.g., beds, diagnostic instruments) and

western Pennsylvania’s approach to capital payment. In Maryland, the depreciation on major

movable equipment available in the hospital in

a base year is adjusted in subsequent years by an

appropriate inflation factor. The allowance for

movable equipment is unaffected by the hospital’s subsequent capital expenditure decisions, except for special cases in which the rate-setting

commission may make exceptions (185). New

Jersey’s DRG system has a similar method for major movable equipment. The allowance is adjusted

for inflation from a base year, which is updated

periodically, Unlike Maryland’s allowance, however, the rate of reimbursement for major

movable equipment is a blend of the hospital’s

own capital costs and those of other peer group

hospitals (416). In the western Pennsylvania program, hospitals have a choice of historical cost

depreciation not exceeding 4 percent of other

allowable costs or any other method that results

in less than 3 percent of costs (76). Thus, hospitals in western Pennsylvania are subject to an effective ceiling on capital reimbursement.
104 ● Medical Technology and Costs of the Medicare Program —.. — —

Capital Payment Alternatives Under

DRG Payment

What method of payment for capital will eventually be adopted under Medicare’s DRG hospital payment system remains to be seen. The Department of Health and Human Services is

required by law to report to Congress by October

20, 1984, on a recommended approach to capital

payment. For the time being, capital expenditures

by hospital will continue to be reimbursed as

before—on a cost basis.

Figure 3 presents the major alternatives for capital payment under Medicare’s newly created DRG

hospital payment system. The fundamental issue

under DRG payment is whether a hospital’s capital payment should or should not be subject to

some kind of externally imposed limit.

Pass-through reimbursement of capital could

continue as a permanent feature of DRG payment,

As shown in figure 3, there are three alternative

pass-through approaches:

● payment of historical cost depreciation and

interest expenses,

.—-— .—. .— —.. —.— —

● payment by price level depreciation, and

• payment of debt service requirements.

In all of them, the level of payment is directly

linked to the amount of capital investment undertaken by the hospital.

Payment of historical cost depreciation and interest expenses represents a continuation of the

traditional Medicare method. Payment by pricelevel depreciation, with hospitals paid according

to the current value of the capital assets used up

in any year, would be more generous than historical cost depreciation in an inflationary economy. Finally, payment by Medicare of its share

of the hospital’s debt service requirements would

match the flow of capital payments over time

more closely with the actual flow of debt payments. In any of these cases, the hospital would

receive cash sufficient to cover its debt over the

lifetime of an asset.’

‘Investments using equity capital rather than debt instruments

could be paid depreciation and a return on equity. The issue of which

hospitals should receive a return on equity capital and how high

this return should be is clearly important to the hospital industry,

but it is not a central issue with respect to medical technology and

is therefore not discussed in this chapter.

Figure 3.—Options for Capital Payment Under Medicare’s DRG Hospital Payment System

I Controlled payments I

Historical

cost

depreciation

+ interest

+ return on

equity

Price level Debt service

depreciation requirements

+ interest + return on

+ return on equity

equity

SOURCE Off Ice of Technology Assessment
Ch. 6—Medicare Hospital Payment and Medical Technology w 105

——. . ——— -.— — —

Methods of limiting capital payment fall into

three categories:

●

●

●

methods that establish uniform rates of payment across all hospitals (or all within a

class),

methods that establish hospital-specific controlled rates, and

methods that condition payment on approval

of capital expenditure projects.

The uniform payment approach would treat all

hospitals alike, regardless of their capital or operating expenditures. The uniform payment could

be calculated either as a fixed percentage of the

DRG price or as a flat rate per bed. Hospital-specific approaches, on the other hand,

would take the hospital’s capital or operating costs

into account in establishing a level of payment

but would limit increases in the payment level

over time. Thus, for example, capital payments

could be limited to a percent of operating costs,

so that hospitals with high operating costs would

receive a higher capital payment than others; alternatively, the capital payment in any year could

be tied to the hospital’s actual capital costs (as

measured by interest and depreciation) in a base

year with adjustments for inflation in subsequent

years. If capital payments were controlled through

direct regulation of capital expenditures, only

projects approved by a CON or other designated

agency would be recognized by Medicare for capital payment. Approved projects would then be

paid on a cost basis. Areawide or statewide annual capital expenditure limits could be used to

establish an upper bound on the value of approved projects. The State of New York is currently considering adoption of such a capital expenditure limit.

The alternative capital payment methods described above can be evaluated on the basis of

four general criteria:

● Efficiency—The extent to which the approach promotes the cost-effective use of hospital technology. An ideal method would not

distort the relative costs to the hospital of

capital and other inputs, would discourage

needless duplication of capital-intensive services in the community, would encourage specialization and regionalization of services

when appropriate, and would minimize the

cost of providing any given level of hospital

care,

Equity of access to medical technology—The

extent to which the method promotes equal

access to capital-embodied medical technology. An ideal method would not deny people living in certain regions or with low incomes access to medical technology that is

available to others.

Fairness—The extent to which the method

treats all kinds of hospitals alike. An ideal

system in this respect would not reward or

penalize hospitals according to their ownership status, location, or other factors that lie

outside management’s control.

Feasibility—The extent to which the method

is administratively workable and politically

acceptable. An ideal method would involve

low administrative costs, minimize the problems of transition from the old to the new

payment method, and accommodate the inherent cyclic nature of hospital investments.

A permanent capital cost pass-through under

DRG payment violates the efficiency criterion, because it distorts incentives for hospitals to adopt

and use capital-embodied technologies. Table 19

shows how a pass-through for capital expenditures influences hospitals’ incentives to adopt four

different kinds of hospital technology under DRG

per case payment. So long as the effect of medical technology acquisition on a hospital’s total

cost per case is in the same direction as its effect

on operating costs, for example, the method of

capital payment under DRG payment will not

alter the direction of the incentives for technology adoption. Thus, there are disincentives under

DRG payment to adopt most quality enhancing,

cost-raising (Type I) technologies regardless of the

way in which capital is handled. Capital cost passthroughs weaken the disincentive to adopt such

technologies, but they do not remove it. New

technologies with high capital costs but only small

increases in operating costs would be affected less

by DRG payment with a capital pass-through

than by DRG payment with capital built into the

rate.

Of course, since DRG payment sets up incentives for hospitals to increase admissions, hospitals
106 ● Medical Technology and Costs of the Medicare Program

. — — —— — — —

Table 19.—lmpact of Technological Innovation on Per Case Costs Under DRG Payment

Direction of effect on costs:

1,

II

Ill

Iv

Capital cost

Type of innovation per case —

Cost-raising, quality-enhancing

new technology . . . . . . . . . . . +

Operating cost-saving innovations

A. Raises total costs ., . . . . . . . . . . . . . . . . . +

B. Saves total costs . . . . . . . . . . . . . . . . . . . . +

Capital cost-saving innovations

A. Raises total costs . . . . . . . . . . . . . . . . . . . –

B. Saves total costs . . . . . . . . . . . . . . . . . . . . –

Service/procedure disadoption . . . . ... . . –

Operating cost

per case —

+

Total cost

per case

Incentives for

technology adoption

With capital Without capital

in rate in rate

1 1

SOURCE Oft Ice of Technology Assessment

can be expected to seek cost-raising technologies

whose availability promises to bring in profitable

admissions. A capital cost pass-through essentially

subsidizes this kind of investment, leading potentially to wasteful duplication of these services

among hospitals.

In the case of operating-cost-saving (Type II)

and capital-cost-saving (Type III) technologies, the

incentives for hospitals to adopt may actually be

reversed by the policy regarding payment for capital. Of particular concern is the incentive under

a pass-through to adopt expensive capital equipment that reduces operating costs but raises total

cost per case. Automated hospital information

systems, for example, could be evaluated in terms

of their ability to reduce operating costs with inadequate regard for their impact on total costs.

The more labor-saving capital-intensive system

would be preferred regardless of its net impact on

costs, Over time, then, hospitals could be expected

to become more capital intensive than efficiency

would dictate.

Despite the inefficiency inherent in a capital cost

pass-through, this approach does well on the other

three criteria. Its feasibility has been demonstrated

through the years. It is inherently fair because all

hospitals are treated alike in their payment. Finally, it poses no barriers to equal access to medical

technology, although it does nothing to redress

current inequities. Public and inner-city hospitals

tend to have lower ratios of capital to total costs

than other hospitals, because these hospitals have

older facilities and possibly less equipment-embodied technology (20,188,356). 10 A cost-based

system of reimbursement for capital would continue to pay these hospitals relatively less than

other hospitals. Because public and inner-city hospitals typically have a high burden of bad debts

and indigent care, their reimbursement from depreciation costs is often used to assist their cash

flow to subsidize the operating costs associated

with this uncompensated care. Since it is unlikely

that the implementation of DRG payment will do

much to change the situation, hospitals with low

levels of capital assets will continue to receive low

payment under a capital cost pass-through.

Despite the low level of capital payment, some

hospitals serving poor areas may find their ability

to raise capital enhanced by DRG payment with

a capital cost pass-through. These hospitals now

have the potential to generate operating savings

which could be used to offset operating cost losses

on bad debts and charity care.

Controlled capital payment is generally more

efficient than pass-through capital payment, because the hospital is encouraged to provide its care

at the least possible cost. New technologies would

be judged by hospitals in terms of their impact

on total costs, not just on operating costs. Hospitals would be further encouraged to specialize

and join in plans for regionalization of health services. However, it is difficult to devise a controlled

1OFor examp]e, the mean percentage of capita] costs to total costs

for non-Federal public hospitals in 1981 was 5.2 compared to 6,7

for private not-for-profit hospitals and 8.9 in for-profit hospitals (1s).
Ch. 6—Medicare Hospita/ Payment

payment system that is fair to all hospitals. In a

uniform payment system, hospitals that in the

past have had lower ratios of capital to operating cost would receive more than they had in the

past, while those with high ratios would receive

less. Thus, public hospitals would, at least in the

near term, fare better under a uniform system than

they had in the past. But uniform payment of capital also favors multihospital systems, because it

allows these affiliated hospitals to pool capital

payments and smooth out fluctuations in capital

expenditures across hospitals. 11 A uniform rate

of payment would also create a difficult and possibly costly transition if hospitals that have made

major investments in recent years are not to be

unduly penalized. The American Hospital Association has recently proposed a uniform capital

payment system that would pay each hospital the

higher of cost-based reimbursement or a fixed

payment rate during a 1(1-year phase-in period (9).

Andersen and Ginsberg have suggested a less generous transition in which “budget neutrality”l2 is

maintained by gradually reducing the proportion

of the capital payment that is a pass-through (15).

Tying the capital payment to the level of capital

costs in a base year or to the hospital’s operating

costs is efficient but may be unfair. This approach

tends to reward the hospitals that were most capital intensive in the past, leaving those with low

levels of capitalization forever to receive lower

payments. Moreover, this approach would not

work well for hospitals requiring major capital

expenditures in the early years of implementation.

Perhaps for these reasons, support for this approach has been limited to the movable equipment

portion, which typically has shorter lifetimes and

lower variations in asset values among hospitals.

———

1‘At present, approximately 26 percent of a]] community hospitals are members of mult]hospita] systems. About I I percent of these

systems are proprietary, the remainder are government or not-forproflt systems (51 ).

‘J’ Budget neutrall~” means (as specified in the Social Security

Amendments of 1983) that the aggregate payments tor the operating

costs of inpatient hospital services in fiscal years 1984 and 1985 will

be neither more nor less than would have been paid under the Tax

Equity and Fiscal Responslblllty Act of 1982 for the costs ot the same

services

and Medical Technology ● 107

—

It is difficult to predict the effects of direct regulation of capital expenditures through CON or

other agencies. Direct regulation can occur with

or without statewide or areawide maximum limits

on the total capital outlays over a given period,

and the effects can be expected to differ between

the two. Although there has been much discussion in certain States about establishing capital

expenditure limits or “pooling” capital, all experience to date has been with CON and Section 1122

programs which do not operate with areawide or

statewide limits. The experience with capital expenditures regulation in the absence of such limits

has been disappointing, with most evaluations

concluding that the level of capital expenditures

has not been affected (65,69,251,414). Moreover,

the distribution of medical technologies among

hospitals does not appear to have been improved

as a result of CON (65).

The institution of an annual (or perhaps, longterrn) limit on the level of capital expenditures that

can be approved by CON agencies would, if it

were strictly enforced, ensure that the program

has an effect on the total level of capital expenditures. But there is no evidence, either theoretical

or empirical, to suggest that the outcome of such

a regulatory process would be either efficient or

fair (417). A review of the literature on resource

allocation decisions by committees revealed that

the ultimate outcomes depend both on chance and

on the composition of the committee and the procedures governing the decisionmaking process

(417). Moreover, the kinds of information needed

to make informed tradeoffs among competing

capital projects is likely to be unavailable, thus

leaving the process even more exposed to political solutions.

Regardless of whether or not an areawide limit

is applied, direct regulation of capital expenditures

is administratively feasible only for large projects—construction and renovation projects and

major new services. The current trend toward

high thresholds for inclusion in capital expenditure controls (256) would probably continue, leaving an ever larger proportion of capital-embodied

technology needing to be controlled in some other

way.
108 ● Medical Technology and Costs of the Medicare Program

— — . — ——— —.— — — ——— . — —

LIMITED PROVIDER CONTRACTING

Another approach to hospital payment has

arisen following recent legislation. In 1981, under

Section 2175 of the Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35), Congress

gave States greater flexibility in restricting Medicaid beneficiaries’ freedoom to choose their providers of medical care. Under this statute, State

Medicaid agencies are permitted to apply for

waivers from the freedom-of-choice provision of

the Social Security Act. Most waivers to date have

been for case management systems that restrict

the providers from whom a Medicaid beneficiary

can obtain primary care (332). The implementation of a hospital-only contracting approach,

whereby contracts are negotiated with selected

hospitals for provision c)f inpatient care to Medicaid patients, is nevertheless possible. California

has recently adopted this approach (226).

The two fundamental variables of hospital contracting are: 1) the rules used to determine which

hospitals can serve beneficiaries, and 2) the

method used to determine the level of payment

for such services. A hospital contracting system

could be administered by a negotiated bidding system where the bid price is computed on a per case,

per day, or per service basis. Or, the third-party

payers could select eligible hospitals on the basis

of their per case costs (with or without adjustments for case mix) and either pay a flat prospective rate or continue to reimburse the hospitals

on a retrospective cost basis. In either case, by

tying a hospital’s receipt of revenues to its ability

to constrain costs, contracting may encourage

hospitals to keep costs low.

The impact of contracting on technology use

and on equality of access to medical technology

depends to a large extent on the contracting program’s design and administration. For example,

California’s Medicaid program uses a bidding system that encourages hospitals to choose a price

for contracted patients that cover short-run, but

not long-run, incremental costs of treating those

patients. Ln essence, other classes of payers may

subsidize the Medicaid program by bearing more

than their share of overhead and other fixed costs.

At the time that contracting was instituted in

California, hospitals in the State were suffering

from very low occupancy rates, a condition which

encourages hospitals to offer to treat patients at

rates below the long-run incremental costs of

treating them (172). If the contracting agency

selected low-cost providers and then paid a prospective rate based on fully allocated costs, the

cost shift to other payers would be eliminated.

Selected provider contracting can have serious

implications regarding the equality of access of

beneficiaries to medical technologies. If beneficiaries can receive hospital care only in low-cost

hospitals, the availability of certain technologies,

particularly newer ones, could be restricted.

Moreover, as the revenues of contracting hospitals are held down relative to those with other

kinds of patients, the discrepancies could widen

over time.

With Medicare accounting for about 35 percent

of community hospital revenues nationwide, selected contracting with hospitals by Medicare

would probably be highly disruptive and would

greatly change the patient mix of hospitals. It

would be difficult to contract selectively without

turning some hospitak into predominately Medicare hospitals, leaving the others to serve private

sector patients. This kind of separation of care

by payer class is a necessary condition for the development of a two-class hospital system and

would represent the abandonment of the principles of equal access on which Medicare was

founded.

INCREASED BENEFICIARY COST-SHARING FOR HOSPITAL SERVICES

Still another approach to affecting the use of ple of this approach was found in the fiscal year

medical technologies through hospital payment 1984 budget request of the Reagan Administrais to increase beneficiary cost-sharing. One exam- tion. The Administration proposed an increase in
Ch. 6—Medicare Hospital Payment and Medical Technology ● 109

Medicare beneficiary cost-sharing for inpatient

hospital services (224). Under the proposal, the

beneficiary would continue to pay a deductible

approximately equal to the cost of a day’s care

but would be responsible for additional payments

of 8 percent of the deductible for days 2 to 1.s and

5 percent of the deductible for days 16 to 60. In

exchange, the beneficiary would no longer be responsible for cost-sharing after 60 days.

Increasing patient cost-sharing has the immediate benefit to the Medicare program of shifting

the expenditure burden from Medicare to the beneficiary or other third-party payers. Proponents

of increased cost-sharing for inpatient hospital

services also contend that patients will have

greater incentives to resist unnecessary technology—admissions, long stays, and procedures

or services offered as part of the stay. Thus, according to this argument, the Medicare program

would benefit from these behavioral influences on

the use of medical technology due to increased

cost-sharing.

Interim results from the Rand National Health

Insurance Study, a well-designed experiment, indicate that the level of patient cost-sharing does

influence the use of hospital services (243). This

experiment randomly assigned 2,7.56 families

whose members were not older than 61 with incomes under $25,000 (in 1973 dollars) to one of

six insurance plans with differing levels of deductibles, coinsurance rates, and upper limits on annual out-of-pocket expenditures. Plans with high

levels of coinsurance had lower admission rates

per capita than plans with low rates of coinsurance. With coinsurance rates of 50 or 95 percent,

hospital admission rates for adults were, respectively, about 60 and 40 percent below those with

no cost-sharing. However, the annual expenditure per hospitalized patient showed no consistent or significant relation to the level of costsharing. Of the patients admitted to the hospital,

70 percent exceeded their catastrophic limit. Thus,

while patient cost-sharing affects hospital admission rates, it appears to be “a poor instrument for

affecting costs once patients are admitted” (243).

It should also be noted that the Rand experiment involved cost-sharing for all covered services, not just hospital care. Part of the decline in

— — —

rates of hospitalization may have been due to a

decline in ambulatory care visits that would otherwise have generated a hospital stay. A hospitalonly cost-sharing provision with a catastrophic

limit on out-of-pocket expenses might not result

in the reductions in hospitalization rates experienced in the study. Moreover, applicability of the

Rand study to the Medicare program is limited

by its inclusion only of a nonelderly population.

It is not known whether the elderly would respond

to cost-sharing in the same way or to the same

degree. Indeed, evidence from this and another

short-term study of hospital cost-sharing indicates

that cost-sharing’s effects on hospital use vary

with the patient’s age and sex (243,413).

The effect of any beneficiary cost-sharing proposal on the use of medical technology must be

considered in the context of a specific method of

hospital payment. Under cost-based reimbursement, hospitals had no financial incentive to reduce occupancy rates or the volume of technology use; increasing coinsurance rates, as opposed

to increasing deductible amounts, could conceivably have made patients better consumers of

care in the hospital. (However, available evidence

does not support this contention. ) Under the DRG

inpatient hospital payment system, hospital administrators have incentives to implement policies

that reduce the length of stay and the use of unnecessary ancillary technologies. Increasing hospital coinsurance rates would probably have little additional influence. Increasing the deductible

for hospital admissions, on the other hand, might

be more consistent with per case payment. In per

case payment, the hospital has an incentive to

selectively increase the number of admissions and

readmission. At present, the deductible of $356

upon hospitalization covers any readmission within 60 days of the original episode (Social Security Act, sees, 1861(a) and 1813(a)), To the extent

that hospital-only cost-sharing can be expected

to reduce the rate of hospital admissions in the

elderly, requiring a second deductible for rehospitalizations within 60 days would counteract the

incentive for hospitals to discharge and readmit

patients for elective procedures that could be performed during a single stay.

Whether cost-sharing for inpatient hospital care

can moderate the use of hospitals and their tech-
110 ● Medical Technology and Costs of the Medicare Program

—. —. — .—— . . -. —

nology depends to a large degree on the willingness of Medicare beneficiaries to circumvent

cost-sharing by purchasing private supplementary

(“Medigap”) insurance covering deductibles and

coinsurance. In 1976, approximately 63 percent

of aged beneficiaries had some form of private

supplementary coverage, and 14 percent were

eligible for public support, mainly through Medicaid (199). According to one study, most Medigap insurance covers deductibles and coinsurance

(217), and joint Medicare/Medicaid beneficiaries

have no cost-sharing requirements. These supplementary plans dilute the impact of present costsharing provisions.

An increase in Medicare cost-sharing for hospital services would be expected to raise premiums

of Medigap policies. The effect of such premium

increases on Medigap enrollment has not been

studied. Data are available on the correlation beCONCLUSIONS

The Medicare program has recently embarked

in a new direction in hospital payment with its

DRG prospective payment system for inpatient

services. The implications of this approach for the

use and adoption of medical technology are varied and to some extent uncertain. Much will depend on the way in which the program is implemented and the changes or refinements that may

come in the future. The overall DRG price level

and the rates of increase permitted over time will

have a great deal to do with hospitals’ ability to

adopt new medical technologies. If, as many have

claimed, there is substantial room for increased

efficiency in the provision of hospital care, and

if the payment level is reasonably generous, DRG

payment under Medicare could provide hospitals

with substantial surpluses of funds that could be

used to provide new technologies and services,

If, on the other hand, increases in rates are restrictive or set at a level that reclaims all the cost

savings made in the previous years from hospitals, then hospitals would probably find it difficult to finance new cost-raising technologies and

services, The results cannot be predicted at this

time.

tween family income and the supplementation of

Medicare with private insurance. One study found

that, although purchase of supplementary insurance increases with family income, the differences

are small across income groups when the availability of public programs, particularly Medicaid,

are accounted for (34). Another study found that

Medicare families with low incomes were just as

likely to purchase private Medigap insurance as

families with higher incomes, a finding which may

suggest that the elderly are relatively insensitive

to premiums in their demand for Medigap coverage (216). If this is the case, increasing hospital

deductibles under Medicare would serve mainly

as a means of transferring the burden of expenditure from the public to the private sector, with

a particularly heavy burden on the near-poor,

without substantially altering patterns of hospital

use.

The way in which capital is paid for under DRG

payment is a critical issue for medical technology.

Permanent continuation of a capital cost passthrough under DRG payment would be inefficient

and would ultimately distort hospitals’ capital investment decisions, making hospitals too capital

intensive. Externally controlled capital payments,

on the other hand, are efficient but are difficult

to administer effectively or fairly.

Approaches to prospective payment of hospitals other than DRG hospital payment are certainly possible. INNovative prospective payment

methods such as per capita hospital payment and

areawide global budgeting may hold promise in

some areas. Furthermore, the current Medicare

law encourages States to experiment with these

as part of all-payer systems. In addition, case-mix

classification systems with more desirable properties than DRGs may become available in the

future (343).

HCFA expects to hold statewide systems applying for waivers to the cost-containment standard

of DRG payment: for Medicare to join in a State

system, the State must provide strong evidence
C h

—

that Medicare’s inpatient hospital expenditures

will be at least as low as they would be under

DRG payment (1 12). Although the available evidence supports the contention that the hospital

cost increases under prospective payment systems

implemented by individual States in the mid to

late 1970’s were lower than those under Medicare’s

traditional cost-based reimbursement system,

there is virtually no evidence on the effects of per

case prospective payment using DRGs. Thus, it

is not known how DRGs perform relative to other

prospective payment systems or whether the State

prospective payment approaches can meet the

DRG cost-containment standard.

Other approaches to the control of hospital

costs, including increasing the patient’s respon6—MedIcare

sibilit y

Hospita/ Payment and Medica/ Technology • 111

— — —. — .

for cost-sharing and limiting providers

through contracts between Medicare and hospitals, have significant limitations. Patient costsharing is not likely to be as effective as desired

in altering the patterns of use of hospital technologies because of the patient’s relative lack of

power and information to make informed decisions about the use of technologies in hospitals

and the apparently strong preference of the elderly

for supplemental medical insurance regardless of

its cost. Finally, although contracting may save

program dollars, it represents an abandonment

of the principle of assuring beneficiaries freedom

of choice of providers on which Medicare was

built and forces subsidies of hospital care from

other payers.
7.

Medicare Physician Payment

and Medical Technology

As the ancients say wisely, have a care of the main chance and look before

you leap, for as you sow, you are like to reap.

Samuel Butler
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................,...115

Physicians and the Use of Medical Technologies . . . . . . . . . . . . . . . . . . . . ... ... ..115

Methods of Enhancing Cost Consciousness Among Physicians . ...............118

Physician Education Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..119

Utilization Review programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....119

Second Surgical Opinion Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121

Changes in Physician Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........122

Changes in the Amount and MethosOf Physician Payment . ..............122

Increased Beneficiary Cost-sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...127

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..130
7

Medicare Physician Payment

and Medical Technology — ——— ———

INTRODUCTION

Although Medicare’s method of payment for

inpatient hospital services has recent] y been

a1tered, its charge-based systern of payment for

physicians’ services remains (see ch. 2). Medicare

expenditures for physician services centinue to

grow rapidly, however, and changes in payment

are currently being considered. The recent changes

in Medicare’s system of payment for inpatient hospital services under Part A have been made primarily for the purpose of improving the long-run

financial incentives for efficient provision of care.

Although one objective of the changes is cost containment, the payment policy does not provide

for all savings to accrue to Medicare. Most of the

payment changes proposed in the area of physician services under Part B would result in immediate savings to Medicare. By changing physicians’

financial incentives to adopt and, especially, use

medical technology, however, they would also

affect program costs in the future.

This chapter examines methods to change the

incentives for the use of medical technologies

through Medicare payment for physician services.

The chapter discusses physicians’ influence on the

use of medical technologies and analyzes several

methods to enhance cost consciousness among

physicians. Then it identifies possible ways that

physician payment mechanisms could be used to

reduce Part B costs related to the use of medical

technologies.

PHYSICIANS AND THE USE OF MEDICAL TECHNOLOGIES

Physicians are the key determinants of the volume and kinds of medical services and technologies provided to patients. Because they control

the decisions made and the resources used in providing medical services, physicians can influence

the demand for their services. Thus, it is important to consider how physicians behave in their

adoption 2 and use of medical technologies and

how that behavior is or can be influenced by payment methods and programs in the health care

system.

It is generally accepted that the charge-based

payment system used by Medicare and other

third-party payers provides financial incentives

—. .-

-’As noteci In ch 2 there I\ I[ttle emplrlcal e~lcknce rrldted to ph>’-

\I ( } a ns adopt I (m 01 t e( h nol ogies, althou~h It IS known that ph\r\l-

( I d ni I nl ] LIC n c t’ ht~sp] ta ] + a(](~p t l~ln dec isl ~~n \ ? h u + t ht’ emph d \I \

in t h I \ c h apt er IS I > n the u w’ ()1 tec h n ~ )1 t>gIe<

to physicians for the use of “technology-intensive”

medical care, and these financial incentives exist

even within a primary care field such as general

internal medicine (295). Furthermore, the influence of financial incentives is supported by empirical evidence from “natural experiments’” in

which physicians might be expected to respond

to the imposition of restraints on payment for the

care they offer by providing larger numbers of

“technology-intensive” services.

One natural experiment involved the Economic

Stabilization Program (ESP) put in place between

1972 and 1974 to slow the national rate of inflation. ESP imposed both general controls on price

increases, including physicians’ fees, and administrative controls on the amount Medicare would

— .

‘A ndtural experiment present< changing c(~ndltl(~ns th~t can

help te+t a hypotht+l<

115
116 ● Medical Technology and Costs of the Medicare Program

pay for physicians’ services. An examination of

the impact of ESP on Medicare payments to California physicians found that growth in billed

charges for individual services was successfully

slowed by ESP to half that of the pre-1972 rate,

and that when controls were lifted in 1974, the

rate of increase more than doubled. During the

period that ESP was in place, however, physicians’ gross payments from Medicare were largely

unchanged. The reason was that physicians were

able to increase the number of services they provided and to shift to a relatively higher priced mix

of services (153).

In the second natural experiment, between 1976

and 1977, all Colorado physicians in similar

specialties were grouped together in computing

prevailing charges for Medicare reimbursement.

Prior to this change, similar specialties had been

grouped together, but prevailing charges had been

computed for 10 separate regions in the State;

urban physicians had had higher prevailing

charges than nonurban physicians. After the

change to a single statewide prevailing charge for

each specialty, urban physicians’ prevailing

charges were allowed to increase by less than 5

percent, while nonurban physicians had increases

of about 20 percent. Subsequently, urban physicians provided more highly intensive services,

while nonurban physicians provided less highly

intensive services (275). General surgeons who

had relative decreases in their reimbursement rates

provided greater numbers of surgical services.

Declining laboratory reimbursement rates resulted

in ordering of more lab tests, and increasing reimbursement rates resulted in ordering of fewer lab

tests. Radiology services were not affected (275).

Excessive use of medical technologies is sometimes incorporated into medical practice through

the habitual behavior of physicians and because

the health care system contains few disincentives

for such use. These practices continue even though

the ordering physician personally may not benefit financially. Excessive use of medical technologies occurs even within the norms of medical

practice and is evident across the spectrum of technologies available to physicians. Some examples

follow.

-- ———

Lengths of stay of patients hospitalized with the

same illnesses vary widely across geographic

areas, and these differences are explained neither

by regional differences in age, sex, or race distribution, nor by regional differences in severity of

illness (350),

Between 1972 and 1977, laboratory tests nearly

doubled for both hospital and ambulatory care.

The costs of hospital laboratory tests increased

from $2.2 billion to over $4 billion, and the number of out-of-hospital tests increased from 850

tests to 1,510 tests per 1,000 physician visits (134).

Studies on specific tests have confirmed the intuition that much laboratory testing is unrelated

to outcome and not used to assist in therapy (232).

One study, for example, found a 27-percent increase in the number of laboratory tests but no

decline in length of stay for patients hospitalized

with diabetic ketoacidosis and pulmonary edema

(150). Another study found that blood pressure

control did not improve with more and costlier

laboratory testing (79).

Laboratory tests are often ignored by the ordering physician, even when the tests are abnormal

(90,150,427). And physicians often issue multiple orders for tests to be repeated, the results of

which neither provide additional information nor

are used by the ordering physician to change therapy (89,209,212,415).

Increases in the number of tests and procedures

have contributed to changes in clinical practice

that have raised costs (212,298,300). Showstack

and colleagues (302) have suggested that increased

use plateaus over time, as the use of technologies

becomes relatively standardized for individual

diagnoses. They therefore suggest that methods

to limit increases in use may best be focused on

use shortly after technologies are introduced because of the ease with which new technologies can

become part of accepted practice and the expansion of the pool of patients in which certain therapies are applied.

Physicians’ concerns for their patients’ health

can lead to physician-initiated visits. An analysis of the magnitude and determinants of physician-initiated visits (286,426) based on a 1977-1978
Ch. 7—Medicare Physician Payment and Medical Technology ● 117

—

Photo credit National Kidney Foundation Washington D C

The costs of unnecessary and redundant laboratory tests, which have no effect on the type of therapy prescribed or

the health outcome of the patient, have contributed to the rise in Medicare expenditures

National Medical Care Expenditure Survey found

that physicians initiated 39 percent of all visits in

the survey period. Physician-initiated visits increased with patient age and with poorer health

status. Although most of the variations in physician-initiated demand could be attributed to medical factors, other factors were also found to

influence physician-initiated visits. Greater insurance coverage increased the probability of a physician-initiated visit (but surprisingly, did not affect patient-initiated visits). Greater physician

density (i. e., the physician-to-population ratio)

also increased the probability of a physician-initiated visit. The analysis concluded, however, that

increasing the physician-to-population ratios

should not result in large increases in physicianinduced demand. The probability of physicianinitiated visits also increased with younger physicians, a finding that was attributed to the higher

incomes and more established practices of older

physicians, who have less financial incentive to

initiate visits. The substantial numbers of new,

younger physicians expected to enter practice in

the coming years, the analysis concluded, may

have only temporary impacts on physician-induced demand.

Physicians may also alter their medical practices and change their patterns of technology use

because they believe patients may sue them for

malpractice if harmed. Thusr defensive medicine

can lead to patterns of technology use that increase costs, Two major types of physician behavior have been identified as defensive medicine.

The most common type is known as positive defensive medicine and includes such actions as

ordering extra tests and procedures, scheduling

more followup visits, using more consultations
118 ● Medical Technology and Costs of the Medicare Program

and referring more patients to specialists, telling

patients more about risks of procedures or tests,

using more consent forms, and hospitalizing more

patients (254). Less common is negative defensive

medicine, which consists mainly of underutilizing technologies, i.e., not performing certain tests

and procedures because of possible risks to the

patient, thus forestalling legal actions (370).

Another behavior that would fit this category

would be the refusal to treat certain patients because of the physician’s belief that they may be

litigious.

Identifying or measuring defensive medicine is

difficult, in part because individual physician decisions may be considered either customary medical practice or defensive medicine, depending on

the motives for those decisions. Whether the use

of individual tests or procedures constitutes defensive medicine depends on how physicians interpret their reasons for making specific decisions.

Not surprisingly, physicians do not always identify (nor do they try to identify) all the components in each clinical decision they make. Some

physicians use the information on sensitivity and

specificity of diagnostic tests, the prevalence of

a particular disease, and other objective information before ordering tests for their patients

(101,323). Some physicians consider cost in their

decisions. Even physicians who use explicit decisionmaking criteria may not be able to identify

the subconscious processes that may modify or

override their conscious decision processes. The

inability of physicians to specify their reasons for

clinical decisions in all cases magnifies the problem of determining which decisions should be

classified as defensive medicine.

Published data on the total cost of defensive

medicine in the United States are sparse and

poorly documented. Estimates of the annual national bill for defensive medicine range from $1.5

billion to $8 billion (239). None of the published

estimates refers to a source for these figures.

Evidence of defensive medicine has been based

on opinion surveys of physicians, which are necessarily subjective. One early survey concluded

that defensive medicine is more likely to reduce

than to increase use of medical technologies (165).

Another survey found that fear of malpractice

does influence physicians’ clinical decisions, especially where positive defensive medicine was used.

This study also found that defensive medicine is

not practiced extensively (94), a finding which

seems to conflict with the results of a survey of

a random national sample of more than 4,000

practicing physicians (254). In the survey of 4,000

physicians, 35 percent of the surveyed physicians

responded to questions regarding 15 specified

practice changes. When asked whether concern

over legal liability had induced any of these

changes, more than 80 percent checked at least

one. For example, 48 percent of the physicians

who responded to the survey indicated that they

ordered more diagnostic tests, citing fear of

malpractice as the reason. Thus, the extent and

effects of defensive medicine remain speculative.

METHODS OF ENHANCING COST CONSCIOUSNESS

AMONG PHYSICIANS

Several methods of enhancing physicians’

awareness of cost-raising behavior have been used

selectively in the past and continue to be suggested

by policy makers. These methods include education programs, utilization review programs, and

second surgical opinion programs. Physician education programs have not been particularly effective in encouraging cost-conscious behavior. Unfortunately, although cost-conscious behavior

may have occurred during and immediately following physician participation in education programs, the effect has been quickly lost. Mandatory peer review programs have decreased

inappropriate hospital admissions and lengths of

stay, but have not been successful in addressing

excessive use of tests and procedures. Furthermore, the costs of administering these programs

may have exceeded the savings that resulted from

them. At a more limited level of peer review,

second surgical opinion programs have had an
Ch. 7—Medicare Physician Payment and Med\cal Technology ● 119

—— —. -— — —————

impact on decreasing elective surgical rates, but

only when the program has been mandatory, not

voluntary.

Physician Education Programs

In 1978, the Association of American Medical

Colleges (AAMC) surveyed 119 U.S. medical

schools and found that over one-third of them had

or had planned programs for teaching health care

cost containment to undergraduate students, residents in postgraduate training, or both (175). The

1982-83 AAMC Curriculum Directory, however,

lists only 15 medical schools that offered electives

in cost containment.

Curriculum development for cost-containment

education in medical schools has been suggested

by various authors. Some authors have suggested

a preclinical and clinical curriculum that would

attempt to make physicians aware of the economic

consequences of their decisions to use medical

technologies, while at the same time assuring

quality of care (264). Others have suggested that

misuse of tests might be decreased through more

medical school courses in microbiology, principles

of decisionmaking, cost effectiveness, bioethics,

and health economics (101,149). Not only improved physician education, but better incentives

for appropriate use of tests and more selective use

of automated technology for tests have also been

recommended (149). It is important to stress, however, that although these recommendations appear reasonable, they are not founded on actual

evidence of effectiveness.

When physicians begin ordering tests and procedures during clinical training, they do not necessarily behave according to their knowledge (144,

232). Attitudes and personality traits are important factors in physicians’ clinical decisions. Physician attitudes toward preventive medicine, for

example, may be more important than factual

knowledge (67).

Several studies have reported a tendency for

physicians to underestimate rather than overestimate costs (93,306). Furthermore, the impact

of information about costs on physicians’ behavior has been mixed. In one experiment, it was

found that providing cost information to physicians led to an average reduction in the total cost

of tests ordered per patient of almost one-third

(78), In another study, two groups of physicians

received feedback on costs of X-ray tests and two

other groups received information on costs of laboratory tests. X-ray use stayed about the same for

all four groups, but laboratory use decreased for

the groups receiving feedback on lab tests (66).

Peer review feedback alone might not ensure reductions in test usage (66). Long-range results of

peer review feedback have also been questionable.

Short-term changes in physician test ordering

behavior have been demonstrated but have not

persisted over the long term (197).

Utilization Review Programs

The purpose of utilization review is to ensure

that patients receive appropriate medical services

that range from specific diagnostic tests to hospital

admission. Since physicians admit and discharge

patients and provide and order other medical services, review processes are expected to have an impact on their behavior. The most relevant review

programs for Medicare have been the Professional

Standards Review Organizations (PSROs).

PSROs, established under the Social Security

Amendments of 1972 (Public Law 92-603), were

areawide groupings of practicing physicians responsible for reviewing institutional services provided and paid for by Medicare and Medicaid.

The purpose of their review was to help ensure

that these services were: 1 ) medically necessary,

2) of a quality that met locally determined professional standards, and 3) provided at the most

economical level consistent with quality of care

(359). Thus, quality assurance and cost containment were the two purposes of the PSRO program (140,167,313).

PSROs were to accomplish these goals by conducting the following types of evaluations in inpatient hospital settings, long-term care facilities,

and ambulatory care settings: 1 ) utilization review, 2) medical care evaluations, and 3) profile

analyses, Utilization reviews were reviews of the

necessity of each hospital admission and length

of stay. Medical care evaluations were usually

audits of patient records to monitor the appro-
120 . Medical Technology and Costs of the Medicare Program

—

privateness of tests, drugs, and procedures administered to patients, according to locally established criteria. Profile analyses were reviews of

patterns of care to identify potential problems.

They were intended to assist hospitals in focusing the utilization review and medical care evaluations on their specific problems.

Procedures for the three types of PSRO evaluations were developed in the order listed. By 1980,

however, most PSROs had worked mainly with

review of inpatient care at short-stay hospitals;

they had not worked much with care in long-term

care facilities or ambulatory care settings. PSROs

could penalize hospitals by withholding Medicare

payments, but they have not penalized physicians directly, other than through occasional peer

pressure.

The PSRO program was evaluated by the

Health Care Financing Administration (HCFA),

the General Accounting Office (GAO), and the

Congressional Budget Office (CBO). The basic

question underlying all three organizations’ studies

was whether the PSRO program paid for itself.

HCFA reported that utilization review in the

Medicare program paid for itself in 1977, but the

number of hospital days saved per 1,000 Medicare beneficiaries by different PSROs ranged from

an 8.75-percent decline to a 1.95-percent increase

(365), In 1979, HCFA compared geographic areas

with and without PSROs and found a 1.7-percent

reduction in days of care in the areas with active

review (374). Physician cooperation differed

among the regions with and without PSROs, so

review was probably not the only cause of the

difference. Using the same data but different

assumptions and measures of effectiveness, both

GAO and CBO disagreed with HCFA’s findings

and found the savings highly questionable (328,

329,334), HCFA maintained that the appropriate

measure was the ratio of reimbursement savings

to total program cost, which it calculated to be

1.27 to 1. CBO maintained that the proper measure should have been resource savings instead of

reimbursement savings, used different estimates

of the effect of PSROs on utilization, made different assumptions on savings on ancillary services, and adjusted the per diem rate used in calculating reimbursement savings. According to

CBO, the resource-savings-to-cost ratio was 0.4

to 1. Even if the ratio of reimbursement savings

to total program costs were used, however, CBO’s

ratio (0.9 to 1) was lower than HCFA’s because

of the different assumptions used (329).

Others have criticized using the costs saved per

patient day (even when average variable costs per

day were used) instead of marginal costs as the

measure of success (50,60). Still others have criticized cost-benefit analyses that compared total

costs of the PSRO program with the marginal benefits of PSRO review over claims review by intermediaries (313). In addition, the use and cost

of alternative forms of care for patients with

shorter lengths of stay are usually ignored in analyses (60). Yet another problem is the fact that

quality improvements resulting from PSRO review activities were not measured and considered

in the evaluations (202), although HCFA did distribute a quality review studies policy to PSROs

in 1980 (376).

More specific evaluations of individual PSROs

and PSRO-type organizations were conducted in

many parts of the country (50,98). The studies

reported little or no cost savings, and in those

studies where cost effects were observed, no control groups had been assigned, so the cause of any

cost savings found could not be conclusively attributed to the review programs (60,98). In one

hospital study, while length of stay and average

charges per patient generally decreased following

institution of PSRO review, the decrease did not

result in overall cost savings to Medicare and

Medicaid (425).

Following years of budget cuts and uncertainty

over their continuation, PSROs were replaced

statutorily in 1982 by utilization and quality control peer review organizations (PROS) in the Tax

Equity and Fiscal Responsibility Act of 1982 (Public Law 97-248). The Social Security Amendments

of 1983 (Public Law 98-21) provided funding for

PROS through Part A of Medicare and made PRO

contracts a condition of participation for hospital payment. PSRO areas will be consolidated into

PRO regions. The PROS will be contract organizations that will set objectives to meet quality

assurance and cost-containment goals at the beginning of each 2-year contract period and subsequently be evaluated on the basis of those objec-
Ch. 7—Medicare Physician Payment and Medical Technology ● 121 — —

tives. PRO functions will include review of the

validity of diagnostic information provided by

hospitals (Diagnosis Related Group verification);

review of the completeness, adequacy, and quality

of care provided to inpatients; and review of the

appropriateness of hospital admissions and discharges.

Evaluations of types of utilization review other

than that performed by PSROs have been attempted. Few studies of ancillary service review

focus on the review’s effectiveness, but several

studies have shown that ancillary service review

may not have the desired effect of reducing the

number of tests and procedures used. One of the

basic reasons for this result is that it is physicians, and not hospital administrators, who admit

patients to hospitals, order diagnostic tests and

therapeutic procedures for inpatients, and discharge patients from hospitals, while the financial incentives or other requirements are often

aimed at hospital administrators. There is also

wide variation in ordering of ancillary services by

physicians (98).

Utilization review has also been performed in

nonhospital settings, although to a limited extent.

Until recently, cost problems for the Medicare

program were not as obvious for ambulatory

services as for inpatient hospital care, because the

Part B program, which covers ambulatory services, includes patient copayments and deductibles,

PSRO demonstration projects in which ambulatory care was reviewed concentrated on the Medicaid population, for whom the Federal and State

governments pay the entire ambulatory care bill.

Reviews of multiple ambulatory care facilities

have been inconclusive (252).

Second Surgical Opinion Programs

The institution of second surgical opinion programs for elective procedures represents another

approach to enhancing cost consciousness among

physicians and containing costs in both private

and public sector health insurance programs. Although some second surgical opinion programs

maintain that their purpose is to better inform patients so that they can make appropriate decisions,

the major purpose of such programs is to reduce

the numbers of unnecessary surgical operations.

Insurance groups were among the first to become interested in the potential cost savings of

second surgical opinion programs. Members of

several unions in New York City have participated

in mandatory and voluntary second opinion programs conducted by Cornell University Medical

School/New York Hospital since 1972 (123,218,

219,220,221,288). Several Blue Cross and Blue

Shield plans have voluntary second surgical opinion programs (225). At least one commercial insurance company, The Prudential Co., has used

a mandatory program (4), In addition, six State

Medicaid programs (Massachusetts, Michigan,

Missouri, New Jersey, Washington, and Wisconsin) use second surgical opinion programs to control costs (281). The Medicare program itself has

experimented with voluntary second surgical

opinion demonstration projects in Detroit and

New York City (127).

Although second surgical opinion programs differ in detail, they can be best distinguished by their

mandatory or voluntary nature. Mandatory programs generally require patients to consult with

a board-certified surgeon, often from a panel designated by the third-party payer, before elective

surgery. If patients do not seek second opinions,

they may not receive insurance benefits for those

procedures (in some programs, however, patients

still retain the right to receive insurance benefits

for the surgery even if the second opinion contradicts the original recommendation for surgery).

Consultation fees are usually covered by the payer

when the second opinions are mandatory. Mandatory programs have averaged 18 to 20 percent

nonconfirmed opinions (225).

Voluntary programs make available lists of

board-certified surgeons but do not require consultation in order for patients to receive reimbursement for surgical procedures. Sometimes

these programs will make the appointments for

the patients’ second opinion consultations, and

they, too, usually cover the consultant’s fees. Few

patients (about 2 percent) participate in these

voluntary programs. Those who do are a selfselected sample and are not necessarily representative of the group. Not surprisingly, patients in

voluntary programs get more nonconfirrning second opinions than do patients in mandatory programs. The national average nonconfirmation rate
122 ● Medical Technology and Costs of the Medicare Program

— — — — .

in Blue Cross and Blue Shield plans’ voluntary

program was 30 percent and one Ohio plan had

a 42-percent nonconfirmation rate (225),

HCFA has sponsoreci demonstration projects

to test whether Medicare beneficiaries would use

a voluntary second opinion program if they did

not have to pay any out--of-pocket expenses, Two

sites were chosen, and contracts were awarded to

Blue Cross and Blue Shield of Michigan and of

Greater New York. Both of these projects began

in 1978 and ran for 3 years, Participation rates

were very low. In New York, 1.2 percent of Medicare beneficiaries who had surgery participated;

in Michigan, 0.3 percent participated, HCFA estimated that the maximum reduction in surgery

rates was 12 percent, and with the low participation rates, the maximum reduction in the number of surgical procedures would be less than 0.5

percent for Medicare beneficiaries (127).

Mandatory second surgical opinion programs

have usually been found to have greater cost savings than expenditures. In a study at Cornell/New

York Hospital, $2.63 was saved for each $1.00

spent on the program (288). The Massachusetts

Medicaid program has been estimated to save

$3.90 for each $1.00 spent, including the “sentinel”

.- — — .——— —

effect (the change in frequency of physician recommendations for surgery when they are aware

that their patients will need a second opinion)

(213). Another study of the Massachusetts Medicaid mandatory program, however, examined

one procedure from other areas of Massachusetts

and found that “speculative, simple benefit-cost

analysis” yielded ratios of 2.27, 1.11 and 0.79,

depending on the assumptions made and not including the sentinel effect (133).

Voluntary programs, on the other hand, have

high administrative costs relative to the low participation rates. Even though nonconfirmation

rates are higher in voluntary programs, there is

little potential for savings because of the low numbers of patients getting second opinions.

The use of second opinion programs, although

assumed to decrease surgical rates, might increase

them, Researchers in both mandatory and voluntary programs have indicated that patients tend

to follow the second opinion consultant’s recommendation (127,218). Since confirming second

opinions outnumber nonconforming second opinions, some of the patients with confirming opinions might decide in favor of surgery they might

not have had without the second opinion (48).

CHANGES IN PHYSICIAN PAYMENT

The use of Medicare’s physician payment

method to contain Part B costs related to medical

technology adoption and use consists of two

approaches:

●

●

imposing restraints on the amount and

changing the method of payment to physicians, and

requiring Medicare beneficiaries to assume —

more responsibility for their health care costs,

either through increases in patient cost-sharing or reductions in the types of benefits

covered.

Although either approach could result in cost savings for the Medicare program, each would have

different effects on the use of medical technologies

and on access to medical care by Medicare beneficiaries.

Changes in the Amount and Methods

of Physician Payment

Restricting payment to physicians means the

adoption of fee schedules or similar restrictions

on the level of payment physicians will receive

from Medicare. The inflationary nature of the

“reasonable charge” criterion by which physicians

are reimbursed by Medicare has been dampened

somewhat by the imposition of the Medicare Economic Index, which limits the rate of increase in

physicians’ fees to the rate of increase in their costs

(see ch. 2). Further controls on physician payment, such as indexing fee increases to the Consumer Price Index (CPI) or developing a system

of fee schedules, would help to save some program costs and are discussed below. Such changes,

however, would leave three problems un-
Ch. 7—Medicare Physician Payment and Medical Technology ● 123

addressed: 1 ) as long as Medicare’s voluntary

assignment policy continues, physicians can attempt to recoup their unreimbursed charges from

patients: 2) because physicians would still determine the price they will charge (as opposed to

what portion of that price Medicare will pay) and

because no rational mechanism to set prices for

new procedures exists, inflation in medical prices

will continue; and 3) even if physician payment

is limited, physicians may create demand for their

services. Currently, physicians can respond to a

reduction in the amount that Medicare will pay

by refusing to accept assignment. If a physician

refuses assignment, Medicare reimburses the beneficiary rather than paying the physician directly,

but the physician can still anticipate payment.

Limits on Reasonable Charges

To slow growth in reasonable charges for physicians’ services, indexes other than the Medicare

Economic Index could be used. One of these is

the CPI, which is projected to grow at a lower

rate than the Medicare Economic Index (330). Reasonable charge levels could also be frozen temporarily and, or limited to modest yearly percent

increases (412).

Reasonable charges could also be selectively reduced. Hourly reimbursement rates in 1978, for

example, after standardization for variations in

the complexity of different procedures, ranged

from $40 for a general practitioner to $200 for surgical specialists (174). Thus, allowed charges for

surgical procedures might be reduced by a specified percentage (e.g., 10 percent) (330).

Fee Schedules

Fee schedules are set amounts of payment for

particular services. Indeed, indexing the growth

in reasonable charges to the Medicare Economic

Index is slowly leading to a de facto fee schedule,

but the base rate upon which allowable increases

are calculated retains the historical specialty and

geographic differences in fee levels that have developed under the current system of payment. Fee

schedules could be constrained on this historical

basis of current fee levels or recalibrated on the

basis of costs. Historical fee levels for existing

technologies and services could be retained-with

- —. — —...— .

controls on future increases—and cost-based fee

levels developed for new technologies and services as they are adopted and disseminated. But

putting new procedures on a cost basis and leaving old procedures on a fee basis might encourage

retention of older, less effective technologies.

The adoption of fee schedules to achieve limited

cost containment and provide incentives for appropriate technology use within the confines (>f

the Part B program could be approached in a

number of ways.

First, de facto fee schedules could occur by

simply freezing current allowed charges, by continuing use of the Medicare Economic Index, by

replacing the Medicare Economic Index with a less

inflationary index such as the CPI or by imposing arbitrary limits (e. g., 5 percent) on the growth

of reasonable charges.

Second, selected specialties could be targeted

for fee schedules, such as by imposing a lo-percent

reduction in fees for surgical procedures (330).

Alternatively, fee schedules could also be selectively or incrementally applied, perhaps starting

with inpatient surgical services (330), which comprise about 25 percent of physician payment under

Part B (222). Inpatient surgical services would also

be a logical starting point to complement the Diag

nosis Related Group (DRG) system of payment

for hospital care under Part A.

Another possibility y relates to ways to encourage

higher assignment rates without increasing costs.

A study of changes in Medicare reimbursement

rates and their relationship to changes in assignment rates has led to the suggestion that increasing reimbursement for medical services would lead

to an increase in assignment rates, but that decreasing reimbursement rates for surgical, laboratory, and radiological services would not lead to

significant decreases in assignment rates (276), The

existing fee and price system provides financial

incentives for the use of “technology-intensive”

medical care (295 ). Still another possibility, therefore, is to initiate movement toward an overall

review of the relative values of all procedures and

revision of the fee system, to value “cognitive”

services more equally with technology-intensive

services.
124 ● Medical Technology and Costs of the Medicare Program

Third, fee schedules could be more broadly applied, for example, in the conversion of physician

payment to a parallel DRGbased system. This

approach could be limited to inpatient and a few

other (e. g., skilled nursing facility) physician services only, extended to ambulatory care for DRGrelated services, or extended to all physicians’

services. In other words, physician payment could

be included in the current DRG system for inpatient care, or a fee schedule might be devised

that would consist of capitated payments for all

services associated with a particular diagnosis.

Whatever the approach to fee schedules, administrative changes in the coding system that would

have to precede specific changes in methods of

payment may of themselves lead to significant

cost savings, whether or not they are subsequently

used to implement fee schedule changes. The ease

with which physicians can use medical technologies is in part a function of the present coding

system that is used by Medicare to identify and

pay for medical services. That coding system has

developed in part in response to the payment policies implemented under the Medicare program.

Procedure codes are used to determine Medicare’s reasonable charges. At Medicare’s inception, Medicare providers could use any coding

system on their Part B claims and could change

codes at any time. In 1979, providers were required to continue with whatever coding system

they were then using. Providers were subsequently required to use a standardized coding scheme

for Part B, the HCFA Common Procedure Coding

System (HCPCS), which all providers are required

to use by the end of fiscal year 1985. In HCPCS,

coding for physicians’ services is identical to the

American Medical Association’s Current Procedural Terminology, 4th Edition (CPT4). The

CPT4 code is augmented with compatible codes

for nonphysician services, such as laboratory services, radiology services, durable medical equipment, orthodontic services, chiropractic services,

and dental services. Coding for Part B remains

completely different from Part A coding, as hospitals have been using the International Classification of Diseases (ICDA, Adapted for use in the

United States), which they consider more appropriate for hospitals (19).

In 1966, at the time of the implementation of

Medicare, the first Current Procedural Terminology (CPT1) contained 2,084 separate procedures. By 1969, the second edition (CPT2) contained 3,440, up 65 percent; and by 1977, CPT4

contained 6,132 procedures, an increase of 78 percent over the 1969 edition and an increase of

almost 200 percent in 10 years (228).

The large numbers of procedures from which

to choose not only make it easier for physicians

to bill for their more expensive services, but also

increase the possibility that physicians will inadvertently bill for the wrong procedures. Thus,

for example, in an analysis of two types of operations performed on Medicare patients—cholecystectomy (removal of the gallbladder) and total hip

replacement—it was found that different members of the surgical team frequently billed for entirely different operations. The chief surgeon and

the assisting surgeon billed for entirely different

operations 19 percent of the time. The surgeon

and anesthesiologist disagreed even more, in 40

percent of the gallbladder operations and in 55

percent of the total hip replacements (228).

Similar problems have been found with hospital discharge data. In two studies of the reliability

of hospital discharge data (236,237), two types

of data discrepancies were found: 1) “ordering”

discrepancies, reflecting problems in determining

which of several diagnoses or procedures should

be regarded as the principal one, and 2) coding

discrepancies, reflecting errors in assigning a diagnosis or procedure code number. As a result, the

discharge data were reliable in only 66.8 to 77.5

percent of the cases in the first study (236), and

in only 59.1 to 64.1 percent of the cases in the

second study, which examined data on Medicare

beneficiaries (237). Ln both studies, the correct

diagnostic code was a matter of judgment in about

5 percent of the cases. And in the Medicare study,

in 70 percent of the cases in which discrepancies

were found, the data on principal diagnosis included in the Medicare claim did not accurately

reflect the patient’s condition.

Several groups of physicians have made attempts to create coding systems for common diagnoses encountered in office-based practice. These
Ch, 7—Medicare Physician Payment and Medical Technology • 125 ——— . .

include the United States Modification of the

Royal College of General Practitioners Classification (567 categories), the Canadian Modification of the International Classification of Health

Problems in Primary Care (ICHPPC) (371 categories), and ICHPPC-2 (362 categories) (294).

Thus, it appears that proliferation of codes and

their categories satisfies neither physicians nor

those concerned with the use of these codes for

payment and other purposes. A smaller number

of billing packages could be constructed—num -

bering in the hundreds, not in the thousands, and

perhaps mirroring hospital-based DRGs—which

would bear a more reasonable relationship to the

services actually provided by physicians.

Repackaging of physicians’ services could concentrate on office visit and special procedure

packages. Office visit packages could combine

visits and ancillary tests instead of paying for them

separately. Present codes could be collapsed for

surgical procedures as well as for office visits, and

an all-inclusive bill submitted by one physician

(e.g., the chief surgeon) could avoid the problem

of inconsistent billing by members of the surgical

team (228).

Special procedure packages, the inpatient analog to office visit packages, could be defined narrowly to include just specialist services or broadly

to include all inpatient and nursing home costs

as well. The more narrow packages for special

procedures, a more feasible starting point, could

be used to group all inpatient physicians’ services,

i.e., not only specialist services but also services

provided by the patient’s primary physician for

inpatient care (228).

Assignment

Physicians at present can decide whether to accept assignment on a claim-by-claim basis. When

physicians refuse assignment, they are released

from their obligation not to demand the difference

between their billed and allowed charges from

their Medicare patients.

Assignment rates fell from a high of about 60

percent of claims in the early years of Medicare

to approximately 50 percent in the mid-1970’s and

have remained near 50 percent since then (80,118).

These rates include claims from beneficiaries receiving both Medicare and Medicaid benefits for

whom assignment is mandatory and who comprise about 10 percent of the total. Thus, the

assignment rate for services where physicians have

discretion in accepting assignment is about 4 0

percent.

Assignment rates vary greatly by State, from

a high of 83.9 percent of services for the aged in

Rhode Island, to a low of 19.7 percent in Oregon

in 1978 (222). Assignment rates also vary by medical specialty. The highest assignment rates (about

60 percent) are in the hospital-based specialties

of pathology and radiology (222). This situation

may change, however, because pathologists and

radiologists are now paid 80 percent of reasonable charges (until 1983, they received 100

percent ),

As long as Medicare pays for nonassigned care,

cost shifting to patients is likely to occur, because

physicians can attempt to collect the unreimbursed

portion of their bills from their patients. There

are several possible methods of penalizing physicians for not accepting assignment. One option

is for Medicare to institute a mandatory assignment policy in which no payment would be made

for nonassigned care (228). A mandatory assignment policy would solve the problem of cost shifting to beneficiaries, but at issue is whether a

substantial number of physicians currently treating Medicare patients would refuse to participate

under mandatory assignment.

In a 1976 national survey, over two-thirds of

primary care specialty physicians indicated that

they would take no Medicare patients on assignment if assignment were mandatory. The greatest influence on the choice was the physician’s current assignment rate—physicians with higher

assignment rates were more likely to choose to

accept assignment rather than not to participate.

If assignment were mandatory, assignment rates

were predicted to decline about 10 percent nationwide, and the total supply of assigned visits to

decline by almost 6 percent, Assigned visits were

predicted to increase 11 percent for general practitioners but to decrease 12 to 25 percent for general surgeons, internists, and obstetrician-gynecologists. Despite the survey results, the investigators
126 . Medical Technology and Costs of the Medicare Program

—. —. -. — — .

concluded that few physicians could probably afford to give up their Medicare clientele totally,

despite their threats (228).

More recent information supports the idea that

physicians would find it difficult to cease treating

Medicare patients. The number of physicians who

treat Medicare patients is large. In 1982, 87 percent of active physicians treated some Medicare

patients, and 80 percent of these physicians accepted assignment on some of these patients (1).

In a 1981 survey of physicians maintaining office

practices, nearly 15 percent of their patient visits

were funded by Medicare. Cardiology, internal

medicine, urology, gastroenterology and several

surgical subspecialties had levels of Medicarefunded visits well above the average. Moreover,

while 23 percent of visits to all of the surveyed

physicians were by patients 65 years and older,

47 percent of the visits to cardiologists were by

patients 65 years and older; for internists, the figure was 41 percent; for urologists, 39 percent; and

for gastroenterologists, it was 36 percent (178).

Physicians also tend to accept assignment in

proportion to the size of their Medicare patients’

bills, the assignment rate rising to as high as 79

percent for bills over $2,500 for internists and 73

percent for general surgeons (222). If faced with

mandatory assignment, the potential loss of income from their more expensive services may be

enough to offset whatever misgivings they might

have over accepting assignment for all Medicare

claims.

Another possible influence on assignment

choices is the rapid growth in the number of physicians, largely due to Federal policies beginning

about the time Medicare and Medicaid were

enacted in the mid-1960’s. As a result of these policies, the supply of physicians has grown much

faster than the population has. There were 165.5

physicians per 100,000 population in 1974, increasing to 193.1 /100,000 in 1980, and projected

at 213.8/100,000 in 1985 and 231.3/100,000 in

1990 (346). Increases in the number of physicians

relative to population growth have been positively

correlated with increased assignment rates among

general practitioners and internists, perhaps indicating that increased competition induced physicians to accept assignment on more claims to attract patients (276).

Medicare is, therefore, already an important

contributor to physicians’ incomes and will

become even more important to physicians’ practices as the size of the aged population continues

to increase. Thus, existing conditions and future

trends make it likely that most physicians would

continue to treat Medicare patients.

One option besides mandatory assignment is

for Medicare to pay for nonassigned claims but

at lesser rates. Nonassignment could be discouraged by discounting the physician’s charge on

nonassigned bills in addition to the 20 percent

coinsurance. This could be accomplished either

by reducing the allowed charges for nonassigned

care or by increasing the coinsurance rate (e. g.,

to 50 percent) (228). A variation of this option

is to allow slower growth in allowed charges for

nonassigned care (330).

Changing assignment policy is closely linked

to changes in physician payment. If further controls are placed on the rate of payment to physicians while assignment policy is left unchanged,

it is likely that the bulk of program savings will

be borne by beneficiaries if there is no change in

medical technology use. Even though Medicare

would reimburse the beneficiary and not pay physicians directly when the physicians refuse assignment, physicians could still anticipate payment,

subject only to delayed payments and bad debts.

Thus, in the absence of a change to mandatory

assignment, policies aimed at physicians ultimately would be felt most by Medicare’s beneficiaries.

Therefore, no matter whether program savings

come initially from reduced physician payment

levels or increased cost-sharing by beneficiaries,

in the absence of mandatory assignment, most

Medicare Part B savings will still ultimately come

at the expense of beneficiaries.

Discussion of Physician Payment Changes

Policies that place further limits on Medicare’s

allowable charges may themselves lead to further

distinctions between physicians who treat Medicare patients and those who do not. The price differential between what Medicare will pay and

what physicians charge their non-Medicare patients may become large enough that many physicians may refuse to treat Medicare patients. The
Ch. 7—Medicare Physician Payment and Medical Technology . 127

—

alternative is that most physicians would continue

to treat Medicare patients. However, most program savings would again ultimately be borne by

beneficiaries, because beneficiaries would still be

liable for the difference between allowed and

billed charges under current assignment policy.

When any payment system is changed so that

it changes the incentives to provide care, reviews

of the appropriateness of the care provided are

generally regarded as necessary for quality assurance. As noted earlier, most PSROs were never

able to progress substantially beyond reviews of

hospital admissions and continued stays, nor did

they include reviews of ancillary and physicians’

services (109). And review activities have not included extended-care facilities or ambulatory care.

PSROs were statutorily replaced by PROS in 1982

(public Law 97-248). While it is too early to tell

what kinds of review activities these new organizations will undertake, it is doubtful that many

PROS will begin to review physician and ancillary services soon. Given the difficulties in assessing what is necessary medical care at the serviceby-service level, it is even more doubtful that PRO

reviews will be extended any time soon to ambulatory medical care.

Another possible review activity is second

surgical opinions. The Inspector General of the

Department of Health and Human Services recommended that HCFA initiate legislation on mandatory second surgical opinion programs for

Medicare and Medicaid (44). The types of surgery

for which second opinions would be mandatory

would be specified, and beneficiary copayments

and deductibles would be waived for the second

surgical consultations. HCFA has responded that

these actions would be premature because of

limited research on mandatory second surgical

opinion programs and because of what HCFA

considers questionable cost estimates made by the

Inspector General (44).

Increased Beneficiary Cost= Sharing

Cost shifting to beneficiaries is expected to give

beneficiaries increased incentives to be more prudent in seeking medical care. The expectation is

not only for patients to reduce their use of physicians’ services (199,243,299), but also that physicians would reduce prices (307,309). Greater selectivity by patients in seeking medical care, resulting

in fewer visits to physicians, it is hoped, will force

physicians to compete by lowering their prices.

It is important to note that different methods

of cost shifting to Medicare beneficiaries can have

different effects. Increasing Part B premiums

should have little or no effect on the demand for

services, because the increased cost is incurred

regardless of whether beneficiaries reduce their demand for services. Raising premiums is an insurance mechanism for spreading the costs across

Part B’s entire beneficiary population. Increasing

the deductible and coinsurance, on the other

hand, may reduce demand, because more costs

are incurred by the beneficiary as more services

are used.

In considering increases in cost-sharing by

Medicare beneficiaries, it is important to recognize that the elderly already have more out-ofpocket expenses than the young. The results of

1977 and 1978 interviews with 14,000 households

indicate that annual out-of-pocket expenses increased steadily by age, from $97/year for patients

under 6 years of age, to $295/year for patients

age 55 to 64, and to $326/year for those over 65

after Medicare’s contribution (396).

Another important point is that the Medicare

population is not homogeneous in its use of medical services. About two-thirds of elderly beneficiaries use their Part B insurance in a given year

(339). But less than one-fifth of beneficiaries account for nearly 90 percent of costs, and these

high users of medical services tend to remain high

users over time (215). Whether these high users

are consuming large amounts of unnecessary services is not known, but the answer is crucial to the

question of whether increased cost-sharing would

simply shift costs from the Part B program to beneficiaries, or whether it would also lead to reduction of unnecessary technology use.

Premiums

As noted in chapter 2, beneficiary expenses

under Part B are premiums, deductibles, and coinsurance. At the outset of the Medicare program,

premiums financed half of Part B program costs.

By 1978, following amendments limiting Part B
128 ● Medical Technology and Costs of the Medicare Program

premium increases to no more than the percentage increase in social security cash benefits, however, the percentage contribution of premiums to

Part B costs had dropped below 25 percent (134).

Under the Omnibus Budget Reconciliation Act of

1981 (Public Law 97-35), the limitation on Part

B premium increases was suspended for a l-year

period between July 1, 1983, and July 1, 1984.

During this period, premiums were to be increased

so that they met 25 percent of Part B costs. However, the Social Security Amendments of 1983

(Public Law 98-21) delayed the start of the suspension period to January 1, 1984. Thus, premiums

rose to $13.10/month on July 1, 1983, and rose

again to $14.60/month on January 1, 1984. The

previous method of calculating premiums is expected to resume on January 1, 1985.

In its fiscal year 1984 budget proposals, the

Reagan Administration recommended increasing

premiums until they reached 35 percent of Part

B program costs by 1988 (412). CBO identified

two similar options: 1) increasing premiums to 30

percent of costs; or 2) limiting the premium increase to higher income elderly, with a cutoff

point in income at $20,000/year (330).

Most of the elderly participants in Medicare

Part B have some form of supplemental “Medigap” private insurance. In 1976, 63 percent had

private insurance, and another 14 percent had

Medicaid or some other public supplemental insurance (199). CBO hypothesizes that additional

medical services used as the result of extra first

dollar coverage by Medigap policies will cost the

Medicare program $3.2 billion in 1984, most of

which CBO estimates could be recovered by a 30-

percent premium tax on any Medigap policy that

pays any part of the first $1,000 of Medicare costsharing (330).

The Social Security Advisory Council to the

Secretary of the Department of Health and

Human Services has recommended that Part B

premiums be doubled and the extra revenues be

used to finance changes in Medicare’s Hospital Insurance program. Under the Social Security Advisory Council’s proposal, Medicare patients would

have no limit on the number of days of hospital

care each year after paying an initial deductible

of $350 for the first day, plus a second deductible of $350 if additional hospitalizations occur. ’

Out-of-pocket costs for Part B would be limited

to $200 per year, a limit which would decrease

the demand for commercial Medigap policies, because premiums for these policies cost from $300

to $800 per year (372). For protection against the

$200 deductible and for services not covered by

Medicare, however, some demand for supplemental insurance should continue.

Part B premiums could be varied to reflect local

costs. The reasoning follows analyses of plans for

implementing a voucher system.5 It has been proposed in those plans that the value of the voucher

follow average reimbursements at the county or

State level. Under such proposals, differences in

the value of the voucher are meant to reduce the

intermarket subsidies that result from large variations in per capita expenditures for hospital care

and reimbursement for Medicare and private insurance enrollees. Otherwise, in some low cost

markets, the value of the voucher would be more

than current per capita reimbursement rates, and

total costs would rise, If the price of health insurance were adjusted to reflect local market conditions, more competition might result (424).

Following that theory, Part B premiums could

be similarly adjusted, with higher premiums for

areas with higher program costs. For example, because Part B participants already are subsidized

by general revenues (such revenues cover 75 percent of current Part B costs), the lowest premiums

could be set at the current rate. While this change

would relate premium costs more closely with

local medical costs, it would not be expected to

lead to more competition. Beneficiaries would still

have only one choice of an insurance plan and

would not have the opportunity to shop among

competing insurance plans as would be the case

under a voucher system.

Deductibles

The current deductible, the amount Medicare

beneficiaries pay before Part B insurance is ac-

‘The purpose in requiring the second deductible is to moderate

the financial incentive under DRG hospital payment to increase admissions, See ch. 6 for more information.

5A voucher is an entitlement of fixed value for the purchase of

health insuranm. For a discussion of vouchers, see ch, 8,
Ch. 7—Medicare Physician Payment and Medical Technology ● 129

—

tivated, is $75 per year. The deductible could be

indexed to the Medicare Economic Index so that

the deductible would increase in pace with medical costs (412). It could, of course, be set at any

other level.

Unlike the premium, the deductible is related

to initial use of services. In Medicare’s elderly

population, however, many people have chronic

diseases and require continued access to care. For

such a population, the deductible may often not

be a deterrent to seek care, but a financial hurdle

to overcome with each new calendar year. Thus,

increasing the Part B deductible would shift costs

from the Medicare program to its beneficiaries and

might not result in any significant reduction in

the demand for medical technologies.

Coinsurance

Coinsurance raises financial barriers to the use

of medical services each time such services are

sought. Thus, increasing Part B coinsurance requirements might reduce demand, because costs

would be related to the amount of services used.

However, Part B beneficiaries already have a coinsurance requirement of 20 percent, and for nonassigned care, beneficiaries incur additional liability for the difference between allowed and billed

charges. Thus, one issue is the amount of additional coinsurance requirements that might be reasonably imposed, and whether those additional

beneficiary costs would be accompanied by a significant reduction in demand.

In the past, suggestions to change Medicare’s

coinsurance requirements have been focused on

Part A, where coinsurance is currently activated

only after 60 days of hospitalization for a particular illness. Together with the coinsurance of

20 percent of allowed charges under Part B, imposing hospital coinsurance raises concern that

out-of-pocket expenses could be substantial for

hospitalized beneficiaries. Thus, for example, one

CBO proposal to impose hospital coinsurance for

the next 29 days after the day of admission (on

which there is a deductible equal to the average

cost of 1 day’s hospitalization) also includes coverage of all charges after the first 30 days and a

cap of $2,000 on total out-of-pocket costs for both

Parts A and B for beneficiaries with annual incomes below $20,000 (330).

Discussion of Beneficiary Cost-Sharing

Although a significant amount of cost-sharing

is possible through changes in the Part B program,

the likelihood of cost containment from such

changes is limited at best. If significant cost containment occurs, it may come primarily at the expense of reduced access to medical care for Medicare’s beneficiaries. And while reduced access

includes a reduction in the provision of excessive

technology use, it also implies a reduction in the

provision of necessary and appropriate medical

care.

Of the three types of direct financial liability

incurred by beneficiaries participating in Part B—

premiums, deductibles, and coinsurance (a fourth

liability is the difference in billed and allowed

charges for nonassigned care) —changes in premiums have the greatest potential for reducing Medicare program costs. The extra revenum from the

Social Security Advisory Council’s proposal to

double Part B premiums were projected to allow

unlimited hospitalization after an initial deductible for each hospitalization, as well as to limit outof-pocket costs in Part B to $200 per year. The

$200 per year limit on out-of-pocket costs, in turn,

was expected to make commercial Medigap policies less attractive (372). Premiums, however, are

insurance mechanisms for spreading the risk of

the costs of illness, but are not particularly relevant in affecting behavior related to medical technology use. This observation is particularly applicable with respect to the Part B program, where

premiums purchase a single insurance policy—

i.e., beneficiaries have no choice in the types of

coverage they might purchase (as they would in

the case of a voucher system). Regardless of their

prudence or excess in seeking medical services,

beneficiaries receive no feedback in terms of the

medical costs they incur. Furthermore, premiums

are deducted from Medicare beneficiaries’ Social

Security checks before the checks are issued, so

beneficiaries’ awareness of the relationship between premium levels and the costs of medical

care is even less than it might be otherwise.

CBO hypothesized that, of all the Medicarespecific proposals to contain program costs, a tax

on premiums for supplemental Medigap insurance

would result in the greatest savings (33o). Currently, all persons who purchase health insurance
130 ● Medical Technology and Costs of the Medicare Program

enjoy a tax subsidy, and elimination of that subsidy is a crucial element of proposals to increase

competition in health care by making consumers

more cost conscious (355). Despite the economic

rationale, however, proposals that increase costsharing for Medicare beneficiaries and that also

penalize them alone for seeking additional insurance against this greater cost-sharing by taxing

their supplemental policies would be widely

regarded as discriminatory. Furthermore, the

elderly population has greater medical needs and

more out-of-pocket expenses than the younger

population (396), Thus, a tax on supplemental insurance, while leaving the tax subsidy on general

health insurance intact, not only would be discriminatory but also would be imposed on a class

of persons who have the greatest need for medical care,

Finally, while a tax on supplemental insurance

has been projected as resulting in the greatest savings of the proposals identified (330), the projected

savings are also the most hypothetical. In addition to premium tax receipts, the bulk of the savings are expected from a reduction in the use of

Medicare-reimbursed meclical services by beneficiaries who drop their Medigap coverage. Although

such a reduction in use can be expected, quantifying the effect on the Medicare-reimbursed portion of these services is a tenuous exercise.

Deductibles and coinsurance are methods with

more promise than premiums for changing physician and patient behavior and thus containing

long-term Medicare costs, but even changes in

these areas have limited applicability in the Part

B program.

CONCLUSIONS

Strategies for changing the incentives for physicians to provide medical technologies under

Medicare’s Part B have substantial limitations.

These limitations fall into two categories.

First, short-term Medicare program savings can

be achieved, but these savings are likely to come

primarily at the expense of beneficiaries and

would not necessarily reduce excessive care. If

A large deductible maybe more appropriate for

hospitalization than for ambulatory care, particularly for the Medicare population. Because of the

higher prevalence of chronic conditions among

the elderly than among the younger population,

maintenance therapy for elderly people is more

essential. Therefore, increasing the Part B deductible would have a predominantly cost-shifting effect without a proportional decrease in demand

for services.

Coinsurance has the effect of raising financial

barriers each time medical services are sought.

Thus, it would have a more significant effect on

the demand for ambulatory care than a deductible would. However, Medicare beneficiaries

already have a 20-percent coinsurance liability

under Part B, and for nonassigned care, the coinsurance is higher. Together with other out-ofpocket expenses, less than half of the health expenditures by the average elderly Medicare beneficiary was covered by Medicare Parts A and B

in 1978 (203).

Substantial increases in beneficiary cost-sharing

would likely come at the expense of reduced access for Medicare beneficiaries. While reduced access would be less likely or of less magnitude with

incremental increases, the effect would probably

be a simple shift of costs from the program to beneficiaries. This effect would occur because marginal changes in the Part B program cannot be

expected to substantially alter the limited incentives for cost containment that are inherent in the

Part B program.

payment limitations are imposed on physicians’

services, beneficiaries would be affected either indirectly through cost shifting from physicians to

beneficiaries or directly through increased costsharing. A substantial increase in cost-sharing

through increased coinsurance might reduce demand significantly, but two factors argue against

this approach: 1) there is already a coinsurance

of 20 percent; and 2) further significant increases
Ch. 7—Medicare Physician Payment and Medical Technology ● 131

.

(e.g., up to 50 percent) might reduce beneficiaries’

access to necessary medical care.

Even if these Medicare-specific approaches to

containing Part B costs resulted in an acceptable

allocation of costs between beneficiarim and physicians, the second limitation is that the gap between fees paid through Medicare and those collected from non-Medicare patients would continue

to widen. In 1978, the percent reduction of the

average total billed charge per service used to calculate the average Medicare-allowed charge was

20.3 percent, up from 18.7 percent just 3 years

earlier in 1975 (222). Further increases in the difference between billed and allowed charges, which

could be expected if additional restraints were

placed on physician fees under Medicare, again

raises the issue of reduced access for Medicare

— ——

beneficiaries. Equalizing fees for all patients would

solve the access problem and could be accomplished either by raising public fees or by imposing a fee schedule on all physicians’ services, public and private. Raising public fees would lead to

higher charges, but fee controls alone, under the

current method of billing based on existing diagnostic and procedure codes, may not be enough

to control expenditures for medical technologies

or to provide incentives for the provision of the

most cost-effective technologies. Thus, there is still

a need for methods other than changes in payment, such as utilization review to monitor and

evaluate the quantity, mix, and quality of the

medical technologies provided ( 170), or more

focused reviews, such as with second surgical

opinion programs.
8

Alternative Approaches to

Changing Incentives for Medical

Technology Adoption and Use

When society requires to be rebuilt, there is no use in attempting to rebuild

it on the old plan.

—John Stuart Mill
Contents

Page

Introduction . . . . . . . . . . .’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., ......135

Mechanisms To Foster Competitive Behavior by providers . ..................136

Alternative Sites of Health Care Delivery . ...............................136

Alternative Organizations for Health Care DeEvery . ......................139

Administrative Changes in Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...141

Merging Parts A and B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............141

Vouchers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................142

Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......................,...143
8 ■

Alternative Approaches to

Changing Incentives for Medical

Technology Adoption and Use

.—— — — —

INTRODUCTION

The strategies in previous chapters have focused

on changes in Medicare payment methods—

changes in coverage policy for individual technologies and changes in hospital and physician payment. This chapter explores policy mechanisms

other than payment that could be instituted by

Medicare in order to foster the appropriate adoption and use of medical technologies and ultimately save costs. Such mechanisms include changes

that must involve the general health care system

but that Medicare could encourage or embrace

and changes in the structure of the Medicare program itself. For discussion in this chapter, the

mechanisms are divided into two broad categories: 1 ) methods to foster competitive behavior

by providers, and 2) administrative changes in

Medicare.

It is generally believed that costs to the Medicare program and to the health care system in general can be contained by the rational adoption and

use of medical technologies, which includes using

them in appropriate settings. An important method of stimulating the rational adoption and use

of technology is to foster competitive behavior

by health care providers. In most cases, it is

through policies encouraging the use of the alternative sites and organizations for health care delivery that competitive behavior is expected to

occur.

This chapter presents an overview of some of

the most prominent mechanisms to increase competitive behavior by providers. Alternatives to

traditional fee-for-service, solo physician office

practices and traditional inpatient hospital care

include site alternatives such as freestanding ambulatory surgery centers, emergency care centers,

hospices, hospital outpatient departments, home

health care, and nursing homes. They also include

organizational alternatives such as health maintenance organizations (HMOs), the use of primary

care gatekeepers, and preferred provider organizations (PPOs). Organizational and site alternatives

are not precisely distinct entities, but they are

separated here for the purpose of discussion. This

chapter defines several alternatives, discusses

available evidence on their cost and quality of

care, and discusses Medicare’s past experience or

possible future involvement with them. The chapter does not provide an exhaustive list of alternatives. More descriptive information on the

selected alternatives is presented in appendix D.

Alternatives to traditional modes and sites of

care have been initiated and developed in response

to a variety of factors. In many instances, such

as the development of freestanding ambulatory

surgery centers and HMOs, factors for change

have included technological advances, perceived

patient need, and potential financial reward for

the entrepreneurs, Changes in the health care delivery system have been influenced by, and had

an effect on, the development and use of technologies. As noted in chapter 2, some changes in technology and in the health care delivery system have

also been influenced by Medicare. It is the optimal

blend of Medicare’s adoption of pre-established

health care system innovations and of Medicare’s

fostering innovations with which much of the discussion in this chapter is concerned.

Changes in the structure of the Medicare program itself are also examined in this chapter.

These changes (vouchers, in particular) overlap

with mechanisms to increase competition among

providers but are presented separately for ease of

discussion.

135
136 ● Medical Technology and Costs of the Medicare Program

MECHANISMS TO FOSTER COMPETITIVE BEHAVIOR BY PROVIDERS

In an October 1982 report (355), OTA noted

that strategies to increase competition in health

care generally fall into three major categories:

1) increased cost-sharing by patients when they

use medical care; 2) greater competition among

comprehensive care organizations (i. e., organizations that provide health insurance and deliver

medical care); and 3) increased antitrust activities by the Federal Government, The first strategy,

increasing cost-sharing when patients use medical care, relies on the cost consciousness of patients to deter their initiation of care and to temper

their own use of technologies as well as use generated by providers (355). Beneficiary cost-sharing

proposals were discussed in chapters 6 and 7. The

focus here is on the development of alternatives

to traditional organizations and sites of health care

delivery. Antitrust activities are excluded, because

they are beyond the scope of this report.

Proponents of greater competition in health

care believe that the changes they propose have

the best chance of moderating medical care use

and costs in the near future. Proponents of competition among health care plans emphasize the

importance of creating incentives for providers

to perform efficiently. They point to the largely

untapped potential to use medical technologies

more judiciously and to hospitalize less frequently, and would rely on alternative delivery

systems to rationalize technology use and to

achieve lower medical expenditures (355).

Under competition thec}ry, providers’ behavior

is expected to change as patients become more

conscious of cost in deciding whether or not to

use services and shop for services on the basis of

cost and quality. Physicians are expected to continue to guide patients as they do under traditional

fee-for-service payment incentives, but their advice is expected to reflect to a greater extent concerns about the effect on their patients’ finances.

And hospital administrators are expected to become more conscious of costs in the management

of their institutions (116).

Because “the sick or worried patient is in a poor

position to make an economic analysis of treatment alternatives” (102), some proponents of

competition conclude that the appropriate point

for a rational economic choice is the annual selection of a health insurance plan, Attempts to increase competition among comprehensive care

organizations, therefore, would place the critical

choices by consumers at the point of insurance

coverage rather than at the point of use of

services.

Physicians strongly influence the adoption and

use of medical technologies. For example, they

may purchase sophisticated diagnostic equipment

for their office use, or they may persuade hospital administrators and boards of trustees to purchase it. In their decisions, hospital administrators

or boards may consider the importance of individual physicians in admitting patients and the

various specialties competing for the technologies,

as well as the cost of the new equipment and its

benefits to patients. They may also consider the

extent to which the physicians use the technologies already available.

To increase competitive behavior by providers,

Medicare could be used to encourage further development of alternative delivery methods. Alternatively, Medicare could be restructured to embrace alternative methods of delivery (instead of

providing exceptions for demonstration and evaluation of alternative methods), with the expectation that the health system already has the

capacity to provide the preferred modes of delivery. Conclusions as to which is the preferred approach will depend on the answers to two closely

related questions: 1) what is Medicare’s leverage

in promoting or requiring that alternative delivery methods be substantially available? and 2)

what is the capacity of the health care system to

provide these alternatives? Their answers will affect both the substance and pace of change in

moving Medicare to a competitive system of insurance.

Alternative Sites of Health Care Delivery

Patients can obtain different types of medical

care in a variety of locations. Examples of alternatives to inpatient hospital settings are ambula-
Ch. 8—Alternative Approaches to changing Incentives for Medical Technology Adoption and Use ● 1 3 7 —

tory surgery centers, home health care, nursing

homes, and hospices. Examples of alternatives to

physicians’ offices for the delivery of primary care

are hospital outpatient centers and emergency care

centers. Each of these alternative sites is discussed

further below.

Ambulatory Surgery Centers

Units to accommodate ambulatory surgery

were developed in the early 1970’s in response to

overcrowded operating room schedules and inconvenience to patients and physicians (125).

These units could not have been established without the technological improvement of fast-acting

anesthesia and the development of the practice of

encouraging patients to walk soon after surgery

(125). Some of the units are affiliated with hospitals and are located either in the hospitals or

at other sites. Others are not associated with hospitals and are known as freestanding ambulatory

surgery centers. The latter are often physicianowned. Surgical procedures that are appropriate

to these centers are procedures using general anesthesia but requiring only a few hours of postoperative monitoring of the patient. Patients are

carefully screened. In recent years, third-party

payers have accepted claims for surgery performed in these centers, and some now require

that certain procedures be done on an ambulatory

basis for coverage.

In 1982, Medicare began to pay 100 percent of

a fixed fee for the facility and a surgeon’s fee (if

the physician accepts assignment ) for 100 specific

surgical procedures if they were performed in freestanding ambulatory surgery centers (108). Historically, Medicare had paid 100 percent of costs

(after the deductible and copayments) for inpatient, hospital-based tests and procedures

including surgery through Part A but only 80 percent of an allowable charge for outpatient technologies through Part B. The 1982 change

represented an overt attempt by Congress to encourage Medicare patients and their physicians

to use the less costly ambulatory surgery centers

when the quality of care they provided was at

least as good as, if not better than, that provided

in a hospital inpatient setting, The effect the Medicare coverage change has had on the use of inpatient or ambulatory surgery in the first year is

thought to be minimal (177).

Medicare’s prospective hospital payment system based on Diagnosis Related Groups (DRGs)

provides conflicting incentives for the use of

ambulatory surgery. On the one hand, the first

criterion for categorizing patients into DRGs is

the presence or absence of a surgical procedure,

and the strongest financial incentive of DRG payment is to increase hospital admissions. On the

other hand, hospitals may try to shift some of

their patient care to their own outpatient departments, including ambulatory surgery departments, where the DRG system is not in effect.

Home Health Care

Another care setting to which Medicare patients

may be discharged from hospitals is their homes,

where home health agencies can provide care. The

specific aspects of home health care have changed

over time. Currently, the basic services include

part-time or intermittent nursing care by or under

the supervision of a registered nurse; physical, occupational, or speech therapy; medical social services; and part-time or intermittent services from

a home health aide. Certain medical technologies

(e.g., intravenous antibiotic therapy) that used to

be administered only on an inpatient basis are

now part of home health care (248). Home health

services are usually provided by independent public or private home health agencies but can also

be provided as an outreach service by hospitals.

Continued growth in the home health industry is expected in response to the financial incentives for shorter hospital stays provided by the

DRG payment system. The number of agencies

providing home health care services has greatly

increased since 1966 when Medicare began covering skilled nursing care and physical and speech

therapy to homebound elderly people (207). The

purposes of providing those services was to lower

the hospital length of stay for acutely ill patients,

thus cutting costs to the program.

Studies of home health care in the 1970’s seemed

to indicate that home care made early discharges

from hospitals possible. Recent studies have examined overall nursing home and hospital use and
138 ● Medical Technology and Costs of the Medicare Program

found no reductions in length of hospital stay,

although patient satisfaction and life expectancy

were improved. These studies did not address readmission rates or length of stay (333). Thus, the

long-term effect of the early discharges on the substitution of home care for hospital care is not

evident.

Nursing Homes

The Health Care Financing Administration

(HCFA) has categorized nursing homes as either

skilled nursing facilities (SNFs) or intermediate

care facilities (ICFs). More types of medical technologies for treating inpatients and more intensive levels of care are available in an SNF than

in ICFs. Medicare covers 100 days of care in an

SNF following an acute episode of illness, but it

does not cover care in ICFS.

Not all SNFs accept Medicare patients and payment. This is partly because of some financial risk

posed by the possibility that Medicare intermediaries (contractors who administer Part A) may

deny payment and partly because Medicare patients may require more intensive nursing care and

more use of medical technologies than other SNF

patients (106). There are shortages of SNF beds

for Medicare patients in parts of the country (106).

As an alternative to inpatient hospital care, care

in SNFs is less costly. The intensity of care differs between hospitals and SNFs, so their patient

populations also differ. SNF patients have usually spent time in a hospital before being admitted to a nursing home. Under the old cost-based

hospital reimbursement system, Medicare paid as

much as four times the necessary cost of care for

patients waiting in hospitals for SNF beds (106).

Under the DRG payment system, if a patient remains in the hospital because SNF-level care is

unavailable, the days are counted just like other

inpatient days, If the length of stay exceeds the

DRG average by a specified amount, Medicare

will pay the hospitals a per diem outlier rate. In

part because DRG payment provides incentives

for hospitals to discharge patients to SNFs, Medicare costs for SNF-level patients in hospitals may

decrease. Discharges of sicker patients to SNFS

could affect the need for more technologies in the

SNFS, It could also increase Medicare’s costs for

SNFS, which may offset the Medicare hospital

savings.

Hospices

Hospice care has been available to terminally

ill patients in this country since 1971. Treatment

consists of palliation of the patient’s symptoms

and psychosocial care from a multidisciplinary

team of physicians, nurses, social workers, clergy,

psychiatrists and psychologists, dietitians, lawyers, and specially trained volunteers. By allowing most patients to remain in their homes rather

than the hospital, hospice care saves costs. It also

is more pleasant for the patients.

Hospice care is a recently enacted Medicare

benefit. Legislation to cover hospice care was

passed in 1982, while the National Hospice Study,

which was to assess the costs and quality of care

in a national sample of existing hospices, was still

in process. At the time of the benefit addition,

preliminary results seemed to show that hospice

care would be cost effective for Medicare. The incentives for hospitals to encourage their patients

to use their hospice benefits depend on whether

the hospital runs its own hospice and on whether

the patient might be an outlier case for whom the

hospital might be paid some additional, marginal

costs. The effects of the new benefit for hospice

care on the quality of life for terminally ill patients are unknown. Also unknown are the costs

of the benefit to Medicare and to the beneficiaries.

Technology use in hospice care, whether home

or hospital based, was significantly lower than use

in conventional treatment of terminal cancer patients in the National Hospice Study, while quality

of life seemed to be about the same in the different

sites (146).

Hospital Outpatient Departments

Outpatient departments of hospitals maybe an

alternative site to both inpatient hospital care and

private physician office-based care. Many hospitals, particularly teaching hospitals, have long

had outpatient services, including primary care.

Furthermore, in recent years, one of the ways hospitals have responded to financial pressures has

been to expand hospital services, including primary care in outpatient departments (136). Other
Ch. 8—Alternative Approaches to Changing incentives for Medical Technology Adoption and Use ● 139 —..—

reasons for the increased use of hospital ambulatory care are low access to private physicians,

particularly for some inner-city residents (2), increasing prevalence of chronic diseases (2), greater

patient expectations regarding hospitals (2), and

advances in medical technology that have allowed

movement from inpatient to outpatient settings

(136, 157,248).

Under Medicare’s current payment system, hospital outpatient departments receive payments

through Part B, based on the hospital’s costs. Because hospital overhead costs are high, Medicare

payments for outpatient department visits are usually higher than physician office charges. However, unlike physicians, hospitals must accept

assignment to participate in Medicare, so Medicare beneficiaries’ costs for outpatient visits may

be lower than those for physician office visits.

Costs to Medicare are generally higher for outpatient department care than for office care. There

is evidence that increasing numbers of patients 65

and older are using outpatient visits for primary

care (210).

Emergency Care Centers

Emergency care centers are alternatives to hospital outpatient departments, to some emergency

room care, and to primary care in physician offices. Such centers are generally equipped with

some emergency technologies but do not treat lifeor limb-threatening situations, so the name “emergency” may be misleading (325), They usually

have more diagnostic technologies on location

than a physician’s office. Emergency care specialists and some family practitioners have opened

emergency care centers to make medical care more

accessible to patients who have no primary care

physician or who cannot find a physician after

hours. The centers have extended hours during

evenings and weekends when physicians’ offices

are closed, and some are open 24 hours a day,

7 days a week. No appointments are necessary,

so care is more convenient for some patients, although patients may not experience desired continuity of care.

Emergency care centers usually compare their

charges with those of hospital emergency rooms

rather than with fees for physician office visits.

—— — ——— —

This comparison is not necessarily a good one,

because the care provided is often more like office than hospital care. Nonetheless, the National

Association of Freestanding Emergency Centers

estimates that center charges are 30 to 50 percent

lower than hospital emergency rooms for comparable services (238).

If an emergency care center is hospitalaffiliated, Medicare will reimburse for visits as

though the center were a hospital department. If

the center is totally independent, Medicare will

pay as though the visit were a physician office

visit (55). As noted earlier, hospitals must accept

assignment to participate in Medicare, but physicians need not. Thus, if elderly patients were informed about which centers were hospital-affiliated (and thus accepted assignment), they would

be more likely to choose them over the independent ones if total prices were comparable. A 1979

study showed that most of the emergency care

centers’ revenues came from private insurers or

patients who paid directly, with only a small fraction coming from Medicaid and even less from

Medicare beneficiaries (55). The 1983 followup,

although limited in sample size, showed more

centers accepting Medicare funds but some centers

specifically excluding Medicare cases (248).

Alternative Organizations for

Health Care Delivery

Organizational differences among providers

allow patients choices and increase competition

in the health care market. Two examples of alternatives are described below, HMOs and PPOs.

Also, primary care gatekeepers are discussed.

Health Maintenance Organizations

An HMO is a defined set of physicians and

other health care providers who provide services

for a voluntarily enrolled population that pays

a prospective per capita amount. HMOs provide

both insurance benefits and comprehensive but

specified medical care, and are often cited as the

cost-effective mode on which competitive care

could be built.

In a series of laws, the Federal Government has

encouraged the development of HMOs in the be-
140 ● Medical Technology and Costs of the Medicare Program

lief that health care costs will be contained by this

organizational type. Even with the special governmental treatment, however, HMOs cover only

about 5 percent of the U.S. population (392).

HMOs cover an even smaller proportion of Medicare beneficiaries: approximately 2 percent of the

Medicare population is enrolled in an HMO-like

organization (392). The evidence on why so few

Medicare beneficiaries are HMO members is inconclusive, but some possible reasons include a

lack of interest in or knowledge about HMOs on

the part of the Medicare population and a lack

of interest in enrolling an older, sicker group of

people on the part of HMOs. Another reason may

be that beneficiaries need incentives to join

HMOs, because they would probably have to

change physicians and hospitals. Finally, another

consideration is that HNfOs operate on a per

capita payment basis, and as long as Medicare required cost-based data, the HMOs incurred significant administrative costs.

The cost effectiveness of HMOs has been

thoroughly studied. The empirical evidence on

costs and quality of care for HMOs verifies the

predicted behavior: patients are not constrained

from seeking necessary care, and, at the same

time, physicians are constrained from using unnecessary medical technologies, including tests,

procedures, and hospitalizations (206). H M O

physicians are usually salaried, and because they

often share in the HMO’s surplus revenues, they

have financial reasons to keep general costs and,

specifically, the number of office visits low.

HMOs provide incentives to providers to use

fewer laboratory and radiological tests on an ambulatory basis. HMO physicians hospitalize patients less frequently than non-HMO physicians

(204). Office visits that have doubtful cost effectiveness, such as annual physical examinations for

healthy individuals, might be discouraged by

HMO physicians, but in many cases, patients initiate such visits themselves. Studies have shown

that although HMOs use fewer medical technologies, they do provide care that is at least as good

quality as fee-for-service care, and their costs are

1ower (204,206,429).

Primary Care Gatekeepers

One of the methods HMOs use to save costs

is to have each patient choose a primary care provider who acts as a gatekeeper to specialists and

other types of care (316). These primary care gatekeepers not only have the responsibility for referring patients to others, but they also coordinate all facets of a patient’s medical care. The

gatekeeper’s coordinator role is especially important for elderly patients, who often have multiple diseases and must take a variety of drugs that

may interact dangerously.

The gatekeeper is neither a new concept nor

confined to a particular payment method (316).

The “traditional” family physician who took care

of most medical problems and referred patients

to specialists when necessary was an informal

gatekeeper. Several years ago, the SAFECO Insurance Co. experimented with a primary care

network in Seattle that used physicians as gatekeepers. The experiment showed that the gatekeepers must have financial risks for referring too

many patients to specialists, or there are no cost

savings to the insurers (277). Great Britain’s National Health Service uses general practitioners as

gatekeepers. Their effectiveness is questionable,

however, because there is a growing private medical care sector for people who do not want to

wait for specialists’ care and can afford to pay for

it privately.

The evidence on technology use by physicians

as gatekeepers comes from the literature on HMOs

and Great Britain’s National Health Service.

Physicians in HMOs hospitalize patients less often

and use fewer medical technologies in their roles

as gatekeepers (204). Evidence of constraints on

technology use in Great Britain include long waiting periods for elective surgery and an age cutoff

for new hemodialysis patients (316). The evidence

from Great Britain must be viewed with caution,

because there are substantial differences between

the health system of Great Britain and that of the

United States.

Clearly, the gatekeeper performs a rationing

function. How this rationing of health care serv-
Ch. 8—Alternative Approaches to Changing Incentives for Medical Technology Adoption and Use ● 141 — ———

ices would be interpreted in light of the freedom

of choice enjoyed by Americans in the health care

system is unknown. Could the concept be introduced in the Medicare program, thereby limiting

choice for elderly and disabled patients only? A

demonstration project of case management (i.e.,

gatekeeper) for Medicaid patients in Massachusetts was ready for implementation but was

canceled by the new governor for political reasons. Patient groups could be appropriate targets

for experiments with gatekeeper approaches, but

such special treatment might result

medicine.

in two-class

Preferred Provider Organizations

PPOs are new entities that are designated to

combine some of the features of HMOs with those

of fee-for-service medicine. A PPO is an agreement among providers (usually hospitals and phy -

sicians), patients, and insurers that medical care

will be delivered at a discounted price as long as

the patients use the “preferred providers” (i. e.,

providers who are among the contractors). Discounted prices and utilization review agreements

should result in the use of fewer medical technologies by PPOs. Since payment is on a fee-forservice basis in PPOs, however, providers’ financial incentives to use more ancillary services may

be as great as in the traditional mode of care. The

effect of PPOs on the use of medical technology

will depend in part on the effectiveness of the

organizations’ utilization review programs. The

PPO concept is relatively new, and there are no

reliable data on which to base predictions about

how PPOs will interact with Medicare or the overall health care delivery system. Currently, Blue

Cross and Blue Shield of Michigan is developing

a PPO for Medicare recipients in Detroit under

a grant from HCFA (59).

ADMINISTRATIVE CHANGES IN MEDICARE

The alternatives addressed in this section focus

on Medicare’s structure. There are definite overlaps between the administrative changes discussed

here and the competitive mechanisms presented

above. Vouchers, for example, would encourage

competition among providers and change Medicare’s makeup. The separation is to facilitate discussion.

Merging Parts A and B

It is well known that separate income and payment mechanisms for Parts A and B of Medicare

have led to inefficiencies. Some medical technologies have been covered under both Parts A and

B, but because of differences in which part paid

for their use at which time, there has been unnecessary duplication of equipment in adjacent facilities. This effect could be avoided if there were

one type of coverage and one payment source.

Thus, merging Part A and Part B would thwart

efforts to shift costs from one part to the other

and should decrease the supply of some of the excess technologies. The incentives to open a new

freestanding facility for diagnostic tests across the

street from a hospital equipped to do those tests

would be reduced by the elimination of the costshifting possibility.

There is no sound fiscal reason for separating

Part A—the Hospital Insurance (HI) program—

from Part B—the Supplementary Medical Insurance (SMI) program—which covers physician

services. There is also no sound health reason for

the separation. Merging the two parts could alleviate the financial problems of the Medicare program and improve quality of care for patients.

Davis and Rowland (84) have proposed that a

comprehensive, integrated set of benefits be substituted for those under Parts A and B and be paid

from a single trust fund formed from the HI and

SMI funds. Everyone eligible for Part A would

be covered; no benefits would be optional.

According to Davis and Rowland, their suggestions for Medicare revenues would guarantee the

future solvency of the Medicare program and the

availability of medical care for its beneficiaries.

Revenues would come from: 1) the current payroll

tax contributions to the HI trust fund; 2) general

revenues currently projected for SMI expendi-
142 ● Medical Technology and Costs of the Medicare Program

-—

tures; and 3) new beneficiary premiums that

would be related to income and administered

through the personal income tax system. The proposal assumes that cost-containment efforts and

incentives for providers to improve efficiency

would continue.

The merger proposed by Davis and Rowland

focuses on financial solvency through revenue

reforms for Medicare, but such a merger would

also provide incentives for new organizational innovations fostering competitive behavior among

providers. Medical technology adoption and use

would be more directly affected by the efforts following the merger to increase provider efficiency

than by the actual merger described. It might be

possible, for example, to initiate a gatekeeper approach that would penalize the primary physician

for inappropriate hospital admissions, thus putting the onus on the decisionmaker. The merged

Medicare program would be better able to administer such a system than the current separate data

systems.

Vouchers

Vouchers are seen by some policymakers and

analysts as an important alternative to change

Medicare and contain costs. A voucher system

would allow each eligible person a set amount of

money with which to purchase medical care and/

or health insurance. In some voucher systems,

people who did not spend their entire amount

would be able to keep the remainder, Under most

systems, though, more benefits would be added

to basic coverage to spend up to or over the

voucher amount. Any costs of insurance benefits

over the voucher amount would be paid by the

patient.

Medicare vouchers have been proposed in Congress several times as a cavitation payment method. A Medicare voucher system is attractive for

a number of reasons. First, a fixed-dollar subsidy

is a cavitation method of payment, which would

make it easier for HCFA to predetermine and control the program’s expenditures. Second, a voucher system could substitute for or complement the

service-by-service (e. g., ambulatory surgical

centers, hospices) and provider-by-provider (e.g.,

HMOs, PPOs) revisions in current Medicare policy that attempt to fine tune the program in its

search for cost-effective alternatives to traditional

methods of delivering medical services. Third,

such a system would provide Medicare enrollees

with a greater choice of insurance plans, in contrast to the present single Medicare program with

its increasing amount of cost-sharing and perhaps

decreasing access to physicians of the enrollee’s

choice. And fourth, Medicare’s enrollees’ ability

to enter the general marketplace for medical services could lead to significant competition for their

care and accelerate the development of cost-effective methods of providing medical care.

The entry of Medicare enrollees into the medical marketplace through a voucher system raises

three questions. First, will a voucher system generate cost savings to Medicare? Second, at what

pace and to what extent should the Medicare program be integrated into general health insurance

plans? And third, to what extent could Medicare

patients adapt to such a new system?

The answers to the latter two questions are primarily philosophical. Cost savings to Medicare

will depend on the voucher’s initial value and

future increases in value. Currently, Medicare

pays for hospital and physician services at lower

rates than the private sector does. If the value of

the voucher is set at average per capita expenditures per Medicare enrollee, insurers that enroll

Medicare beneficiaries may have to reduce benefits or raise premiums to cover their actual costs.

Insurers also incur costs that Medicare does not,

such as advertising, reserve requirements, premium taxes, as well as profits, all of which would

have to be built into the premiums.

Voucher proposals link future increases in the

voucher’s value to indexes that have increased at

lesser rates than medical costs, such as the Consumer Price Index, If medical costs continue to

increase at a faster rate, premiums would have

to be raised above the voucher’s value or benefits

would have to be curtailed (336). Thus, in order

for Medicare enrollees to have the same level of

benefits as under the current Medicare insurance

program, initial expenditures would have to increase, and if medical costs continue to outpace

general inflation, future costs would be comparable to increases in costs under the present program. If the initial value of vouchers is kept at
Ch. 8—Alternative Approaches to Changing Incentives for Medical Technology Adoption and Use ● 143

the level of current expenditures, and if future

values increase less than medical costs increase,

average benefits would be less or the voucher

would not be sufficient to cover premiums for

most beneficiaries.

Most legislative proposals to date would allow

voluntary participation in a voucher system, although some of the proposals would allow beneficiaries to reenroll in Medicare and others would

make the decision to participate permanent. A

voluntary system could initially increase per capita Medicare costs if low-cost users selected private

plans while high-cost users chose the traditional

Medicare option. If benefits for the low-cost users

decreased in their plans, they would choose to go

back to Medicare’s regular benefits. One of the

alternatives is a mandatory voucher system if and

when more than half of the beneficiaries choose

vouchers (336). Under a mandatory voucher system, which would replace the present Medicare

program and in which Medicare beneficiaries

would be required to purchase insurance from the

marketplace, Medicare program expenditures

could be kept the same as current expenditures.

Beneficiaries, however, might have to pay more

premiums or have their benefits reduced. None

of the legislative proposals to date have included

mandatory vouchers, though the conditions vary.

Voucher problems for both insurance companies and Medicare beneficiaries deserve consideration. Individual policies would have high

administrative costs, and many insurers have indicated they would not sell to the Medicare market (156). Many of Medicare’s elderly and disabled

DISCUSSION

Medicare has fostered certain patterns of care

because of its payment policies and program structure. The program has influenced how much and

where specific medical technologies are provided.

For the most part, Medicare has fostered inpatient

hospital care and adoption and use of technologies. The End-Stage Renal Disease (ESRD) program (see ch. 2) also illustrates the influence of

Medicare with the growth of the dialysis center

— — ——.—.

beneficiaries may not understand the differences

in insurance policies and may be excluded or disadvantaged by policy exclusions and preexisting

condition costs. Furthermore, beneficiaries’ mobility problems may hamper comparison shopping

for the best deal.

Technology incentives would depend on the

method of payment from the insurance companies

to the physicians. If physicians accepted capitation payments for Medicare patients, they would

have financial incentives to use the fewest possible and least costly medical technologies while still

providing good quality care. If they continued to

be paid on a fee-for-service basis, their financial

incentives would remain much as they are now.

It is unlikely that insurance companies would

choose the latter path.

The choice between mandatory and voluntary

voucher systems raises several issues. A voluntary voucher system would present Medicare beneficiaries with the choice of joining other insurance

plans on a test basis to see if there would be more

cost-effective services available to them than

under the present Medicare system. A mandatory

voucher system would take advantage of the market power of Medicare enrollees as incentives for

providers to develop more cost-effective approaches, but would place beneficiaries at greater

risk for increased cost-sharing and reduced benefits if providers failed or were slow to respond.

A voucher system might also weaken the influence of Medicare as a large payer for hospital cost

control.

industry. It is doubtful whether, without Medicare coverage, the market would have stimulated

the research and development for some ESRD

technologies such as continuous ambulatory peritoneal dialysis. Provided that the alternative sites

and modes of care are truly believed to have a

beneficial impact on costs and on technology

adoption and use, can Medicare stimulate their

development?
144 ● Medical Technology and Costs of the Medicare Program

The Medicare program has not been used to its

full extent to encourage or discourage alternative

sites and organizations of care, in part because

of the original political agreement that the Federal Government would not use Medicare and

Medicaid to interfere in the practice of medicine.

Despite the noninterference policy, however,

Medicare was certainly intended to influence, and

in fact has influenced, the practice of medicine

through the conditions of participation and other

quality of care standards provided by the Professional Standards Review Organizations (see ch.

7). The key is that Medicare has influenced medicine in a politically acceptable manner, because

it has traditionally included the medical profession in its decisions. The separation of Medicare

payment for inpatient hospital care (Part A) and

for physicians and other types of care (Part B) has

had an effect, though not purposeful, on the

changes in medicine.

As a large single buyer of hospital inpatient

care, Medicare has always had a significant impact on the availability and use of hospital-based

technology. The DRG hospital payment system

is explicitly designed to provide incentives for

more efficient provision of care, and because of

Medicare’s size, changes in hospital behavior are

predicted to be realized, The actual effects of DRG

payment on the adoption and use of medical technologies by the hospital industry and alternative

sites and organizations of care will provide policymakers with necessary information for future

change.

Medicare’s leverage for initiating changes in

alternative sites or organizations of care is not as

great as it is for initiating changes in hospitals.

If Medicare used its purchasing power prudently,

competition and alternative delivery systems

could be either fostered or hindered. It would

probably be more appropriate for Medicare policies to be neutral for sites and organizations of

care until the evidence on cost effectiveness is

more conclusive. For example, the removal of

freedom of choice of providers from one segment

of the population by requiring case management

of Medicare patients may raise ethical questions.

Would a voucher system increase freedom of

choice of benefits, and would the insurance industry participate in such a program? Whether

it is reasonable to expect Medicare to pay for the

most expensive, optimal level of health care or

to pay less for an adequate level of care is also

at issue. If Medicare chooses the latter route, a

possible result would be a system of two-class

medicine.

More targeted Medicare program changes to

stimulate the use of alternative cost-effective

modes of care may add to Medicare’s costs in the

short run, until these alternative modes are more

firmly established in the health care system.

HCFA’s efforts to stimulate the use of cost-effective modes of care are reflected in recent changes

in the ESRD program (see ch. 2) and in Medicare

demonstrations on risk-contracting for HMOs (see

app. D).

In the ESRD program, the imposition of composite reimbursement rates to stimulate home dialysis care makes Medicare payment rates for

home dialysis higher than the actual costs. Home

dialysis costs may rise because of the need for

home health aides for patients with little family

support. If costs do not rise significantly and the

use of home dialysis does increase greatly, Medicare will be paying at a rate much above costs.

Whether there will be a savings to the ESRD program with the redistribution of dialysis patients

between home and center dialysis is not clear.

Also not clear is whether the large difference between costs and payment levels (estimated at nearly 50 percent (344) will continue to be justified.

HCFA’s HMO risk-contracting demonstration

programs involve the same issue—paying more

initially to establish alternative sites or modes of

care, yet leaving unresolved for future consideration how these alternative modalities can be sustained at payment levels lower than originally

needed to stimulate their participation in Medicare. Payments in HCFA’s risk-contract demonstrations were set at 95 percent of average adjusted

per capita costs of providing fee-for-service care

to these enrollees in the HMO’s service area. Thus,

payments in these demonstrations were set above

the HMO’s cost levels, with the extra payment

to be used to induce Medicare beneficiaries to

enroll through extra benefits or decreased premiums (97). Again, left for future consideration

is the payment level to HMOs if and when they
Ch. 8—Alternative Approaches to Changing Incentives for Medical Technology Adoption and Use Ž 145

gain a significant share of the medical market for

Medicare enrollees.

If the DRG payment system continues to be the

only change in Medicare, what effects are predicted for the rest of the system? Care in SNFs,

ICFs, hospices, and in the home will probably increase in response to the financial incentives to

shorten hospital lengths of stay. In some cases,

therefore, sicker patients will be treated in these

alternative sites. To the extent that the alternative

sites have the facilities and staff to give appropriate care, such treatment might not lower the

quality of care. If the patients are so much sicker

that their treatment in alternative sites necessitates

the hiring of new staff or the purchase and use

of new technologies, however, the cost of care in

the alternative sites will increase. In addition, the

current DRG prices reflect average lengths of stay

in hospitals. If patients move to other sites for the

final convalescent days of care and the DRG prices

do not reflect the change, Medicare would essential] y be charged twice for the convalescent care.

Policyrnakers concerned with the Medicare program have shifted their emphasis from making

mainstream medical care available to the elderly

and disabled to a search for more cost-effective

methods of providing care. Detailed, specific

changes have been made, which still preserve the

basic framework of the Medicare insurance program and its separate hospital and physician

reimbursement parts. The development of alternative modes of care, and step-by-step revisions

in the original Medicare legislation in order to

adopt and nurture these alternatives, are gradually

transforming Medicare away from a cost- and

charge-based retrospective system of payment.

The direction of these changes is clearly toward

a total, prospectively determined system of payment and toward providers with both financial

and service responsibilities.

The transition to cost-effective modes of care

raises issues that can only be resolved with experience. At least for the short run, alternative

methods of care may add to costs—as when home

health care supplements instead of replaces hospital and nursing home care—or they may require

payment levels similar to the fee-for-service system to build up their presence—as in the case of

HMOs serving the elderly. In the case of vouchers,

cost-containment objectives have to be balanced

against the use of Medicare enrollees to test economic theory in practice and the probability that

at least some of the Medicare program’s cost savings will come at the expense of increased costsharing and or reduced benefits for Medicare

enrollees.

Medicare’s leverage in the health care system

is variable and depends on which segment of the

system is examined. If the Medicare program is

to be changed, is it sufficient for Medicare to try

reforms, or must the alternatives exist in the system so that Medicare can incorporate them? Alternative sites and organizations for health care delivery are currently available for experiments or

revisions in the Medicare program. The extent to

which these alternatives could adapt quickly and

adequately to a major change in Medicare policy

is being tested by DRG hospital payment.

Clearly, Medicare policies can provide small

steps, as they have by the special coverage for ambulatory surgery in freestanding centers and for

hospice care. Parallel developments of alternatives

in the health care system outside of Medicare will

continue. Policy makers should watch these system developments and modify Medicare policy

to take advantage of new cost-effective modes or

sites of care when available. Finally, the decision

must be made for the Medicare program either

to keep and strengthen its purchasing power by

continuing to cover beneficiaries in a large program or distribute its beneficiaries into the marketplace by means of a voucher system. Either of

these actions has implications for technology innovation and diffusion and for cost control.
Part Three
9 m

Findings and Policy Options

Nobody can really guarantee the future. The best we can do is size up the

chances, calculate the risks involved, estimate our ability to deal with them,

and then make our plans with confidence.

—Henry Ford II
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............151

Coverage of Specific Medical Technologies. . . . . . . . . . . . . . . . . . . . . .. ... ... ....151

Broader Incentives Toward Technology . . . . . . . .............................156

Hospital Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................156

Physician Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Alternative Approaches to Changing Incentives . ..........................168
—— . . ..——— — . . . . .—

—

Findings and Policy Options

—.— -. -- .—

INTRODUCTION

The dual relationship between medical technology and the Medicare program has been explored

in previous chapters: Medicare policies affect the

adoption and use of medical technologies, and

patterns of use of medical technologies significantly affect the types and levels of Medicare

costs. This chapter identifies several options for

changes in Medicare policy that could be used to

influence medical technology adoption and use

and to restrain Medicare program costs.

Medicare policy can influence the adoption and

use of medical technologies in order to cut program costs both through policies directed specifically toward individual technologies and through

policies that provide broad incentives for rational

adoption and appropriate use of medical technologies. This chapter presents findings and policy

options by issue area within each of these two

broad policy areas. The first section of this chapter

focuses on policies directed at individual technologies and contains options pertaining to Medicare

coverage policy, The second section focuses on

policies that provide broader incentives toward

technology and contains options directly concerning Medicare hospital and physician payment and

approaches encompassing interactions between

Parts A and B of Medicare as well as interactions

between Medicare and the general health care

system.

—

changes in Medicare’s

specific technologies;

changes in the methods

to hospitals;

changes in the methods

to physicians; and

. ——

coverage policy for

of Medicare payment

of Medicare payment

approaches to changing the incentives for the

adoption and use of technology that do not

directly involve, but may be related to,

Medicare payment mechanisms (e.g., encouraging the development of alternative

cost-effective health care delivery systems).

Some of the options involve direct legislative action. Others are oriented to the actions of the executive branch but would involve congressional

oversight or encouragement.

The order in which the options are presented

is not meant to imply priorities among them. Furthermore, the options are not, for the most part,

mutually exclusive. Adopting one option in any

category does not necessarily imply that others

are inapplicable within that category or within

any other category. More often, a careful combination of options can better produce the intended effects. In some cases, an option may suggest improvements for more than one aspect of

Medicare policy. It is important to keep in mind

that changes made in one area have repercussions

in other areas.

The options identified in this chapter generally

fall into the following categories:

COVERAGE OF SPECIFIC MEDICAL TECHNOLOGIES

ISSUE: of some expensive, visible medical technologies.

How can Medicare’s coverage process for Thus, the coverage of specific technologies is a

specific technologies be improved? potential method of containing Medicare costs

through control of the diffusion (i. e., adoption

and use) of medical technologies. In the present

It is generally agreed that third-party coverage cost-conscious environment, the attention of polpolicy has influenced decisions about the purchase icymakers may become focused on expensive

151
152 ● Medical Technology and Costs of the Medicare Program

technologies, i.e., both technologies with a high

capital purchase price and technologies with lower

capital purchase prices but high utilization. Longterm effects of other technologies, however,

should be considered in Medicare coverage decisions. The precise relationship between coverage

policy and purchase of other kinds of medical

technologies or the use of any technologies remains speculative.

The benefits for which Medicare will pay are

designated in broad general categories such as inpatient services, outpatient services, and physicians’ services. With few exceptions, therefore,

Medicare coverage policy is determined at the

local or national level on a technologyby-technology basis. Coverage decisions by

Medicare contractors or by the Health Care Financing Administration (HCFA) follow the statutory mandate which excluded Medicare payment for items and services that are not “reasonable and necessary” for diagnosis, treatment, or

improved functioning of a malformed body member. “Reasonable and necessary” items and services are interpreted as those that meet four criteria: general acceptance as safe and effective; not

experimental; medically necessary; and provided

according to accepted standards of medical practice in an appropriate setting, Evaluation of the

nonmedical effects, for example, economic and

social effects, of a technology is usually not part

of a technology assessment for coverage purposes.

HCFA officials and individual Medicare contractors have had considerable latitude in determining which technologies are to be covered for

reimbursement. Furthermore, there is considerable variation in the implementation of national

coverage decisions by Medicare contractors.

Uniform implementation of HCFA’s coverage

decisions might foster equal treatment of Medicare beneficiaries throughout the country, 1 However, although traditional local variations in the

practice of medicine do mean that Medicare beneficiaries effectively receive somewhat different

benefit packages, there is no evidence that local

differences in standards of care affect patients’

health. Uniform implementation of coverage deci-

‘It should be noted, however, that current national coverage policy

IS considered an interpretive rule and does not have the force of law.

—

sions may discourage local differences, and some

observers believe that it may interfere in the practice of medicine. The strength of such interference

would depend on the influence coverage policy

has on the adoption and use of medical technology in the first place.

The lack of necessary information on which to

base assessments and coverage decisions is a serious problem. Although the guidelines used by the

Office of Health Technology Assessment (OHTA)

to evaluate the safety and efficacy of medical technologies stress the value of basing coverage recommendations to HCFA on data from controlled

clinical trials or other well-designed clinical

studies, in many cases, such data are unavailable.

Furthermore, timeliness of identification of new

or outmoded technologies is important to Medicare, because the assessment process is itself timeconsuming. Some technologies, such as heart

transplantation, are so expensive and visible that

they have been identified, but a coverage decision has been delayed, In the case of the artificial

heart, the ostensible reason for the delay is to

allow a thorough assessment of the technology’s

safety, efficacy, and other aspects. Some analysts

have noted that the true reason behind the delay

is cost containment (22,258). Such delays in coverage decisions may save Medicare program costs

for a time. Sometimes the coverage decisions are

slowed by the backlog of technology assessments

faced by OHTA, In other cases, new techniques,

such as coronary artery bypass graft (CABG),

have been paid for by Medicare under existing

procedure codes. By the time payment issues were

raised, CABG was considered generally accepted

medical practice.

A new issue for the Medicare program is the

role of coverage policy with respect to the new

Diagnosis Related Group (DRG) prospective payment system for hospitals. Although the coverage process and the DRG-rate adjustment process share a similar “approval for payment”

function, they differ in that a coverage determination focuses on a specific technology, while adjusting DRG payment rates focuses on the larger

entity of a diagnostic group, which includes particular technologies. Moreover, the DRG-rate adjustment process must include issues of cost as an

integral issue, while the coverage process at pres-
Ch. 9—Findings and Policy Options • 153

— —

ent does not consider cost issues. Despite their differences, the technology assessments performed

for the coverage and DRG rate adjustment processes no doubt will have similarities, and their coordination should be encouraged.

An idea related to the coverage process that

may be worth exploring is the use of Medicare

conditions of participation to influence the adoption and use of individual medical technologies.

A new condition of participation for hospitals,

for example, could require that hospitals have

technology assessment committees. The process

of explicitly discussing safety, efficacy, and cost

questions before a hospital purchases, and physicians use, a particular technology may be worthwhile. A major finding of OTA’s 1980 assessment

of cost-effectiveness analysis (CEA) in health care

was that the process of identifying and considering costs and benefits in CEA might be more valuable in decisionmaking than the rigid and formal

application of CEA results in health care program

decisions (353).

There is no process of identifying and considering costs and benefits in CEA for a hospital that

is yet acceptable to all concerned, however, nor

is there evidence of effectiveness of such processes

in making technology adoption or use more rational. In part, this is because a decision that is

rational from a hospital’s perspective may not be

rational from society’s perspective. Furthermore,

Medicare conditions of participation are being

simplified under the current Administration to reduce the burden of administering detailed nonstatutory requirements. Adding a new condition of

participation would be counter to that objective.

In addition, hospitals may decide to use technology assessment committees under the DRG payment system even without the requirement because of the complexity of the incentives. Many

hospitals already have purchasing departments or

committees that perform the function of assessment with variable rigor.

‘Condl t ions of part Iclpatlon are requirements that must be met

by provlciers In order to be allowed to receive payment for Nledlcare

patients An example ]s the requirement that hospitals conduct

util ] zat Ion review.

Option 1: Amend the Medicare law to allow coverage for emerging technologies on an interim

basis in exchange for data on their safety, efficacy, and costs.

Implementing this option could improve the

availability of data necessary for good coverage

decisions and, ultimately, for the rational adoption and use of medical technologies.

Defining “emerging” technology is difficult. The

movement of any technology from the research

phases into common clinical practice represents

a continuum, and there is no specific point at

which a particular device or technique would stop

being “experimental. ” Developing criteria would

be necessary to ensure that interim coverage was

not allowed too early in a technology’s development in order to minimize the risks to patients

involved in clinical trials.

Coverage of emerging technologies in return for

data would yield new information on elderly

patients—few previous clinical trials have collected data on such patients. Involving elderly patients in clinical trials would have positive and

negative aspects. A disadvantage would be the inherent risks to patients involved in clinical trials

of emerging technologies, although subjecting

Medicare beneficiaries to technologies tested only

on younger patients also involves risk. Designing clinical trials involving elderly patients is very

difficult, because such patients usually have more

than one medical condition.

Important decisions would have to be made.

One such decision would be about how long to

provide interim coverage. Time limits would have

to be explicit from the beginning, if interim coverage were implemented. Another important decision would be where and to whom the interim

coverage would apply. Sites and providers to conduct clinical trials would be selected as part of the

research peer review process. Although the selection of specific sites and investigators for interim

coverage might be regarded as favoritism, limiting

Medicare coverage only to sites and investigators

with very specific protocols would seem to be a

more prudent approach than paying for the use

of emerging technologies on a more widespread

basis. Once an emerging technology’s safety and
154 ● Medical Technology and Costs of the Medicare Program

efficacy had been established, coverage could be

extended, or, if Option 2 were implemented, other

appropriate sites and providers could be identified

for permanent coverage.

The collection of cost data is a key element of

this option. Thus, this option is closely related

to Option 3 below. If Medicare payment rates,

particularly for Part B services, are ever to be

based on technologies’ costs instead of past

charges, the Medicare program will need better

cost data on which to set these rates. In the past,

costs have often been unknown until technologies

were already in widespread use.

Coverage of emerging technologies in exchange

for data would initially add costs to the Medicare

program, but the information gained could very

well be worth the investment. The availability and

interpretation of better data on the safety, efficacy, and especially costs of new technologies

would provide a good mechanism for Medicare

policy makers to decide how best to expand or

contract benefits in a rational manner. Such coverage would shorten the usual delay involved in

getting data from clinical trials on which to base

coverage decisions. Although long delays may

save Medicare costs in the short run, such delays

may sometimes mean that some patients are

denied efficacious technologies.

Option 2: Amend the Medicare law to limit coverage of complex technologies to their provision in selected sites by selected providers.

Certain medical technologies involve highly

complex equipment and supplies and require a

skilled team of providers. Limiting Medicare coverage for specified complex technologies to their

provision in particular sites could help control

Medicare costs and might also improve quality

of care.

Theoretically, implementing this option would

help control costs by reducing excess capacity.

There would be a reduction in unused technologies in a number of sites along with economies

of scale produced by having larger capacities at

only a few sites. Certain surgical procedures performed in high-volume hospitals have better patient outcomes than the same procedures done in

low-volume hospitals (124a). And for high volumes of complicated surgical procedures, the

teams of surgeons, nurses, anesthesiologists, and

medical technologists who work together would

learn to work together more efficiently and effectively.

While limiting sites and providers could help

control costs by limiting the adoption and use of

complex technologies, it might also limit the numbers of patients who could be treated. If need exceeded capacity, a method for rationing care

would be necessary.

Currently, private insurance companies cover

exceptional technologies in selected sites: Blue

Cross will pay for the heart-lung transplantation

done at Stanford University. And Medicare itself

has set some precedent by limiting payment for

therapeutic apheresis to its use in specific settings

and by specified providers (26).

A potential problem with selective coverage by

Medicare is that such coverage could lead to twoclass medicine. Nonselected hospitals, for example, could purchase major medical equipment that

might not be covered by Medicare. Physicians in

the hospitals might then use the equipment only

for their non-Medicare patients. The probability

of the occurrence of this situation would depend

on the cost of the technologies and the availability of trained staff, as well as on the proportion

of the hospital’s patients who are Medicare beneficiaries.

The specification of providers and sites for certain technologies might be regarded as unequal

treatment of providers. Yet in this option, as in

the previous one, sites and providers could be

selected on a peer reviewed basis to assure quality

and to maintain acceptability within the medical

profession. Peer review such as that undertaken

by the National Institutes of Health (NIH) study

groups would be one possibility.

The DRGs encompassing the specified technologies would have to be treated differently in

selected hospitals (sites other than hospitals are

not yet under the DRG payment system). Assuming that these complex technologies would be very

expensive, Medicare hospital payment would

somehow have to support their rational adoption
—.

Ch. 9—Findings and Policy Options ● 155

—

and use (see Option 6). Otherwise, all cases using

such technologies would be outliers.

Option 3: Mandate that Medicare coverage decisions include cost considerations when appropriate,

Because cost containment is so crucial in the

Medicare program and in the health care system,

it may be necessary to explicitly include cost considerations in coverage decisions. At present, the

adoption and use of medical technologies involves

implicit rationing of scarce dollars. In today’s economically constrained environment, perhaps the

tradeoffs among coverage decisions should be

more explicit. Especially if Medicare covers highcost technologies that yield few benefits, other

services must be eliminated in order to decrease

program expenditures,

Because Congress provided little guidance on

how it intended the statutory “reasonable and necessary” tests to be applied, the question of the appropriateness of using cost information in Medicare coverage decisions has been raised by the

U.S. Department of Health and Human Services

(DHHS) several times. DHHS has asked its legal

counsel to investigate the definition of “reasonable and necessary” in the Medicare law. No clear

decision has yet been provided,

If quality of medical care for Medicare beneficiaries is to be maintained, a method of determining the most cost-effective technologies in health

care is highly desirable. CEAs and cost-benefit

analyses (CBAs) represent a possible group of

methods. One strength of using cost considerations in general, or CEA/CBA specifically, in

Medicare coverage decisions would be that the implicit rationing would become explicit. CEA/CBA

methods still need to be enhanced and refined, but

the process of analysis itself can help make assumptions explicit and can help identify as many

costs and benefits as are feasible for consideration in decisionmaking in the health field. It is important to note that the availability of cost data

is essential for this option.

A previous OTA study (353) found the use of

formal, well-conducted, sophisticated CEAs or

CBAs in decisionmaking in the health field is the

exception rather than the rule. Adding it to the

Medicare coverage decisionmaking process might

be a helpful step.

Although on the surface it would appear that

technology evaluations including cost criteria

would be more effective in allocating resources

than those without, the relative effectiveness of

the two types of evaluations has yet to be demonstrated. At this time, though, it appears that

CEA/CBA can at least aid decisionmaking when

used in conjunction with other kinds of information (353).

Option 4: Conduct oversight hearings to improve

the Medicare coverage process.

Several administrative problems pertaining to

the Medicare coverage process have been identified in this report. Problems that need attention

include the following:

1.

2.

3,

4.

5.

the inadequate identification of emerging

and outmoded technologies for coverage

decisions;

the lack of uniformity in the implementation

of national coverage decisions;

the timelag involved in the coverage process, including technology assessment;

the complex coding system and proliferation

of codes; and

the incomplete dissemination of information.

These problems all potentially raise Medicare’s

costs. Their solutions may save some money and

reduce the disparity in Medicare beneficiaries’ coverage across the country. Numbers 2, 3, and 5,

however, could actually decrease Medicare expenditures, so a detailed analysis of these problems may be warranted. The timelag, for example, could save Medicare program costs but have

negative consequences on patients’ health. If patients use more services in the long run because

of the adverse effects of coverage delays, costs to

Medicare could increase.

There are several ways of improving the identification process. Contractors have recently

reported that they are receiving inquiries concerning the coverage status of new technologies from

manufacturers and providers. HCFA could monitor the Food and Drug Administration’s (FDA’s)

processes to anticipate new medical devices and
156 ● Medical Technology and Costs of the Medicare Program

NIH’s registries where new applications of procedures (e.g., percutaneous transluminal coronary

angioplasty) are followed. Similar efforts in the

private sector could be scrutinized.

Oversight hearings could be used by Congress

to focus the attention of DHHS on problems in

the coverage process. However, the law provides

DHHS with the authority to make, but not to implement, coverage decisions. The coverage index

appendix, other manual instructions, and intermediary lessons are usually considered interpretive rules, and as such do not have the force

of law.

DHHS may need additional funds to improve

its administration of Medicare coverage. Whether

the savings to the program would justify the extra cost of the administrative changes that might

be necessary is speculative without further study.

BROADER INCENTIVES TOWARD

Hospital Payment

ISSUE:

How can Medicare’s hospital payment

system incorporate appropriate incentives

for generating effective and efficient

adoption and use of medical technology?

The retrospective, cost-based hospital reimbursement system under which Medicare operated

from 1966 until fiscal year 1983 was significantly

altered first by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Public Law 97-248)

and then by the Social Security Amendments of

1983 (Public Law 98-21). The latter mandated the

phasing in of a prospective, per case, hospital payment system based on DRGs.

Prior to the implementation of Medicare’s DRG

per case payment system, hospital payment was

based on utilization of medical technologies or on

days of hospital care. Such payment may provide

incentives for the inappropriate use of medical

technologies in hospital settings (e.g., requiring

chest X-rays upon admission to the hospital and

admitting patients to the hospital on Friday before

Monday surgery). Per case payment is an improvement over per diem payment but still provides rewards for certain types of inefficient

behavior (e.g., unnecessarily increasing admissions). Another possible method of hospital payment is cavitation payment. Unlike per case

payment, cavitation payment offers incentives to

decrease admissions. Paying by cavitation would

TECHNOLOGY

require data systems

available.

other than those currently

Although it is too early to evaluate the effects

of DRG hospital payment, Medicare’s new hospital payment system gives financial incentives

to hospitals to increase admissions and reduce

lengths of stay. Under DRG payment, therefore,

some patients may be admitted to the hospital unnecessarily, others may be discharged too early,

and some may not get all their elective care in one

hospital stay. In addition, under DRG payment,

hospitals have a financial incentive to decrease

length of stay as a way of both opening beds for

new admissions and decreasing the hospital’s cost

per stay. To the extent that a hospital’s occupancy

rates are low, the incentive to shorten length of

stay is weakened, because the hospital will have

difficulty in filling the opened beds and covering

its fixed costs.

Medicare’s DRG hospital payment system also

provides incentives for hospitals to reduce the

number and cost of ancillary services. Prior to the

implementation of the DRG system, hospital administrators had financial reasons to encourage

physicians to use available technologies. Under

DRG payment, hospital administrators are likely

to discourage physicians from using many highcost technologies, particularly diagnostic tests that

add only marginal information and may not

change the course of treatment. In some cases, the

substitution of low-cost technologies for high-cost

technologies may result in a decline in quality of

care. Thus, quality of care remains an important

issue under DRG payment.
-— .—

Ch. 9—Findings and Policy Options . 157

— -. — ——- . . —

DRG prospective payment has changed the incentives provided under cost-based reimbursement for the adoption and use of medical technologies in hospitals. In general, hospitals now

have greater incentives to adopt new medical technologies that reduce their costs and lower incentives to adopt technologies that increase their

costs, even when the latter are worth their added

costs to society. But the incentives for the adoption of medical technology depend on the way

capital costs are treated. Thus far, capital costs

are not covered by the DRG hospital payment system and are treated as pass-throughs. Treatment

of capital costs as pass-throughs does not alter the

direction of the incentives governing technology

adoption under DRG payment as long as the effect of a new technology on total cost per case

is in the same direction as its effect on operating

costs. However, for certain medical technologies,

namely, those which reduce operating costs but

raise total costs per case, capital cost pass-through

reverses the incentives for adoption inherent in

DRG payment. Congress has recognized that capital costs are still a problem for Medicare, and the

law requires DHHS to study how capital costs

should be paid in connection with the DRG hospital payment system.

Innovations in medical devices, drugs, and

medical techniques that improve the quality of

care for the Medicare population but also increase

hospital per case costs may not be as readily

adopted under DRG payment as they were before.

Quality is a difficult concept to define and its

measurement is equally complex. Technology

assessments may offer some assistance in comparisons of the quality of care afforded by different technologies. Comparisons of different

measures of quality are important for national

policy makers who must decide whether a particular quality-raising technology is worth its cost to

society and, thus, whether it should be adopted.

Congress has provided some control over quality of care by mandating the utilization and

quality control peer review organizations (PROS).

Hospitals must have signed agreements with these

PROS in order to receive Medicare payments.

Funding for the PRO reviews will come from the

Part A Medicare trust funds. The PROS will be

evaluated on the basis of their individual contracts

with HCFA. One of the responsibilities of the

PROS will be to monitor the potential admission/

discharge/readmission problem.

The development of DRGs originally was not

related to payment, but DRGs were refined once

they were used for payment purposes. Although

Congress has adopted DRGs for the Medicare hospital payment system, improvements of DRGs

and of the payment system are still needed. Such

refinements are anticipated in light of the series

of congressionally mandated studies and the Prospective Payment Assessment Commission’s responsibility for recommendations on changes in

DRG relative weights and categories.

The success of the DRG payment system in containing Medicare’s hospital costs remains to be

seen, as does its impact on the adoption and use

of medical technologies. Thus, experience with

other approaches to hospital cost containment is

still necessary. Furthermore, the effect of a

Medicare-only payment system on health care delivery is unknown. Whether a Medicare-only

DRG payment system operating in the context of

a largely pass-through system for other payment

can bring about the desired changes in hospital

and physician behavior on which ultimate cost

savings depend is largely unknown. Thus, it

would be useful to examine how all-payer systems

perform.

Option S: Encourage DHHS to support further

refinement and development of case-mix measures other than DRGs.3 

Congress has recognized the need to refine the

DRGs as the case-mix measure for hospital payment by mandating several studies. Severity-ofillness measures, for example, will be studied for

their applicability within the DRG system. Even

with refinements, however, a DRG-based system

may not be optimal, and case-mix measures that

account for resource use more accurately than

DRGs might be found. Examples of potential

alternatives to DRGs are Disease Staging, the

Severity-of-Illness Index, and Patient Management Categories (PMCs).

——

‘The background information on this option was discussed in

detail in the OTA technical memorandum entitled Diagnosis Re~ated

Groups (DRG$) and the hledlcare Program: Implications for Medical

Twhnc)log~r (343)
158 . Medical Technology and Costs of the Medicare Program — — —

Disease Staging and the Severity-of-Illness Index were both designed to provide a framework

for classifying diseases according to the relative

severity of the patient’s condition. Both have required extensive developmental work and testing,

which are still underway. Use of either measure

would require more data than are generally available on Medicare claims at the present time,

though the staging approach can be employed by

using data that are normally included in hospitals’ computerized records. Neither measure has

reached the point where it is suitable for widespread implementation in a reimbursement context, However, the existence of such measures, at

a minimum, serves as a reminder that the present set of DRGs ultimately may not be the best

system for classifying patients.

PMCs are also in the developmental stage and

are being tested now. This case-mix measure differs from others, including DRGs, in that PMCs

are normative. Physicians specify an optimal set

of clinical care components based on a patient’s

clinical characteristics. This set is the basis for the

relative cost weights of PMCs, The system appears unique in that it recognizes that optimal patient management should be the focus of a system that seeks to encourage efficiency.

Development of alternatives to DRGs will require continued interest and funding from DHHS.

Research and demonstration projects in which

these and other alternative case-mix measures can

be studied and refined may need additional funding. Other studies could be mandated if necessary.

Option 6: Encourage DHHS to develop DRG

price adjustment methods that result in higher

DRG payment rates for those hospitals that

purchase and use certain socially desirable but

costly new medical technologies.

Medicare’s DRG hospital payment system provides financial incentives to hospitals to purchase

and use those technologies that reduce costs per

case. Thus, specific policy might be required to

encourage the adoption of socially desirable technologies that raise costs, Making extra payment

for a DRG conditional on a hospital’s adoption

and use of a new technology would encourage the

technology’s diffusion.

-..

Two possible mechanisms for making adjustments in DRG prices that would be conditional

on the adoption of technology are reliance on

hospital-initiated appeals of DRG prices and creation of new technology-specific DRGs. Either of

these mechanisms could stimulate adoption of

desirable but cost-raising technologies. If a new

DRG with a higher rate were created specifically

to pay hospitals only if they actually adopt and

use a technology, the adjustment in price would

clearly be an incentive to adopt.

Both of these mechanisms have drawbacks.

First, reliance on case-by-case hospital appeals of

DRG prices is likely to be administratively costly

and cumbersome in comparison to other adjustment methods. Second, both the appeals mechanism and the creation of new DRGs would result

in an effective increase in the number of DRG categories, or DRG inflation. Eventually, if the number of categories increased to significant levels,

DRG payment would develop into a system resembling a fee-for-service system, because more

and more categories would exist for specific procedures or services. Such a system, in turn, would

destroy the incentives inherent in per case payment to minimize the utilization of services.

Conditional DRG payment adjustments would

work best if limited to a few very high-cost technologies whose introduction would be strongly

discouraged in the absence of such an adjustment.

The majority of cost-raising technologies probably would be adequately handled through periodic reestimation of the costs of DRGs. The

timeliness of reestimation is considered in Option

7.

Option 7: Amend the Medicare law to require annual reestimation of the relative costs of DRGs.

Congress has recognized the need for periodic

adjustment of DRG prices, The law currently calls

for recalibration (assigning new relative weights

to DRGs or establishing new DRGs) at least every

4 years. This option offers a refinement of that

mandate and differs from it in two ways: 1) it

defines reestimation as a type of recalibration

based on the estimation of historical relative costs

of technology; and 2) it suggests adjusting the relative rates every year.
Ch. 9—Findings and Policy Options ● 159

From year to year, some DRGs will experience

cost-saving technological innovations; others will

experience cost-raising ones. The relative prices

of personnel, supplies, and other inputs will also

change, with consequences for relative DRG costs.

Relative DRG rates should reflect the relative costs

of efficient and clinically optimal care, including

appropriate use of technologies. The purpose of

annual reestimation would be to keep DRG rates

reasonably in line with the cost of efficient care.

Annual reestimation of relative DRG rates would

also encourage the rational adoption and appropriate use of medical technologies. Under the current statutory requirement, up to 4 years may

elapse after the emergence of a new, fast-developing technology before the relative DRG rates

would even begin to reflect the change, and the

gradual adoption of new technologies would further delay the full capture of their effects in DRG

prices. Implementation of annual reestimation

would provide a quicker mechanism for adjusting

prices to the efficient production of care.

Financial incentives for hospitals to increase

their efficiency would not be weakened by frequent reestimation of relative costs of DRGs. This

option focuses on relative prices, so it would still

be in a hospital’s best interest to perform efficiently. Since the reestimation would be based on

average prices across hospitals, the inclusion of

a large number of hospitals’ cost reports in the

reestimation is important so that there is a large

sample size within each DRG.

The potential gains from DRG creep, or deliberately assigning a patient to a higher priced DRG

to receive more payment, would diminish if

DRG prices were reestimated frequently. New DRG

prices or weights would reflect the new distribution of patients among DRGs and the new average costs per DRG. Over time, reestimation of

prices would cause the more profitable DRGs to

become less profitable, and the less profitable ones

more profitable. Thus, one could expect a gradual

decline in the potential for “gaming” via DRG

creep with periodic reestimation of DRG prices.

One advantage of frequent updates of DRG

prices would be the alleviation of the lag that is

already built into the current system because fiscal

year 1984 prices are based on fiscal year 1981

data. The 1981 data reflect accepted modes of

practice in 1981 and do not account for new technologies currently in practice. Furthermore, Medicare cost reports are available on an annual basis,

so annual reestimation would require no additional data collection (at least until fiscal year

1988, when cost reports will no longer be required). Frequent reestimation of DRG prices

would capture gradual changes in hospitals’ costs

which should result as hospitals seek technological efficiency.

If the reestimation were too frequent, however,

hospitals would not be able to plan their moves

toward efficiency as well as they could if they

were certain of particular payments for a segment

of time. Because the year-to-year changes in relative prices are likely to be small and gradual, an

annual (or at most biannual) reestimation would

seem to provide the optimal mix of certainty for

hospital planning with the adjustment of prices

for efficient production of care.

Administering annual reestimations would be

slightly more expensive for Medicare than reestimation every 4 years. Not only would the process be more frequent, but the data requirements

for reestimation—cost reports and patient charges

—would continue indefinitely. The requirements

for data collection would increase administrative

costs to the hospitals, although many hospitals

are likely to use the same data for internal management functions under DRG payment.

Option 8: Amend the Medicare la w to strengthen

controls over hospital admission rates.

Under Medicare’s DRG prospective payment

system, hospitals are paid by Medicare on the

basis of the number of Medicare cases treated in

each DRG. Thus, the DRG hospital payment system provides a strong financial incentive for hospitals to increase the number of Medicare patients

they admit. One of the responsibilities of the PRO

program is to monitor hospital admissions. The

following suboptions are presented as possible

support for the PRO regulations.
160 ● Medical Technology and Costs of the Medicare Program —

Option 8a: Amend the Medicare law to require

a second deductible for rehospitalization within

60 days of the first admission.

Implementation of this option could save the

Medicare program money in two ways. Currently, Medicare beneficiaries do not have to pay a

second deductible for rehospitalization within 60

days of the first day of the initial admission. By

increasing beneficiary cost-sharing, adopting this

option would save Medicare program costs. Imposing a second deductible could also save costs

by encouraging cost consciousness in physicians.

Physicians would be aware of the financial burden of readmission on their patients, and such

patients might take a more active role in decisionmaking about readmissions.

Identifying unnecessary discharges and readmission is a PRO responsibility. It is important to

recognize that some readmission are necessary.

Often, elective procedures are postponed until patients are stronger and more able to withstand surgery or invasive procedures. Sometimes unrelated

diseases may strike patients in short periods of

time.

A drawback to the second deductible is that

Medicare beneficiaries already carry a heavy financial burden for their health care. Furthermore,

the amount of control patients actually can have

in making decisions about hospitalization is questionable. Thus, a second deductible might decrease access to inpatient hospital care for some

elderly and disabled patients. On the other hand,

its effect on admissions may be low because a

high proportion of the elderly have supplemental (“Medigap”) medical insurance, (Of course,

Medigap insurance premiums are likely to rise

in response to cover the increased costs. ) The

strength of the incentives is unknown, because

there are no empirical studies on how the elderly

would respond to additional cost-sharing.

Finally, implementation of this option might actually increase Medicare’s costs. Physicians and

patients might decide to keep patients in the hospital if there is a chance that a readmission might

be possible in 2 or 3 weeks.

Option 8b: Amend the Medicare law to provide

a short-term outlier policy for DRG payments.

— —

With a short-term outlier policy, Medicare

would not pay the full DRG payment if a length

of stay were less than a particular number of days

for each DRG. Such a policy would counteract

the incentive under DRG payment for hospitals

to admit patients for very short stays instead of

treating them on an outpatient basis. A potential

benefit could be that marginally ill patients who

might not require the intensive services of an inpatient hospital stay would not be admitted. A

potential problem would be that such patients

might be kept beyond the outlier threshold length

of stay to avoid the short-term outlier payments.

The strength of the incentives under this kind of

policy would depend on the marginal costs of admitting a patient compared to the outlier price,

as well as the hospital’s influence with its admitting physicians. The effect of a short-term outlier

policy on the volume of patients in each hospital

or in hospitals in the aggregate is unknown.

Option 8c: Amend the Medicare law to adjust

DRG payments for patient volume changes.

DRG prices are based on the assumption that

hospitals’ annual volumes are predictable and

vary only slightly from year to year. Adjusting

DRG payments to hospitals for volume changes

could directly balance the financial incentive that

DRG payment gives hospitals to admit more and

more patients. Unusual increases in the annual

number of hospital admissions could trigger a penalty charge against the hospital’s total Medicare

payment, or each DRG payment could be decreased by a certain amount. Thus, for example,

if a hospital’s volume increased 10 percent, DRG

payments could be decreased by an amount reflecting the marginal costs of those additional admissions. While this payment reduction would

discourage hospitals from unnecessarily increasing their admissions, the net decrease in a hospital’s revenues would be relatively small.

A two-way volume adjustment imposing a penalty for unusual increases in admissions and giving a bonus for unusual decreases could be instituted. A penalty for unusual increases in patient

volume could weaken the incentives for hospitals

to overadmit patients. A bonus for unusual decreases in admissions could protect hospitals from

the financial problems caused by population
Ch, 9—Findings and Policy Options . 161

— . -. —-— — —

migrations. It should be noted, however, that

some hospitals are inefficient or provide a lower

quality of care and may experience decreased admissions for these reasons; the low-end volume

adjustment might allow them to remain open

when they actually should close.

Another important consideration for deciding

whether to adopt a volume adjustment is the

fixed-cost-to-variable-cost ratio for various hospitals. Although low-occupancy hospitals may

need to increase their patient volumes in order to

cover their fixed costs, large volume increases may

trigger high variable costs. Thus, even without

volume adjustments, the fixed-cost-to-variablecost ratio and its relationship to the DRG payment and penalty are important.

Volume adjustment also discourages the potential for specialization of services within hospitals

for the purposes of efficiency. Payment based on

DRGs gives hospitals financial incentives to treat

patients in those DRGs in which the hospitals are

efficient and to avoid treating patients in those

DRGs which lose money. Thus, consolidation of

services is a potential result of the DRG payment

system. Again, high- and low-occupancy hospitals would be affected differently, with fixed and

variable costs important to their decisions about

which patients to treat.

Option 8d: Amend the Medicare law to establish

financial incentives for physicians’ decisions

about hospital admissions that are consistent

with the incentives of DRG payment.

Decisions to admit and discharge patients and

to use medical technologies during hospital stays

are primarily made by physicians, although patients’ decisions are certainly important. Under

DRG hospital payment, physicians will probably

be pressured by hospital administrators to discharge patients earlier than they previously have

and to readmit patients for elective procedures.

While quality assurance and utilization review

programs will reinforce physicians’ own inclinations to provide adequate care for their patients,

financial incentives could be established to mitigate any potentially harmful pressure from hospitals. One possibility would be to pay physicians

only half their fees for rehospitalization within 60

A potential administrative and policy problem

might arise when more than one physician is

involved in a patient’s care. In a case, for example, in which one physician admits a patient

to a hospital for diagnosis and then, after discharge, refers that patient to a specialist for longterm treatment, it remains questionable whether

a hospitalization should be counted against the

patient (if Option 8a were implemented), the physician (in the case of this option), or the hospital.

Identifying readmission would be a fairly simple task, and monitoring their appropriateness is

a PRO responsibility. Difficult judgments will

have to be made about which ones are unnecessary and what caused the readmission—not all

complications can be predicted, nor can they necessarily be averted by additional hospital days

during an initial admission. The difficulty in making such judgments could be compounded by administrative difficulties of combining Part A data

on hospital admissions with Part B data on phy -

sician payment.

Option 9: Amend the Medicare law to control

capital expenditures by hospitals by removing

capital cost pass-throughs.

Historically, capital expenditures by hospitals

have been reimbursed under Medicare on the basis

of depreciation and incurred interest expenses.

Under the DRG hospital payment system, at least

during the 3-year transition period, capital costs

will continue to be treated as pass-throughs. The

pass-through method of payment for capital,

which directly links the level of payment to the

amount of capital investment undertaken by a

hospital, does not discourage inefficient capital

purchases. However, its feasibility has been demonstrated, it is fair in the sense of treating hospitals alike, and it poses no barriers to equal access

to medical services,

The Social Security Amendments of 1983 (Public Law 98-21) mandated a DHHS study of alternative methods of handling capital under Medicare’s DRG hospital payment system. Three

methods of limiting capital payment to contain

costs for Medicare were discussed in chapter 6:

1) uniform payment (flat rate) approaches; 2)

days. hospital-specific controlled rates; and 3) if the
162 ● Medical Technology and Costs of the Medicare Program

— . —

pass-through is continued, direct regulation of

capital expenditures.

If the capital pass-through is continued, capital expenditures could be regulated on a projectby-project basis. Such regulation could be implemented through certificate-of-need (CON) programs or other agencies. The political process involved in CON programs might, but would not

necessarily, provide equity of access to medical

technologies. Studies of the effectiveness of CON

regulations in containing costs are inconclusive,

and the efficiency of a process such as this is questionable. Administrative costs would be very

high, and some hospitals might be unable to afford the costs associated with the application process and, thus, be impeded from making capital

investments. New hospitals might not be considered because of the high cost of application and

the possibility of denial

The following two suboptions are presented as

possible alternatives to capital pass-through payments under DRG payment. They are not intended to represent the entire range of methods

of handling capital,

Option 9a: Incorporate a flat rate for hospital

capital into the DRG rates.

The uniform payment approach would treat all

hospitals or all those in a class alike, regardless

of their level of capital expenditures. A flat rate

for capital, whether calculated either as a fixed

percentage of the DRG price or as a flat rate per

bed, would encourage hospitals to provide care

at the least possible total cost to the hospital. Since

new technologies would be judged in terms of

their impact on total costs, not just on operating

costs, a flat rate would give hospitals more incentives to be efficient than the current capital cost

pass-through. Hospitals would be further encouraged to specialize and join in plans for regionalization of health services.

Despite the increased efficiency of a uniform

rate for capital built into the DRG rates, it would

be difficult to ensure that this type of system

would be fair to all hospitals. Hospitals that in

the past have had lower ratios of capital to operating cost would receive more than before, while

those with historically high ratios would receive

less. Thus, public hospitals would probably fare

better with a flat-rate system than they have in

the past, at least in the short term. Multihospital

systems, whose affiliated hospitals could pool capital payments and smooth out fluctuations in capital expenditures across affiliated hospitals, would

also be favored. Implementing the uniform payment approach might require a difficult and costly

transition period if those hospitals that have made

major investments in recent years or that face

them in the near future are not to be unduly

penalized.

A uniform capital payment method such as a

flat rate within the DRG payment would not discourage equal access to medical technologies and

might help redress some current inequities because

of the possibility of increased capital payments

to public hospitals and others that serve low-income patients. It might, however, have a negative impact on the regionalization and specialization of services among hospitals because of the

difficulty some hospitals would have in accumulating enough capital to specialize. If the population shifts, moreover, new inequities for opening

and closing hospitals might appear. The question

of separating capital expenditures for equipment

from those for buildings should be addressed.

Making the transition from the cost-based reimbursement system to a flat rate capital payment

could be difficult for hospitals. Phasing in the flat

rate by reducing the proportion of capital payment that would be a pass-through over a period

of time could alleviate some of the financial difficulties but would not necessarily reduce the

amount of paperwork or data collection costs.

Option 9b: Build hospital-specific capital allowances into the DRG system.

To implement this option, hospital-specific cost

information would be taken into account to establish a base period level of capital payment, and

the payment level would be increased by an index over time. One approach would be to use the

hospital’s capital costs in a base year and then add

a percentage for inflation. Another would be to

limit capital payments to a percentage of a hospital’s operating costs in each year.
—

Ch. 9—Findings and Policy Options ● 163

Tying capital payment to a hospital’s level of

capital costs in a base year or to the hospital’s

operating costs would be efficient but might be

unfair. Hospitals that were most highly capitalized

in the past would be rewarded, while those with

low levels of capital would forever receive low

payments.

An increased administrative burden would be

put on the hospitals, especially in the transition

period from pass-through to hospital-specific controls. In the early years of implementation, this

system would not work well for hospitals that require major capital expenditures. Perhaps for

these reasons, it might be better to limit this approach to the movable equipment portion of capital, which typically has shorter lifetimes and

lower variations in asset values among hospitals.

Option 10: Provide adequate resources or incentives for States to experiment with alternative

hospital payment systems, especially those invoiving all payers.

In States where Medicare is the only third-party

payer using prospective payment, hospitals will

have incentives at best to shift costs to other payers and at worst to treat patients differently depending on their insurance. Savings to the Medicare program may not offset these other social

costs. Furthermore, a Medicare-only hospital payment system such as the current one may not provide sufficient leverage to lower the annual rate

of increase in hospital costs. Further experimentation with hospital payment systems would be

desirable to learn which methods of cost containment save the most money to Medicare and society as a whole.

The Social Security Amendments of 1983 (Public Law 98-21) encourage States to experiment

with payment systems that cover multiple thirdparty payers and differ from DRG payment by

requiring the Medicare program to participate in

any State-legislated prospective payment program

that covers at least 75 percent of the State’s

population; makes provisions for competitive

health plans; assures the Federal Government that

access to hospital care for Medicare and Medicaid beneficiaries will not decline; and assures the

Federal Government that hospital costs will not

be higher under the State program. Four States

—Maryland, Massachusetts, New Jersey, and

New York—already regulate all payers in their

hospital prospective payment systems and have

Medicare waivers. Other States will be examining the effectiveness of the payment systems in

these four States with Medicare waivers and

others experienced in containing hospital cost increases, The goal of this option would be to encourage the efforts of several State legislatures that

are working on this issue.

While all-payer systems would increase the payment system’s leverage over the hospital industry and reduce hospitals’ tendencies to shift costs

among payers, such systems have been criticized

for their potential to inhibit competition. According to this viewpoint, regulation precludes market forces from exhibiting their desired effects and

thwarts innovation. How much health care delivery systems should respond to market forces is

debatable.

Changes in hospital behavior in response to the

all-payer system incentives are predicted to range

from increasing efficiency through specialization

and interhospital cooperation to closing their

doors (6). The viability of particular hospitals can

be guaranteed or threatened, depending on the

goals of the particular State payment system. For

example, in New York, the capital pooling system

was established to save a number of inner-city

hospitals; and in New Jersey, several small hospitals have closed or merged at least in part because they could not earn enough money through

DRG payment (47).

There is empirical evidence from New Jersey

that vertical integration has been encouraged by

the DRG all-payer system there (75). As long as

only hospitals are under the all-payer system,

there will be incentives for them to branch out

and open separate home health agencies, nursing

homes, and satellite outpatient clinics. They will

have to continue to compete with each other for

physicians and patients.

All-payer prospective payment systems are not

the only approaches that may be attempted by

the States. Other approaches to the control of hospital costs, however, have significant limitations.

Two of these methods, increasing the patient’s

responsibility for cost-sharing and limiting pro-
164 . Medical Technology and Costs of the Medicare Program

— — -—. — —

viders through contracts between Medicare and

hospitals, were examined in chapter 6. Factors

such as the patient’s relative lack of power and

information to make informed decisions about the

use of technologies in hospitals and the apparently

strong preference of the elderly for supplemental

medical insurance regardless of its cost imply that

beneficiary cost-sharing for hospital services is not

likely to be as effective in altering the patterns of

use of hospital technologies as desired. And although contracting might save Medicare dollars,

such contracting would represent an abandonment of the principle of beneficiary freedom of

choice of provider on which Medicare was built

and would force subsidies of hospital care from

other payers,

Option II: Consider ways to extend the DRG prospective payment system to payers other than

Medicare (e.g., Medicaid) without relying on

State waivers.

This option differs from the previous one because this option addresses the current DRG prospective payment system, whereas the previous

option sought alternative systems. The desirability

of this option depends on the effectiveness of DRG

payment in encouraging the appropriate adoption

and use of medical technology and in containing

Medicare costs, The effectiveness of DRG payment is currently unknown.

As discussed in the previous option, a multipayer system would increase the payment system’s

leverage over the hospital industry. A multipayer

system would also diminish hospitals’ opportunities to shift costs from one payer to another, although multipayer systems need not pay all

payers the same price.

The clearest technical problem with extending

the current DRG-based hospital payment system

beyond the Medicare program is that DRG prices

have been based almost exclusively on Medicare

data. Comparable Medicaid data bases are not

available, and the Medicare and Medicaid populations are so different that the use of Medicaregenerated DRG prices for the Medicaid population would be unfair. Even if both data bases were

available for recalculation of DRG prices, the

problem of within-DRG variation in costs per patient would be exacerbated because of the diversity of populations.

It should also be noted that many State Medicaid agencies are experimenting with methods of

prospective payment. Potential refinements for

the Medicare system could come from these experiments,

Physician Payment

ISSUE:

How can Medicare’s physician payment

method be used to improve the incentives

for appropriate technology adoption

and use?

Physicians can influence both the number of patient visits and the use of a variety of technologies,

especially diagnostic tests. Furthermore, the ways

in which physicians are paid can influence physicians’ adoption and use of medical technologies.

Physicians who are paid on a fee-for-service basis

have incentives to see more patients more often

and to provide more technologies. Physicians (or

practice plans in which they participate) paid on

a cavitation basis would want to increase the number of their patients but would have incentives

to keep the number of visits low (or nonexistent)

and to use particularly cost-effective technologies.

Physicians’ incentives under a fee schedule system would depend on the particular type of schedule adopted. Under fee schedules based on patient

visits, physicians would have an incentive to

schedule more visits but would have a disincentive to use a large number of technologies (particularly those whose costs are high in relation to

the fee per visit received). If the fee schedule were

based on episodes of illness, physicians would

have incentives to treat for more episodes but

would want to keep patient visits for each episode

and the use of costly technologies at a minimum.

Excessive adoption and use of medical technologies are sometimes incorporated into medical

practice through habitual behavior of physicians

and because the health care system contains few

disincentives for these practices. Excessive use occurs within the norms of medical practice and is
—

evident across the spectrum of technologies available to physicians.

Physicians are motivated by their training to

do all they can for their patients, and generally

they have not—in the past—had to be concerned

about the costs of the care they provide. Indeed,

there have been economic incentives for physicians to increase demand for health care services.

These factors, singly and combined, often result

in overuse of medical technologies.

Two types of changes in Medicare’s physician

payment method could contain costs for the Medicare program and help rationalize the adoption

and use of medical technologies: 1) requiring beneficiaries to assume more responsibility for their

health care costs, either through increases in patient cost-sharing or reductions in the types of

services covered; and 2) imposing restraints on

the amount and type of payment to physicians.

The options presented below are grouped according to these two categories-cost-sharing by Medicare beneficiaries and changes in physician payment methods. Either type of change could result

in cost savings for the Medicare program, but each

type would have different effects on the adoption

and use of medical technologies and on access to

medical care by Medicare beneficiaries. The options presented do not always relate directly to

medical technology, but they are important because of their indirect effects on technology.

Changing Medicare’s voluntary physician assignment policy could strengthen the effect of implementing some of these options.

Option 12: Amend the Medicare law to increase

beneficiary cost-sharing for Part B services.

Several methods of cost-sharing were explored

in chapter 7. Increasing the premium for Part B

benefits would increase revenues for the Medicare

program, but the evidence suggests that premium

cost is too far removed from the use of medical

services to alter patterns of use. This change

would spread the burden of costs among many

beneficiaries without regard to their use of the

medical care system, and demand for medical

technologies probably would not be affected. Increasing the deductible for Part B, again, might

not reduce the use of services. Medicare benefiCh. 9—Findings and Policy Options ● 165

ciaries often have chronic diseases and require

multiple physician visits.

Coinsurance raises financial barriers each time

medical services are sought. Increasing Medicare’s

Part B coinsurance requirements would have a

more significant effect on the demand for medical technologies than would a deductible. Part B

beneficiaries are already responsible for a 20-

percent coinsurance payment for assigned care

and even more for nonassigned care. Modest increases in coinsurance requirements would probably have little effect, beyond the incentives

already accompanying current coinsurance requirements, on patient behavior. Large increases,

on the other hand, would probably result in fewer

visits to physicians but might also result in a reduction in access to necessary medical care, especially for the lower income elderly who are not

eligible for Medicaid.

In summary, greater cost-sharing by Medicare

beneficiaries under Part B could help contain

Medicare program costs, in part by a shifting of

costs to beneficiaries and in part through some

resulting decrease in patient visits, It is unclear

that all appropriate technologies would be provided with greater cost-sharing, however, because

Part B beneficiaries might have to forgo some necessary medical care.

Option 13: Discourage Medicare beneficiaries’

purchase of private supplemental (“Medigap”)

insurance.

Private insurance companies have offered, and

many Medicare beneficiaries have purchased, supplemental (’Medigap”) insurance policies to cover,

at least partially, patients’ out-of-pocket medical

expenses. Noting that the type of extra first-dollar

coverage that Medigap policies provide partially

nullifies the intended effects of Medicare’s deductible and coinsurance requirements on use of medical services, some observers have suggested taxing Medigap policies to make their purchase less

attractive, A principal objection against taxing

Medigap insurance is fairness, because the general population’s health insurance policies retain

their tax advantages. If this option were adopted,

the constitutionality of selective taxation would

most likely be challenged.

25-337 0 - 84 - 12
166 ● Medical Technology and Costs of the Medicare Program —— .—

Because elderly people already pay about onethird of their medical expenses out-of-pocket and

need more medical care than younger people, this

option raises two broad issues: 1) whether Medicare should become the sole medical insurer for

the elderly rather than providing a floor of insurance coverage as it does now, and 2) whether the

Medicare program will provide adequate insurance coverage, especially in view of present costcontainment efforts.

Option 14: Place further limits on payment to

physicians under Part B of Medicare.

Methods of limiting payments to physicians fall

into two categories: 1) limits on allowable physician fees, and 2) the use of fee schedules. Both

methods raise the issues of assignment of claims

and changes in coding of procedures.

Option 14a: Amend the Medicare law to place a

ceiling on allowable physician fees under

Medicare.

The Medicare Economic Index currently limits

the rate of physicians’ fee increases to the rate of

their cost increases. Other types of caps that could

be imposed include freezes on physician payment

levels for a specified period of time and percent

limitations on the annual rate of allowable fee increases.

A cap on physician payment levels by Medicare is unlikely to change overall reimbursement

to physicians, because physicians could increase

patient visits, increase the number of technologies

provided to each patient, and shift to a higher

priced mix of technologies. Because it is unlikely

that physicians would charge less than the cap,

such a cap would be effective in containing program costs only if it were set low. A low fee cap,

however, would result in widening the gap between fees paid by Medicare (allowed charges)

and those paid by private patients (billed charges).

Thus, fewer physicians would be likely to accept

assignment, With less assignment, Medicare beneficiaries would have to pay an even greater share

of their total health costs. Program savings would

accrue at the expense of patients, and increased

cost-sharing might result in decreased access to

needed medical care.

Option 14b: Move to fee schedules for physician

payments under Medicare.

Current limitations on increases in allowable

charges are slowly turning Part B physician

payments into de facto fee schedules, but historical specialty and geographic differences in fee

levels that have developed under the fee-forservice system of payment remain. Cost-based fee

levels could be developed, but they would require

a data base that relates costs to charges in some

rational fashion. The difficulty in developing such

a data base should not be taken lightly.

Payment through fee schedules would necessitate a reformulation of the diagnostic and procedural codes for physician services that are

currently used by the Medicare program. The

number of procedural and diagnostic categories

in these codes has increased by the thousands since

the onset of Medicare and Medicaid. The large

number of categories increases the likelihood of

incorrect coding, and the availability of numerous

categories to choose from in the billing process

makes it possible for physicians to bill for higher

priced services than those actually provided.

Furthermore, since the existing fee and price

system provides financial incentives for the use

of “technology-intensive” medical care, one longrange objective in developing fee schedules might

be an overall review of the relative values of all

procedures. The fee system could then be revised

in such a way that technology-oriented services,

such as performing diagnostic tests and surgical

procedures, might be valued neutrally with cognitive services, such as taking medical histories

and providing patient counseling. Current fees

and payment methods favor the technological patient services over the cognitive.

Before fee schedules are developed, packages

of physician services, possibly designed to complement existing DRGs for hospital care, could

be developed. Inpatient surgical services would

be one logical starting point. Other physician services could also be included. For example, DRGbased payment to physicians might be applied initially only to acute inpatient care, then extended

to include physician services in skilled nursing fa-
Ch. 9—Findings and Po/icy Options . 167 — . —. --———— .—

cilities, and then to ambulatory care for those

diagnostic categories where such an inclusion was

found to be appropriate and feasible. Coordinating physician and hospital payments is important,

because there is an incentive under DRG hospital payment to move services out of the hospital

settings. An advantage of a fee schedule for physicians would be a probable reduction in inpatient

hospital physician consultations and possibly even

reduced length of stay. A disadvantage is that it

would depend on inpatient care as the starting

point, leaving other ambulatory visits outside the

system, at least at first.

Option 15: Change Medicare’s claim-by-claim

voluntary physician assignment policy.

Medicare's current policy of allowing physicians to decide whether or not to accept assignment on a claim-by-claim basis allows costs to be

shifted from the physician to Medicare benefici -

assignment policy, Medicare pays 80 percent of

allowed charges for nonassigned care.

An alternative to establishing a mandatory “allor-nothing” assignment policy or maintaining current assignment policy is for Medicare to pay less

for nonassigned than for assigned care. This might

spread the burden of cost-sharing more equitably

between patients and their physicians and provide

significant incentives to both groups to be more

conscious of costs. Reduced payment could be implemented either by further reducing allowable

charges for nonassigned versus assigned services,

or by increasing the coinsurance requirement for

nonassigned care (e. g., from 20 to 50 percent).

Either approach could be designed to achieve similar savings for the Medicare program, but reducing allowable charges would be directed at

physicians, while increasing the coinsurance requirement would be directed at patients.

aries. Although such cost shifting may decrease Patients may ultimately bear most of this shift

demand for medical technologies, it may also de- in costs in either approach, however, because of

crease access to necessary medical care. Chang- their liability for the difference between billed and

ing assignment policy would strengthen Option allowed charges for nonassigned care. An addi14 and suboptions. tional adjustment under this alternative could be

One type of change in assignment policy is to

make assignment mandatory, so that physicians

are not paid at all by Medicare if they refuse to

accept assignment. Under mandatory assignment,

beneficiaries would have greater incentives to seek

out physicians who accept assignment, because

they would assume all of the costs of nonassigned

care (except for any portions covered by a Medigap policy). Physicians would also have to weigh

the financial impact of losing their Medicare income altogether versus accepting the payment

levels set by Medicare.

Thus, mandatory assignment provides an incentive for cost-conscious behavior in both patients and their physicians, whereas under present assignment policy, most of the burden of cost

savings falls on Medicare patients. Mandatory

assignment could reduce access to medical care

for Medicare’s beneficiaries, however, because

they would be responsible for payment of charges

for nonassigned care. At least under current

to prohibit billing by physicians for the difference

for nonassigned care, and payment could be made

directly to the physician for allowed charges

(minus the patient’s coinsurance share). Under

current payment for nonassigned care, allowed

charges are computed and 80 percent paid to the

patient, not to the physician, who must then collect from the patient.

Most, if not all, payment changes in the Part

B program are likely to place additional financial

burdens on patients. Some observers suggest that

the additional burden (which Medigap insurance

moderates) is desirable, because it gives patients

incentives to behave in a cost-conscious manner

when seeking medical care. Patients must have

the information on which to make such informed

decisions. Thus, even if none of the financing and

assignment options is undertaken, it would be

desirable for patients to have more information.

Medicare beneficiaries could be given information

on their payment responsibilities, what assign-
168 ● Medical Technology and Costs of the Medicare Program

—

ment means, the relative charges of physicians in

their areas, and names of physicians who accept

assignment.

Option 16: Require review of physicians’ services.

Option 16a: Encourage the development of a review program for physicians’ services.

Professional Standards Review Organizations

(PSROs), which concentrated their review on the

appropriateness of hospital admissions and

lengths of stay, were statutorily replaced by PROS

in 1982 (Public Law 97-248). Under Medicare’s

DRG hospital payment system, PROS will have

the added responsibilities of reviewing the validity

of diagnostic information provided by hospitals

(DRG verification) and the appropriateness of

moving patients from hospitals to less intensive

care settings such as nursing facilities and home

health care.

DRG payment provides financial incentives to

reduce the unnecessary use of ancillary services

in hospitals. This option would address the fact

that similar disincentives for the excessive use of

medical services in physicians’ offices and other

ambulatory care settings are lacking. While there

is evidence that physicians do respond to restraints

on physician payment levels by increasing the

number of services they provide and shifting to

a higher priced mix of services (153,275), however, one problem in identifying excessive use on

a procedure-by-procedure and physician-by-physician basis is in differentiating between normal

and excessive provision of medical care.

Under Public Law 98-21, HCFA is required to

study the possibility of extending DRG payment

to physicians’ services. The resulting information

will, in essence, reflect norms of care on which

DRG-based prices could be computed. Such

norms of care might also be used to extend PRO

activities to inpatient physicians’ services. Similarly, information for extending DRG payment

to ambulatory care might be used to develop review systems for office-based care. The costs of

conducting such an extensive review program,

however, would be substantial.

Option 16b: Require or pay for second opinions

in elective surgery.

Voluntary second surgical opinion programs

generally have had low participation rates. In

HCFA’s two demonstration programs, for example, only 1.2 and 0.3 percent of Medicare beneficiaries who had surgery participated in the programs and sought second opinions, despite waiver

of deductibles and coinsurance for the second

opinion (127). Because of low participation rates,

the potential savings from voluntary programs are

not great.

On the other hand, there is growing, though

not comprehensive, evidence that mandatory second surgical opinion programs reduce the amount

of elective surgery. The reduction takes place in

part because the first surgeon is aware that the

patient will need a second opinion and in part

because patients tend to follow the second surgeon’s recommendation.

As an alternative to an across-the-board, mandatory program, a mandatory program could be

initiated for a few elective surgical procedures.

The procedures included could be slowly expanded if the original program leads to cost savings. Monitoring the impact of this option, if implemented, would thus be very important.

Alternative Approaches to

Changing Incentives

ISSUE:

What broad approaches, other than those

directly involving Medicare’s payment

mechanism, could be used by Medicare to

encourage the appropriate adoption and

use of technology?

Most cost-containment strategies that rely on

the existing Medicare program structure emphasize restraints on payments made to hospitals,

physicians, and other providers, augmented by

utilization and other types of review programs.

Such approaches are complemented by efforts
Ch. 9—Findings and Po/icy Options ● 169

—-—.—. — ——.. .—. .. —— - .

to increase beneficiary cost-sharing. Other approaches that may be more feasible or desirable

include changes that must involve the general

health care system but that Medicare could embrace and changes in the structure of the Medicare program itself.

Long-range cost containment in the Medicare

program is limited by the kinds of health care delivery systems available and the influence that

Medicare financing can have on the settings and

kinds of technologies provided. In recent years,

the Medicare program has granted exceptions to

specific alternative types of care (e. g., freestanding ambulatory surgical centers) and encouraged

the development and evaluation of alternative delivery methods (e.g., preferred provider organizations) through demonstration programs. Thus,

Medicare’s efforts in developing competition with

the types of care predominantly available have

been to identify and encourage other types of provider practices and modes of delivery. In the long

run, it is hoped, the use of alternative sites and

organizations will lead to cost-effective health care

by encouraging competitive behavior among providers.

A complementary approach to increasing competition among providers involves moving from

the current Medicare program structure to a system in which a variety of types of health insurance coverage would be made available to Medicare beneficiaries. The most discussed possibility

is the use of vouchers, wherein persons eligible

for Medicare would receive a specified amount

of money to purchase health insurance from the

marketplace. The assumption is that beneficiaries

would be encouraged to select delivery systems

that offer the best benefits for the least amount

of money. To the extent that health maintenance

organizations (HMOs) or preferred provider organ izatio ns (PPOs) can achieve this goal, these orga -

nizations would be selected.

Competition can occur both at the point of insurance and at the point of service delivery. In

both cases, payment by cavitation is believed to

increase competition. A voucher, with its fixed

dollar subsidy, is actually a cavitation method of

Pavment for total medical care (both inpatient and

voucher may benefit from competition among

plans. The beneficiary could purchase traditional

fee-for-service insurance or could select a plan

such as an HMO that accepts a capitated payment

per enrollee. Important decisions regarding competition for policy makers in the Medicare program include: 1) the relative emphases to be

placed on the insurance versus the alternative delivery system approach, and 2) the pace of adopting the various competitive approaches into Medicare. To increase the capability of Medicare to

embrace the various competitive approaches,

however, the program could undergo an administrative change—merging Parts A and B.

Option 17: Move toward a cavitation payment

system for Medicare.

The extent and pace of changing the Medicare

program to cavitation payment depend on the

capacity of the health care system to provide alternative sites and organizations of medical care and

on Medicare’s leverage in promoting alternative

delivery methods or requiring that they be substantially available. In one sense, there is a

chicken-or-egg question —i.e., must substantial

changes in the health delivery system come first,

or is it the financing leverage of programs such

as Medicare (and its effects on the general health

care system) that will lead to the desired health

system changes?

Under current Medicare policy, the implicit

assumption is that health care system changes

must come first. This assumption is reflected in

Medicare-supported demonstrations of alternative

delivery methods and Medicare’s service-byservice adoption of alternative methods (e.g., ambulatory surgery centers, special provisions for

HMO participation). This assumption is also present in discussions among policy makers on Medicare vouchers. A voucher program may involve

mandatory or voluntary participation. A voucher

could be completely voluntary and allow beneficiaries to reenroll in Medicare, it could require

that the decision to opt out of Medicare be permanent, or it could trigger mandatory participation if and when more than half of the beneficiaries choose vouchers. It is believed, however,

. .

outpatient). The beneficiary who receives the that the implementation of mandatory vouchers
170 ● Medical Technology and Costs of the Medicare Program

— — .-. . —

for Medicare is not politically feasible (336). In

other words, there is reluctance to end the current Medicare program per se and place the burden on beneficiaries tc) see if the market will

respond.

Under voluntary voucher proposals, the policy is to provide enrollees with incentives to seek

more cost-effective care, such as through HMOor PPO-type organizations. If voluntary vouchers

succeed in stimulating alternative systems, then

the current Medicare program would slowly be

replaced.

A voluntary voucher system for Medicare could

be implemented without fundamental changes in

the basic Medicare program. Replacement of the

current Medicare program would depend on the

amount of use of the vouchers, which in turn

would depend on the capacity of the health care

system to provide cost-effective alternatives to

present Medicare benefits.

In sum, encouraging competitive approaches

into the Medicare program can proceed by providing enrollees with the opportunity to opt out

of the basic program, or by transforming the basic

payment program itself into a competitive mode.

A Medicare program with cavitation as the insurance mechanism might be initially implemented in urban areas, particularly urban areas

with competition for patients and with substantial availability of prepaid services. The pace at

which a voucher-only approach might be implemented has already been explored by the several

bills introduced in Congress. A cautious pace

would be to implement voluntary vouchers as a

first step with periodic opportunities for reenrollment in Medicare.

Option 18: Merge Parts A and B of Medicare.

The separation of the Hospital Insurance portion of Medicare (Part A) from the Supplementary Medical Insurance portion (Part B) is inefficient and allows incentives for the inappropriate

provision of technologies to persist. Because of

duplication of administration in the two parts,

administrative costs to Medicare are probably

higher than necessary. In addition, the fiscal

separation, wherein Part A is financed through

a payroll tax and

general revenues,

. . . . . .

Part B through premiums and

also seems wasteful.

Merging Parts A and B could ameliorate the

current revenue problems faced by Medicare. One

proposal (84) would substitute a comprehensive,

integrated set of benefits for current separate sets

under Parts A and B, The benefits would be paid

from a single trust fund formed from the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund, Revenues would come from a combination of the

current HI contributions, the general revenues

projected for SMI expenditures, and new incomerelated beneficiary premiums.

Currently, parallel data systems and administrative mechanisms for Parts A and B do not allow

easy cross-referencing by patient or provider. This

problem is important because of providers’ efforts

to shift costs from one part to the other (usually

A to B). Some medical technologies have been

covered under both parts, but because of differences in which part paid for their use at which

time, facilities covered under one part or the other

have duplicated equipment unnecessarily. Such

duplication results in facilities and equipment that

remain idle and raise prices in order to cover fixed

costs. If there were one type of coverage and one

payment source, at least some of this duplication

and subsequent cost shifting could be avoided.

A merger of Parts A and B would allow Medicare beneficiaries to participate more easily in

alternative organizations of care. A merger would

also facilitate expansion of the DRG payment system beyond the inpatient hospital setting. For example, in the future, the DRG could be defined

on the basis of an “episode” of care under the joint

purview of Parts A and B. The definitional difficulties could be substantial, but so could be the

payoffs in efficiency, cost control, and appropriate medical technology adoption and use (201),

The transition from Part A and Part B to an

integrated system would be complex. Data systems would have to be merged, and intermediaries

and carriers would have to negotiate to be single

Medicare contractors. Once integrated, however,

the system could be more efficient, less administratively burdensome to hospitals, and less costly

to society.
Appendixes
Appendix A.— Method of the Study and Case Studies

This assessment of “Medical Technology and Costs

of the Medicare Program” was preceded by a 2-month

planning effort that identified areas on which to concentrate and established a tentative study approach.

The planning phase took place in April and May 1982,

and resulted in a study proposal for the full assessment.

The full assessment began on June 1, 1982. One of

the first tasks undertaken was the selection of the advisory panel. Most of the studies undertaken at OTA

rely on the advice and assistance of an advisory panel

of experts. The advisory panel for a particular assessment suggests source materials, subject areas, case

studies, and perspectives to consider; assists in interpreting information and points of view that are assembled by OTA staff; and suggests possible findings and

conclusions based on the accumulation of information

produced by the study. The panel members review

staff and contract materials for accuracy and validity, discuss policy options of the study, and present

arguments for and against the options and conclusions.

They do not determine the report’s final form, however, and are not responsible for its content, direction,

or conclusions.

The advisory panel for the present assessment consisted of 20 experts with backgrounds in health policy,

hospital administration, health economics, medicine,

health insurance, State- and Federal-level Government,

industry, and academia. Several panel members also

represented consumers of the Medicare program. The

panel was chaired by Stuart Altman, Dean of the

Florence Heller School of Brandeis University (in December 1983, Dr. Altman became chairman of the congressionally mandated Prospective Payment Assessment Commission).

The first panel meeting was held on October 22,

1982. Panel members discussed the overall study plan

for the assessment based on the proposal and preliminary modifications and helped OTA staff refine the

goals for the project. The panel examined the project

boundaries and definitional issues and was key in

sharpening the study’s focus. The panel was also

helpful in reviewing the primary issue areas to be covered and in providing suggestions of individuals and

organizations to contact for information and assistance. Case studies of four medical technologies that

were specifically requested by Congress were discussed, and the panel provided ideas for possible additional cases. The case study approach was intended

to provide additional (e. g., efficacy, safety, and costs)

information on specific medical technologies in order

to analyze their possible effects on Medicare. The requested technical memorandum on the proposed use

of Diagnosis Related Groups (DRGs) as Medicare’s

hospital payment method was also discussed.

Following the panel meeting, contracts were let for

some of the additional case studies. Drafts of the first

three case studies were received by OTA staff and

subsequently mailed out for the review. This process

involved the advisory panel and 50 to 80 additional

reviewers, depending on the case study. In addition,

OTA staff prepared staff papers on the main issues of

the assessment. A draft of the technical memorandum

on DRGs was also prepared by the staff and sent to

the panel for their review. Only 2 weeks after the first

draft of the technical memorandum was completed,

the Social Security Amendments of 1983 (Public Law

98-21) mandated a change in Medicare’s hospital payment system to a prospective system based on DRGs.

A decision was made to focus the technical memorandum on implications for medical technology under

DRG payment. Previously, the focus had been on

whether a DRG system would be appropriate. Finally,

during this period, the case study on alcoholism treatment was also completed. It was released by the Senate Finance Committee, Subcommittee on Health in

March 1983.

The second panel meeting was held on March 22,

1983. At that meeting, progress of the study was reviewed, and the panel explored modifications in the

emerging conceptual approach of the project. Considerable time was spent discussing ways to analyze and

synthesize the material that had been collected. The

panel also provided comments on the technical memorandum, the case studies, and OTA staff papers.

In July 1983, the technical memorandum on DRGs,

entitled Diagnosis Related Groups and the Medicare

Program: Implications for Medical Technology, and

the case study on therapeutic apheresis were completed

and released by OTA. Additional case studies were

received from contractors and mailed out for review.

In August 1983, the case study on the variations in hospital lengths of stay was completed and released by

OTA. The staff also prepared a first draft of the main

report for the panel’s review.

The third and final meeting of the advisory panel

was held on August 2, 1983. The primary focus of the

meeting was on the draft of the final report prepared

by OTA staff. The panel identified its strengths, weaknesses, and omissions and also defined areas for developing policy options for congressional consideration.

The first draft of the main report was revised by

OTA staff to reflect the extensive suggestions and comments of the advisory panel. The second draft was then

sent for a further round of review by a much broader

173
174 ● Medical Technology and Costs of the Medicare Program

—

range of experts in a diversity of settings: Federal agencies, private and nonprofit organizations, academic institutions, practicing health professionals, and other

selected individuals, Altogether, more than 200 individuals or organizations were asked to comment on

drafts of the main report, the technical memorandum,

or individual case studies of this assessment. The

second draft of the main report, containing policy options, was sent for review to approximately 90 individuals. After appropriate revisions based on comments received were made, the report was submitted

to the Technology Assessment Board.

This project resulted in a number of documents: the

main report, of which this appendix is a part; a technical memorandum on DRGs; and six case studies on

specific medical technologies:

The Effectiveness and Costs of Alcoholism Treatment: Leonard Saxe, Denise Dougherty, Katharine Estes, and Michelle Fine. Requested by the

Senate Committee on Finance; Subcommittee on

Health.

The Safety, Efficacy, and Cost Effectiveness of

Therapeutic Apheresis: John C. Langenbrunner

(Office of Technology .4ssessment). Requested by

the Senate Committee on Finance; Subcommittee on Health.

Variations in Hospital Length of Stay: Their Relationship to Health Outcomes: Mark R. Chassin.

Requested by the Senate Committee on Finance,

Subcommittee on Health.

●

●

●

Intensive Care Units (ICUs): Costs, Outcomes,

and Decisionmaking: Robert A. Berenson.

Effectiveness and Costs of Continuous Ambulatory Peritoneal Dialysis (CAPD): William B. Stason and Benjamin A. Barnes. Requested by the

Senate Committee on Finance and its Subcommittee on Health.

The Cost Effectiveness of Digital Subtraction

Angiography (DSA) in the Diagnosis of Cerebrovascular Disease: Matthew Menken, Gordon H,

DeFriese, Thomas R. Oliver, and Irwin Litt.

Several contractors’ reports were also prepared. The . .

main report, the technical memorandum, and the case

study on apheresis were prepared by OTA staff. The

remaining case studies were commissioned by OTA,

performed under contract by experts, and reviewed extensively under the direction of OTA.

The case studies are part of OTA’s Health Technology Case Study Series. The case study selection process involved OTA staff and consultations with the

congressional staffs, the advisory panel for this assessment, the Health Program Advisory Committee, and

other experts in various fields. Four of the case studies

were specifically requested by congressional committees. The remaining two were selected to provide information and ideas for the main report and to serve

as individual analyses of particular issues and technologies. Like this report, the case studies and the DRG

technical memorandum are available through the U.S.

Government Printing Office.
Appendix B.—Acknowledgments and

Health Program Advisory Committee

. —. —

The development of this assessment was greatly aided by the advice and review of a number of people in

addition to the Advisory Panel and the Health Program Advisory Committee. OTA staff would like to express

their appreciation especially to the following individuals:

Joel Broida

Health Care Financing Administration

John P. Bunker

Stanford University

Marc Chassin

Los Angeles, Calif.

Dennis Cotter

Prospective Payment Assessment Commission

Philip Cotterill

Health Care Financing Administration

J. Richard Crout

National Institutes of Health

Helen Darling

Government Research Corp., Washington, D.C.

Palmer Dearing

Blue Cross Blue Shield Association

Ginette Fowles

Stanford University

Paul Ginsburg

Congressional Budget Office

Mark Goodhart

American Hospital Association

Ruth S. Hanft

Washington, D.C.

Charles Helbing

Health Care ‘Financing Administration

John C. Langenbrunner

Health Care Financing Administration

Joseph Lipscomb

Duke University

Bryan R. Luce

Health Care Financing Administration

Glenn Markus

Health Policy Alternatives, Inc.

Washington, D.C.

John E. Marshall

National Center for Health Services Research

Thomas McElvogue

Blue Cross of Greater Philadelphia

Mary Lou McIntyre

Health Care Financing Administration

John Reiss

Dechert, Price & Rhodes, Philadelphia, Pa.

Thomas Rice

University of North Carolina

Sheila Ryan

Health Care Financing Administration

Leonard Saxe

Boston University

Marvin Shapiro

U.S. Administrators Inc., Los Angeles, Calif.

Bruce C. Vladeck

United Hospital Fund of New York

Irwin Wolkstein

Health Policy Alternatives, Inc.

Washington, D.C.

Craig Wright

Health Care Financing Administration

James M. Young

Blue Cross and Blue Shield of Massachusetts

HEALTH PROGRAM ADVISORY COMMITTEE

Sidney S. Lee, Committee Chair

President, Michael Reese Hospital and Medical Center

Stuart H. Altman’ Carroll L. Estes**

Deanr Florence Heller School Chair

Brandeis University Department of Social and Behavioral Sciences

H. David Banta

Deputy Director

Pan American Health Organization

School of Nursing

University of California, San Francisco

175
176 ● Medical Technology and Costs of the Medicare Program — ———-.—.—.

Robert Evans

Professor

Department of Economics

University of British Columbia

Rashi Fein

Professor

Department of Social Medicine and Health Policy

Harvard Medical School

Harvey V. Fineberg

Dean, School of Public Health

Harvard University

Melvin A. Glasser***

Director

Health Security Action Council

Patricia King

Professor

Georgetown Law Center

Joyce C. Lashof

Dean, School of Public Health

University of California, Berkeley

Margaret Mahoney* ***

President

The Commonwealth Fund

New York, N.Y.

Frederick Mosteller

Professor and Chair

Department of Health Policy and Management

School of Public Health

Harvard University

—— .——

‘until April 1983.

* ● UntJ March 1984

● ‘ “Until October 1983

● ‘ g ‘Until August 1983

Nora Piore

Senior Advisor

The Commonwealth Fund

New York, N,Y.

Mitchell Rabkin*

President

Beth Israel Hospital

Boston, Mass.

Dorothy P. Rice

Regents Lecturer

Department of Social and Behavioral Sciences

School of Nursing

University of California, San Francisco

Richard K. Riegelman

Associate Professor

School of Medicine

George Washington University

Walter L. Robb

Vice President and General Manager

Medical Systems Operations

General Electric

Milwaukee, Wis.

Frederick C. Robbins

President

Institute of Medicine

Rosemary Stevens

Professor

Department of History and Sociology of Science

University of Pennsylvania
Appendix C.— Selected Activities in

Medical Technology Assessment

Introduction

Medical technology assessment in health policy

today typically refers to an evaluation of the efficacy

and safety, and sometimes costs, of medical technology. Medical technology assessments are a source of

information needed by government officials in formulating legislation and regulations, by health professionals in managing patients, by industry in developing products, by private insurers in creating benefit

packages, and by consumers in making personal health

decisions (359). Furthermore, medical technology}?

assessments can yield information for hospitals functioning under Medicare’s new Diagnosis Related Group

(DRG) hospital payment system. 1

Currently, there are numerous activities in medical

technology assessment. Multiple participants from

both the public and private sector perform or use medical technology assessments (359 ). However, there is

little, it any, coordination among the various organizations, and because of a lack of funds, many organ izations neither assess as many technologies nor perform as comprehensive assessments as they desire.

Assessments are used for different purposes, including

coverage, payment, purchasing, and management decisions, The focus of this appendix is on assessments

made or used for coverage purposes.

In the past 2 years, the private and nonprofit sectors have increased their involvement in assessing medical technology. However, many of their assessments

are limited to specific organizational objectives and

have limited value for national policy decisions. Safety

and efficacy criteria are usually used in technology

assessments; economic, legal, social, and ethical criteria are sometimes used.

Public Sector Activities

OTA has estimated that Federal expenditures on

evaluating health technologies in general are approximately $200 million a year (361). Only a small fraction of this amount is spent for evaluating medical

technologies specifically to determine their eligibility

for Medicare payment. By way of contrast, it is interesting to note that fiscal year 1982 reimbursement

for Medicare services totaled $50.9 billion (135).

Currently, the body with explicit responsibility for

evaluating selected medical technologies to assist the

Health Care Financing Administration (HCFA) in determining what diagnostic and therapeutic techniques

ought to be covered by Medicare is the Office of

Health Technology Assessment (OHTA), of the National Center for Health Services Research in the Public

Health Service (PHS). 2 OHTA’s budget for fiscal year

1983 was approximately $1 million.

The Medicare program has called on PHS to provide technical medical advice for making coverage

decisions since the late 1960’s. The coverage advice

process established initially was a loosely structured

one, relying mainly on informal contacts with experts

at the National Institutes of Health (NIH) or medical

specialty societies for opinions about the safety and

effectiveness of medical technologies. In 1977, the

Administrator of HCFA and the Assistant Secretary

for Health of the Department of Health and Human

Services (DHHS) formalized the PHS role in providing

advice through the Office of the Assistant Secretary

for Health.

In recent years, the increasingly rapid development

and use of sophisticated and expensive medical technologies has increased the number and complexity of

Medicare coverage determinations. Thus, Congress

passed the National Health Services Research, Health

Statistics, and Health Care Technology Act of 1978

(Public Law 95-623). That act established the National

Center for Health Care Technology (NCHCT).

One of NCHCT’s mandated assignments was to provide scientific / medical assessments to HCFA on Medicare coverage for specific medical procedures and technologies, The agency’s overall mission, however, was

much broader: it was to “stimulate increased scrutiny

of new and existing health care technologies to insure

that their safety, efficacy, cost-effectiveness, social,

ethical and economic impacts are more completely explored” and to encourage the “rapid dissemination of

newly developed health care technologies which have

proved their worth in terms of safety, efficacy, (and)

cost-effectiveness. ” NCHCT’s staff was officially limited to never more than 20, but “creative management”

by its director, Dr. Seymour Perry, enabled the center to obtain the services of 39 individuals (45). In December 1981, however, NCHCT ceased to function because of a lack of congressional funding.

OHTA, formed as NCHCT’s successor, has been

assigned a variety of duties (see table C-1 ). Generally,

however, its activities have been confined to evaluating

-[kp)te thv .)rml.lnt It+ )n the)r narntw the otf ILtL c)t He.]lth rec hnt~l{~~~

,Av+s\\n~ent C)} ITA ,lnd t he congrt>sslon,)” I (>tl I( t, i!t Tec hn{~l(~g~ ,A\v+\nlvnt

( OT.LI I ,Irt, fii () (]]t ft>rcnt c)tt I( LJS

177
178 . Medical Technology and Costs of the Medicare Program

●

●

●

●

●

●

b

Table C-1 .—Activities of the Office of

Health Technology Assessment (OHTA)

Provide national Ieadership, coordination, and

administration of a comprehensive program for health

care technology assessment and transfer to improve

the quality and reduce the cost of medical care

Establish criteria for public and private organizations

and individuals both within and outside OHTA to

identify the critical technologies to be assessed

Administer a program of assessments of health care

technologies which take into account their safety;

efficacy; cost effectiveness; and social, ethical, and

economic impacts

Make recommendations 01 health care technology

issues i n the administration of the laws under the

Assistant Secretary for Health’s jurisdiction, including

preparation of the PHS position regarding

appropriateness of Medicare coverage of health care

technology

Publish and disseminate the information obtained as a

result of activities supported by OHTA, and undertake

programs to develop new and improved methods for

making such information available

Provide technical assistance and consultation to

organizations and individuals within and outside DHHS

engaged in or concerned with the results of health

care technology assessments, research, evaluations,

and demonstrations

Coordinate PHS research, evaluations, and

demonstrations relating to the assessment of health

care technology undertaken and supported by DHHS

components.

SOURCE Federa/ Regisfer 48(13} 2444 Jan 19 1983

technologies in response to requests from HCFA.

When HCFA has a simple inquiry about the regulatory and research standing of a particular technology,

the staff of OHTA provides background information

obtained from other PHS agencies, including the Food

and Drug Administration (FDA), NIH, the Centers for

Disease Control (CDC), and the Alcohol, Drug Abuse,

and Mental Health Administration (ADAMHA).

HCFA may also request full assessments from OHTA.

OHTA’s assessment process, which involves synthesizing the available information about a technology and

transmitting the results to HCFA, requires 12 to 18

months for completion. As of June 1983, OHTA had

a backlog of 12 months or more on 23 technologies

requiring assessment—some from 1979 (211). OHTA

completed 26 assessments in 1982. The OHTA Director reported that as of June 1983, 16 assessments had

been completed, 30 assessments were in progress, and

40 were expected to be completed by the end of the

1983 fiscal year (211).

In performing a full assessment, the OHTA staff first

reviews the coverage issue with HCFA, clarifies the

original request, and defines appropriate questions. It

also initiates a literature search and data collection effort, gathering information from a wide spectrum of

—

sources. Working under a philosophy that it should

hear from all interested parties, OHTA advertises an

impending assessment in the Federal Register. Although notices and advertisements regarding particular coverage issues also appear in professional and

trade publications, notices in the Federal Register are

PHS’s primary access to the “general public” and are

used to obtain the views of a broad mix of interested

parties. Responses to such notices have generally come

from industry and physicians.

For available scientific information, clinical trial

data, bibliographic materials, and other relevant materials, OHTA solicits the advice and assistance of Federal agencies such as NIH, FDA, ADAMHA, and

CDC, Each agency has developed a formal plan for

responding to such evaluations. Furthermore, PHS

routinely announces the assessment through DHHS’s

Technology Coordinating Committee, which informs

other interested Federal agencies. OHTA also contacts

the Council on Medical Specialty Societies, the organization representing all medical specialty societies, as

well as the relevant specialty societies for information

on the specific technology (or in some cases, a list of

technologies) being considered.

The OHTA staff then analyzes and synthesizes the

medical and scientific evidence and professional opinions collected. OHTA’s assessment, primarily of the

safety, efficacy, and clinical effectiveness, of the technology in question is conducted according to specific

criteria (399). The types of acceptable information

range from qualified medical opinions derived from

personal experience, to well-designed clinical studies,

to controlled clinical trials, Although OHTA’s guidelines emphasize the value of controlled clinical trials,

few evaluations have had the benefit of such rigorous

evidence (352).

Like its predecessor NCHCT, OHTA provides recommendations to HCFA about the appropriateness of

providing Medicare coverage for a technology which

it has assessed. OHTA does not release its assessment

until HCFA has taken action on the recommendation.

The assessments, but not the recommendations, are

published and disseminated.

The formation of the Prospective Payment Assessment Commission (ProPAC), mandated with the passage of the Social Security Amendments of 1983

(Public Law 98-21), initiates a new Government involvement in medical technology assessment for payment purposes. ProPAC members were appointed in

November 1983, and the body’s activities started in

the early part of 1984. ProPAC is an independent advisory committee that is empowered to collect and assess

information on hospital costs and productivity, technological advances, and the cost effectiveness of hospital services. It is required to use existing informa-
APP. C—Selected Activities in Medical Technology Assessment ● 179

— . — —

Private Sector Activities
180 ● Medical Technology and Costs of the Medicare Program

. — ——

collecting the opinions of professional medical associations, the Medical Advisory Subcommittee either

reaches a coverage decision or postpones a decision

until further information on the product or service is

available for review (141).

Cost considerations are more likely to be explicitly

included in the evaluation of a technology by the Medical Advisory Subcommittee than they are in evaluations for Medicare. During the initial review for the

Medical Advisory Subcommittee, the BC/BS staff

gathers information about the reimbursement level for

the product or services, or similar product or services,

where possible. Furthermore, when a decision is

reached, it is reviewed by the Providers Affairs and

Cost Containment Review Committees and then by

the National Blue Goss and Blue Shield Board Review,

The coverage determinations, which go out as a recommendation to the 106 local U.S. BC/BS plans, usually concern new technology and are expressed in

broad terms. However, sometimes they specify indications for use.

The Medical Necessity Program was developed in

1977 in conjunction with the American College of Physicians (ACP), the American College of Surgeons

(ACS), and the American College of Radiology. It was

designed to curtail reimbursement for obsolete, duplicated, and outmoded procedures (4 I ). In 1977, the

Medical Necessity Program advised BC/BS plans to

discontinue routine payment for a group of 42 procedures unless physicians provided special medical

justification for their use. Since 1977, the original list

of 42 procedures has been expanded to nearly 100 (41).

In 1979, on the basis of the recommendations of ACP

and ACS, the Medical Necessity Program advised

BC/BS plans to pay for diagnostic tests performed at

the time of admission to hospitals only when the tests

had been specifically ordered by a physician.

The stated objectives of the Medical Necessity Program—cost containment and the improvement of quality of care—remain the same as in 1977. The focus of

the program, though, was expanded in 1980 from evaluating possibly obsolete procedures to examining procedures that may be overutilized or inappropriately

utilized. In October 1982, the BC/BS national associations recommended new guidelines to member plans

“intended to raise the level of cost consciousness”

about the unnecessary use of certain respiratory care

procedures, with expectations of potential savings of

hundreds of millions of dollars annual]y (326).

In arriving at its recommendations, the Medical Necessity Program draws on the advice of national medical specialty organizations including ACP. Indeed,

ACP’s involvement in evaluating the safety, efficacy,

and effectiveness of clinical tests, procedures, and therapies began with its participation in the project (230).

Commercial insurance companies make independent coverage decisions regarding the coverage of new

and emerging technologies. When a coverage question

arises, a company may contact the Health Insurance

Association of America (HIAA). HIAA is a trade association of 338 commercial insurance companies. It will

provide information to its member companies on the

medical appropriateness of diagnostic and therapeutic procedures. HIAA does not conduct technology

assessments, but reports opinions rendered by the

Council of Medical Specialty Societies (CMSS)

through its program for clinical procedure review

(193). In late 1977, CMSS agreed to accept questions

from insurers with HIAA acting as the intermediary

between the many insurance companies and CMSS.

HIAA will transmit the information to the requesting

insurer and publish the CMSS opinion in its “Medical

Relations” bulletin. Each company makes its own coverage policy decision using its discretion.

Some prepaid group practices have also had experience with medical technology assessment. The Department of Medical Methods Research of the Kaiser-Permanente Medical Care Program (KPMCP) of Northern

California has conducted research on the utilization

of modern technology for the development of improved methods of providing and delivering medical

care within the KPMCP (72). The primary purpose of

the department’s Division of Technology Assessment

is to aid in the selection of the most cost-effective technology. The process of assessment the division uses

is quite different from that employed elsewhere, primarily because of the unique financial structure of

prepaid group practices, In a prepaid group practice,

an increase in the use of a technology often increases

expenses and does not generate revenues as it might

in fee-for-service or cost-reimbursement programs. In

addition, there are no savings from the purchases of

equipment that could increase cash flow. Thus, the incentives are for low-cost technology that maintains or

improves the effectiveness of medical care.

Assessments at the KPMCP begin with the identification of a technology that uses substantial resources.

Next, the characteristics of the population utilizing the

technology and the workloads for its utilization are

determined. Alternative technologies used for the same

specified objectives are evaluated as to important intended and unintended consequences. The technology

assessments use epidemiological methods, controlled

studies, medical record studies, literature reviews, consensus development, and sensitivity analyses, The

results of the assessments are presented as important

consequences of alternative technologies so that management can make more rational decisions.

A number of medical specialty societies are interested in technology assessment. ACP is now conduct-
App. C—Selected Activities in Medical Technology Assessment ● 181

ing the Clinical Efficacy Assessment Project (CEAP),

a major effort to study the efficacy, clinical effectiveness, and safety of tests, procedures, and therapeutic

interventions. CEAP evaluated 50 procedures and tests

from January 1981 through November 1983 and as of

March 1984 had 11 other evaluations in process. Almost all the technologies that have been evaluated to

date were submitted by the Federal Government or insurance companies who generally use the result in their

coverage and reimbursement decisions (21).

The steps in ACP’s evaluation process are similar

to those used by OHTA. CEAP draws on its membership for information on the technology under evaluation, and after developing a draft statement, sends the

statement to outside experts for review. The final statement is written by staff with the help of ACP’s Clinical Efficacy Subcommittee.

In addition to ACP, other medical specialty societies

and medical associations have either initiated or intensified existing activities involved with medical technology assessment during the past few years. Among

these are the American College of Cardiology (ACC),

the American Medical Association (AMA), and the

American Hospital Association (AHA).3 Although the

assessment activities of these organizations are not as

directly linked with coverage and reimbursement decisions as ACP’s have been, their findings are often used

by public and private insurers.

ACC has three activities related to technology assessment. First, it responds to requests from Federal

agencies as well as from the private sector (e. g., hospitals, clinics, third-party carriers) about the standards,

criteria, and appropriateness of procedures usually performed in a hospital setting by physicians treating cardiovascular diseases, Second, it has a Joint Task Force

in conjunction with the American Heart Association

that undertakes in-depth technology assessments. The

assessments include criteria of contribution uniqueness, sensitivity, specificity y, indications and contraindications, and cost effectiveness.

The third activity of ACC is new and under development. A Cardiovascular Norms Committee is being formed, to “establish and obtain consensus on

dynamic norms (defined as factors essential for quality

care decisionmaking) for the diagnoses and management of the most common cardiac diagnoses, including

cost effectiveness of alternate plans or diagnostic techniques. ” The first step of this ambitious undertaking

is to investigate a mechanism for developing dynamic

norms (a type of criteria setting) (196).

—

‘Tht ,,lrtlrrl(,in A( ,ic~t,rnj ot I)(dutr]c . tht, .Anlt,rlc an 1‘ublI( } icalt h .A\\(I

( Ia[ I( ~n t ho ,~!rntn( a n (( ~1 Iegt, (~t 1{.KIIIII( ~K\ art J m [ IW t ht. (]tht,r pr(~tm~l(}n.] 1

a>w K I,it I (Ins uw~i t h.]t h.]tt, t,]ktn pmt In t’i ,]1 uat I n~ (M hn(~l(~gle~ The]r a{ (I\

I t le. <ire LiI\( USWLI I n thr c)TA report f(r,itt,R/(,s [( )r ,\ifR/J(Ji T(J( hnt I/L IA, }

,4 .>t.~rr?t’nl 35Q

AMA has been involved in evaluating and providing

information of technologies through its scientific publications; through a series of reports published by its

Council of Scientific Affairs dealing with diagnostic,

therapeutic, and other medical technologies; and by

responding to thousands of inquiries that involve information on assessment of medical technologies, particularly those that are well established. AMA just

began a new project, Diagnostic and Therapeutic

Technology Assessment (DATTA), whose purpose is

to “expeditiously and effectively examine medical technologies that are passing from experimental or investigational to accepted forms of treatment and define,

where possible, indication for their use. ” It is intended

that the assessments will be limited to the evaluation

of the safety and effectiveness of a technology (196).

Other private sector parties with a longstanding involvement in medical technology assessment, especially to determine safety and efficacy, are manufacturers of drugs and devices, They initiate research and

are required by FDA to conduct tests for premarket

approval of their products. Large private clinics, e.g.,

the Cleveland and Mayo Clinics, also perform some

assessments’ (359).

Recently, AHA and other members of the hospital

community have become actively involved in evaluating technologies, but mainly from the perspective of

planning for new health care services and in reviewing existing services. AHA has played a catalytic role

in this authority by issuing the manual, Technology

Evaluation and Acquisition Methods for Hospitals

(’TEAM), in 1979 (13). The program described in the

manual not only provides a mechanism for hospitals

to evaluate technologies for financial reasons but also

emphasizes evaluation with respect to community

needs and hospitals’ role in the community,

AHA has continued to involve its members in recent developments in technology and technology assessment through its Hospital Technology Series

Guidelines Reports, published as part of the Hospital

Technology Series, which are individual reports devoted mainly to specific technologies. They usually examine the key factors a hospital should include when

evaluating a particular technology for purchase, as

well as product information on commercially available models of the technology.

In addition, hospitals and hospital chains, such as

Humana and the Hospital Corporation of America,

are examining technologies more carefully than before.

However, when they evaluate technology, it is most

often with respect to an “overall risk management program for the identification, evaluation, and treatment

—.———

~%(, .$tratt>~,wt i[~r ,Al(ti[( .i) TtY hrr I J< )AJ\ .4 sw,<ment I< ~r J dew npt)(m (It their

<i( t I \, I t It>s ‘ 35Q

25-337 0 - 84 - 13
182 . Medical Technology and Costs of the Medicare Program ——

of risk or financial loss” (292). The Hospital Corporation of America, for example, recommends the formation of a Product Selection Committee by each of its

member hospitals. The committee’s purpose is to evaluate the degree of inherent risk to each patient and/or

employee posed by material that may be introduced

into or is already being used within the hospital (171).

Prepaid group practices, such as Kaiser-Permanente

of Northern California, conduct technology assessments in order to improve their methods of providing

and delivering medical care within their organization.

Finally, ECRI (formerly the Emergency Care Research Institute) is a nonprofit organization primarily

involved in comparative product evaluations of diagnostic and therapeutic devices and hospital equipment

and supplies. ECRI provides a type of “consumer report” service for hospital administrators that gives

ratings to comparable medical technologies based on

performance safety, ease of use, and cost effectiveness.

An emphasis on the larger economic, social and ethical

issues surrounding health care technologies has recently been added. Further, ECRI maintains a computerized health devices data base on over 6,000 categories

of devices and hospital equipment (28).

Public/Private Sector Activities

There are some indications of cooperation between

the public and private sector and among members of

the private sector in evaluating medical technologies.

Massachusetts Blue Shield, for example, has been sending its Interspecialty Medical Advisory Committee’s

monthly agenda to HCFA’s Office of Coverage Policy for 2 years (436). This mechanism informs the Office of Coverage Policy of current issues pertaining to

technology assessments considered in Massachusetts

by Massachusetts Blue Shield’s Interspecialty Medicare

Advisory Committee. The monthly agendas are also

exchanged with the Blue Shield of New Jersey’s Medical Advisory Committee and with the National Blue

Cross and Blue Shield Medical Advisory Committee

and their staff. Furthermore, the national BC/BS Association has begun a comprehensive medical policy

manual that will be the basis for a uniform medical

policy for all of the Blues nationwide (436).

The activities just mentioned are but a few of the

numerous efforts underway to evaluate medical technologies. The proliferation of medical technologies and

the absence of an organization to coordinate and complement existing technology assessment activities prompted the Institute of Medicine (IOM) to appoint a

committee to develop a plan for a technology assessment organization that would be based in the private

sector and supported by both governmental and nongovernmental funds (234). The IOM report recommended the establishment of a medical technology

consortium that would function under the auspices of

IOM during an initial period of development, and

then, after approximately 5 years, function as an independent entity in the private sector. The functions

of the medical technology consortium would be as

follows:

●

●

●

●

●

●

to serve as a clearinghouse of information on

medical technologies and medical technology

assessment;

to assemble and evaluate information and make

recommendations concerning individual medical

technologies;

to act when necessary and appropriate to stimulate, coordinate, undertake, or commission medical technology assessments, including activities

that would complement those of others;

to identify needs in the assessment of specific medical technologies;

to develop and evaluate assessment criteria and

methods; and

to provide education, training, and technical assistance in the use of medical technology assessment methods and results.

The IOM report noted that the “consortium is not

intended as a competitor or replacement for an existing

entity involved in assessing medical technologies. ”

Rather, it is to be complementary and facilitative of

the efforts of others involved in responsible assessments

of medical technologies. The report recommended that

when the consortium first starts to function, initial

emphasis should be placed on the clearinghouse function because of expected financial constraints. A proposal for the creation of the consortium awaits funding (169).
Appendix D.—Selected Alternatives to

Traditional Health Care Delivery

Introduction

Strategies for containing Medicare costs by changing the incentives for the adoption and use of medical

technology were identified in chapters 5 through 8.

Chapter 8 identified examples of alternatives to traditional health care delivery sites and organizations’ that

might stimulate competitive behavior by health care

providers. The purpose of this appendix is to provide

additional information on those alternatives. Available data on utilization by Medicare patients and costs

to the program of these alternatives have been included

in this appendix to illustrate potential data and evaluation needs. Assuming that a current goal of the Medicare program is to contain or reduce costs without

compromising quality of care, it is reasonable to examine alternative sites and organizations of health care

delivery for their potential in helping attain that goal.

Development of Alternative Sites and

Organizations for Health Care Delivery

The precise reasons for the creation of alternative

sites and organizations for health care delivery are difficult, if not impossible, to specify, although the causes

of the proliferation of alternative sites and organizations for health care delivery clearly include economic

and social forces. As the prices of medical care have

soared, coverage of services by public programs such

as Medicare and Medicaid and expanded coverage of

services by private insurance companies have enabled

a greater number of persons to obtain needed health

services (135 ). Entrepreneurs responsive to financial

incentives throughout the health care system have

joined physicians and other health care providers in

developing alternative sites and organizations of health

care delivery. Many of the alternatives have developed

as for-profit operations (325), and they have fostered

competition in local markets. Freestanding ambulatory

surgery centers and health maintenance organizations

(HMOs), for example, developed under the influence

of specific market conditions (e. g., overscheduled hospital operating rooms in the case of the centers and

increased supply of physicians and Federal encouragement in the case of HMOs). Other alternatives have

been developed to provide services at more convenient

times and in more convenient locations for patients.

1l’romlnent example’~ ot “trad]tlonal s]te~ or organlzat ]ons are

the lndepencient communlt}” h(l~pltd], the M)](), tee-ior-service ph\rSIC jdn d nd use of on I y h( )\pI tals for surger y

Emergency care centers are an example.

Medicare itself has had varying impacts on the establishment of alternatives. Home health care agencies have proliferated since Medicare began covering

home visits in 1966. Ambulatory surgery centers, on

the other hand, developed without Medicare coverage, and although freestanding centers have received

specific coverage since September 1982, the impact of

the new coverage is unknown. Emergency care centers

generally do not encourage Medicare patients to use

them, and some even exclude Medicare patients except in life-threatening situations. The Medicare program was used to directly encourage the development

of HMOs.

A major question with respect to alternative sites

and organizations of health care delivery is whether

the alternatives are less costly to patients, to the Medicare program, or to both. Some alternative sites (e. g.,

ambulatory surgery centers) may substitute for traditional hospital and physician office sites for some patients, while others (e. g., emergency care centers) may

complement them. Covered sites of care may or may

not save money, depending on the extent and appropriateness of use. As long as lower cost health services are substituted for more expensive ones, Medicare

will save. If instead, the alternatives are used in addition to more expensive, traditional care, Medicare

costs will rise. Potential cost savings for the Medicare

program depend on the number of beneficiaries using

any service, on the prices paid for medical technologies in various sites, and on the quality of the care

produced. Quality is important in its own right. It is

also important in economic terms, though, because

lack of it may cost the beneficiaries and the program

more in the long run.

Measurements of quality of care for alternative sites

are controversial. For those sites of care and services

specifically covered by Medicare, there are conditions

of participation that providers must meet in order to

receive payment. The conditions for freestanding ambulatory surgery centers, for example, specify that

such centers must meet State licensing requirements

and obtain accreditation by an appropriate association. Medicare conditions of participation have been

criticized for concentrating on the structure and process aspects of quality measures (176) instead of on patient outcomes. In home health care, the Medicare conditions of participation have been important in

developing quality assurance programs (176).

Costs of alternative sites for health care delivery are

not easily compared. There are no published studies

183
I&f . Medical Technology and Costs of the Medicare Program — — —

that account for differences in case mix and services

rendered by freestanding emergency care centers, hospital emergency rooms or outpatient departments, or

physicians’ offices (2,325), One study on ambulatory

care found slight differences in case mix between hospital outpatient departments and private physician office practices (200). Measuring differences in costs of

various sites is also difficult, because hospitals, for example, do not use consistent methods of reporting

costs, and, thus, do not accurately measure the true

cost of ambulatory care (2). Measuring utilization of

the alternative sites also presents problems. The customary measure is the visit, but differences in case mix,

use of tests and procedures, and standby equipment

and staff are not adequately accounted for by the visit

measure (2).

The incentives for provider behavior will be changed

by Medicare’s new prospective per case payment system for inpatient hospital services (see ch. 6). Under

the payment system based on Diagnosis Related

Groups (DRGs), hospitals have financial incentives to

decrease lengths of stay and substitute outpatient services for inpatient services. Increased use of outpatient

visits might help prevent use of inpatient care, but the

research evidence is mixed (33). Early discharges of

hospitalized patients will probably increase the need

for care in skilled nursing facilities (SNFs) and for home

health care. Hospice care may also be affected by the

DRG payment system, although in the absence of previous Medicare experience with hospices, interpretation of the evidence will be difficult.

The discussion below provides information on

selected alternatives to traditional health care delivery. The first section discusses alternative sites of care,

i.e., alternatives to inpatient care in hospitals and to

primary care in physicians’ offices. The second section

describes two alternative organizations for health care

delivery, HMOs and preferred provider organizations

(PPOs), both of which may increase competition in

the health field.

Alternative Sites of Health Care Delivery

Patients can obtain different types of medical care

in a variety of locations. The sites described here are

alternatives to inpatient care in hospitals and to primary care in physicians’ offices. The discussion of each

alternative site includes patterns of use, evidence on

cost and quality of care, and effects of Medicare policy. Unfortunately, data vary in availability and quality, so comparisons are not always possible.

Alternatives to Inpatient Hospital Care

Entrepreneurs have reacted to the availability of

money in the health care system by providing alternative sites for hospital care. In some cases, medical

technologies are being moved from their traditional

sites in hospitals to other locations. Certain surgical

procedures have been moved from traditional hospital sites to ambulatory surgery centers. Hospital inpatient care for acute illness is being complemented,

and, in some cases, replaced by home health and nursing home care. Palliative care for terminally ill patients

has also been moved out of hospitals to hospices.

These alternatives are described below.

Ambulatory Surgery Centers.—Units to accommodate ambulatory surgery were developed in the early

1970’s in response to overcrowded operating room

schedules and inconvenience to patients and physicians

(125). Ambulatory surgery centers could not have been

established without the technological improvement of

fast-acting anesthesia and the practice of making patients walk soon after surgery (125). Some units are

affiliated with hospitals and are located either in the

hospitals or at other sites. Other units are not associated with hospitals. These units, known as freestanding ambulatory surgery centers, are often physicianowned. Surgical procedures that are appropriate to

ambulator y surgery centers are those using general

anesthesia but requiring only a few hours of postoperative monitoring of the patient. Patients are carefully

screened. In recent years, third-party payers have accepted claims for surgery performed in these centers,

and some now require that certain procedures be done

on an ambulatory basis for coverage.

On September 7, 1982, Medicare changed its coverage of ambulatory surgery to encourage more patients

and surgeons to use the less expensive freestanding ambulatory surgery centers (108). The purpose was to increase substitution of ambulatory surgery for inpatient

surgery. The utilization of ambulatory surgery centers

since that change is unknown. Yet there was sufficient

concern about the possibilit y of adding to the surgical rate for Medicare beneficiaries that the General

Accounting Office was requested to study utilization

patterns in the first year of the new coverage policy

(177).

Prior to the policy change, there was diversity in

the age distribution of patients among freestanding ambulatory surgery centers, but there is no single source

of reliable aggregate numbers of ambulatory surgical

procedures by age group (325). From 1973 to 1980,

surgical rates rose even more rapidly for the elderly
App. D—Selected Alternatives to Traditional Health Care Delivery ● 185

than for the general population in the United States

(5). In 1967, 85.4 per 1,000 Medicare beneficiaries had

surgery during their hospitalizations; but in 1972, the

rate was 93.4; and in 1976, it was 104.9 surgeries per

1,000 beneficiaries (162). Again, improvements in

anesthesia and in some procedures have reduced the

risks of some types of surgery. More surgery is required, also, as people age and suffer from cataracts,

cancer, and cardiovascular diseases.

Freestanding ambulatory surgery centers generally

charge less than hospital inpatient or hospital outpatient surgery for most procedures. Clearly, inpatient

surgery is more expensive, because patients must pay

for a hospital stay of at least 1 day. In addition,

freestanding ambulatory centers can charge lower

prices because their construction costs are lower, they

do not need some of the most expensive technologies

available in hospital operating rooms, and their overhead is lower since many of the hospital ancillary services (e.g., food services) are not needed (124,428). It

is likely that these fixed costs of the hospital setting

will be spread among fewer surgical procedures, which

will result in higher costs for hospital surgery.

Under Medicare, freestanding ambulatory surgery

facility costs are covered for 100 specific procedures

(an additional list of 50 has been proposed) in four

groups to encourage use of the centers. Facility fees

are prospectively set by the Health Care Financing

Administration (HCFA), and the schedule is based on

complexity of procedure with no beneficiary deductible or copayment. The least complex and least costly

procedures (e. g., gastroscopy) are in Group 1, for

which Medicare pays the center $231; the most complex and costly ambulatory surgical procedures (e.g.,

laparoscopy) are in Group 4, for which facilities are

paid $336 (108). Physicians who accept assignment are

paid 100 percent of reasonable charges for covered

services. By statute, Medicare expenditures for ambulatory surgery must be less than they would be if

the procedures were performed on an inpatient basis.

HCFA estimated that this benefit would save $2 million for Medicare in its first year of operation.

Since hospital outpatient surgery is usually reimbursed 80 percent of costs with a 20-percent copayment, some hospitals with ambulatory surgery units

might be at a disadvantage with regard to Medicare

payment unless they elect to participate as though their

units are fremtanding ambulatory surgery centers, i.e.,

accept the prospective fee schedule rather than costbased reimbursement. To participate as freestanding

units, they must establish centers that are physically,

administratively, and financially independent from the

rest of the hospital (108).

Quality of care in ambulatory surgery centers appears to be good. The centers have reported no deaths

and lower complication rates than inpatient surgery

(29,82,248). There is an accreditation association to

advance their credibility to the public. In addition,

centers that want to participate in Medicare must meet

Medicare conditions of participation requiring that certain staff and equipment be available.

Home Health Care.—Continued growth in the home

health industry is expected in response to the incentives under Medicare’s DRG hospital payment system

for shorter inpatient stays. The number of agencies

providing home health care services has greatly increased since 1966 when Medicare began covering

skilled nursing care and physical and speech therapy

to homebound elderly people. The purposes of providing those services was to lower the hospital length of

stay for acutely ill patients, thus cutting costs to the

program.

The specific aspects of home health care have

changed over time. Currently, the basic services are

part-time or intermittent nursing care by or under the

supervision of a registered nurse; physical, occupational, or speech therapy; medical social services; and

part-time or intermittent services from a home health

aide. Certain medical technologies that used to be administered only on an inpatient basis (e. g., intravenous

antibiotic therapy) are now part of home health care

(248).

Home health agencies may be licensed by the States,

although the licensing requirement for Medicare participation was eliminated in 1980 with the passage of

the Omnibus Reconciliation Act (Public Law 96-499)

(207). Visiting nurses associations were among the first

home health agencies (223). Other home health care

providers are public health departments, hospitals, and

independent agencies, both for-profit and not-forprofit, The hospital-affiliated home health agencies

alone almost doubled between 1979 and 1982, when

they numbered 450 and more than 720 respectively

(207).

The number of home health care visits paid for by

Medicare almost tripled between 1969 and 1980 (from

8.5 million to 22.4 million) (392). Studies of home

health care in the 1970’s seemed to indicate that home

care made early discharges from hospitals possible. Recent studies looked at overall hospital use, but not

readmission rates or length of stay (333), so the longterm effect of the early discharges and substitution of

home care is not evident.

Home health care as a substitute for an extended

hospital stay may be underutilized, although it appears

to be used more often than SNFs by Medicare patients
186 ● Medical Technology and Costs of the Medicare Program

(391). In 1980, home health agency services were used

by 890,400 elderly and 67,000 disabled Medicare beneficiaries. Medicare reimbursed the agencies providing these services a total of $662.1 million (392). A

General Accounting Office study of home health care

demonstration projects showed mixed effects of expanded home health care on Medicare costs (333). Several demonstration projects have studied the effects of

expanded home health care on patient outcomes: their

results are also mixed (333).

The Omnibus Reconciliation Act of 1980 (Public

Law 96-499) changed Medicare’s home health care coverage by eliminating the remaining copayments, the

limit on number of visits, and the hospitalization requirement. Patients must be homebound, under the

care of a physician, and in need of skilled nursing or

physical or speech therapy. Medicare Part A covers

all home health visits unless a beneficiary has Part B

coverage only. In the latter case, Part B covers the

home health services (391).

Nursing Homes.—SNF care usually consists of

skilled nursing care and rehabilitation services. Medicare covers 100 days of care in an SNF following an

acute episode of illness. There is a required daily copayment of one-eighth of the Part A deductible ($44.50

in 1984) for days 20 through 100 in an SNF.

Not all SNFs are participants in Medicare. This situation exists in part because there is some financial

risk posed by submitting claims to Medicare intermediaries that may deny payment, and in part because

Medicare patients may require more intensive nursing care than the longer term chronically ill Medicaid

and private-pay patients (106), Because there is limited

access to SNF beds, Medicare patients have often remained in the hospital for extra days. For these patients, Medicare has paid as much as four times the

necessary cost of patient care, possibly totaling $100

million to $900 million extra annually (106). By encouraging earlier discharges from hospitals, the DRG

payment system will probably decrease these backup

hospital days, estimated at from 1 million to 9.2 million annually (104). To alleviate the SNF bed shortage, some hospitals with extra beds are converting

them into nursing home beds for long-term care (l03,

320). Hospital reporting requirements for skilled nursing beds are different from the reporting requirements

for separate SNFs, so this bed conversion may not reduce costs to Medicare (278).

In 1980, 269,500 elderly and 9,300 disabled Medicare enrollees used SNF days (161). Yet Medicare pays

only 2 percent of the total SNF industry revenues. In

1980, Medicare paid $339.3 million to SNFs for elderly

beneficiaries and $13,5 million for disabled beneficiaries who were admitted. Table D-1 shows that discharges from and days of care in SNFs by Medicare

enrollees have declined since 1969 (391 ), when a rigorous claims review policy resulted in retroactive

denial of many claims and substantial loss of revenues

for some SNFs (106).

Quality of care in nursing homes is variable. The

Joint Commission on Accreditation of Hospitals accredits nursing homes. Medicare conditions of participation for SNFs are complex, State licensure requirements of nursing homes often have different definitions

of “skilled” and “intermediate” care facilities than does

HCFA. In many cases, nursing homes choose not to

Table D-l .—Use of and Reimbursement for Skilled Nursing Facilities (SNFs) Under Medicare

by Type of Enrollee, 1969.79
App. D—Selected Alternatives to Traditional Health Care Detivety ● 187 —. — ——

participate in Medicare because of the extra administrative burden of multiple regulations and requirements.

Hospices.—The hospice is a relatively new concept

in care for patients with terminal illnesses. Until hospice care became available in this country, beginning

in 1971, most terminally ill patients had been kept in

hospitals and nursing homes. Terminally ill patients

have usually undergone highly sophisticated treatments (e. g., radiation therapy, chemotherapy, and extensive surgery) without success. In hospices, such

patients receive palliation of their symptoms and psychosocial care from a multidisciplinary team that includes physicians, nurses, social workers, clergy,

psychologists and psychiatrists, dietitians, lawyers,

and specially trained volunteers. Home care is one of

the desirable aspects of hospice, for economic as well

as psychological reasons, although it is not always

possible. Furthermore, the use of many volunteers by

hospices helps keep costs low. There are about 500 fullservice and 500 part-service operating hospices and 80

in the planning stages (362). In 1982, Congress mandated in the Tax Equity and Fiscal Responsibility Act

(Public Law 97-248) that Medicare cover 6 months of

hospice care for terminally ill Medicare eligibles under

Part A.

There is no experience to report on hospice use by

Medicare beneficiaries, because hospice care is a new

benefit. However, during congressional deliberations,

the Congressional Budget Office estimated that potential users would number 268,000 in fiscal year 1984

but only about 12,000 would use the benefit that year

(257),

Prices for hospice care have been based on the type

of care and on costs from demonstration project hospices. The type of care is determined by how much

nursing time a patient requires in a day. Costs differ

between freestanding hospice units and hospital-based

per pa -

tient per year, on an aggregate basis (112).

Alternatives to Physicians’ Offices

Primary medical care traditionally has been provided in physicians’ offices. In recent years, however,

alternative sites of primary care have been established

in response to economic, social, and health factors.

The supply of physicians has increased in many regions, so there is competition for patients. In addition,

Medicare and Medicaid, among other Government

programs, have provided funds for medical care for

the elderly and the poor, thereby increasing the potential patient population. Patients’ expectations have

increased, and the U.S. population itself is growing

older and needs more medical care. Two examples of

alternative sites of primary care, hospital outpatient

clinics and emergency care centers, are described

below. Emergency care centers are also alternative sites

for outpatient care.

Hospital Outpatient Departments. -Hospitals, particularly teaching hospitals, have long had outpatient

departments. Yet in recent years, one of the ways hospitals have responded to financial pressures has been

to expand services, including primary care in outpatient departments (136). The increased use of hospital

ambulatory care in recent years is also due to limited

access to private physicians for inner-city residents,

increasing prevalence of chronic diseases, and greater

expectations of patients for medical care from hospitals (2). Advances in medical technology have also

resulted in the movement of some treatments from inpatient to outpatient settings (136,157,248). Visits to

hospital outpatient departments by the elderly have

been increasing, while the rest of the population has

been using fewer outpatient visits (210).

Some hospitals are also establishing satellite clinics,

i.e., decentralized sites where ambulatory care is available (142). Primary care clinics have been set up by

many community hospitals throughout the country

(40). Specialized clinics for the outpatient treatment

of cancer patients have also been opened in some urban areas (263).

Over 10 percent of the physician visits made by persons 65 and older in 1978 were visits to hospital outpatient departments or emergency rooms (210). This

was a 22.2-percent growth in outpatient department

visits since 1973 for that age group. About one-third

of these outpatient visits were to the emergency room,

one-third to a physician in a clinic, and one-third to

ancillary service referrals (210). The growth, especially

in the ancillary service referrals and clinic visits, will

probably continue after the implementation of Medicare’s DRG payment system.

Hospital outpatient department and emergency

room visits are combined in Medicare Part B statistics. In 1980, Medicare reimbursed $1.9 billion for outpatient services for about 7.5 million beneficiaries

(392).

Medicare Part B pays 80 percent of reasonable

charges for visits to hospital outpatient departments

and emergency rooms. Part B beneficiaries must pay

the initial deductible ($75 since 1983) and 20 percent

coinsurance, just as they do for a physician office visit.

Reasonable charges differ between physician offices

and hospitals, and for outpatient visits, hospital

charges are generally higher. Because hospitals must

accept Medicare assignment, however, some patients

may have an incentive to use hospital outpatient services instead of physician office visits.
188 . Medical Technology and Costs of the Medicare Program

Emergency Care Centers. —Emergency care centers

are alternatives to hospital outpatient departments and

to some emergency room care and to primary care in

physician offices, Such centers, though generally

equipped with some emergency technologies, do not

treat life- or limb-threatening situations, so the name

“emergency” may be misleading (325). They usually

have more diagnostic technologies on location than a

physician’s office. Emergency care specialists and some

family practitioners have opened emergency care centers to make medical care more accessible to patients

who have no primary care physician or who cannot

find a physician after hours, The centers have extended

hours during evenings and weekends when physicians’

offices are closed, and some are open 24 hours a day,

7 days a week. No appointments are necessary, so care

is more convenient for some patients, although patients may not experience desired continuity of care.

Use of emergency care centers by the elderly has not

been well documented. While one estimate of total

visits to these centers was 12 million patient visits for

1982 (238), the elderly population is probably underrepresented. To keep costs down, most freestanding

emergency care centers accept cash or credit cards only

(325), so patients must be reimbursed by their insurance companies. This requirement may deter elderly

and disabled patients with limited incomes from using

the centers. Furthermore, most freestanding centers do

not accept Medicare assignment, and this means more

money out-of-pocket for elderly and disabled beneficiaries.

Emergency care centers usually compare their

charges with those of hospital emergency rooms rather

than with fees for physician office visits. This comparison is not necessarily a good one, because the care

provided is often more like office than hospital care.

Nonetheless, the National Association of Freestanding

Emergency Centers estimates that center charges are

30 to 50 percent lower than hospital emergency rooms

for comparable services (238). If an emergency care

center is affiliated with a hospital, Medicare will reimburse for visits as though the center were a hospital

department. If the center is freestanding, Medicare will

pay as though the visit were a physician office visit

(55). Hospitals must accept assignment to participate

in Medicare, but physicians and freestanding centers

need not. Thus, if elderly patients were informed about

which centers were hospital affiliated or accepted

assignment, they would be more likely to choose those

centers over the other centers if total prices were comparable. A 1979 study showed that most of the emergency care centers’ revenues came from private insurers or patients who paid directly, with only a small

fraction coming from Medicaid and even less from

Medicare beneficiaries (55). The 1983 followup, although limited in sample size, showed more centers

accepting Medicare funds but some centers specifically

excluding Medicare cases (250).

The National Association of Freestanding Emergency Centers has a policy of not judging the quality

of care delivered in individual facilities but leaving that

judgment to the patients (238). The centers are characterized as physician offices for quality review purposes by the physicians practicing in them. There are

no licensing laws for freestanding emergency care

centers in most States, although some States are trying to regulate them (239). If Medicare were to develop

a special benefit program for emergency care centers

like that for ambulatory surgery centers, more evidence of quality would probably be required in the

conditions of participation.

Alternative Organizations for

Health Care Delivery

Organizational differences among health care providers allow patients choices and increase competition

in the health care market. This section describes two

examples of alternative organizations that may increase competition among providers. Patterns of use,

evidence on cost and quality of care, and effects of

Medicare policy are presented for HMOs. PPOs are

described only briefly because of a lack of information.

Health Maintenance Organizations

A defined set of physicians who provide services for

a voluntarily enrolled population paying a prospective per capita amount is known as a group practice

prepayment plan (GPPP). Some GPPPs have accepted

financial risk for hospitalization of their patients and

have become part of the competitive health care market known as HMOs. These organizations, thus, are

both providers and insurers of comprehensive but

specified medical services.

In a series of laws, the Federal Government has provided financial support for HMO development, including construction loans and mandatory access for

HMOs (i.e., employers must offer an HMO health

plan as an option for health insurance coverage). Not

all HMOs have participated in these Federal programs

because of the regulations imposed on participating

HMOs (227), From 5.3 million enrollees and 142 plans

in 1974, HMO enrollment doubled to 11.6 million

enrollees in 269 plans in 1982 (85). Still, HMOs cover

only about 5 percent of the U,S. population.

The growth of HMO and other GPPPs since the

early 1970’s has not been accompanied by a similar
App. D—Selected Alternatives to Traditional Health Care Delivery ● 189

——.— ..— ——.— -—— . ——

growth in the number of Medicare enrollees joining

these groups. By March 1982, 45 HMOs had cost contracts, 2 had normal risk contracts, and 8 had special

experimental demonstration risk contracts with Medicare (392). Another 33 GPPPs were also participating

under Medicare in less restrictive contracts (392). Just

under 116,000 HMO members were Medicare enrollees

as of March 1982, and about 515,000 Medicare enrollees were GPPP members (392). Thus, around 2 percent of the Medicare population is participating in an

HMO or GPPP.

Under the Social Security Amendments of 1972

(Public Law 92-603), payment to HMOs for Medicare

beneficiaries could be made under the usual cost-based

method or under a risk-sharing contract. Most HMOs

with Medicare enrollees are under a cost-contracting

arrangement with Medicare in which they receive

monthly interim payments based on their estimated

allowed costs with a year-end adjustment to allowed

costs (392).

As of March 1982, only two HMOs were under a

risk contract in which its adjustment was compared

with the adjusted average per capita cost (AAPCC)

for its services. The AAPCC is the average per capita

cost of providing services to the enrolled group of beneficiaries if they had been receiving fee-for-service care

in their area (there are more specific actuarial and

demographic factors that are used in calculating the

actual AAPCC). If the HMO’s costs are lower, it

retains half of the savings above 80 percent of the

AAPCC, for a maximum of 10 percent. Higher costs

must be absorbed or carried over into the next budget

year (392),

In September 1982, HCFA began funding five demonstration projects on a risk contract basis to see if

significant numbers of Medicare beneficiaries could be

enrolled in HMOS through aggressive marketing techniques and attractive benefit packages (97). These

demonstrations have added significance in view of prospective payment provisions in the Tax Equity and

Fiscal Responsibility Act of 1982 (Public Law 97-248),

and the establishment of Medicare’s prospective hospital payment system using DRGs in the Social Security Amendments of 1983 (Public Law 98-21). One reason why HMOs have not actively sought to enroll

Medicare beneficiaries may be that HMOs operate on

a per capita payment basis, while their participation

in Medicare necessitated significant administrative

costs in order to conform to Medicare requirements

for cost-based data. Medicare prospective payment

would be in tune with HMO operations, and HMOs

can be expected to be more aggressive in seeking Medicare beneficiaries. Another consideration in increasing HMO participation in Medicare is that beneficiaries need incentives to join HMOs, because many

would have to change physicians and hospitals and

would have less freedom of choice of physicians and

hospitals in HMOs (145).

Analyses of Medicare beneficiaries’ use patterns

prior to their enrollment in three of the HCFA HMO

demonstrations addressed the issue of whether beneficiaries sicker than the average Medicare enrollee

would be attracted to HMOs or whether HMOs would

recruit Medicare beneficiaries who had fewer medical

problems on average (i.e., whether adverse or favorable selection from the standpoint of the HMO would

occur) (97).

In two of the HMOs, which were closed-panel

HMOs, pre-enrollment use rates of Medicare-reimbursed services were lower than the use rates of comparison group beneficiaries. In the third HMO, which

operated much like an independent practice association (IPA) and which was the only significant provider

of care in the area, there was no difference between

the enrolled and comparison groups. The analysts

studying the HMOs concluded that the circumstances

under which enrollment occurred probably ruled out

deliberate selection of healthier beneficiaries by the

closed-panel HMOs and that the selection bias was

probably on the part of the enrollees. As beneficiaries

enrolling in the closed-panel HMOa probably had to

give up their previous doctors and hospitals, these two

HMOs may have enrolled Medicare beneficiaries who

did not have close ties to their physicians. In the IPAtype HMO, most enrollees were probably receiving

care from a physician who belonged to the IPA and

therefore did not have to change physicians (97).

Interim results a study of one of the closed-panel

HMOs (Oregon Region Kaiser-Permanente Medical

Care Program) have shown that Medicare beneficiaries

can be motivated to join HMOs through premium savings or increased benefits over those available from

the fee-for-service sector and that there is a high level

of acceptance of continued HMO participation (145).

In regards to utilization, recruited Medicare members

used hospital beds at a rate slightly higher than individuals over 65 previously enrolled in the plan. But

the recruited Medicare members’ rate of use was still

much lower than the rate of all individuals over 65 in

the same area—1,677 days per 1,000 members per year

versus 3,142 days per 1,000 people per year. New

members also used about 20 percent more office visits

than old members of the same age group. The successful recruitment of additional members and increased utilization of services through the enhanced

Medicare coverage provided in the demonstration

projects led the authors to hypothesize the following:

1 ) prior Medicare coverage did not meet a significant
190 • . Medical Technology and Costs of the Medicare Program

.—.————— —— — —-————— —— —

amount of need, and/or 2) those selecting HMOs were

more likely to use services. These interim results also

support the conclusion reached earlier in the preenrollment study (97) that the HMO did not recruit

healthier beneficiaries.

The evidence on cost savings by HMOs centers

around lower hospital utilization, although there is

some evidence that physicians in HMOs use fewer tests

and procedures than physicians paid on a fee-forservice basis (203). One of the reasons HMOs have

not enrolled more Medicare patients may be that the

aged and disabled require more costly care, including

more physician visits and more hospitalizations, than

a younger, healthier population.

Numerous studies have examined the structure,

process, and outcome factors of quality for HMOs

(205). In addition to the difficulty of defining and

measuring quality, comparisons of HMO practices to

fee-for-service practices are complicated by the insurance aspects of the former which change the financial

incentives. The evidence on quality in HMOs does not

support the contention that HMOs save money by providing lower quality care (204), Neither does the

evidence support the suggestion of substantially better care in all HMOs (205). Thus, care in HMOs appears to be about equal in quality to that received

through fee-for-service practices under conventional

insurance coverage (429).

Preferred Provider Organizations

PPOs include a variety of organizational designs.

Basically, PPOs are contract agreements between an

insurer (or employer, if self-insured) and providers

(physicians or hospitals or both) that give services at

a reduced rate to the insured group. Patients are given

a choice of seeing a physician from the PPO list at little or no out-of-pocket cost or seeing someone else and

having to pay the difference in fees.

Incentives for the insurers to enter into PPO agreements include reduced cost because of the reduced rate

and some control over utilization of medical technologies. This control comes from an agreement by the

physicians to participate in utilization review and

quality assurance programs. Physicians who overutiIize tests and procedures potentially will be dropped

from the PPO list. There are also incentives for physicians to agree to the discounts of 5 to 20 percent

(191). First, insurance claims on a fee-for-service basis

will be paid quickly and in full. Second, billing is easier

for these patients. Finally, patient volume is guaranteed to be increased. Indeed, most PPOs have been

initiated in areas where there are a very large number

of physicians.

It is difficult to determine the number of PPOs because PPOs are agreements among entities, not entities

themselves. Concentrations of PPOs are in Denver,

Los Angeles, and San Francisco (100). MediCal (California’s Medicaid program) is contracting with California hospitals, and a new law in that State allows contracting between hospitals and other third-part y

payers. Blue Cross and Blue Shield of Virginia is trying to set up a PPO in the Richmond area (147). Blue

Cross and Blue Shield of Michigan is developing a PPO

for Medicare recipients in Detroit under a HCFA grant

(59). Data are not available on patient participation

rates in PPOs. The agreements are too new to have

generated much publishable data, and they are too diverse to use their data in comparisons with other physician organizations.

It is still too early to draw conclusions regarding cost

and quality of PPOs. If patients choose the physicians

offering reduced fees, the third-party payers may save.

At the same time, these physicians have agreed to participate in utilization review and quality assurance

programs. The design and implementation of these

programs will be important to their acceptance by physicians and to their effectiveness.

Discussion

As noted earlier in this report, the original purpose

of the Medicare program was to increase the access

to medical care for the Nation’s elderly population.

Currently, the primary focus of policymakers is on

cost containment. This appendix has described examples of alternative sites and organizations for health

care delivery. These alternatives may represent future

directions for Medicare cost-containment efforts.

Rational encouragement of the best alternatives

would benefit the Medicare program and its enrollees.

In order to decide which alternatives would provide

the best quality of care at a low cost, comparisons of

evidence on costs and quality are needed. This appendix has presented available evidence on patterns of

Medicare beneficiaries’ use of several alternatives and

the available evidence on cost and quality. Clearly,

more research and better data collection are needed.

Definitional problems regarding quality, cost, and

what constitutes a particular type of care exacerbate

the paucity of comparable data (2,205,429).
Appendix E.— Decisionmaking by Medicare Contractors

for Coverage of Medical Technologies

Prepared under contract to OTA by:

Linda K. Demlo, Glenn T. Hammons, John M. Kuder, Sally Rodgers, Dianne Lynch

The University of Iowa College of Medicine and Graduate College

and the University of lowa Hospitals and Clinics

Introduction

This study of decisionmaking by Medicare contractors was conducted for OTA to determine whether

there is variation in decisionmaking by Medicare contractors (intermediaries and carriers) with respect to

the coverage of particular medical technologies. The

findings are based primarily on the results of a 1983

telephone survey of Medicare contractors.

Background and Objectives

Conventional wisdom holds that there is wide variation in the decisions made by Medicare contractors

regarding the coverage of particular medical technologies. This variation stems from the absence of precise

national policy about which medical care technologies

are “reasonable and necessary” and, hence, eligible for

reimbursement; the decentralized process by which

Medicare coverage policy is promulgated and implemented; and the wide range of discretion allowed to

individual contractors in making coverage and reimbursement decisions (54,143,353). Variation in Medicare contractors’ interpretation of rules governing coverage of skilled nursing care has been documented

(314). However, comparable information is not available to document the variation in contractors’ coverage decisions about medical technologies.

Any attempt to change the economic incentives in

the Medicare program by refining coverage policy in

order to control or modify the adoption and use of

medical technology, thereby constraining the growth

of Medicare costs, ideally would be grounded on a better understanding of the way in which coverage decisions are currently made. This study was intended to

assist in developing that information base by addressing the following specific objectives:

1.

2.

To determine the manner in which Medicare intermediaries and carriers identify new technologies and new uses of established technologies;

To determine the manner in which intermediaries

and carriers monitor and implement national coverage decisions; and

3. To determine whether there is variation among

intermediaries and carriers in Medicare coverage

of specific technologies:

a. by any type of technology (drugs, devices, and

medical and surgical procedures); and

b. by stage of development (experimental, new,

and established).

This appendix presents the study findings. It includes

a discussion of study methods, a description of findings with respect to reported coverage policies and factors associated with those policies, and a summary of

conclusions.

Methods

The study requirements included drawing a sample

of Medicare carriers and intermediaries, selecting the

technologies for which specific coverage questions

were formulated, developing and pretesting the questionnaire, and gathering and analyzing the survey

data. The various aspects of the study methodology

are presented in the following sections, along with a

discussion of study limitations.

Sampling Plan

The sampling plan was developed to reflect characteristics of Medicare contractors that were hypothesized to influence their coverage decisionmaking. Adequate representation of both commercial insurance

companies and Blue Cross/Blue Shield (BC/BS) plans

was indicated because of the possibility that variation

in claims processing between these groups might influence coverage decisions, Discussions with staff of

OTA, the Health Care Financing Administration

(HCFA), local BC/BS plans, and nearby hospitals suggested that intermediaries are more limited than carriers in their ability to identify new technologies or new

uses of established technologies because of the restricted information provided by the hospital claim

form. Accordingly, both carriers and intermediaries

were represented. The potential variation in physician

practice patterns among geographic regions required

191
192 ● Medical Technology and Costs of the Medicare Program

—

a geographically balanced sample. To simplify the

analysis, we preferred to avoid disproportionate

sampling from fractions among these groupings of contractors. In the absence of firm information about the

likely variation in decisionmaking among contractors,

the sample size was governed primarily by the need

to balance the contractors’ characteristics specified

above and the time and funds available for conducting the study. A total sample size of 60 contractors

was deemed reasonable.

After determining the target sample size, the most

recent HCFA intermediary and carrier directory was

used as the sampling frame (385). Contractors in Hawaii and Puerto Rico were eliminated because of the

time and expense involved in communicating with

them. The HCFA Offices of Direct Reimbursement and

Group Health Operations were also eliminated. (These

offices serve as intermediaries and carriers for providers who bill HCFA directly, and, as such, have a

unique national perspective. Because of pending organizational changes, however, information about

their operations would provide little useful data on

which to make policy recommendations. )

Random sampling resulted in an initial sample of

21 intermediaries and 39 carriers, whose distribution

among Blue Cross/Blue Shield and commercial insurance contractors and geographic region is shown in

table E-1. After telephoning to verify the names and

addresses of persons in charge of government programs, a letter of introduction was sent to each

sampled contractor, which described the purpose of

the study and indicated that the program administrator

would be contacted to schedule an interview.

Almost immediately, however, changes were required in the initial sample. Both the verification phone

calls prior to mailing the introductory letter revealed

that in many cases the HCFA directory was outdated.

Some contractors no longer held HCFA contracts but

were able to tell us who the current contractor was.

In these instances, we replaced the prior contractor

with the current contractor in order to maintain the

geographic representativeness of the sample. Two

other categories of sampled contractors performed no

claims review functions: Railroad Retirement Boards,

who contracted for review with a commercial insurance company; and home offices of large commercial

companies, whose review functions were performed

by field offices. Both were listed in the HCFA directory and given intermediar y or carrier numbers, so

there was no way to identify them in advance. When

such contractors were identified, they were declared

ineligible for inclusion in the sample because they were

not engaged in claims review. They were subsequently

replaced by another randomly selected contractor.

The final sample of contractors is shown in table

E-2, which reflects the changes discussed above. Four

contractors (all Blue Cross or Blue Shield plans) refused

to participate. Their reasons for nonparticipation reflected extreme staff shortages and time pressures involved in the need to implement system changes demanded by the Tax Equity and Fiscal Responsibility

Act of 1982 (Public Law 97-248) and Social Security

Amendments of 1983 (Public Law 98-21). Despite these

changes, the representation of carriers and intermediaries remained about the same in both the original and

final samples. Similarly, the distribution of contractors among HCFA regions remained about the same

except that the minimum representation decreased in

the final sample (i. e., only three contractors in the

Denver region).

Questionnaire Development

A telephone-administered questionnaire was developed to elicit information about intermediaries’ and

Table E.1 .—Distribution of initially Sampled Medicare Contractors

Number of carriers Number of intermediaries

HCFA region BC/BS Commercial BC/BS Commercial Total

Seattle. . . . . . . . . . . . . . . . . . 1 2 2 1 6

San Francisco . . . . . . . . . . . 1 2 1 2 6

Denver . . . . . . . . . . . . . . . . . . 2 2 0 0 4

Dallas . . . . . . . . . . . . . . . . . . 2 2 1 0 5

Kansas City . . . . . . . . . . . . . 3 2 1 1 7

Chicago. . . . . . . . . . . . . . . . . 2 3 3 0 8

Atlanta. . . . . . . . . . . . . . . . . . 3 2 1 1 7

Philadelphia . . . . . . . . . . . . . 2 0 2 0 4

New York . . . . . . . . . . . . . . . 2 3 1 1 7

Boston, , . . . . . . . . . . . . . . . . 1 2 1 2 6

Total . . . . . . . . . . . . . . . . . 19 20 13 8 60

SOURCE’ L K. Demlo, G T Hammons, J M Kuder, et al , “Report of a Study on Decisionmaking by Medicare Contractors

for Coverage of Medical Technologies, ” prepared for the Office of Technology Assessment, U.S. Congress, Oct

28, 1983
App. E—Decisionmaking by Medicare Contractors for Coverage of Medica/ Technologies w 193 —— .-

Table E-2.—Distribution of Actual Study Participants

Number of carriers

HCFA region BC/BS Commercial

Seattle . . . . . . . . . .....1... 1 2

San Francisco . . . . . . . . . . . 1 2

Denver . . . . . . . . . . . . . . 2 1

Dallas . . . . . . . . . . . 2 2

Kansas City . . . . . . . . . 3 2

Chicago. . . . . . . . . . . 2 2

Atlanta. . . . . . . . . . . . . . 3 4

Philadelphia . . . . . . . . . . . . . 3 0

New York . . . . . . . . . . . ~ . . . 1 1

Boston . . . . . . . . . . . . . . . . . . 2 1

Number of intermediaries

BCIBS Commercial

1 1

1 2

0 0

1 0

1 1

3 0

1 0

2 0

1 2

2 0

Total

5

6

3

5

7

8

8

5

5

5

Total . . . . . ., . . . . . . . 20 17 13 6 56

SOURCE L K Demlo, G T Hammons J M Kuder, et al , “Reporf of a Study on Decistionmaking by Medicare Contractors

for Coverage of Medical Technologies, ” prepared for the Office of Technology Assessment, U S Congress, Oct

28 1983

carriers’ claims review processes, their uses and impressions of HCFA transmittals that update the Medicare

coverage issues appendix, their methods for identifying technologies for which coverage may be questionable, and their policies with respect to covering certain

technologies specified in the questionnaire. Potential

questionnaire items were discussed with regional and

national reimbursement experts. Two pilot tests were

conducted, and additional questions were eliminated

or refined in order to accommodate the 40-minute time

limit.

The most complicated aspect of questionnaire development was identifying the technologies about

which coverage questions were asked. This task was

handled primarily by the physician member of the

study team, in consultation with colleagues at the

University of Iowa College of Medicine, medical consultants in insurance companies, and staff of OTA,

HCFA, and the Office of Health Technology Assessment (OHTA) of the Public Health Service (PHS). In

addition, recent HCFA updates to the coverage issues

appendix, the Commerce Clearinghouse version of the

appendix, and lists of studies completed or underway

by OHTA were carefully reviewed.

As indicated by the study objectives, the technologies about which coverage questions were asked were

chosen to represent a variety of types (drugs, devices,

and medical and surgical procedures) at various stages

of development (experimental, new, and established).

This diversity was intended to raise different coverage issues reflecting questions about the extent to

which these technologies are safe, effective, and generally accepted within the medical community. Developing a matrix of technologies for potential inclusion

in the study proved to be difficult, however, since

assigning individual technologies to these categories

frequently required some arbitrary decisions. The dividing points between experimental, new, and established technologies are not clear-cut. Determining

whether a procedure is medical or surgical may reflect

personal biases about which medical specialty should

be permitted to perform it, as well as its contribution

to diagnostic v. therapeutic decisions, and its relative

degree of invasiveness. The questionnaire was designed

to include some technologies for which there is an explicit HCFA policy and some for which there is not,

in which case Medicare contractors are expected to

make their own determinations. Finally, Medicare coverage policy is constantly evolving. Even during this

limited study period, there were changes in HCFA policy and its interpretation. The technologies included

in the questionnaire are shown in table E-3. However,

the sometimes arbitrary and fluid nature of the manner in which they are categorized should be noted.

Data Gathering

The interviews were conducted by a nonphysician

senior member of the study team and two research

assistants who were second-year graduate students in

hospital and health administration. All interviewers

consulted with the physician member of the study team

and reviewed medical literature and the coverage issues

appendix in order to become thoroughly familiar with

the nature and uses of the medical technologies included in the study. Our intent was to interview a senior official from each Medicare contractor, who would

be familiar with the overall processes by which claims

were reviewed, as well as the contractor’s specific coverage policies. In most cases, the respondent was a

nonphysician administrator responsible for the Part

A or Part B Medicare contract. Sometimes, physician

consultants and nurse reviewers responded; occasionally, a conference call was held so that all three
194 ● Medical Technology and Costs of the Medicare Program

Table E-3.Medical Technologies Included in Questionnaire

Type of

Technology technology HCFA policy

Developmental

stage Useb

Intraocular lens implant following cataract

removal

Chelation therapy with EDTA in the

treatment of atherosclerosis

Chelation therapy with EDTA in the

treatment of rheumatic arthritis

Pacemaker device and its implantation for

a patient with chronic second degree AV

block of Mobitz type 11, with symptoms

attributable to intermittent complete

heart block

Pacemaker device and its implantation for

a patient who has sinus bradycardia

without symptoms

Implantable chemotherapy infusion device,

such as the “lnfusaid, ” and its

implantation for a patient with primary

hepatic malignancy, such as hepatoma

Implantable chemotherapy infusion device

for a patient with metastatic: cancer in

the liver

External insulin infusion pump for a

diabetic patient

Purchase of a home blood glucose

monitor such as the Dextromete@

Continuous 24-hour monitoring of blood

pressure using an automatic device (i.e.,

preset intervals not under control of

patient for readings)

Continuous 24-hour monitoring of blood

pressure using a semiautomatic or

patient-activated device

Percutaneous transluminal coronary

angioplasty (PTCA) for a single vessel

procedure

PTCA for two or more coronary arteries

Streptokinase administration at cardiac

catheterization into a coronary artery to

dissolve a clot in a patient with acute

myocardial infarction (thrombolytic

therapy)

External osteogenic stimulator for use in

the treatment of a long bone fracture

Chemonucleolysis (i.e., injection of the

enzyme chymopapain or “Disease”) in

the treatment of a herniated disc

Electroencephalographic (EEG) monitoring

during carotid endarterectomy

EEG monitoring during open heart surgery

- . ,

Experimental/new

Experimental

Experimental

Established

Therapeutic

Therapeutic

Therapeutic

Therapeutic

surgical procedure Covered

Not covered

Local option

Covered a

Drug/medical

procedure

Drug/medical

procedure

Device/surgical

procedure

Device/surgical

procedure

Covered a

Covered a

Established

New

Therapeutic

Device/surgical Therapeutic

procedure

Covered a Device/surgical New Therapeutic

procedure

Device Covered a

Covered a

Not covered

Experimental/new

Established

New

Therapeutic

Diagnostic

Diagnostic

Device

Device/medical

procedure

(interpretation)

(as of July 1983)

Device/medical

procedure

(interpretation)

Medical procedure

Not covered New Diagnostic

Covered a New/established Therapeutic

Medical procedure

Drug/medical

procedure

Not covereda New

Local option Experimental

Therapeutic

Therapeutic

Covered a New

Local option Experimental/new

Device/medical

procedure

Drug/medical or

surgical

procedure

Medical procedure

Therapeutic

Therapeutic

Covered a New use of

established

Not covered New use of

established

Covered a New or new use

established

Diagnostic

Diagnostic

Therapeutic

Medical procedure

Apheresis (therapeutic pheresis) or plasma

exchange in the treatment of

hyperglobulinemias such as a multiple

myeloma

Medical procedure of
App, E—Decisionmaking by Medicare Contractors for Coverage of Medical Technologies ● 195

.— . —

Table E-3.—Categorization of Medical Technologies Included in Questionnaire—Continued

Type of Developmental

Technology technology HCFA policy stage Useb

.— —

Apheresis (therapeutic pheresis) or plasma Medical procedure Not covered Experimental use Therapeutic

exchange in the treatment of systemic of established

lupus erythymatosis (SLE)

Topical oxygen therapy for decubitus Device/medical

ulcers (e. g., Topox device) procedure Not covered Experimental Therapeutic

perspectives could be represented. The latter occurred

at the suggestion of the respondent. The variation in

respondents introduces the potential for bias; however,

when the data were analyzed according to the position and discipline of the respondent, no systematic

differences were detected.

Another source of potential bias was introduced by

variation in the method by which answers were obtained. As noted earlier, the questionnaire was designed to be administered by telephone, In some instances, however, the respondent insisted on reviewing

the questionnaire in advance and then responding by

telephone or submitting the answers by mail. This

occurred when the respondents were short of staff or

when the contractor had a policy of only responding

to self-administered mail questionnaires. Rather than

lose the respondent, we reluctantly agreed to send the

questionnaire in advance. Finally, in some cases, respondents were unable to respond to all the questions

about technologies and preferred to check on coverage policy and provide the answers later, either in a

followup telephone call or in writing.

Obviously, the respondents who reviewed the questionnaire in advance or who provided answers in

followup contacts had the opportunity to consult the

coverage issues appendix and provide the “correct”

answer. We attempted to minimize this possibility in

several ways. In administering the questionnaire, we

were careful to emphasize that we expected variation

to occur, that there was no “correct” answer, and that

we were simply interested in ascertaining what the contractor’s customary policy would be. In some instances, there was a general HCFA coverage policy,

but in others, there was not. Ultimately, the data were

analyzed according to the method by which answers

were obtained; entirely by telephone interview (61 percent of the responding contractors); entirely by selfadministration (14 percent); or by a combination of

telephone interview and followup telephone or written response to questions that were initially unanswered (25 percent).

When the reported coverage policies for individual

technologies were categorized according to these three

general methods of response, a statistically significant

difference was found for only one technology (the implantation of a pacemaker for a patient with sinus

bradycardia without symptoms). For this technology,

the responses derived entirely through a telephone interview indicated lowest adherence to HCFA policy,

while those based on mixed methods showed highest

adherence. The differences in reported coverage for a

24-hour, semiautomatic or patient-activated blood

pressure monitor were almost statistically significant

(p = 0.079). In this case, the responses to questions

that were totally self-administered showed lowest

adherence to HCFA policy, while those based on

mixed methods again showed highest adherence. For

all other technologies for which HCFA has established

a coverage policy, the differences were not statistically

significant at the 0.05 level and were about evenly

divided among general methods of response. However,

there remained a slight tendency (not statistically significant) for responses from contractors who utilized

the combination method or self-administered responses

to show greater adherence to HCFA policy. If one assumes that the responses derived entirely from telephone interviews are most likely to reflect actual contractor behavior (e. g., the reviewer simply made a

decision based on the claim without bothering to refer to the coverage issues appendix), then the findings

from this study are biased in the direction of underestimating deviation from HCFA coverage policy.

Study Limitations

The potential for bias stemming from the sample,

variation in the position and discipline of the respondent, and the methods by which responses were ob-
196 Ž Medical Technology and Costs of the Medicare Program

— —— ——— —

tained was noted above. In addition, responses reflect

the opinion of (usually) one respondent at one point

in time about a limited set of medical technologies,

Thus, the data would not reflect potentially different

judgments about coverage policy made by different individuals within a single contractor organization or by

a single individual at different points in time. Time and

resource limitations precluded an indepth survey of all

contractors in a manner that would illuminate both

inter- and intracontractor variability in coverage decisions, categorized by a wide range of technologies and

administrative and policy variables. Perhaps a more

definitive study would be based on the submission of

actual, identical claims to a sample of Medicare contractors and the analysis of variation in claims processing and decisionmaking; however, that was not our

charge.

Despite the limitations of the current study, we

believe that the findings are generally reliable and that

the resulting information on coverage decisions of a

sample of Medicare contractors should provide a

useful framework for considering alternative Medicare

coverage policies.

Findings

Although there was variation in reported coverage

decisions by the Medicare carriers and intermediaries

in our study, the processes by which claims are reviewed were quite predictable. The characteristics of

the participating contractors are described below.

Characteristics of Participating Contractors

The 56 Medicare contractors (37 carriers and 19 intermediaries) included in the study reported fairly similar methods for processing Medicare claims. After an

initial review of completeness, most claims pass

through (potentially) three levels of review that reflect

differing degrees of comprehensiveness, specificity,

and clinical judgment and involve clerical employees,

registered nurses, and physicians or some other health

professional (pharmacist, podiatrist, occupational

therapist, etc. ) in that order. All but nine (16 percent)

of the respondents utilized some automated screening

procedures that vary in sophistication. The nine respondents without automated screening procedures

were all intermediaries (contractors that process Part

A claims), rather than carriers (contractors that process Part B claims). The most common computerized

screens flag cases that exceed certain utilization

parameters (specified numbers of hospital days, office

visits, lab services, nursing home visits, etc. ), claims

requesting payment for noncovered services, incompatible diagnostic and procedure codes, and claims involving diagnoses, procedures, or providers which are

automatically submitted to medical review by physicians.

The referral of claims to registered nurses is generally based on rather clear-cut screening and referral

guidelines, recorded in policy manuals and employed

either by clerical workers or automated review processes. All but two contractors (4 percent) also have

established criteria to assist nurse reviewers in determining when to refer a coverage question to a medical consultant. Referral guidelines often reflect cases

that have been troublesome in the past, as well as

claims for technologies for which there is no prior

claims experience, so there is no precedent for making a coverage determination. Some guidelines specify

particular conditions or technologies for which review

by a physician consultant is always required, such as

bypass surgery, pacemaker implantations, computed

tomography (CT) scans, and cases involving enteral

and parenteral feeding.

Physician consultants utilize their own knowledge

of medical practice and the scientific literature to resolve many coverage questions. Institutional sources

of information utilized by consultants in making coverage determinations are shown in table E-4. The

HCFA regional office, colleagues in other insurance

companies or BC/BS Plans, and State and national

medical and specialty associations are most frequently

consulted. Professional Standards Review Organizations (PSROs) (now utilization and qualily control

peer review organizations (PROS)) are least frequently

used. Other resources include “inhouse” peer review

panels, publications of the Food and Drug Administration (FDA), drug manuals, informal medical consultation, and policies established for private programs

whose claims are also processed by the Medicare contractor. The responses were very similar for both commercial insurance companies and BC/BS plans, except

that the “Blues” were much more likely to turn to national insurance associations (in this case, the Blue

Cross and Blue Shield Association), while commercial

insurers were more likely to rely on State or national

medical or specialty associations. The responses for

intermediaries and carriers were also quite similar, except that intermediaries were more likely than carriers

to rely on information from PSROs, HCFA regional

offices, national insurance associations, and manufacturers. These differences were not statistically significant, however.

Most contractors report that they learn about new

technologies for which coverage questions might be

raised prior to the actual submission of claims through

inquiries from providers and manufacturers, drug and
—— ._. -

App. E—Decisionmaking by Medicare Contractors for Coverage of Medical Technologies ● 197 —— —

Table E-4.—Sources of Information Used by Medical Consultants in

Making Coverage Decisions

— —

Percent of

consuItants

using source

Sources Yes N O“

Colleagues in another insurance company or BC/BS plan ., . . . . . . . . . 78.6 21,4

HCFA regional office ... ., ., . . ... . . . . . . . . . . . . . . . . . . . . . . 87.5 12.5

University medical center ., ., . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 44.6 55.4

PSRO (PRO). . . . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.9 73.1

National insurance association ., . . . . . . . . . . . . . . . . . . . . ... . . 37.5 62.5

State or national medical or specialty association . . . . . . . . . . . ... 75.0 25.0

Drug or device manufacturer ., . . . . . . . . . ., . . ... . . . . . . . . , . 53.6 46.4

Other ., . . ., . . . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.0 49,0

28, 1983

device approval lists from the FDA, and HCFA announcements. Once claims are submitted, new technologies are identified because of the absence of code

numbers or the presence of codes that are not recognized by the claims reviewers, A few contractors conduct extensive research to assist in identifying and

making coverage decisions for such claims, utilizing

in-house review panels, specialists in nearby medical

colleges, and medical journals. The majority, however,

assume a more passive role. Similarly, the majority

are reasonably well satisfied with existing methods for

identifying new technologies and report that this is not

a big problem for them. Some mentioned a need for

greater cooperation between national medical and insurance associations and governmental agencies, as

well as faster turnaround on coverage decisions, once

questions are raised. There were no noticeable differences between intermediaries and contractors in

these responses.

The volume of claims processed by the study contractors varies widely. During the March to January

quarter of 1983, the total number of Medicare claims

processed ranged from 18,000 to 4,155,000 claims per

contractor, with a mean of 854,741,

Reported Coverage Decisions

The basic data reflecting reported coverage decisions

for specified medical technologies are shown in table

E-5. The columns headed “covered” and “not covered”

include clear-cut responses with no associated qualifications or criteria. To estimate the frequency with

which contractors cover individual technologies, the

reader should combine the responses from the first and

third columns. The latter include responses indicating

that coverage would be dependent on compliance with

specified criteria or guidelines, discussed in more detail

below. Whenever possible, respondents were limited

to these first three categories, even if that required a

followup phone call to determine actual coverage policy. The fourth, fifth, and sixth columns (referral to

the coverage issues appendix, to a physician consultant, or to the HCFA regional office) may be viewed

as “last resort” responses. They were used in instances

where the respondent had never heard of the technology, or had never seen a relevant claim, and had no

precedent for making a decision other than to refer to

one of the three sources of assistance. The number of

responses is sometimes less than the total number of

study participants. Since the same questions were

asked of both carriers and intermediaries, there were

some instances when the question was not applicable.

For intermediaries, this was especially true for questions about durable medical equipment for home use.

When a question was not applicable, the response was

coded as “missing data” and excluded from the

reported responses.

Table E-5 reveals some instances of near unanimity

or high levels of agreement in coverage decisions—

particularly for intraocular lens implant following cataract removal (98.2 percent covered), the use of chelation therapy in the treatment of atherosclerosis (87.0

percent not covered), and the use of topical oxygen

therapy for decubitus ulcers (86.3 percent not covered).

However, there are also examples of considerable variation in coverage policies—particularly for a pacemaker device and its implantation for a patient who

has sinus bradycardia without symptoms, an implantable chemotherapy infusion device for a patient with

metastatic liver cancer, an external insulin infusion

pump for a diabetic patient, and streptokinase administration at cardiac catheterization to dissolve a clot

in a patient with acute myocardial infarction. These

responses and their implications are perhaps better presented in table E-6, which categorizes them according

to HCFA coverage policy.

25-337 0 - 84 - 14
198 ● Medical Technology and Costs of the Medicare Program .—

. . .
App. E—Decisionmaking by Medicare —

Technologies Covered by HCFA

The technologies for which HCFA explicitly provide

coveragel have a higher percent of responses indicating

unqualified coverage than those in any subsequent

coverage category (see table E-6). The implantation of

an intraocular lens provides an exception to HCFA’s

general policy of not covering experimental or investigational items or services. Although FDA still considers intraocular lenses to be investigational, Congress

directed FDA to study them without interfering with

Contractors for Coverage of Medical Technologies ● 199 —

their availability to patients. Lens implantation is the

only technology included in this study for which

almost all respondents (about 98 percent) indicated a

policy of unqualified coverage. For the remaining technologies in this category, most qualified responses reflect the contractor’s policy of assuring that HCFA’s

coverage criteria are met, even though the questions

were phrased so as to leave little doubt about their

eligibility for coverage. Because of the publicity surrounding pacemakers, many contractors automatically

submit all such claims to medical consultants for indepth investigation prior to payment. If the qualified

and unqualified coverages are combined, close to 90

percent of the respondents indicated that they approve

coverage for the technologies that are explicitly covered according to HCFA policy. The one exception was

electroencephalographic monitoring during carotid

endarterectomy, which reportedly would not be covered by about 14 percent of the contractors.

Table E-6.—Reported Coverage Decisions by Medicare Contractors

. .

Decisions/policy of contractors

Not covered

Covered with

qualifications Refer for advice
200 ● Medical Technology and Costs of the Medicare Program — ——— — . — . . — —— —.

The second category of technologies in table E-6 includes those for which HCFA has delineated criteria

that must be met in order for coverage to be approved

and for which our descriptions of the procedure were

less specific than in the first category. The qualifications associated with approving a claim for the purchase of a home blood glucose monitor, the use of an

external osteogenic stimulator in the treatment of a

long bone fracture, and the use of PUVA for psoriasis

consistently reflect the application of criteria specified

in the coverage issues appendix. If the qualified and

unqualified coverages are combined, from 84 to 88 percent of the respondents approve coverage for these

three procedures, although some approvals may be

granted without ascertaining whether the specified criteria are met.

The responses pertaining to the coverage of infusion

devices require somewhat more interpretation. Currently, the only pertinent national coverage instructions are those in section 60-9 of the coverage issues

appendix and in section 2100.5 of the Medicare carrier’s manual. The coverage issues appendix provides

that infusion pumps are covered if the contractor’s

medical staff verifies the appropriateness of the therapy and of the prescribed pump for home use. The

Medicare carriers manual provides that reimbursement

may be made for supplies necessary for the effective

use of durable medical equipment, citing as an example tumor chemotherapy agents used with an infusion

pump, as long as the drug or biological used with a

pump is reasonable and necessary for the patient’s

treatment. The state of the art of infusion pump technology has changed considerably since these policies

were developed. They have been interpreted by HCFA

to include an implantable pump such as that manufactured by the Infusaid Corp. (referred to in the questionnaire), even though the policies were not developed with that technology in mind, PHS is examining

issues related to the coverage of infusion pumps, including chemotherapy and insulin devices. HCFA is

postponing the issuance of revised chemotherapy

guidelines until those studies are completed. The responses to our questionnaire items reflect this uncertainty.

The respondents were most likely to cover an implantable chemotherapy infusion device, such as the

“Infusaid,” and its implantation for patients with primary hepatic malignancy, such as hepatoma. They

were less likely to cover the same device for a patient

with cancer metastatic to the liver. They were least

likely to cover an external insulin infusion pump for

a diabetic patient; of the three technologies, the responses cover the total range of response options—

perhaps more so than for any other technology considered to this point. The circumstances of coverage

for the chemotherapy infusion device reflected FDA

approval status of the drug to be administered, as well

as the condition of the patient. For example, one respondent indicated that the device would be covered

for a patient with metastasized liver cancer only if the

liver were the key to survival and at least a 6-month

survival period were likely. Criteria were also specified for coverage of an external insulin infusion pump,

including patient condition (e. g., a “brittle diabetic”),

case-by-case review to assure medical necessity rather

than simply convenience, and a multidisciplinary assessment of diet and exercise programs and patient

motivation. One respondent indicated that the same

criteria would be applied as for a home blood glucose

monitor.

“Local Option” Technologies

Technologies are included in the coverage issues appendix only if they have presented difficult coverage

questions for Medicare contractors, who generally

would have submitted them to a HCFA regional office, and, eventually, to the central office in Baltimore

for a national coverage determination. HCFA policy

holds that individual Medicare contractors should

make coverage decisions for all technologies that are

not mentioned in the coverage issues appendix. In

other words, their coverage status is determined by

“local option.’” The technologies included in this study

that fall into the “local option” category all involve

the use of drugs, which in turn, requires that contractors refer to FDA policy in making Medicare coverage decisions. These technologies are included in the

third category in table E-6.

Although the drug mentioned in our questions about

chelation therapy (endrate or disodium EDTA) has

been approved by FDA, the labeling indications do not

mention its use for rheumatoid arthritis. About 81 percent of the respondents approve coverage of streptokinase administered at cardiac catheterization to

dissolve a clot in a patient with acute myocardial infarction, as well as chemonucleolysis injections in the

2Thls dlst]nctlon between technologies for which coverage IS speclfled In

the coverage Issues appendix and those for which coverage ]s expected to be

a matter of local option Is overly s]mpl]stic and glosses over an Important

source of am blg-uit y and confus]on In HCFA pol)cy Not all technologies that

are not mentioned in the coverage Issues appendix are expected to be a matter ot local option As discussed m the next section, some technologies are

n<)t expltctt[y den]ed [n the coverage issues appendix, even though, according to HCFA staff, the contractors should know that they are not covered

How th]s knowledge Is transmitted M unclear Furthermore, when contractor-s encounter cla]ms for technologies that are not Included In the coverage

]ssues appendix and wh]ch ra]se issues of nat]onal importance because they

are experimental or pntent]alty costly, the contractors are expected to ask

HCFA for a nat]onal coverage determ]natlon However, the cntena for ldent] fylng such technologies are not well speclfled
App E—Decisionmaking by Medicare contractors for Coverage of Medical Technologies • 201

———

treatment of a herniated disc. In both instances, coverage is generally contingent on FDA approval. The

timing of the streptokinase is important: respondents

require that it be administered from 4 to 6 hours after

onset of symptoms; one respondent required that the

patient be placed in a specialized care unit postoperatively. In approving chemonucleolysis claims, two

respondents require that its use be limited to the lumbar region; two others require that the provider have

special training,

Technologies Not Covered by HCFA

For some technologies, HCFA’s Office of Coverage

Policy expects that claims will be denied, even though

there is no HCFA policy explicitly denying coverage.

For example, some sections of the coverage issues appendix state that technologies will be covered only in

specified circumstances, meaning by implication, that

all other uses of the technology will not be covered.

The use of biofeedback for intractable pain is the only

study technology to fall into this category. Section 35-

Fifty-five percent of the contractors follow HCFA’s

intent and reported that they would not cover biofeedback therapy for intractable pain, Reasons given for

approving coverage with qualifications include: documentation that all other methods have failed, when

used in conjunction with physical therapy, when part

of a pain rehabilitation center program, and when used

for specific muscle reeducation. (The final qualification listed may indicate that the respondent misunderstood the question. Although specific muscle reeducation would be a reimbursable use of biofeedback, that

is not what the question addressed. )

The questionnaire included two other technologies

which are not explicitly denied coverage, but for which

HCFA believes the contractors should understand that

coverage should be denied. In both instances, other

uses of the same technology are specifically covered.

According to HCFA, percutaneous transluminal coronary angioplasty (PTCA) to eliminate obstruction in

two or more coronary arteries should not be covered,

even though a single vessel procedure is covered.

Almost 52 percent of the respondents would not approve a claim for PTCA involving two or more arteries, while about 38 percent would approve the

claim, either with or without qualifications. The

reported qualifications suggest that the contractor

would review each case individually to determine medical necessity, that the criteria specified for a singlevessel procedure would be applied, that the claim

would be approved only if the requested charges were

reasonable, and that the claim would be approved, but

the level of reimbursement would be the same as for

a single-vessel procedure. Presumably, the HCFA restriction on multiple-vessel procedures was based on

a concern for increased patient risk; however, it does

provide an opportunity for “creative” billing.

The other instance in which coverage should be understood to be denied is the use of apheresis (therapeutic apheresis) or plasma exchange in the treatment

of systemic lupus erythymatosis (SLE ). Therapeutic

apheresis is covered for several indications listed in the

coverage issues appendix, but not for systemic lupus.

In May 1983, PHS tentatively recommended that

apheresis for SLE should not be covered; however, that

recommendation was withdrawn and the issue will be

reconsidered. This uncertainty is reflected in our responses. Sixty percent of the contractors do not cover

apheresis for patients with SLE, while 18 percent would

cover without restriction, and another 14 percent

would cover with qualifications.

The final category of technologies includes those for

which HCFA policy explicitly denies coverage. The

highest adherence to that policy is seen in claims for

chelation therapy with EDTA in the treatment of atherosclerosis and for topical oxygen therapy (e. g., using

a Topox device) in the treatment of decubitus ulcers.

The lower rate of claims denial for a pacemaker device for a patient with sinus bradycardia without

symptoms may reflect the policy of at least some contractors to submit all pacemaker claims to indepth

medical review, prior to making coverage determinations. The primary reason for covering electroencephalographic (EEG) monitoring during openheart surgery was documentation by a physician that

it was needed. Some contractors noted the difficulty

of determining whether a monitor was used, indicating

that they do not usually receive a separate bill for this,

but that the bill for the surgery may be somewhat

inflated.

The responses for continuous 24-hour monitoring

of blood pressure reflect, in part, changing HCFA policy. Use of a semiautomatic or patient-activated portable monitor had been specifically not covered since

October 1982. However, there was no explicit policy

regarding coverage of the automatic, continuous

monitoring device until July 1983, when coverage was

explicitly denied. Some respondents may not have

been aware of this recent policy issuance. Furthermore,

some respondents appear to have confused the automatic device in the question (which includes a sensing
202 ● Medical Technology and Costs of the Medicare Program

—

apparatus and provides continuous monitoring and

recording) with an automatic blood pressure monitor

that can be covered, if prescribed by a physician for

use as part of a home dialysis delivery system. Reimbursement for the latter is limited to the amount which

would be payable for a sphygmomanometer with cuff

and stethoscope unless there is documentation that the

patient’s condition is such that conventional methods

of monitoring are not successful. Both potential

sources of confusion may have resulted in a greater

tendency to approve coverage of automatic, continuous, 24-hour blood pressure monitors than would have

been expected.

In summary, it appears that with the exception of

intraocular lens implantation, there is variation in coverage decisions made by Medicare contractors, regardless of HCFA policy. Interpretation of the variation

is complicated by the dependence of coverage policy

on consensus within the medical community that a

given technology is safe and effective. If that consensus

is lacking or just emerging, it might be expected that

a coverage policy, if one existed, would be lacking in

specificity and inconsistently adhered to by contractors. Nevertheless, differences in coverage decisions

by Medicare contractors appear to be related to the

clarity or specificity of HCFA policy. The variation

is least in some instances in which HCFA has explicitly

approved coverage. Variation is much greater for technologies that HCFA intends to be denied, but for

which there is no explicitly stated denial policy, as well

as technologies for which coverage policy is changing.

In most instances, however, the majority of contractors adhere to HCFA’s intentions.

Contractor’s Views and Interpretation of

HCFA Coverage Policy

Several questions explored the contractor’s perceptions of HCFA coverage policy and the processes by

which it is promulgated. For example, the respondents

were asked how frequently HCFA coverage transmittals can be implemented as written, rather than requiring further interpretation. As shown in table E-7, over

half the respondents indicated that HCFA transmittals

can always or almost always be implemented as written. When further clarification is needed, the sources

of assistance tend to be the same as those utilized in

making any coverage determination (see table E-4).

It was noted earlier that about 88 percent of the

respondents indicated that they utilize HCFA’s regional

office in their area for assistance in making coverage

decisions. To ascertain whether there is any predictability in the types of coverage questions referred to the

regional office and, perhaps, to HCFA’s central office,

the contractors were asked whether they used any criteria to determine when to refer a coverage question

to HCFA. The responses generally fell into two categories, Some contractors appear to use the regional

office rather routinely if the coverage issues appendix

does not address the technology in question, HCFA

policy is ambiguous, the contractors are not familiar

with the technology, or “we don’t know what to do. ”

Other contractors attempt to establish their own policies and use the regional office as a last resort, i.e.,

only if their own decisions have been challenged by

providers or if a technology is experimental and has

a potential for abuse. Some contractors are guided by

Table E-7.—Medicare Contractors’ Attitudes and Actions Regarding HCFA Coverage Transmittals

Contractors’ response

Almost Number of

Never Rarely Sometimes always Always responses

HCFA coverage transmittals can be

implemented as written rather than

requiring further interpretation. . . . . . . . . 7.1 0/0 7.1 0/0 30.40/0 35.7% 19.60/o 56

Contractor informs HCFA regional office

of its interpretations of HCFA policy . . . 10.6 25.5 14.9 — 48.9 54

Number of

More Same Less Not applicable responses

Specificity of HCFA policy compared with

, .

policy for other claims reviewed by

contractor . . . . . . . . . . . . . . . . . . . . . . . . . . 35.7%0 26.8% 3.60/o 33.90/0 56
App. E—Decisionmaking by Medicare Contractors for Coverage of Medical Technologies ● 203

-— — —— —-— ——

the advice of their onsite HCFA representatives about

when to refer coverage questions to the regional office.

When contractors take the initiative to further interpret HCFA coverage policies themselves, most of

them inform HCFA’s regional office of their interpretation (see table E-7). Of those respondents, most have

onsite HCFA representatives to whom they automatically send copies of their policy interpretations.

When comparing HCFA coverage policy with policies governing other health insurance claims reviewed

by the contractor, most contractors report that HCFA

policy is as specific or more specific than policies for

other insurance claims (see table E-7). About one-third

of the contractors were unable to answer the question,

because they review only Medicare claims and had no

basis for comparison.

Interrelationships Between Coverage Decisions

and Contractor Characteristics

To better understand the extent to which characteristics of Medicare contractors and their claims review

processes may influence coverage decisionmaking, several additional analyses were performed. The responses about coverage of individual technologies

were categorized according to whether the respondent organization was án intermediary or carrier,

whether the contractor was a commercial insurance

company or a Blue Cross or Blue Shield plan, and

according to the contractor’s geographical location, the

discipline and position of the individual respondent,

claims volume, and the contractor’s reasons for and

willingness to refer coverage questions to the regional

office. Occasionally, statistically significant differences

emerged; however, no meaningful trends were observed for any of these analyses.

Contractors’ Suggestions for Improving

Coverage Transmittals

Given the importance of HCFA transmittals in shaping coverage decisions, the respondents were asked to

suggest specific changes that might improve either the

process by which HCFA coverage policies are transmitted to Medicare contractors or the content of those

coverage policies. The timing of HCFA coverage transmittals is the primary concern of respondents. A majority of them cite difficulties in implementing transmittals simply because they lack adequate lead time

to prepare their organizations; some transmittals arrive after the date on which they were to become effective. Suggested improvements include increasing reliance on interim memos and guidelines transmitted

prior to the final directive, as well as simply lengthening the lead time for implementation and eliminating retroactive policies.

Many contractors note a need for greater national

consistency in interpreting coverage policies. They

mention differences in policy interpretations among

HCFA regional offices, which may increase contractors’ vulnerability to litigation and are particularly

troublesome for large commercial insurance companies

that serve as carriers in several States. They also note

instances in which a single contractor receives a policy determination from HCFA’s central office in response to an inquiry; that is not shared nationwide,

the result being inconsistent interpretation of coverage policy. These problems, as well as inadequate local

resources for contractors to pursue the status of new

technologies themselves, lead many contractors to recommend the creation of a national coverage clearinghouse. Such a clearinghouse, perhaps supported by the

Government, insurance companies, and medical and

specialty associations, could disseminate information

on new technologies, the status of their evaluation, and

implications for coverage policies. It should also be

noted, however, that many contractors are quite content with the status quo and prefer to utilize local

resources in making their own coverage decisions.

Another area of concern is the specificity of HCFA

coverage transmittals. Contractors report that the policies are too technical, too ambiguous, and lacking in

specificity. The need for more specific criteria for

covering durable medical equipment was frequently

mentioned, as well as the need to update all references

to a specific technology in order to eliminate inconsistencies within the coverage issues appendix and

manual. Several respondents note that the content of

coverage transmittals is improving, citing the policy

covering pacemakers as a good example. On the other

hand, one respondent cited the pacemaker issuance as

indicative of the failure of HCFA’s central office to understand the claims review process. In this respondent’s opinion, the policy governing pacemakers does

not take into consideration the process by which claims

are submitted and the information included on the

claim, making it impossible to process the claim without extensive and expensive investigation. Some contractors thought that these issues were not worth

debating, because Medicare’s move to prospective payment will render any changes outdated or useless. Still

others felt the coverage issues appendix is clear and

sufficient and that the coverage system as a whole

works “remarkably well. ”

Summary and Conclusions

This study has confirmed the conventional wisdom

that there is variation in the decisions made by Medi-
204 ● Medical Technology and Costs of the Medicare Program —— —

care contractors regarding the coverage of particular

medical technologies. There are high levels of agreement and near unanimity in coverage decisions for

some study technologies—-particularly for intraocular

lens implant following cataract removal (98.2 percent

covered), the use of chelation therapy in the treatment

of atherosclerosis (87.0 not covered), and the use of

topical oxygen therapy for decubitus ulcers (86.3 percent not covered). However, there are also examples

of wide variations in coverage policies—particularly

for a pacemaker device and its implantation for a patient who has sinus bradycardia without symptoms,

an implantable chemotherapy infusion device for a patient with metastatic to the liver cancer, and external

insulin infusion pump for a diabetic patient, and streptokinase administration at cardiac catheterization to

dissolve a clot in a patient with acute myocardial infarction.

Despite these variations in coverage policies, there

is considerable uniformity among contractors in the

methods by which claims are reviewed and national

coverage decisions are implemented. After an initial

review for completeness, most claims pass through

(potentially) three levels of review that reflect differing degrees of comprehensiveness, specificity, and clinical judgment. The levels of review generally involve

clerical employees, registered nurses, physicians, or

some other health professionals (pharmacist, podiatrist, occupational therapist, etc. ) in that order. Although the specifics may vary, general considerations

at each level of review are similar, as are the criteria

for referring a claim from one level of review to the

next. Eighty-four percent of the respondents use some

type of automated screening procedure. When revisions or additions to the coverage issues appendix are

received from HCFA, most contractors review them

internally and modify their claims review procedures

accordingly. Coverage issues requiring further clarification are pursued either locally or nationally; HCFA’s

regional offices are the most frequently utilized sources

of clarification and interpretation.

Similarly, the methods by which contractors identify new technologies or new uses of established technologies are quite predictable. Most contractors report

that they learn about new technologies for which coverage questions might be raised through inquiries from

providers and manufacturers prior to the actual submissions of claims, drug and device approval lists from

FDA, and HCFA announcements. Once claims are

submitted, new technologies are identified because of

the absence of code numbers or the presence of codes

that are not recognized by the claims reviewers. Although a few contractors conduct extensive research

to assist in identifying and making coverage decisions

for such claims, the majority assume a more passive

role. The majority are reasonably well satisfied with

existing methods for identifying new technologies and

report that this is not a big problem for them. Making coverage determinations for new technologies is

a problem, however.

Some characteristics of the contractors included in

the study did vary. The respondents include a mix of

intermediaries and carriers; some are commercial insurance companies and others are BC/BS plans; they

come from different geographic locations, handle different volumes of claims, and show different tendencies and reasons for referring coverage questions to

HCFA’s regional office, rather than attempting to resolve the issue themselves. Nevertheless, these characteristics were not systematically related to variations

in coverage decisions in any meaningful way.

The most illuminating approach to examining variations in coverage decisions was based on coverage policy, according to the following categories: technologies

that HCFA explicitly covers; those that HCFA covers

with qualifications; technologies that HCFA explicitly

denies; those that HCFA denies, but not explicitly; and

those for which HCFA has no explicit policy, but

rather, the local contractor is expected to determine

coverage policy. There is variation in every category

of HCFA coverage policy, with the possible exception

of claims for intraocular lens implantation. Interpretation of that variation is complicated by the dependence

of coverage policy on consensus within the medical

community that a given technology is safe and effective. If that consensus is lacking or just emerging, it

might be expected that a coverage policy, if one existed, would be lacking in specificity and inconsistently

adhered to by contractors. Nevertheless, the differences in coverage decisions by Medicare contractors

appear to be related, at least in part, to the clarity or

specificity of HCFA policy. The variation is least in

instances in which HCFA has explicitly approved coverage. Variation is much greater for technologies that

HCFA intends to be denied, but for which there is no

explicitly stated denial policy, as well as technologies

for which coverage policy has recently changed or is

expected to change. Despite the variation, however,

when the responses for individual technologies are

analyzed, the preponderance of respondents tend to

adhere to HCFA intentions.

If less variation in coverage decisions is desired, the

study findings suggest some ways in which this might

be accomplished. Greater specificity and uniform interpretation of wording would help to lessen the uncertainty about the technologies that HCFA intends to

be denied, but for which denial is not explicitly stated

in written policy. Similarly, uniform and more timely
App. E—Decisionmaking by Meal/care contractors for Coverage of Medical Technologies ● 2 0 5 —

communication from HCFA might lessen the variation

in coverage for technologies that are currently being

reviewed by PHS or for which policy is expected to

change. The respondents’ suggestions about a national

coverage clearinghouse should also be considered.

Reducing variation in coverage decisionmaking

should help to eliminate any existing inequities in the

availability y of benefits to persons eligible for Medicare.

To the extent that a technology is not intended to be

covered, greater adherence to HCFA policy would also

save money. If changes in coverage policy are intended

to influence the proliferation and use of medical technology so as to result in significant cost savings, however, more major revisions are needed in the way in

which coverage determinations are made. The cost effectiveness of technologies would have to assume a

more prominent role in coverage deliberations, as well

as the possibilit of 1imiting the health care settings

and providers who would be eligible to claim reimbursement.

The potential for increased equity of benefits and

financial savings that might accrue from more uniform

coverage decisions must be balanced against the potential negative effects. It is unlikely that any nationally determined, uniform coverage policy can ever

take into consideration the uniquely personalized needs

of all patients. In some small number of cases, increased uniformity of coverage probably would occur

at the expense of quality of care. Carried to the extreme, increased explicitness of coverage policy may

have a negative effect on access to care and the potential for innovation in medicine. Furthermore, the

costs of implementing and enforcing a uniform system might outweigh the advantages.

In the final analysis, the decision to reduce variation

in coverage policy and increase the explicitness and

uniformity of Medicare benefits requires careful judgment and balance. Some lessening in that variation appears to be desirable and achievable, provided it is

carefully coordinated with forthcoming changes in the

overall reimbursement system. However, it is unlikely

that HCFA policy can ever be so precise as to achieve

a totally uniform interpretation and implementation

of Medicare coverage policy throughout the Nation.
References
References

1..

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

Adams, K., American Medical Association, Center for Health Policy Research, personal communication, June 1983.

Altman, S. H., and Socholitzky, E., “The Cost

of Ambulatory Care in Alternative Settings: A

Review of Major Research Findings, ” Annual Review of Public Health 2:117-143, 1981.

Altman, S. H., and Wallack, S. S., “Technology

on Trial—Is It the Culprit Behind Rising Health

Costs? The Case For and Against, ” Medical Technology: The Culprit Behind Health Care Costs?

S. H. Altman and R. Blendon (eds. ), proceedings

of the 1977 Sun Valley Forum on National

Health, U.S. Department of Health, Education,

and Welfarer publication No. (PHS) 79-3216

(Washington, D. C.: U.S. Government Printing

Office, August 1979).

American College of Surgeons, Surgical Practice

Department, Second Surgical Opinion Programs:

A Review and Progress Report (Washington,

D. C.: ACS, March 1982).

American College of Surgeons, Surgical Practice

Department, Socio-Economic Factbook for Surgery, 1982, J. N, Haug and R. Seeger (eds. ) (Chicago: ACS, 1982).

American Enterprise for Public Policy Research,

Conference on “Strategies for Hospital Cost Containment: A Look at the All-Payer Model, ”

Washington, D. C., Nov. 21, 1983.

American Hospital Association, Division of Financial Management, “Report on Budget/Rate

Review Programs, ” update report, January 1979.

American Hospital Association, Division of

Health Financing Policy, Office of Public Policy

Analysis, “Hospital-Blue Cross Contract Provisions, July 1, 1981, ” AHA No. 073200,

February 1982.

American Hospital Association, Division of

Health Financing Policy, Office of Public Policy

Analysis, “Incorporating Capital Costs Into

Medicare Prospective Prices, ” unpublished draft,

July 1983.

American Hospital Association, Hospital Statistics, 1983 (Chicago: AHA, 1983).

American Hospital Association, Hospital Statistics, 1982 (Chicago: AHA, 1982).

American Hospital Association, Hospital Statistics, 1978 (Chicago: AHA, 1978).

American Hospital Association, Techno/ogy

Evaluation and Acquisition Methods for Hospitals (Chicago: AHA, 1979).

American Society for Parenteral and Enteral Nutrition, Public and Private Insurance Coverage

15.

16

17.

18.

19.

20.

21.

22.

23

24.

25

26,

of- Parenteral and Enteral Nutrition Services,

background paper prepared by Meml, Jacobs,

Pierne & Gersh, Washington, D. C., March 1983.

Andersen, G., and Ginsberg, P. B., “Prospective

Capital Payments to Hospitals, ” Health Affairs

2(3):52-63, fall 1983,

Anderson, J. G., and Jay, S. J., “Computer Applications in Medicine: Adoption and Utilization, ” D. A. B. Lindberg, E. E. van Brunt, and

M. A. Jenkin (eds. ) AAMSI Congress 83, proceedings of the Congress on Medical Informatics

(Bethesda, Md.: American Association for Medical Systems and Informatics, 1983).

Ashby, J. L., Jr., “An Analysis of Hospital Costs

by Cost Center, 1971 Through 1978, ” Health

Care Finan. Rev. 4:37, 1982.

Austrian, R,, “Some Observations on the Pneumococcus and on the Current Status of Pneumococcal Disease and Its Prevention, ‘r Reviews of”

Infectious Diseases 3( Supplement) :S1-17, MarchApril 1981.

Baker, D., Health Care Financing Administration, U.S. Department of Health and Human

Services, personal communication, July 1983.

Banta, H. D., “Computed Tomography: Cost

Containment Misdirected” (editorial), Am. J.

Public Health 70:215, 1980.

Banta, H. D., “Notes of a Peripatetic Correspondent, ” The Sorcerer’s Apprentice 3(2):2, April

1983.

Banta, H. D., statement before the Subcommittee on Investigation and Oversight, Committee

on Science and Technology, U.S. House of Representatives, hearings on Organ Transplantation,

Medical Technology Assessment and Resource

Allocation, Apr. 27, 1983.

Banta, H. D., and Behney, C. J., “Policy Formulation and Technology Assessment, ” prepared

for the Experiment and Social Policy Issue of

Health and Society, Milbank Mere. Fund Q.

59(3):445, 1981.

Banta, H. D., Behney, C. J., and Williems, J. S.,

Toward Rational Technology in Medicine, Volumes in Springer Series on Health Care and Society (New York: Springer Publishing Co., 1981 ).

Banta, H. D., and Kemp, K. B., The Management of Health Care Technology in Nine Countries (New York: Springer Publishing Co., 1982).

Banta, H. D,, Ruby, G., and Burns, A. K . ,

“Using Coverage Policy to Contain Medicare

Costs, ” paper prepared for the Proceedings of the

Conference on the Future of Medicare, Subcommittee on Health, Committee on Ways and

209
210 ● Medical Technology and Costs of the Medicare Program

27.

28.

29.

30.

31.

32.

33!

34.

35.

36

37.

38.

39.

40.

Means, U.S. House of Representatives, Feb. 1,

1984.

Barer, M. L., Evans, R. G., and Stoddart, G. L.,

Controlling Health Care Costs by Direct Charges

to Patients: Snare or Delusion? Occasional Paper

10 (Toronto: Ontario Economic Council, 1979).

Bauer, R. A., and Wortzel, L. H., “Doctors

Choice: The Physician and His Sources of Information About Drugs, ” J. Mkt. Research 3:40,

1966.

Beazley, W. S., III, “The Trend to Outpatient

Care: 1, ‘In-and-Out’ Surgery, ” Virginia Medical

107:620-621, September 1980.

Beck, R. H., “The Effects of Copayment on the

Poor, ” J. Hum. Resour. 11(1):129, 1974.

Bentley, D. W., “Pneumococcal Vaccine in the

Institutionalized Elderly: Review of Past and Recent Studies, ” Reviews of Infectious Diseases

3( Supplement) :S61-70, March-April 1981.

Berenson, R., Washington, D. C., personal communication, April 1983,

Berk, A. A., and Chalmers, T. C., “Cost and Efficacy of the Substitution of Ambulatory for Inpatient Care, ” N. Eng. J. Med. 304(7):393-97,

Feb. 12, 1981.

Berk, M. L., and Wilensky, G. R., “Health Care

of the Poor Elderly: Supplementing Medicare, ”

NCHSR National Health Care Expenditures

Study, U.S. Department of Health and Human

Services, Public Health Servicer National Center

for Health Services Research, 1983.

Berry, R., “A Review of the Medicare Economic

Index: An Analysis of Variation in Practice Costs

Among Specialties, “ in Issues in Physician Reimbursement, N. T. Greenspan (cd.), HCFA publication No. 03121, U.S. Department of Health

and Human Services, Health Care Financing Administration, August 1981.

Biles, B., Schramm, C. J., and Atkinson, J. R.,

“Hospital Cost Inflation Under State Rate-Setting

Programs, ” N. Eng. J. Med. 303(12):644-67, Sept.

18, 1980.

Biomedical Business international 6(10):94, June

7, 1983.

Blagg, C. R., and Scribner, B., “Medicare EndStage Renal Disease Program: More Than a Billion Dollar Question, ” Ann. Int. Med. 93:501,

1980.

Block, J. A., Brideau, L. C., Burns, A. K., et al.,

“Hospital-Sponsored Primary Care: The Community Hospital Program, ” Journal of Ambulatory Care Management, February 1980.

Block, J. A., Regenstreif, D. I., and Shute, L. J.,

“Hospital Experimental Payments Program: It’s

41.

42

43.

44.

45.

46.

47.

48.

49.

50.

51.

52.

53.

54.

Working in Rochester, ” Hospital Financial Management, September 1981.

Blue Cross and Blue Shield Association, “Background on the Blue Cross and Blue Shield Association’s Medical Necessity Program, ” Blue

Cross/Blue Shield press briefing, Washington,

D. C., Oct. 21, 1982.

Blue Cross of Massachusetts, Inc., meeting of the

Central Professional Service Committee of the

Blue Shield Board of Directors, July 21, 1976.

Blue Sheet, June 23, 1983,

Blue Sheet, Mar. 30, 1983.

Blumenthal, D., “Federal Policy Toward Health

Care Technology: The Case of the National Center, ” Milbank Mere. Fund Q. /Health & Society

61(4):584, 1983.

Bombardier, C., Fuchs, V. R., Lillard, L. A., et

al., “Socioeconomic Factors Affecting the Utilization of Surgical Operations, ” N. Eng. J. Med.

297(13):699, Sept. 29, 1977.

Brady, J. F., St. Joseph’s Hospital and Medical

Center, panelist for session on “Living Under an

All-Payer System—Views From the Hospital Sector, ” at conference on “Strategies for Hospital

Cost Containment: A Look at the All-Payer

Model, ” American Enterprise Institute for Public Policy Research, Washington, D. C., Nov. 21,

1983.

Brook, R. H., and Lohr, K. N,, “Second-Opinion

Programs: Beyond Cost-Benefit Analysis, ” Medical Care 20(1):1-2, January 1982.

Brook, R. H., Ware, J, E., Rogers, W. H., et al.,

“Does Free Care Improve Adults’ Health? Results

From a Randomized Controlled Trial, ” N. Eng.

J. Med. 309:1426-34, Dec. 8, 1983.

Brook, R. H., Williams, K. N., and Rolph, J. E.,

“Controlling the Use and Cost of Medical Services: The New Mexico Experimental Medical Care

Review Organization-A Four-Year Case Study,”

Medical Care 16(9) Supplement, September 1978.

Brown, M., and McCool, B. P., “Changes in the

Ownership and Governance of America’s Hospitals, ” paper prepared for the Office of Technology Assessment, U.S. Congress, contract No.

233-8460.0, unpublished draft, 1983.

Bunker, J. P., Stanford, Calif., personal communication, June 16, 1981.

Bunker, J. P., Barnes, B. A., Mosteller, F. (eds. ),

Costs, Risks, and Benefits of Surgery (New York:

Oxford University Press, 1977).

Bunker J. P., Fowles, J., and Schaffarzick, R.,

“Evaluation of Medical Technology Strategies:

Evaluation of Coverage and Reimbursement, ” N.

Eng. J. Med. 306(10):620-24, Mar. 11, 1982.
References . 211

.— — -—.——-——

55. Burns, L. A., and Ferber, M. S., “Freestanding

Emergency Care Centers Create Public Policy

Issues, ” Hospitals 55(10):73-76, May 16, 1981.

56. Burrier, B., Inspector General’s Office of Health

Financing Integrity, Health Care Financing Administration, U.S. Department of Health and

Human Services, personal communication, Aug.

12, 1983.

57. Campion, E. W., Mulley, A. G., Goldstein, R.

L., et al., “Medical Intensive Care for the Elderly:

A Study of Current Use, Costs, and Outcomes, ”

J. A.M.A. 246(18):2052, Nov. 6, 1981.

58. Carter, E., National Center for Health Services

Research, U.S. Department of Health and Human

Services, personal communication, Mar. 12,

1984.

59. Cassidy, R., “Will the PPO Movement Freeze

You Out?” Medical Economics 60:262-70,274,

Apr. 18, 1983.

60. Chassin, M., “Containment of Hospital Costs: A

Strategic Assessment, Chapter V, Utilization Review, ” Medical Care 16(10):27-35, October 1978.

61. Chassin, M., personal communication, Feb. 17,

1984.

62. Clegg, J., Health Care Financing Administration,

U.S. Department of Health and Human Services,

personal communication, Aug. 9 and 17, 1983.

63. Cocco, A. E., and Cocco, D. V., “A Survey of

Cimetidine Prescribing, ” Medical Intelligence

304(21):1281, May 21, 1981.

64. Coelen, C., and Sullivan, D., “An Analysis of

the Effects of Prospective Reimbursement Programs on Hospital Expenditures, ” Health Care

~inan. Rev. 2(3):1-39, winter 1981.

65. Cohen, A. B., and Cohodes, D., “Certificate of

Need and Low Capital-Cost Medical Technology, ” Milbank Mern. Fund Q. 60(2):307-28, 1982.

66. Cohen, D. I., Jones P., Littenberg, B., et al.,

“Does Cost Information Availability Reduce Physician Test Usage?” Medical Care 20(3) :286-91,

March 1982.

67. Cohen, D. I., Littenberg, B., Wetzel, C., et al.,

“Improving Physician Compliance With Prevent ive Medicine Guidelines, ” Medical Care

20(10):140-45, October 1982.

68. Cohen, H, A., Solnick, M., and Stephenson, A.,

“On the Quality of Life: Some Philosophical Reelections, ” Circulation 66(5) Part II, AHA Monograph No. 92, Technology Assessment Forum on

Coronary Artery Bypass Surgery: Economic,

Ethical and Social Issues, November 1982.

69. Cohodes, D. R., ‘The State Experience With Capital Management and Capital Expenditure Review

Programs, ” article cited in “Health Capital

Issues, ” papers presented at the Health Capital ~ Conference sponsored by the Bureau of Health

Facilities, Feb. 19-20, 1980.

70. Cohodes, D. R., “VVhich WiIl Survive? The $150

Billion Capital Question, ” Inquiry 20(1 ):5-II,

spring 1983.

71. Cohodes, D. R., and Kinkead, B. M., “Hospital

Capital Formation in the 1980’s: Is There a Crisis?” The Johns Hopkins Medical Institutions,

prepared for the Robert Wood Johnson Foundation, Princeton, N. J., Aug. 1, 1982.

72. Cohen, M. F., “Technology Assessment in Prepaid Group Practice, ” prepared for the Committee on Technology Assessment, Institute of Medicine, National Academy of Sciences, unpublished

draft, revised May 1982.

73. Collins, S., Boston Regional Office, Health Care

Financing Administration, U.S. Department of

Health and Human Services, personal communication, December 1982.

74. Commerce Clearing House, Medicare and Medicaid Guide, pp. 390, 9011-3, 35-60, May 1983.

75. Conrad, D. A., University of Washington, panelist for session on “Living Under an All-Payer

System—Views From the Hospital Sectorr ” at

conference on “Strategies for Hospital CostContainment: A Look at the All-Payer Model, ”

American Enterprise Institute for Public Policy

Research, Washington, D. C,, Nov. 21, 1983.

76. Cromwell, J., and Burstein, P., “Physician Losses

From Medicare/Medicaid Participation: How

Real Are They?’f paper prepared for the U.S. Department of Health and Human Services, Health

Care Financing Administration, Office of Research, June 1982.

77. Cromwell, J., and Kanak, J., “The Effects of Prospective Reimbursement Programs on Hospital

Adoption and Service Sharing, ” Health Care

Finan. Rev. 4(2):67, December 1982.

78. Cummings, K. M., Frishof, K. B., Long, M. J.,

et al., “The Effects of Price Information on Physicians’ Test-Ordering Behavior, ” Medical Care

20(3):293-301, March 1982.

79. Daniels, M., and Schroeder, S. A,, “Variation

Among Physicians in Use of Laboratory Tests.

11. Relation to Clinical Productivity and Outcomes of Care, ” Medical Care 15:482-87, 1977.

80. Davis, C. K., testimony of the Administrator,

Health Care Financing Administration, U.S. Department of Health and Human Services, before

the 97th Congress of the United States, Second

Session Joint Hearing of the House of Representatives Select Committee on Aging and the Subcommittee on Health and Long Term Care, Mar.
212 ● Medical Technology and Costs of the Medicare Program

81.

82

83.

84.

85.

86.

87.

88.

89.

90.

91.

92.

93.

19, 1982, publication No. 97-346 (Washington,

D. C.: U.S. Government Printing Office, 1982).

Davis, K., “Medicare Reconsidered, ” paper presented for Duke University Medical Center Seventh Sector Conference on the Financial Support

of Health Care of the Elderly and the Indigent,

Durham, N. C., Mar. 14-16, 1982.

Davis, K., “Rising Hospital Costs: Possible

Causes and Cures, ” Bull. N. Y. Acad. Med.

48(11):1354-71, December 1972.

Davis, J. E., and Detmer, D. E., “The Ambulatory Surgical Unit, ” Ann. Surg. 175(6):856-62,

June 1982.

Davis, K., and Rowland, D., “Reforming Medicare: A New Approach to Financing, ” paper prepared for the Proceedings of the Conference on

the Future of Medicare, Subcommittee on Health,

Committee on Ways and Means, U.S. House of

Representatives, Feb. “1, 1984.

Demkovich, L. E., “Private Sector Moves in as

Washington Ends Its Financial Assistance for

HMOS, ” National J. 15:1757-89, 1983.

Demlo, L. K., Hammons, G. T., Kuder, J. M.,

et al., “Report of a Study on Decisionmaking by

Medicare Contractors for Coverage of Medical

Technologies, ” prepared for the Office of Technology Assessment, LJ. S. Congress, Oct. 28,

1983.

Dennison, C., National Hospital Discharge

Survey, National Center for Health Statistics,

U.S. Department of Health and Human Services,

personal communication, December 1983.

Desmarais, H. R., Bureau of Eligibility, Reimbursement and Coverage, Health Care Financing

Administration, U.S. Department of Health and

Human Services, statement before the Subcommittee on Health and Long-Term Care, Select

Committee on Aging, [J. S. House of Representatives, Mar. 15, 1984.

Devitt, J. E,, and Ironside, M. R., “Can Patient

Care Audit Change Doctor Performance?” J.

Med. Educ. 50:1122-23, 1975.

Dixon, R. H., and Laszlo, J., ‘Utilization of Clinical Chemistry Services by Medical House Staff:

An Analysis, ” Arch. Int. Med. 134:1064-67, 1974.

Donabedian, A., “Effects of Medicare and Medicaid on Access to and Quality of Health Care, ”

Pub. Hlth. Rpts. , July-August, 1976.

Drake, D. F., “Does Money Spent on Health Care

Really Improve U.S. Health Status?” Hospitals

52(20), Oct. 16, 1978.

Dresnick, S. J., Roth, W. I., Linn, B, S., et al,,

“The Physician’s Role in the Cost-Containment

Problem,” J.A.M.A. 241(15):1606-9, Apr. 13,

1979.

— -.-— —.

94.

95.

96.

97.

98.

99.

100

101.

102.

103.

104.

105.

106.

107,

108,

109.

110.

111.

.— —

Duke Law Journal, “The Medical Malpractice

Threat: A Study of Defensive Medicine, ” pp. 939-

993, 1971.

Edelson, E., “Cleansing the Blood, ” Science 82

(American Association for the Advancement of

Science, Washington, D. C.) 3(8):72-77, October

1982,

Eggers, P. W., Connerton, R., and McMullan,

M., “The Medicare Experience With End-Stage

Renal Disease: Trends in Incidence, Prevalence,

and Survival, ” working paper, Office of Research

and Demonstrations, Health Care Financing Administration, U.S. Department of Health and

Human Services, May 10, 1983.

Eggers, P. W., and Prihoda, R., “Pre-Enrollment

Reimbursement Patterns of Medicare Beneficiaries Enrolled in ‘At-Risk’ HMOS, ” Health Care

Finan. Rev. 4(1):55-73, September 1982,

Eisenberg, J. M., “The Use of Ancillary Services:

A Role for Utilization Review?” Medical Care

20(8):849-60, August 1982,

Elliott, W. B., Strand, H. M., Meyers, F. H., et

al., “The Hospital Cavitation Payment Project:

New Incentives and Tools for Cost Containmerit, ” Inquiry 20(2):114-20, summer 1983.

Ellwein, L. K., and Gregg, D. D,, “An Introduction to Preferred Provider Organizations

(PPOs), ” InterStudy, Excelsior, Minn., revised

June 1982, mimeographed.

Elstein, A. S., Rovner, D. R., and Rothert, M.

L., “A Preclinical Course in Decision Making, ”

Medical Decision Making 2(2):209-216, 1982.

Enthoven, A. C., Health Plan: The Only Practical Solution to the Soan”ng Cost of Medical Care

(Reading, Mass.: Addison-Wesley Publishing

Co., 1980).

Evashwick, C., “Long-Term Care: Long-Term

Care Becomes Major New Role for Hospitals, ”

Hospitals 56::50-55, July 1, 1982.

Feder, J. M., Medicare: The Politics of Federal

Hospital Insurance (Lexington, Mass.: D.C.

Heath & Co., 1977).

Feder, J., Hadley, J., and Mullner, R., “Poor People and Poor Hospitals: Implications for Public

Policy, ” J. Health Polit. Policy Law, forthcoming.

Feder, J., and Scanlon, W., “The Underused Benefit: Medicare’s C’overage of Nursing Home

Care,” Milbank Mern. Fund Q. 60(4):604-632, fall

1982.

Federal Register 45(153):52296-52297, Aug. 6,

1980,

Federal Register 47(151), Aug. 5, 1982.

Federal Register 47:36742-37844, Aug. 26, 1982.

Federal Register 48(13):2444, Jan. 19, 1983.

FederaJ Register 48:21254-21291, May 11, 1983.
References . 213

112.

113.

114.

115.

116.

117.

118.

119.

120.

121.

122,

123.

124,

124a

125

Federal Register 48(191), Oct. 1, 1983,

Federal Register 48(243):56008, Dec. 16, 1983.

Federa/ Register 49(l):282, Jan. 3, 1984.

Feldstein, M. S., Hospita/ Costs and Health lnsurance (Cambridge, Mass.: Harvard University

Press, 1981).

Feldstein, M.S,, The Rising Cost ofHospital Care

(Washington, D.C.: InformationR esourcesPress,

1971).

Feldstein, M.S., and Taylor, A., TheRapidRise

of Hospital Costs, GPO stock No. 052-003-

003.03.1 (Washington, D.C.: U.S. Government

Printing Office, January 1977).

Ferry, T. P., Gornick, M., Newton, M., etal.,

“Physicians’ Charges Under Medicare: Assignment Rates and Beneficiary Liability, ” Health

Care Finan. Rev. 2:49-73, winter 1980,

Fineberg, H. V., “Background Session on Ulcer

Disease: Epidemiology, Diagnosis, and Treatmerit, ” app. A in Cost-Benefit and CostEffectiveness Analysis in Policymaking: Cimetidine as a Model, B. S. Bloom (cd.), proceedings

of an International Symposium, Nov. 22-24,

1981, Tarpon Springs, Fla. (New York: Biomedical Information Corp. Publications, 1982).

Fineberg, H. V., “Clinical Chemistries: The High

Cost of Low-Cost Diagnostic Tests, ” Medical

Technology: The Culprit Behind Health Care

Costs? S. H. Altman and R. Blendon (eds. ), proceedings of the 1977 Sun Valley Forum on National Health, U.S. Department of Health, Education, and Welfare, publication No. (PHS)

79-3216 (Washington, D. C,: U.S. Government

Printing Office, 1979).

Fineberg, H. V., and Pearlman, L. A., Benefit and

Cost Analysis of Medical Interventions: The Case

of Cimetidine and Peptic Ulcer Disease, OTABP-H-9(11) (Washington, D. C.: U.S. Government Printing Office, September 1981 ).

Fineberg, H. V., and Pearlman, L. A., “Surgical

Treatment in Peptic Ulcer in the United States, ”

Z-.ancet 1(8252):1305-7, June 13, 1981.

Finkel, M. L., McCarthy, E. G., and Miller, D,,

“Podiatric Surgery: The Need for a Second Opinion, ” Medical Care 20(8):862-70, August 1982.

Fisher, C. R., “Differences by Age Groups in

Health Care Spending, ” Health Care Finan. Rev.

1(4):65-90, spring 1980.

Flood, A. B., Scott, W. R., and Ewy, W., “Does

Practice Make Perfect? Part I: The Relation Between Hospital Volume and Outcomes for

Selected Diagnostic Categories, ” Medical Care

22(2):98-114, February 1984.

Ford, J. L., “Outpatient Surgery: Present Status

126

127

128.

129.

130.

131.

132.

133.

134.

135.

136.

137.

138.

and Future Projections, ” South. Med. J. 71(3):

311-15, March 1978.

Freeland, M. S., and Schendlerr C, E., “National

Health Expenditure Growth in the 1980’s: An

Aging Population, New Technologies, and Increasing Competition, ” Health Care Finan. Rev.

5(3):1-58, March 1983.

Friedlob, A. S., “Medicare Second Surgical Opinion Programs: The Effect of Waiving Cost-Sharing, ” Health Care Finan. Rev. 4(1 ):99-106, September 1982.

Fries, J, F., “The Compression of Morbidity, ”

Milbank Mere. Fund Q. Health and Society

61(3):397, 1983.

Fuchs, V. R., “Foreword” in Cost-Benefit and

Cost-Effectiveness Analysis in Health Care: Principles, Practice, and Potential, K. E. Warner and

B. R. Luce (eds. ) (Ann Arbor, Mich.: Health

Administration Press, 1982).

Fuchs, V. R. (cd.), “The Growing Demand for

Medical Care, ” Essays in the Economics of Health

and Medical Care (New York: Columbia University Press, 1972).

Garnick, D. W., “The Impacts of Rate Regulation and Unionization on the Demand for Hospital Labor, ” prepared as part of the Hospital

Cost and Utilization Project for the National Center for Health Services Research, U.S. Department of Health and Human Services, unpublished

draft, January 1983.

Gaus, C. R., and Cooper, B. S., “Technology and

Medicare: Alternatives for Change, ” background

paper prepared for the Conference on Health

Care Technology and the Quality of Care, Boston University, Nov. 19-20, 1976 (Boston, Mass,:

Boston University, Program on Public Policy for

Quality of Health Care, 1976).

Gertman, P. M., Stackpole, D. A., Levenson, D.

K., et al., “Second Opinions for Elective Surgery:

The Mandatory Medicaid Program in Massachusetts, ” N. Eng. ]. Med. 302(21):1169-74, May 22,

1980.

Gibson, R. M., “National Health Expenditures,

1978, ” Health Care Finan. Rev. 1 :1-36, summer

1979.

Gibson, R. M., Waldo, D. R., and Levit, K. R.,

“National Health Expenditures, 1982, ” Health

Care Finan. Rev. 5(1):1-32, fall 1983.

Gilbert, R. N,, “Competition Spurs Ambulatory

Choice, ” Hospitals 57(10):67-68, May 16, 1983.

Gillick, M. R,, “[s the Care of the Chronically

Ill a Medical Prerogative?” N. Eng. J. Med.

31o(3):19o, Jan. 19, 1984.

Ginsburg, P., and Mannheim, L., “Insurance,
214 ● Medical Technology and Costs of the Medicare Program

Copayment and Health Services Utilization, A

Critical Review, ” Journal of Economics and Business 25(2) :142-53, spring-summer 1973.

139. Goodgame, J. T., Jr., “A Critical Assessment of

the Indications for Total Parenteral Nutrition, ”

Surg. Gynecol. Obstet. 151(3):433-441, September 1980.

140. Goran, M, J., “The Evolution of the PSRO Hospital Review System, ” Medical Care 18(5) Supplement, 1979.

141. Graham, R., Director, Health Systems, National

Blue Cross/Blue Shield,, personal communication,

December 1983.

142. Greater Detroit Area Hospital Council, “Greater

Detroit Area Hospital Council Pinpointing Satellite Clinic Growth Trends, ” Michigan Medicine

81(8):70-71, February 1982.

143. Greenberg, B., and Derzon, R. A., “Determining Health Insurance Coverage of Technology:

Problems and Options, ” MedicaZ Care I9(10):

967-78, October 1981.

144. Greenland, P., Mushlin, A, E., and Griner, P.

F., “Discrepancies Between Knowledge and Use

of Diagnostic Studies in Asymptomatic Patients, ”

J. Med. Educ. 54:863-69, November 1979.

145. Greenlick, M. R., Lamb, S. J,, Carpenter, T. M.,

Jr., et al., “Kaiser-Permanente’s Medicare Plus

Project: A Successful Medicare Prospective Payment Demonstration, ” Health Care Finan. Rev.

4(4):85-97, summer 1983.

146. Greer, D. S., Mor, V,, Birnbaum, H., et al., “National Hospice Study, Preliminary Final Report,

Extended Executive Summary, ” Brown University, prepared for the Health Care Financing Administration, U.S. Department of Health and

Human Services, grant No. 99-P-97793/l-0, November 1983.

147. Grenell, B., “The Richmond Proposed Preferred

Provider Organization, ” Blue Cross and Blue

Shield of Virginia, paper presented at American

Public Health Conference, Montreal, Canada,

Nov. 16, 1982.

148. Grindstaff, G., Hirsch, B., and Silverman, H.,

“Medicare-Use of Prescription Drugs by Aged

Persons Enrolled for Supplementary Medical Insurance, 1967 -1977,” Health Care Financing Program Statistics, Health Care Financing Administration, U.S. Department of Health and Human

Services, publication No. 03080 (Baltimore, Md.:

HCFA, March 1981).

149. Griner, P. F., and Glaser, R. J., “Misuse of Laboratory Tests and Diagnostic Procedures, ” N.

Eng. J. Med. 307(21):1336-39, Nov. 18, 1982.

150. Griner, P. F., and Liptzin, B., “Use of the Lab-

——-——

oratory in a Teaching Hospital: Implications for

Patient Care, Education, and Hospital Costs, ”

Ann. Int. Med. 75:157-63, 1971.

151. Hadley, D., Statistical Information Services,

Health Care Financing Administration, U.S. Department of Health and Human Services, personal communication, Nov. 25, 1983.

152. Hadley, J., “Background Information on the

Reimbursement of Hospitals’ Teaching Expenses, ”

working paper No. 1302-01 (Washington, D. C.:

The Urban Institute, December 1979).

153. Hadley, J., Holahan, J., and Scar-don, W., “Can

Fee-For-Service Reimbursement Coexist With Demand Creation?” Inquiry 16:247-58, fall 1979.

154. Hamilton, D. C., and Kamens, G., “Case Study

of Prospective Reimbursement in New York, ”

Health Care Financing Grants and Contracts

Reports, Health Care Financing Administration,

U.S. Department of Health, Education and Welfare, contract No. 500-78-0036, April 1980.

155. Hamilton, D., Walterr R., Cromwell, J., et al.,

“First Annual Report of the National Hospital

Rate-Setting Study: A Comparative Review of

Nine Prospective Rate-Setting Programs, ” ~ealth

Care Financing Grants and Contracts Reports

prepared under contract No. 500-78-0036 by ABT

Associates, Inc., August 1980).

156. Hanft, R. S., Washington, D. C., personal communication, Dec. 28, 1983.

157. Harris, D. L., and de Lashmutti-Robbins, M.,

“The Ambulatory Response, ” Hospita~s 57(10):

69-71, May 16, 1983.

158. Heimberger, H. C., “Home Parenteral Nutrition, ”

Ala. J. Med. Sci. 19(4):377-80, October 1982.

159. Helbing, C., “Medicare: Use of Skilled Nursing

Facilities, 1976-1977, ” Health Care Financing

Notes, Health Care Financing Administration,

U.S. Department of Health and Human Services,

publication No. 03021 (Baltimore, Md.: HCFA,

1980).

160. Helbing, C., Office of Research, Division of Beneficiary Studies, Health Care Financing Administration, U.S. Department of Health and Human

Services, 1979 MedPar data xerox, undated.

161. Helbing, C,, Supervisory Statistician, Office of

Research, Division of Beneficiary Studies, Health

Care Financing Administration, U.S. Department

of Health and Human Services, personal communication, June 6, 1983.

162. Helbing, C., “Ten Years of Short-Stay Hospital

Utilization and Costs Under Medicare: 1967-

1976, ” Health Care Financing Research Report,

Health Care Financing Administration, U.S. Department of Health and Human Services, publica-
163.

164.

165.

166.

167.

168.

169.

170.

171.

172.

173.

174.

175.

176.

177.

tion No. 03053 (Baltimore, Md.: DHHS, August

1980).

Hellinger, F. J., “Controlling Costs by Adjusting

Payment for Medical Technologies, ” Inquiry

19:34-43, spring 1982.

Hendricks, J,, and Hendricks, C. D., Aging in

Mass Society: Myths and Realities (Cambridge,

Mass.: Winthrop Publishers, Inc., 1977).

Hershey, N., “The Defensive Practice of Medicine: Myth or Reality, ” Mi/bank Mere. Fund Q.

50(1 ):69-98, January 1972.

Heyse, S. P., National Center for Health Care

Technology, “Geriatric Herniorrhapies at the

Shouldice Hospital, Ontario, Canada, ” memorandum to Deputy Director, Bureau of Program

Policy, Health Care Financing Administration,

U.S. Department of Health, Education, and Welfare, Oct. 23, 1980.

Himler, G., “PSRO, Cost Versus Quality, ” N. Y.

St. ]. Med. 79:1863-65, November 1979.

Hirschmann, J. V., and Lipsky, B. A., “Pneumococcal Vaccine in the United States—A Critical

Analysis, ” J. A.M.A. 246(13):1428-32, Sept. 25,

1981.

Hodges, A., Study Director, Institute of Medicine, National Academy of Sciences, personal

communication, December 1983.

Holahan, J., Scanlon, W., Hadley, J., et al., “The

Effect of Medicare/Medicaid Reimbursement on

Physician Behavior, “ in Physicians and Financial

Incentives, J. R. GabeI, J. Taylor, N. T. Greenpan, and M. O. Blaxall (eds. ), U.S. Department

of Health and Human Services, Health Care

Financing Administration, publication No.

03067, December 1980.

Hospital Corporation of America and Parthenon

Insurance Co., “Product Standardization Manual, ” internal document, undated,

~ospitals, (Headlines) “Guy Defends Medi-Cal

Contracting, ” 57(7):74-80, Apr. 1, 1983.

Hoyer, T., Health Care Financing Administration, U.S. Department of Health and Human

Services, personal communication, January 1983.

Hsiao, W. C., and Stason, W. B., “Toward Developing a Relative Value Scale for Medical and

Surgical Services, ” Health Care Finan. Rev.

1(3):23-38, 1979.

Hudson, J. I., and Braslow, J. B., “Cost Containment Education Efforts in United States Medical

Schools, ” J. Med. Educ. 54:835-40, November

1979.

Hughes, S. L., “Ensuring Quality in Home Care

Services, ” Hospitals 56(21)74-80, Nov. 1, 1982.

Hultgren, R., Government Accounting Office,

U.S. Congress, personal communication, Jan. 23,

1984.

References ● 215 ——

178,

179.

180.

181.

182.

183.

184.

185.

186.

187.

188.

189.

190.

IMS America, Ltd., “The Importance of Government Funded Social Welfare Programs to Private

Medical Treatment, 1976-1981, ” Bulletin #3, IMS

Research at Work for Our Panel Participants,

based on data collected for the National Disease

and Therapeutic Index, American College of Physicians, IMS America, Ltd.; Ambler, Pa.,

undated.

Jensen, G., Kidder, D., Lee, J., et al., “Quantification of Factors Causing Variations in Hospital Staffing and Analysis of Monthly AHA Hospital Data, ” prepared for ABT Associates, Inc.

Cambridge, Mass., under contract No. HRA 232-

79-0076, Oct. 21, 1980.

Jones, D., Health Insurance Association of America, personal communication, Sept. 6, 1983.

JournaJ of the American Medical Association,

“Squaring Off Over Total Parenteral Nutrition”

(Medical News section), 243(16):1610-16, Apr.

25, 1980.

Joskow, P. L., Controlling Hospital Costs: The

Role of Government Regulation (Cambridge,

Mass.: MIT Press, 1981).

Kambric, H., and Nose, Y., Plasmapheresis: Historical Perspective, Therapeutic Applications,

and New Frontiers (Cleveland, Ohio: International Center for Artificial Organs and Transplantation, 1982).

Kane, F., Health Care Financing Administration,

U.S. Department of Health and Human Services,

personal communication, Aug. 11 and 17, 1983.

Keane, J., Maryland Health Service Cost Review

Commission, personal communication, May 5,

1983.

Kennedy, J. W., Killip, T., Fisher, L. D., et al.,

“The Clinical Spectrum of Coronary Artery Disease and Its Surgical and Medical Management,

1974-1979. The Coronary Artery Surgery Study, ”

Circulation 66(5) Part II, November 1982, AHA

Monograph No. 92, Technology Assessment

Forum on Coronary Artery Bypass Surgery: Economic, Ethical and Social Issues.

Kidder, D., and Sullivan, D., “Hospital Payroll

Costs, Productivity, and Employment Under Prospective Reimbursement, ” Health Care Finan.

Rev. 4(2):89-99, December 1982.

Kinney, E. D., and Lefkowitz, B., “Capital Costs:

Reimbursement to Community Hospitals Under

Federal Health Insurance, ” Jnl. Hlth. Polit. Policy Law, fall 1982.

Kleinfield, N. R. , “The Home Health Care

Boom, ” The New York Times, June 30, 1983,

p. D1 .

Knaus, W. A., and Wagner D. P., “Intensive

Treatment for the Elderly: Comment, ” letter to

the editor, J. A.M.A. 247:3185, 1982.
216 ● Medical Technology and Costs of the Medicare Program — . ——————.—

191.

192,

193,

194.

195.

196.

197,

198,

199.

200.

201 ~

202!

203.

204.

205.

206

Kodner, K., “Competition: Getting a Fix on

PPOS, ” I-lospitals 56(22):59-66, Nov. 16, 1982.

Kolata, G., “Some Bypass Surgery Unnecessary, ”

Science 222(4624):605, Nov. 11, 1983.

Korsak, A., Health Insurance Association of

America, personal communication, December

1983.

Kovar, M. G., “Elderly People: The Population

65 Years and Over, ” Health—United States, Z976-

77, U.S. Department of Health, Education, and

Welfare, publication No. (HRA) 77-1232 (Washington, D.C .: DHEW, December 1977).

Krakauer, H., Grauman, J. S., McMullan, M. R.,

et al., “The Recent U.S. Experience in the Treatment of End-Stage Renal Disease by Dialysis and

Transplantation, “N. lhg. ]. Med. 308(26):1558-

63, June 30, 1983.

Langenbrunner, J. C., “Technology Assessment

in the U.S. Private and Nonprofit Sectors: Part

l,” The Sorcerer’s Apprentice 3(2):5-7, April

1983.

Lawrence, R. S., “The Role of Physician Education in Cost Containment,”,/. Med. Educ. 54:841-

47, November 1979.

Lelah, T., and Brook, R. H., “Ischemic Heart Disease: Assessing the Quality of Medical Care Using

Short-Term Outcome Measures, “ in Quality 01

Medical Care Using Short-Term Outcome Measures: Eight Disease-Specific Applications, A. D.

Avery, et al. (eds. ) (Santa Monica, Calif.: Rand

Corp., 1976).

Link, C. R., Long, S. H., and Settle, R. F., “Cost

Sharing, Supplementary Insurance and Health

Services Utilization Among the Medicare Elderly, ” Health Care Finan. Rev. 2:25-31, fall 1980.

Lion, J., and Altman, S., “Case-Mix Differences

Between Hospital Outpatient Departments and

Private Practice, ” Health Care Finan. Rev.

4(1):89-98, September 1982.

Lipscomb, J., Chapel Hill, N. C., personal communication, Feb. 16, 1984.

Lohr, K. N., Winkler, J. D., and Brook, R. H.,

Peer Review and Technology Assessment in Medicine (Santa Monica, Calif.: Rand Corp., August

1981).

Long, S. H., Settle, R. F., and Link, C. R., “Who

Bears the Burden of Medicare Cost Sharing, ” Inquiry 19:222-34, fall 1.982.

Luft, H. S., “Assessing the Evidence on HMO

Performance,” Milbank Mere. Fund Q. 58(4):501-

36, 1980.

Luft, H. S., Health Maintenance Organizations:

Dimensions of Performance (New York: John

Wiley & Sons, 1981).

Luft, H. S., “How Do Health Maintenance Or207,

208,

209,

210.

211.

212

213.

214.

215.

216.

217.

218,

219,

220.

221.

ganizations Achieve Their Savings, ” N. Eng. -1.

Med. 298(24):1336-43, June 15, 1978.

Lundberg, C. J., “New Tax Bill Mandates

Changes for HHAs, ” Hospita]s 56(21):81-84,

N O V. 1, 1982.

Lyman, R., Health Care Financing Administration, U.S. Department of Health and Human

Services, personal communication, June 20, 1983.

MacEwan, D. W., Kavanagh, S., Chow, P., et

al., “Manitoba Barium Enema Efficacy Study, ”

Radiology 126:39-44, 1978.

Mannheim, L. M., and Friedman, B., “Factors

Contributing to the Phenomenal Growth of

Medicare Expense for Hospital-Based Ambulatory Care, ” Inquiry 19:295-307, winter 1982.

Margulies, H. , Office of Health Technology

Assessment, National Center for Health Services

Research, U.S. Department of Health and Human

Services, personal communication, June 24, 1983.

Martin, A. R., Wolf, M. A., Thibodeau, L. A.,

et al., “A Trial of Two Strategies to Modify the

Test-Ordering Behavior of Medical Residents, ”

N. Eng. J. Med. 303(23):1330-36, Dec. 4, 1980.

Martin, S. G., Shwartz, M., Whalen, B. J., et al.,

“Impact of a Mandatory Second-Opinion Program on Medicaid Surgery Rates, ” Medical Care

20(1):21-39, January 1982.

Martin, S. P., Donaldson, M. D., London, C. D.,

et al., “Inputs Into Coronary Care During 30

Years: A Cost Effectiveness Study, ” Ann. Znt.

Med. 81:289-93, 1974.

McCall, N., and Wai, H. S., “An Analysis of the

Use of Medicare Services by the Continuously Enrolled Aged, ” Medical Care 21 :567-85, 1983.

McCall, N., and Wai, H. S., “Medicare Beneficiaries’ Choice of Supplemental Insurance Plans, ”

prepared for SRI International, Health Policy Research Series, Discussion Paper No. 81-2, September 1981.

McCall, N., and Wai, H. S., “Medicare Beneficiaries’ Choice of Supplemental Insurance Plans, ”

prepared for SRI International, unpublished

draft, 1981.

McCarthy, E. G., and Finkel, M. L., “Second

Consultant Opinion for Elective Gynecologic Surgery, ” Obstet. Gyn. 56(4):403-10, October 1980.

McCarthy, E. G., and Finkel, M. L., “Second

Opinion Elective Surgery Program: A Concept

Whose Time Has Come?” Employee Benefits

Journa/ 4:34-83, summer 1979.

McCarthy, E. G., and Finkel, M. L., “Second

Opinion Elective Surgery Programs: Outcome

Status Over Time, ” Medical Care 16(12):984-94,

December 1978.

McCarthy, E. G., FinkeI, M. L., and Ruchlin, H.
———

222.

223.

224.

225.

226.

227.

228.

229.

230.

231.

232.

S., “Second Opinions on Elective Surgery. The

Cornell/New York Hospital Study, ” I,ancet

1(8234):1352-56, June20, 1981.

McMillan, A., Pine, P. L., and Newton, M.,

“Medicare: Use of Physicians’ Services Under the

Supplementary Medical Insurance Program,

1975 -1978,” Health Care Financing Program Statistics, Office of Research and Demonstrations,

Health Care Financing Administration, U.S. Department of Health and Human Services, March

1983,

McNamara, E., “Hospitals Rediscover Comprehensive Home Care, ” Hospitals 56(2):60-66, Nov.

1, 1982.

Medical Device and Diagnostics Report, “Health

Incentive Reform Package Would Refashion

Medicare Along the Competitive Health Model;

Schweicker Predicts 1984 Savings of $2.1 Bil., ”

Feb. 7, 1983, p. S-2.

Medical World News, “Second Opinions Called

Cost-Saver, But Few Voluntarily Seek Them, ”

23(16):8-9, Aug. 2, 1982.

Melia, E. P., Aucoin, L. M., Duhl, L. J., et al.,

“Competition in the Health-Care Marketplace: A

Beginning in California, “ IV. Eng. J. Med. 308(13):

788-92, Mar. 31, 1983.

Meyers, S. M., “Growth in Health Maintenance

Organ izations, ” Hea~th—United States, 1982,

National Center for Health Statistics, U.S. Department of Health and Human Services, publication No. (PHS) 82-1232 (Hyattsville, Md.:

DHHS, 1982).

Mitchell, J. B., and Cromwell, J., “Alternative

Methods for Describing Physician Services Performed and Billed, Executive Summary, ” report

prepared for the Office of Research, Health Care

Financing Administration, U.S. Department of

Health and Human Services, October 1982.

Monsma, G,, “Marginal Revenue and the Demand for Physicians’ Services, ” in Empirical

Studies in Health Economics, H. E. Klarman (cd. )

(Baltimore, Md.: Johns Hopkins Press, 1970).

Moser, R. H., Executive Vice President, American College of Physicians, Washington, D. C.,

statement on “Respiratory Therapy Guidelines, ”

released Oct. 21, 1982.

Mushkin, S. J., Paringer, L. C., and Chen, M.

M., “Returns to Biomedical Research, 1900-1975:

An Initial Assessment of Impacts on Health Expenditures, ” mimeograph (Washington, D. C.:

Georgetown University, Public Services Laboratory, December 1977).

Myers, L. P., and Schroeder, S. A., “Physician

Use of Services for the Hospitalized Patient: A

233.

234.

235.

236

237.

238.

239.

240.

241.

242.

243.

244

245.

References ● 217

.

Review, With Implications for Cost Containmerit, ” Milbank Mere. Fund Q. ‘Health and

Society 59:481-507, 1981.

National Academy of Sciences, Institute of Medicine and National Research Council, Committee

on Technology and Health Care, Medical Technology and the Health Care System: A Studj’ of

the Diffusion of Equipment-Embodied Technology (Washington, D. C.: NAS, 1979).

National Academy of Sciences, Institute of Medicine, A Consortium for Assessing Medical Technology: A Planning Study Report (Washington,

D. C.: NAS, November 1983).

National Academy of Sciences, Institute of Medicine, Division of Health Manpower and Resources Development, A Manpower Policy for

Primary Health Care (Washington, D. C.: NAS,

May 1978).

National Academy of Sciences, Institute of Medicine, Reliabi~ity of Hospital Discharge Abstracts,

publication No. IOM-77-01 (Washington, D. C.:

NAS, 1977).

National Academy of Sciences, Institute of Medicine, Reliability of National HospitaJ Discharge

Survey Data, publication No. IOM-80-82 (Washington, D. C.: NAS, 1980).

National Association of Freestanding Emergency

Centers, “Perspectives on Health Care Costs and

Freestanding Emergency Center Issues” (Dallas,

Tex.: NAFEC, January 1983).

National Association of Insurance Commissions,

Malpractice Claims Final Compilation (Medical

Malpractice Closed Claims 1975-1978) 2(2), September 1980.

NationaI Kidney Foundation, Washington, D. C.,

personal communication, Feb. 9, 1984.

New York Academy of Medicine, “Registry of

Patients on Home Total Parenteral Nutrition

(TPN), ” unpublished data, 1979-81.

New York Academy of Medicine, “Registry of

Patients on Home Total Parenteral Nutrition

(TPN), ” unpublished data, 1982.

Newhouse, J. P., Manning, W. G., Morris, C.

N., et al., “Some Interim Results From a Controlled Trial of Cost Sharing in Health Insurance, ” N. Eng. J. Med. 305:1501, Dec. 17, 1981.

Newhouse, J. P., and Phelps, C. E., “New Estimates of Price and Income Elasticities of Medical Care Services, ” in The Role of Health insurance in the Health Services Sector, R. N. Rosett

(cd. ) (New York: National Bureau of Economic

Research, 1976).

Newhouse, J. P., and Phelps, C. E., On Having

Your Cake and Eating It Too: An Analysis of Es25–337 O – 84 – 16
218 . Medical Technology and Costs of the Medicare Program

246.

247.

248

249,

250.

251.

252,

253.

254.

255.

256.

timated Effects of Insurance on Demand for Medical Care (Santa Monica, Calif.: The Rand Corp.,

April 1974).

Newhouse, J. P,, and Phelps, C. E,, “Price and

Income Elasticities for Medical Care Services, ” in

The Economics of HeaJth and Medical Care, M.

Perlman (cd. ) (London: MacMillan& Co., 1974).

Newhouse, J. P., Manning, W. G., Morris,

C. N., et al., “Some Interim Results From a Controlled Clinical Trial of Cost Sharing in Health

Insurance, ” N. Eng. J Med. 305:1s01, Dec. 17,

1981.

Olseth, D. R., Chairman-Elect of Health Industry Manufacturers Association, statement on

health care costs before the Senate Committee on

Labor and Human Resources, May 19, 1983.

Orkand Corp. , Comparative Evaluation of

Costs, Quality and System Effects of Ambulatory

Surgery Performed in Alternative Settings: Final

Report, prepared for the Health Care Financing

Administration, U.S. Department of Health, Education and Welfare, 1977.

Orkand Corp., Study to Provide Updated information on Emergicenters, prepared for the Office of Research and Demonstrations, Health Care

Financing Administration, U.S. Department of

Health and Human Services, Feb. 22, 1983,

Policy Analysis, Inc., “Evaluation of the Effects

of Certificate of Need Programs, ” Volume III,

Analytic Reports, contract report prepared for

the Bureau of Health Planning and Resources Development, Health Resources Administration,

Department of Health and Human Services, contract No. 231-77-0114, Brookline, Mass., August

1980.

Palmer, R. H., and Nesson, H. R., “A Review

of Methods for Ambulatory Medical Care Evaluations, ” Medical Care 20(8):758-81, August

1982.

Pauly, M. V., and Lan,gwell, K. M., Research on

Competition in the Fizlancing and Delivery of

Health Services; Future Research Needs, National

Center for Health Services Research, U.S. Department of Health and Human Services, DHHS publication No. (PHS) 83-.3328-2, 1982,

Paxton, H. T., Carlova, J, E., Eisenberg, H., et

al., “Making Your Practice More Malpractice

Proof, ” MedicaJ Economics, Sept. 30, 1974.

Peel, E., and Scharff, J., “Impact of Cost Sharing on Ambulatory Services Under Medicare,

1969, ” Soc. Sec. Bull. 36(10):3-24, October 1973.

Perspectives, “Health Planning Looks to the

Future, ” Dec. 5, 1983.

257.

258.

259.

260.

261.

262,

263.

264.

265.

266.

267.

268.

269.

270.

271

——

Perspectives, “Hospice: Medicare’s Newest Provider, ” Nov. 29, 1982.

Perry, S., Washington, D. C., personal communication, Dec. 27, 1983.

Phelps, C. E., and Newhouse, J. P., Coinsurance

and the Demand for Physician Services, R-964-

l-OEO/NC (Santa Monica, Calif.: The Rand

Corp., October 1974).

Phelps, C. E., and Newhouse, J. P., “Coinsurance, the Effect of Time, and the Demand for

Medical Services, ” Research Economics and Statistics 56(3):334-42, August 1974.

Phelps, C. E., and Newhouse, J, P., The Effects

of Insurance on Demand for Physician Services

R-976-OEO (Santa Monica, Calif.: The Rand

Corp., June 1973).

Plough, A. L., and Berry, R. E., “Regulating

Medical Uncertainty: Policy Issues in End-Stage

Renal Disease, ” in Federal Health Programs:

Problems and Prospects, S. H. Altman and H.

M. Sapolsky (eds. ) (Lexington, Mass.: Lexington

Books, 1981).

Potenza, R., “Community Cancer Management,”

Hospitals 57(1):80-85, Jan. 1, 1983.

Praise, I., and Gjerde, C., “Cost Containment

Through Medical Education, ” J. A.M.A. 244(l):

53-55, July 4, 1980.

Primus, W. E., “Financing Medicare Through

1995,” NationaJ J., May 1, 1982.

Rapaport, E., “An Overview of Issues, ” Circulation 66(5) Part 11, AHA Monograph No. 92,

Technology Assessment Forum on Coronary

Artery Bypass Surgery: Economic, Ethical and

Social Issues, November 1982.

Redisch, M, A., “Hospital Inflationary Mechanisms, ” paper presented at the Western Economics Association Meetings, Las Vegas, Nev., June

10-12, 1974.

Reiss, J. B., “Thoughts on Technology Assessment and Paying for Services, ” paper submitted

to the Office of Technology Assessment, U.S.

Congress, November 1981.

Relman, A, S. , “The New Medical-Industrial

Complex, ” N. Eng. J. Med. 303(17):963, Oct. 23,

1980.

Relman, A. S,, “The Rand Health Insurance

Study: Is Cost Sharing Dangerous to Your

Health?” N. Eng. J. Med. 309(23):1453, Dec. 8,

1983.

Rettig, R., “End-Stage Renal Disease and the

‘Cost’ of Medical Technology,” in Medical Technology: The Culprit Behind Health Care Costs?

S. Altman and R. Blendon (eds. ), proceedings of
——

272.

273.

274.

275.

276.

277.

278

279.

280.

281.

282.

283

— — -— —.

the 1977 Sun Valley Forum on National Health,

U.S. Department of Health, Education, and Welfare, publication No. (PHS) 79-3216 (Washington, D. C.: U.S. Government Printing Office,

August 1979).

Rhode Island Health Services Research, Inc.,

“The Effect of Cimetidine on Peptic Ulcer in

Rhode Island, ” Dec. 24, 1980.

Rice, D. P., and Feldman, J, J., “Living Longer

in the United States: Demographic Changes and

Health Needs of the Elderly, ” A4jlbank A4em.

Fund Q./Health and Society 61(3):362-97, 1983.

Rice, T. H., “Determinants of Physician Assignment Rates: An Analysis by Type of Service, ”

Hea)th Care Finan. Rev., forthcoming, 1984.

Rice, T. H., “The Impact of Changing Medicare

Reimbursement Rates on Physician-Induced Demand, ” Medical Care 21(8):803, August 1983.

Rice, T., and McCall, N., “Changes in Medicare

Reimbursement in Colorado: Impact on Physicians’ Economic Behavior, ” Health Care Fjnan.

Rev. 3:67-85, June 1982 .

Richardson, W. C., “Developing Primary Care

Networks: Lessons Learned From Safeco, ” presentation to National Health Policy Forum, Washington, D. C., Oct. 21, 1982.

Ricker-Smith, K. L., “A Challenge for Public Policy: The Chronically 111 Elderly and Nursing

Homes, ” Medjcal Care 20(11): 1071-79, November 1982.

Roberts, S., et al., “Cost-Effective Care of EndStage Renal Disease, ” N. Eng. J. Med. 30:243,

1980.

Rochester Area Hospitals’ Corp., 1980 Annual

Report: Rx for Hospjtals (Rochester, N. Y.:

RAHC, 1981).

Roenick, D., and Bartlett, L., Controlling Medjcajd Costs: Second Surgjcal Opjnion Programs

(Washington, D. C.: National Governors’ Association, November 1982).

Romeo, A. J., Wagner, J. L., and Lee, R. H.,

“Prospective Hospital Reimbursement and the

Diffusion of New Hospital Technologies, ” prepared for The Urban Institute, 1982.

Rosenthal, G., “Anticipating the Costs and

Benefits of New Technology, ” in Medical Technology: The Culprit Behind Health Care Costs?

S. H. Altman and R. Blendon (eds. ), proceedings

of the 1977 Sun Valley Forum on National

Health, U.S. Department of Health, Education,

and Welfare, publication No. (PHS) 79-3216

(Washington, D. C.: U.S. Government Printing

Office, August 1979).

284.

285,

286,

287,

288.

289.

290.

291,

292.

293,

294.

295,

296,

References ● 219

—— ———

Rosenwaike, I., Yaffe, N., and Sagi, P. C., “The

Recent Decline in Mortality of the Extreme Aged:

An Analysis of Statistical Data, ” Am. /. Publjc

Health 70(10):1074-80, October 1980.

Rossiter, L. F,, and Hogan, C. M., “Unequal Financial Incentives for Diagnostic and Preventive

Health Care, ” paper prepared for the 109th Annual Meeting of the American Public Health

Association, Medical Care Section, Los Angeles,

Calif., November 1981.

Rossiter, L. F.r and Wilensky, G. R., “A Reexamination of the Use of Physician Services: The

Role of Physician-Initiated Demand, ” ]nquiry

20:162-72, summer 1983.

Rothwell, R. S., Davis, P., Gordon, P. A., et al.,

“A Controlled Study of Plasma Exchange in the

Treatment of Severe Rheumatoid Arthritis, ”

Arth. & Rheumat. 23:785-90, 1980.

Ruchlin, H. S., Finkel, M. L., and McCarthy, E.

G., “The Efficacy of Second-Opinion Consultation Programs: A Cost-Benefit Perspective, ”

Medical Care 20(1):3-20, January 1982.

Russell, L. B., Technology in Hospitals: Medjcal

Advances and Their Diffusion (Washington,

D. C.: The Brookings Institution, 1979).

Schade, R. R., and Donaldson, H., Jr., “How

Physicians Use Cimetidine—A Survey of Hospitalized Patients and Published Cases, ” Medical

Inte//igence 304(21):1281-84, May 21, 1981.

Schaeffer, L., “Role of the HCFA in the Regulation of New Medical Technologies, ” in C’rjtical

Issues in Medical Technology, B. J. McNeil and

E. G. Cravalho (eds. ) (Bostonr Mass.: Auburn

House, 1982).

Schaeffer, M. J., and Gordon, M. R., “Clinical

Engineering Standards, Obligationsf and Accountability, ” Medical Instrumentation 13(4):209-

15, July-August 1979.

Schiffman, G., “Chemistry and Immunochemistry of the Pneumococcal Polysaccharide Vaccine

With Special Reference to Cross-Reactions and

Immunologic Factors, ” Reviews of Infectious Diseases 3( Supplement ): S18-30, March-April 1981.

Schneeweiss, R., et al., “Diagnostic Clusters: A

New Tool for Analyzing the Content of Ambulatory Medical Care, ” Medical Care 21:105-22,

January 1983.

Schroeder, S. A., and Showstack, J. A., “Financial Incentives to Perform Medical Procedures

and Laboratory Tests: Illustrative Models of Office Practice, ” Medical Care 16:289-98, Apri~

1978.

Schroeder, S., et al., “Use of Laboratory Tests
220 . Medical Technology and Costs of the Medicare Program

—.. ——-.—.—-— .———

297.

298.

299,

300,

301.

302.

303.

304.

305.

306.

307.

308.

309.

and Pharmaceuticals: Variation Among Physicians and Effect of Cost Audit on Subsequent

Use, ” J.A. M.A. 225:?69, 1973,

Schwartz, W. B., and Aaron, H. J., “Rationing

Hospital Care: Lessons From Britain, ” Special Report in N. Eng. J. Med. 301(1):52-56, Jan. 5, 1984.

Scitovsky, A. A., and McCall, N., Changes in

the Costs of Treatment of Selected Illnesses, 19.sI1964-1971, U.S. Department of Health, Education, and Welfare, publication No. (HRA) 77-

3161 (Washington, D. C.: U.S. Government

Printing Office, 1976).

Scitovsky, A. A., and McCall, N., “Coinsurance

and the Demand for Physician Services: Four

Years Later, ” Soc. Sec. Bull. 40:19-27, 1977.

Sheeley, D. R., and Sherman, H., “Conservation

in Hospital Resource Use: Treatment of Pneumonias: An Investigation of Care in Four Hospitals

Over the Past Decade, ” Ann. lnt. Med. 85:648-

52, 1976.

Shils, M. E., “Registry of Patients on HPN, ” in

Home Parenteral Nutrition, symposium proceedings, American Society for Parenteral and

Enteral Nutrition, pp. 42-44, 1980.

Showstack, J. A., Schroeder, S. A., and Matsumoto, M. F., “Changes in the Use of Medical

Technologies, 1972 -1977,” ~. Eng. J. Med.

306(12):706-12, Mar. 25, 1982.

Sigmond, R. M., “Cavitation Reimbursement, ”

paper presented at the 1980 Conference on Health

Care in the American Economy, New York, June

8-11, 1980.

Silverman, H. A., Meciicare Program Statistics

Branch, Health Care Financing Administration,

U.S. Department of Health and Human Services,

personal communication, August 1983.

Sisk, J. E., Office of Technology Assessment,

U.S. Congressr personal communication, Sept.

15, 1983.

Skipper, J. K., Jr., Smith, G., Mulligan, J. L., et

al., “Physicians’ Knowledge of Cost: The Case

of Diagnostic Tests, ” Inquiry 13(2):194-98, June

1976.

Sloan, F. A., “Effects of FIealth Insurance on Physicians’ Fees, ” paper presented at the Annual

Meeting of the Southern Economic Association,

Washington, D. C., Nov. 6, 1980.

Sloan, F. A., “Physician Fee Inflation: Evidence

From the Late 1960’ s,” in The Role of Health Insurance in the Health Services Sector, R. N. Rose]

(cd. ) (New York: National Bureau of Economic

Research, 1976).

Sloan, F. A., “Rate Regulation as a Strategy for

Hospital Cost Control: Evidence From the Last

310.

311

312.

313.

314.

315.

316,

317.

318.

319.

320.

321.

322,

Decade, ” Mi~bank Mere. Fund Q. 61(2), spring

1983.

Sloan, F. A., “Regulation and the Rising Costs

of Hospital Care, ” Review of Economics & Statistics 63:479-87, 1981.

Sloan, F. A,, and Steinwald, B., “Effects of Regulation on Hospital Costs and Input Use, ” Vanderbilt University for presentation at the Annual

Meeting of the American Economic Association,

Chicago, Ill., Aug. 29, 1978.

Smith Kline & French, unpublished data (as

quoted in Wagner, J. L., “Economic Evaluations

of Medicines: A Review of the Literature, ” prepared for the Pharmaceutical Manufacturers Association, October 1982.

Smits, H., “The PSRO in Perspective, ” IV. Eng.

J. Med. 305(5):253-59, July 30, 1981.

Smits, H., Feder, J., and Scanlon, W., “Medicare’s Nursing Home Benefit: Variations in Interpredation, ” N. Eng. J. Med. 307(14):855-62, Sept.

30, 1982.

Soboski, W, S., “Effects of the 1969 California

Relative Value Studies on Costs of Physician

Services Under SMI, ” Health Insurance Statistics,

69, Office of Research and Statistics{ Social Security Administration, U.S. Department of Health,

Education, and Welfare, 1975.

Somers, A. R., “And Who Shall Be the Gatekeeper?” paper presented to the Duke University

Medical Center, Duke-Watts Family Medicine

Programr Alumni Symposium: The First Ten

Years, Durham, N. C., June 16, 1983, forthcoming in Inquiry, winter 1984 (in press).

Somers, A. R., and Somers, H. M., Health and

Health Care (Germantown, Md.: Aspen System,

1977).

Somers, H. M., and Somers, A. R., Medicare and

the Hospitals: Issues and Prospects (Washington,

D. C.: The Brookings Institution, 1967).

Sorenson, A. A., Saward, E. W., Steward, D.

W., “Hospital Cost Containment in Rochester:

From Maxicap to the Hospital Experimental Payments Program, “ Inquiry 19:327-35, winter 1982.

Speltz, D. E., “Long-Term Care: Hospitals Must

Change Missions and Marketing to Better Serve

the Elderly, ” Hospitals 56:56-57, 59-60, July 1,

1982.

Strauss, A., Chronic Illness and the Quality of

Life (St, Louis, Mo.: The CV Mosby Co., 1975).

Sunshine, J. H,, “Medicare: Past, Present and

Future, ” in Rethinking Medicare to Meet Future

Needs, The Government Research Corp., Issues

Book of the Seventh Annual Leadership Conference on Health Po]icv, Tune 17-18. 1982.
References “ 221

—

323.

324.

325.

326

327.

328.

329.

330.

331.

332.

333.

334.

Tancredi, L. R., and Barondess, J. A., “The Problem of Defensive Medicine, ” Science 200:879-82,

May 26, 1978.

Tanon, C. P., and Rogers, E., Diffusion of Mealical Technology, G. Gordon and L. Fisher (eds. )

(Cambridge, Mass.: Ballinger Publishing Co.,

1975).

Traunerr J. B., Luft, H. S., and Robinson, J. O.,

Entrepreneurial Trends in Health Care Delivery:

The Development of Retail Dentistry and Freestanding Ambulatory Services (Washington,

D. C.: U.S. Government Printing Office, Dec. 7,

1982) .

Tr<snowski, B. R., President, Blue Cross/Blue

Shield Association, “Remarks on the Medical Necessity Program, ” Blue Cross/Blue Shield press

briefing, Washington, D. C., Oct. 21, 1982.

U.S. Congress, Congressional Budget Office,

Changing the Structure of Medicare Benefits:

Issues and Options (Washington, D. C.: U.S.

Government Printing Office, March 1983).

U.S. Congress, Congressional Budget Office, The

Effects of PSROs on Health Care Costs: Current

Findings and Future Eva~uations (Washington,

D. C.: U.S. Government Printing Office, 1979).

U.S. Congress, Congressional Budget Office, The

Impact of PSROS on Health Care Costs: Update

of CBO’S 197’9 Evaluation (Washington, D, C.:

U.S. Government Printing Office, January 1981).

U.S. Congress, Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, a report to the Senate and House Committees on the Budget—Part III (Washington, D. C.:

U.S. Government Printing Office, February

1983).

U.S. Congress, Congressional Budget Office, “Response From Alice M. Rivlin to Howard M.

Metzenbaum on the Impact of a Medicare Pneumococcal Vaccination Benefit, ” Sept. 5, 1980.

U.S. Congress, General Accounting Office, Human Resources Division, “Waiver of Medicaid

Freedom-of-Choice Reimbursement: Potential

Savings and Practical Problems, ” memorandum

to Richard S. Schweiker, Secretary of Health and

Human Services, No. GAO/HRD-82-90, July 20,

1982.

U.S. Congress, General Accounting Office, The

Elderly Should Benefit From Expanded Home

Health Care But increasing These Services WilJ

Not Insure Cost Reductions, publication No. IPE83-1 (Washington, D. C.: U.S. Government Printing Office, Dec. 7, 1982),

U.S. Congress, General Accounting Office, Problems With Evacuating the Cost Effectiveness of

335

336,

337.

338.

339.

340.

341.

342.

343.

344.

345.

346.

Professional Standards Review Organizations

(Washington, D. C.: U.S. Government Printing

Office, July 19, 1979).

U.S. Congress, House of Representatives, Committee on Interstate and Foreign Commerce, Subcommittee on Health and the Environment, A

Discursive Dictionary of Health Care (Washington, D. C.: U.S. Government Printing Office,

1976).

U.S. Congress, Library of Congress, Congressional Research Service, “Health Insurance: The

Medicare Voucher Proposals, ” by G. R. Markus,

issue brief No, IB81179, updated Feb. 17, 1983.

U.S. Congress, Library of Congress, Congressional Research Service, “Health Insurance: The

Pro-Competition Proposals, ” by J. P. Lundy and

G. R. Markus, issue brief No. IB81046, updated

Feb. 9, 1983.

U.S. Congress, Library of Congress, Congressional Research Service, “How Medicare Pays

Doctors, ” by J. O’Sullivan and G. Markus, issue

brief No. IE182202, revised Nov. 10, 1982.

U.S. Congress, Library of Congress, Congressional Research Service, “Medic are,” by G. R.

Markus, issue brief No. IB82044, updated January 1983.

U.S. Congress, Library of Congress, Congressional Research Service, “Medicare, f

’ by J. O'Sullivan and G. Markus, issue brief No. IB82044,

updated August 1983.

U.S. Congress, Office of Technology Assessment,

Assessing the Efficacy and Safety of Medical

Technologies, OTA-H-75 (Washington, D. C.:

U.S. Government Printing Office, September

1978) .

U.S. Congess, Office of Technology Assessment,

Development of Medical Technology: Opportunities for Assessment, OTA-H-34 (Washington,

D. C.: U.S. Government Printing Office, August

1976.

U.S. Congress, Office of Technology Assessment,

Diagnosis Related Groups (D17Gs) and the Medicare Program: Implications for Medical 7’echnology, OTA-TM-H-17 (Washington, D. C.: U.S.

Government Printing Office, July 1983).

U.S. Congress, Office of Technology Assessment,

“Effectiveness and Costs of Continuous Ambulatory Peritoneal Dialysis, ” unpublished draft

prepared by W, B. Stason and B. A. Barnes, November 1983.

U.S. Congress, Office of Technology Assessment,

“Federal Policies and the Medical Devices Industry, ” status report, July 1983.

U.S. Congress, Office of Technology Assessment,
222 ● Medical Technology and Costs of the Medicare Program

347.

348.

349.

350.

351.

352.

353.

354.

355.

356.

357.

Forecasts of Physician Supply and Requirements,

OTA-H-113 (Washington, D. C.: U.S. Government Printing Office, 1980).

U.S. Congress, Office of Technology Assessment,

Health Technology Case Study #2: The Feasibility

of Economic Evaluation of Diagnostic Procedures: The Case of CT Scanning, OTA-HCS-2

(Washington, D. C.: [J.S. Government Printing

Office, April 1981).

U.S. Congress, Office of Technology Assessment,

Health Technology Case Study #22: The Effectiveness and Costs of Alcoholism Treatment,

OTA-HCS-22 (Washington, D. C.: U.S. Government Printing Office, June 1983).

U.S. Congress, Office of Technology Assessment,

Health Technology Case Study #23: The Safety,

Efficacy, and Cost Effectiveness of Therapeutic

Apheresis, OTA-f-ICS-23 (Washington, D. C.:

U.S. Government Printing Office, July 1983).

U.S. Congress, Office of Technology Assessment,

Health Technology Case Study #24: Variations

in Hospital Length of Stay: Their Relationship to

Health Outcomes, OTA-I-ICS-24 (Washington,

D. C.: U.S. Government Printing Office, August

1983).

U.S. Congress, Office of Technology Assessment,

Health Technology C,~se Study #26: Assistive

Devices for Severe Speech Impairments, OTAI-iCS-26 (Washington, D. C.: U.S. Government

Printing Office, December 1983).

U.S. Congress, Office of Technology Assessment,

Impact of Randomized Clinical Trials on Health

Poficy and A4edical Practice, OTA-BP-H-22

(Washington, D. C.: U.S. Government Printing

Office, August 1983).

U.S. Congress, Office of Technology Assessment,

Implications of Cost-Effectiveness Analysis of

Medical Technology, OTA-H-126 (Washington,

D. C.: U.S. Government Printing Office, August

1980).

U.S. Congress, Office of Technology Assessment,

“Intensive Care Units (ICUS): Costs, Outcomes,

and Decisionmaking, ” unpublished draft prepared by R. A. Berenson, August 1983.

U.S. Congress, Office of Technology Assessment,

Medical Technology Under Proposals to Increase

Competition in HeaZth Care, OTA-H-190 (Washington, D. C.: U.S. Government Printing Office,

October 1982).

U.S. Congress, Office of Technology Assessment,

Po~icy Implications of the Computed Tomography (CT) Scanner: Art Update, OTA-BP-H-8

(Washington, D. C.: U.S. Government Printing

Office, January 1981).

U.S. Congress, Office of Technology Assessment,

358.

359,

360,

361.

362.

363.

364.

365.

366.

367.

368.

369.

“Report of a Study on Decisionmaking by Medicare Contractors for Coverage of Medical Technologies, ” prepared by L. K. Demlo, G. T, Hammons, J. M, Kuder, et al,, Oct. 28, 1983.

U.S. Congress, Office of Technology Assessment,

A Review of Selected Federal Vaccine and Immunization Policies Based on Case Studies of Pneumococcal Vaccine, OTA-H-96 (Washington,

D. C.: U.S. Government Printing Office, September 1979).

U.S. Congress, Office of Technology Assessment,

Strategies for Medical Technology Assessment,

OTA-H-181 (Washington, D. C.: U.S. Government Printing Office, September 1982).

U.S. Congress, Office of Technology Assessment,

Technology and Aging in America, forthcoming,

summer 1984.

U.S. Congress, Office of Technology Assessment,

Technology and Handicapped People, OTA-H179 (Washington, D. C.: U.S. Government Printing Office, May 1982).

U.S. Congress, U.S. Senate, Committee on Finance, Report No. 92-1230, Sept. 9, 1983.

U.S. Congress, U.S. Senate, Special Committee

on Aging, “The Hospice Alternative, ” hearing

held in Pittsburgh, Pa., 97th Cong., 2d sess., May

24, 1982.

U.S. Department of Commerce, Bureau of Labor

Statistics, personal communication, Sept. 1,

1983.

U.S. Department of Health, Education, and Welfare, Health Care Financing Administration, 1978

PSRO Program Evaluation, DHEW publication

No. (HCFA) 03000 (Baltimore, Md.: DHEW, January 1979).

U.S. Department of Health, Education, and Welfare, Health Care Financing Administration,

memorandum of the Administrator from the Director of the Office of Policy Analysis on “Coverage Under Medicare, ” prepared by M. Chassin,

Aug. 24, 1979,

U.S. Department of Health, Education, and Welfare, National Center for Health Statistics, “Detailed Diagnosis and Surgical Procedures for Patients Discharged From Short-Stay Hospitals:

United States, 1977, ” DHEW publication No.

(PHS) 79-1279 (Hyattsville, Md.: DHEW, September 1979).

U.S. Department of Health, Education, and Welfare, National Center for Health Statistics, “The

Change in Mortality Trends in the United States,”

Vital and Health Statistics, Series 3, No. 1,

DHEW publication No. (PHS) 1000 (Hyattsville,

Md.: DHEW, 1964).

U.S. Department of Health, Education, and Wel-
References ● 223 —.——— — — —

fare, National Center for Health Statistics, “Utilization of Short-Stay Hospitals, Annual Summary for the United States, 1975, ” Vital and

Health Statistics, Series 13, No. 31, DHEW publication No. (HRA) 77-1782 (Washington, D. C.:

DHEW, April 1977).

370. U.S. Department of Health, Education, and Welfare, Report of the Secretary’s Commission on

Medical Malpractice (Washington, D. C.: DHEW,

Jan. 16, 1973).

371. U.S. Department of Health and Human Services,

Office of the Inspector General, “Long-Term

Care: Service Delivery Assessment, Report to the

Secretary, ” 1981.

372. U.S. Department of Health and Human Services,

Social Security Advisory Council to the Secretary, meeting of June 20, 1983, as reported in The

Washington Post, June 21, 1983.

373. U.S. Department of Health and Human Services,

Health Care Financing Administration, 1966-1979

Data, Persons Enrolled for Medicare, 1979,

HCFA publication No. 03079 (Baltimore, Md.:

HCFA, January 1981).

374. U.S. Department of Health and Human Services,

Health Care Financing Administration, 1979

PSRO Program .Eva~uation (Washington, D. C.:

DHHS, 1980).

375. U.S. Department of Health and Human Services,

Health Care Financing Administration, unpublished data, May 1982.

376. U.S. Department of Health and Human Services,

Health Care Financing Administration, “Annual

Report to the Congress From the Secretary of

Health and Human Services on the Professional

Standards Review Organizations Program, Fiscal

Year 1980, ” memo, February 1981.

377. U.S. Department of Health and Human Services,

Health Care Financing Administration, Division

of Public Information staff, personal communication, Jan. 23, 1984.

378. U.S. Department of Health and Human Services,

Health Care Financing Administration, End-Stage

Rena] Disease Report to Congress, 1983, in press.

379. U.S. Department of Health and Human Services,

Health Care Financing Administration, End Stage

Renal Disease Second Annual Report to Congress, Fiscal Year 1980, 1980.

380. U.S. Department of Health and Human Services,

Health Care Financing Administration, Health

Care Financing Trends, DHHS publication No.

03091 (Baltimore, Md.: DHHS, winter 1981),

381. U.S. Department of Health and Human Services,

Health Care Financing Administration, Office of

Coverage Policy staff, personal communication,

December 1982.

382. U.S. Department of Health and Human Services,

Health Care Financing Administration, Office of

Coverage Policy, Medicare Carriers Manual, Part

3, Claims Process, Coverage Index Appendix,

sec. 35-50, Sept. 15, 1981.

383. U.S. Department of Health and Human Services,

Health Care Financing Administration, Office of

Coverage Policy, Medicare Carriers Manual, Part

3, Claims Process Transmittal, No. 984, sec. 35-

70, July 1983.

384. U.S. Department of Health and Human Services,

Health Care Financing Administration, Office of

Coverage Policy, “Operating Guidelines for Determining Medical Necessity of Medicare Items

and Services: Discussion Draft, ” mimeo, Feb. 2,

1981.

385. U.S. Department of Health and Human Services,

Health Care Financing Administration, Office of

Program Administration, “Health Care Financing Administration Intermediary and Carrier

Directory, “ Medicare Manual, October 1982.

386. U.S. Department of Health and Human Services,

Health Care Financing Administration, “Operating Guidelines for the HCFA Physician Panel, ”

mimeo, 1980.

387. U.S. Department of Health and Human Services,

Health Care Financing Administration, “PSRO

Evaluation, ” Research and Demonstrations in

Health Care Financing: 2980-1981, HCFA publication No. 03144 (Rockville, Md.: HCFA,

1982).

388. U.S. Department of Health and Human Services,

Health Care Financing Administration, Region J,

Boston Regional Intermediary Bulletin, No. 197,

Subject: Coverage Issues, mimeo, Jan. 17, 1978.

389. U.S. Department of Health and Human Services,

Health Care Financing Administration, Report to

Congress: Hospital Prospective Payment for

Medicare (Rockville, Md.: HCFA, Decembe r

1982) .

390. U.S. Department of Health and Human Services,

Health Care Financing Administration, Statistical Information Services staff, personal communication, Sept. 1, 1983.

391. U.S. Department of Health and Human Services,

Health Care Financing Administration, The

Medicare and Medicaid Databook, 1981, HCFA

publication No. 03128 (Baltimore, Md.: HCFA,

April 1982).

392. U.S. Department of Health and Human Services,

Health Care Financing Administration, The

Medicare and Medicaid Databook, 1.983, HCFA

publication No. 03156 (Baltimore, Md.: HCFA,

December 1983).

393. U.S. Department of Health and Human Services,
224 ● Medical Technology and Costs of the Medicare Program

——.—

394.

395.

396.

397,

398.

399.

400.

Health Care Financing Administration, “Your

Medicare Handbook, January 1983 Edition, ”

Social Security Administration publication No.

O5-1OO5O (Baltimore, Md.: SSA, January 1983).

U.S. Department of Health and Human Services,

National Center for Health Services Research,

Eyeglasses and Contact Lenses: Purchases, Expenditures, and Sources 0[ Payment, NCHSR

National Health Care Expenditure Study, Data

Preview 11, prepared by D. C. Walden, DHHS

publication No. (PHS) 82-3322 (Hyattsville, Md.:

DHHS, October 1982).

U.S. Department of Health and Human Services,

National Center for Health Services Research, Znpatient Hospital Services: Use, Expenditures, and

Sources of Payment, NCHSR National Health

Care Expenditure Study, Data Preview 15, prepared by A. K. Taylor, DHHS publication No.

(PHS) 83-3360 (Hyattsville, Md.: DHHS, October 1982).

U.S. Department of Health and Human Services,

National Center for Health Services Research,

Out-of-Pocket Expenditures for Personal Health

Services, NCHSR National Health Care Expenditures Study, Data Preview 13, prepared by L. F.

Rossiter and G. R. Wilensky, DHHS publication

No, (PHS) 82-3332 (Hyattsville, Md.: DHHS,

October 1982).

U.S. Department of Health and Human Services,

National Center for Health Services Research,

Medical Equipment and Supplies: Purchases and

Rentals, Expenditures, and Sources of Payment,

NCHSR National Health Care Expenditure

Study, Data Preview 10, prepared by M. M.

Hagan, DHHS publication No. (PHS) 82-3321

(Hyattsville, Md.: DHHS, October 1982).

U.S. Department of Health and Human Services,

National Center for Health Services Research,

Prescribed Medicines: Use, Expenditures, and

Sources of Payment, NCHSR National Health

Care Expenditure Study, Data Preview 9, prepared by J, A. Kasper, DHHS publication No.

(PHS) 82-3320 (Hyattsville, Md.: DHHS, October 1982),

U.S. Department of Health and Human Services,

National Center for Health Services Research, Office of Health Technolc)gy Assessment, “OHTA

Guidelines for the Evaluation of the Safety and

Clinical Effectiveness of Medical Technologies, ”

mimeo, September 1982.

U.S. Department of Health and Human Services,

National Center for Health Statistics, “1982 Summary: National Hospital Discharge Survey, ” No.

95, DHHS Publication No. (PHS) 84-1250 (Hyattsville, Md.: DHHS, Dec. 27, 1983).

401.

402.

403

404

405.

406.

407.

408.

409.

410.

411.

1

U.S. Department of Health and Human Services,

National Center for Health Statistics, “Changes

in Mortality Among the Elderly: United States,

1940-1978, ” Vita] and Health Statistics, Series 3,

No. 22, DHHS publication No. (PHS) 82-146

(Hyattsville, Md.: DHHS, 1982).

U.S. Department of Health and Human Services,

National Center for Health Statistics, “Current

Estimates From the National Health Interview

Survey: U.S. 1981, ” Vital and Health Statistics,

Series 10, No. 141, DHHS publication No. (PHS)

82-1569 (Washington, D. C.: DHHS, December

1982).

U.S. Department of Health and Human Services,

National Center for Health Statistics, “Detailed

Diagnosis and Surgical Procedures for Patients

Discharged From Short-Stay Hospitals: United

States, 1978,” DHHS publication No. 80-1274

(Hyattsville, Md.: DHHS, September 1980).

U.S. Department of Health and Human Services,

National Center for Health Statistics, “Detailed

Diagnosis and Surgical Procedures for Patients

Discharged From Short-Stay Hospitals: United

States, 1979,” DHHS publication No. (PHS) 82-

1274-1 (Hyattsville, Md.: DHHS, January 1982).

U.S. Department of Health and Human Services,

National Center for Health Statistics, Health—

United States, 1980, DHHS Publication No.

(PHS) 81-1232 (Hyattsville, Md: DHHS, December 1980).

U.S. Department of Health and Human Services,

National Center for Health Statistics, Hea/th —

United States, 198 1( DHHS publication No.

(PHS) 82-1232 (Hyattsville, Md.: DHHS, December 1981),

U.S. Department of Health and Human Services,

National Center for Health Statistics, Hea/th—

United States, 1982, DHHS publication No.

(PHS) 83-1232 (Hyattsville, Md.: DHHS, December 1982).

U.S. Department of Health and Human Services,

National Center for Health Statistics, HeaZth—

United States, 1983, DHHS Publication No.

(PHS) 84-1232 (Hyattsville, Md: DHHS, December 1983).

U.S. Department of Health and Human Services,

National Institutes of Health Consensus Development Conference Statement, “Critical Care

Medicine, ” Mar. 7-9, 1983.

U.S. Department of Health and Human Services,

Public Health Service, “Memorandum of Understanding Regarding Medicare Coverage Determination, ” mimeo, Dec. 16, 1980.

U.S. Department of Health and Human Services,

Public Health Service, PSRO: An Initial Evalua-
References ● 225

412.

413,

414.

415.

416,

417,

418.

419.

420,

421,

422.

tion of the Professional Standards Review Organization, Vol 1: Executive Summary, February

1978.

U.S. Government, Executive Office of the President, Office of Management and Budget, Budget

ot the United States Government, Fiscal Year

1~84, 1983.

United Mine Workers of Americar Health and

Retirement Funds, “Effects of Cost Sharing on

Beneficiaries of the United Mine Workers’ Health

Plan, ” prepared f~~r U.S. Department of Health

and Human Services, National Center for Health

Services Research, contract No. 233-79-2034, Ilecember 1982.

Urban Systems Research and Engineering, and

Policy Analysis, Inc., Certificate <Jf Need Programs: A Review Anal}’sis, andAn~o[a[e~ Bj&

Iiographv of the Research Literature, prepared

under contract No. HRA-231 -77-0114 for the Department of Health, Education, and Welfare,

publication No. ( HRA ) 7q- ] 4006 (Washington,

D. C.: DHEW, November lq78).

Vautrain, R. L., and Griner, P. F., “Ph ysician’s

Orders, Use of Nursing Resources, and Subsequent Clinical Events, ” J. bled. Educ. 53:125-28,

1978.

vla~eck, B. ~., “Paying Hospitals, ” New’ Approaches to the Afedic~id Crisis, R, J. Blendon

and T. W. Moloney (eds. ) (New York: F & S

Press, 1982).

Wagner, J, L., “Economic Evaluations of

Medicines: A Review of the Literature, ” prepared

for the Pharmaceutical Manufacturers Association, mimeo, October 1982,

Wagner, J. L., Krieger, M. J., Lee, R. H., et al.,

“A Study of the Impact of Reimbursement Strategies on the Diftusion of Medical Technologies,

Vol. I: Summary and Findings, ” prepared for The

Urban Institute, 1982.

Waldman, S,, “The Effect c~f Changing Technology on Hospital Costs, ” Research and Statistics

Note, U.S. Department of Health, Education, and

Welfare, publication No. (0S) 76-502 (Washington, D. C.: DHEW, Feb. 28, 1972).

Warner, K, E., and Luce, B. R., Cost-Benefit and

C~)st-Effectiveness Analysis in Health Care: Principles, Practjce, and Potential (Ann Arbor,

Mich.: Health Administration Press, 1982).

Wateska, L. P., Sattler, L. L., and Steiger, E. ,

“Cost of Home Parenteral Nutrition Program, ”

\. A.M.A. 244(20):2302-04, Nov. 21, 1980.

Weinstein, ~M. C., and Stason, W. B., “CostEffectiveness of Coronary Artery Bypass Surgery, ” Circulation 66(5) Part II, AHA Monograph

423.

424.

425.

426,

427.

428.

429.

430.

431.

432.

433.

434,

435.

No. 92, Technology Assessment Forum on Coronary Artery Bypass Surger~r: Economjc, Ethical

and Social issues, November 1982.

Weinstein, M. Il., Fineberg, H. V., Elstein, A. S.,

et al., Clinical Decision Ana/_vsjs (Philadelphia,

Pa.: W. B. Saunders Co., 1980).

Wennberg, J, E., “Should the Cost of Insurance

Reflect the Cost of Use in Local Hospita] hfarkets?” fV. .Eng. ], Med. 307(22): 1374-81, Nc}\T, 25,

1982.

Westphal, M., Frazier, E., and Mi]ler, M. C.,

“Changing in Average Length of Stay and Average Charges Generated Following Institution {}f

PSRO Review, ” F/ealth Serv. Res. 14(4):253-65,

winter 1979.

Wilensky, G. R., and Rossiter, L. F., “The hlagnitude and Determinants of Physician Initiated

Visits in the United States, ” U.S. Department of

Health and Human Ser\”ices, National Center for

Health Services Research, prepared for presentation at the World Congress on Health Econ(>mics, Leiden University, The Netherlands, Sept. 8-

11, 1980.

Williamson, 1. W., Alexander, M., and Miller,

G. E., “Continuing Education and Patient Care

Research: Physician Response to Screening Test

Results, ” I. A. LI.A. 201 :118-22, 1967.

Wolff, J., and Dunnihoo, D. R., “A Freestanding

Ambulatory Sur~ical Unit: A Success or Failure?”

Am. ]. Ohstet. G~necol. 143(3) :270-76, lune 1,

1982.

Wo]insky, F. D., “The Performance of Health

Maintenance Organizations: An Analytic Review, ” IPli/bank Mere. Fund Q. 58(4):537-87, fall

1980,

Worthington, N. L., “Expenditures for Hospital

Care and Physicians( Services: Factors Affectin~

Annual Changes, ” SOC. Securit>r Bull, 38:3-15,

1975,

Worthington, N., and Piro, P., “The Effects c~i

Hospitals’ Rate Setting Programs on Volumes of

Hospital Services, ” Health Care Finan. Rev.

4(2):47, December 1982.

Wylie, C., “The Complex Wane of Peptic Ulcer,

II. Trends in Duodenal and Gastric Ulcer Aclmissions to 790 Hospitals— 1974 -7~, ” ]ourna] of Gastroentero/ogy 3:333-39, 1981.

Wyllie, J. H., et al., “ Effect of Cirnetidine on Su r

-

gery for Duodenal Ulcers, ” Lancet 1 (8252): 307-

8, June 13, 1981.

Young, D. A., U.S. Department of Health and

Human Services, Health Care Financing Administration, personal communication, January 1983.

Youn~, D. A., “List and Description of Govern-
226 “ Medical Technology and Costs of the Medicare Program

——-————— .

ment Payers, ” paper submitted to the Commit- 437. Zook, C. J., and Moore, F. D., “High-Cost Users

tee on Evaluating Medical Technologies in Clin- of Medical Care, ” Special Article in IV. Eng. J.

ical Use, Institute of Medicine, National Academy Med. 302(18):996, May 1, 1980.

of Sciences, unpublished, 1984.

436. Young, J. M,, Blue Cross/Blue Shield, personal

communication, 1984.
Index
——

Index ——

ambulatory surgery centers, 137

American Hospital Association, 107

apherwis, therapeutic, 11, 5 6

approa che~ t<) changing incentives for med i ca 1

technology adoption and use, 16

Assoclatic~n of American Medical Colleges, 119

beneficiary cost-sharing, 9, 36, 37, 108, 129

Blue Cr(m, 30, 74, Q4, 95, 101, 122

Ca]itornia, 108, 116

capital payment methods, 102

history under Nledicare, 102

under State protective payment programs, 103

under DRC, payment, 104

certificate of need (CON), 103, 105, 107, 162

Cieveldnd Clinic, 5 9

Colorado, 116

C(llorado Blue Cross, 101

competitive behavior, 136

computed tomography (CT ) scanners, 32, 98

Congress:

House Committee on Energy and Commerce, 3

Subcommittee on Health and Environment, 3

Senate Committee on Finance, 3

Subcommittee on Health, 3

Congressional Budget Office (CBO), 26, 57, 120, 128,

]29

Consumer Price Index, 10, 48, 122, 123

coronary artery bypass surgery, 11, 53

cost-benefit analysis (CBA), 12, 85

cost consciousness, physicians’, 118

cost containment technologies, I I

cost-effectiveness analysis (CEA ), 12, 85, 153

cost saving technology, 86

coverage, Medicare, 74

process, 76

policy under DRG, 82

Current Procedural Terminology (CPT), 124

cleiensive medicine, 117, 11 8

Department of Health and Human Services, 14, 33, 104,

127, 156

Dia~nosis Related Groups (DRGs), 3, 5, 12, 13, 14, 30,

32, 33, 39, 67, 82-83, 8Q, Q3, 94, 98, 99, 100, 104,

105, 121, 152, 157

dialy~is, kidney, II, 59

Ec{~nomic Stabilization Program ( ESP), 115, 116

emergency care centers, 139

end-stage renal disease (ESRD), 6, 7, 26, 59, 60

payment for treatment, 34

Food and Drug Administration (FDA), 5, 23, 55, 67, 77

84

General Accounting Office (GAO), 120

Great Britain, 140

Health Care Financing Administration (HCFA), 11, 12,

56( 54 73, 74< 75, Tb, 77, 78, 79, 80, 81, 82, 84,

120, 124, 127, 138, 152

Boston Regional office, 78

Common Procedure Coding System, 124

Office of Coverage Policy, 78

Health Industry Manufacturers Association (HI,MA), 80

health maintenance organizations (HhlOs), 13Q, 140

home health care, 137

Home Health Care of America, 58

hospices, 138

Hospital Insurance program, 8, 27, 37

hospital outpatient departments, 138

impact of medical technology}’ on kfedic~re costs, 9, 33,

51, 52

Indiana, 95, 98

intensive care units (ICI-IS), 11, 44, 45, 57, 5 8

“intensity of care” approach, 47-5o

interactions between medical technolo~y and Medicare,

104

lohn A. Hartford Foundation, 101

legislation:

End-Stage Renal Disease Program Amendments of

1978, 36

Omnibus Budget Reconciliation Act of 1981, 36, 37,

95, 108, 128

%cia] Security Act, 5, 11, 25, 27, 29, 34, 57, 73, 88

Social Security Amendments of 1972, 26, 31, 34, 60,

95

Social Security Amendments of 1983, 4, 13, 25, 30,

32, 37, 93, 120, 156

Tax Equity and Fiscal Responsibility Act (TEFRA), 13,

32, 33, 93, 94, 120, lsb

Maryland, 95, 98, 103

Massachusetts, 95, 101, 103

Medicaid, 93-95, 108, 121

medical technology:

alternative approaches to changing incentives, 16

development and diffusion of, 23-25

impact on Nledicare costs, 4, Q, 43-tJ I

conclusions from aggregate studies, 52

contribution to health care costs, 51

intensity of care, 4 7

intensive care units (ICUS), 44, 45, 52, 57, 58

Medicare beneficiaries, 43

selected technologies, 53

cimetidine, 54

coronary artery bypass graft (CABG ) surgery,

54

hemodialysis for chronic renal failure, 5Q

pneurnococca] vaccine, 56

therapeutic apheresis, 56

total parenteral nutrition (TPN), 58, 5Q

Medicare policies affecting, 7

53,

229
230 . Medical Technology and Costs of the Medicare Program

Medicare hospital payment, 13

rational and appropriate adoption and use, 5

Medicare:

beneficiaries, 3

beneficiary cost-sharing, 9, 108, 129

“Medigap,” 9

costs, 3, 4, 11, 45, 60

increase, 10

saving, 86

coverage, 74-83

coverage decisions, technologies for, 84-88

DRG hospital payment system, 82

expenditures, 3

interactions with health care system, 5

payment policies, 9, 27

physician payment, 15

policies, 3, 4

policies affecting medical technology, 23-39

benefits, 27, 28

development and diffusion of medical technologies,

23

discussion, 38

eligibility, 26

payment, 30

beneficiary cost-sharing, 36

hospital services, 30

physicians’ services, 32

reimbursement policy, 5

social and political climate, 5

spillover effects, 5

Medicare Economic Index, 34, 123

“Medigap,” 9, 165

Minnesota, 103

National Center for Health Care Technology, 56

National Institutes of Health (NIH), 5, 23, 57, 67

National Medical Care Expenditures Survey, 45, 117

New Jersey, 95, 103

New York, 95, 98

New York Academy of Medicine, S9

North Dakota, 101

nursing homes, 138

Office of Health Technology Assessment (OHTA), 79,

84, 85, 152

parenteral nutrition, total, 11, 58

payment:

hospital, 13, 30, 94, 95, 97, 98, 100-102, 156

physician, 15, 32, 34, 122, 164

Pennsylvania, 103

per capita prospective pay-merit, 100

pneumococcal vaccine, 11, 56

policy options, 17, 151

preferred provider organizations (PROS), 135, 141

primary care gatekeepers, 140

Professional Standards Review Organizations (PSROS),

119, 120, 168

Prospective Payment Assessment Commission (ProPAC),

14, 33, 83

Public Health Service (PHS), 59, 84-86

Rand National Health Insurance Study, 36, 56, 109

Rochester Area Hospitals’ Corp., 101, 102

SAFECO Insurance Co., 140

second surgical opinion, 121

Supplementary Medical Insurance program, 8, 27, 37, 60

U.S. death rate, decline in, 29

Washington, 103