Medicare Spending: Preliminary Findings Regarding an Approach Focusing on Physician Practice Patterns to Foster Program Efficiency
Published: 2007-03-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicare's current system of spending targets used to moderate spending growth for physician services and annually update physician fees is problematic. This spending target system--called the sustainable growth rate (SGR) system--adjusts physician fees based on the extent to which actual spending aligns with specified targets. In recent years, because spending has exceeded the targets, the system has called for fee cuts. Since 2003, the cuts have been averted through administrative or legislative action, thus postponing the budgetary consequences of excess spending. Under these circumstances, policymakers are seeking reforms that can help moderate spending growth while ensuring that beneficiaries have appropriate access to care. For today's hearing, the Subcommittee on Health, House Committee on Energy and Commerce, which is exploring options for improving how Medicare pays physicians, asked GAO to share the preliminary results of its ongoing study related to this topic. GAO's statement addresses (1) approaches taken by other health care purchasers to address physicians' inefficient practice patterns, (2) GAO's efforts to estimate the prevalence of inefficient physicians in Medicare, and (3) the methodological tools available to identify inefficient practice patterns programwide. GAO ensured the reliability of the claims data used in this report by performing appropriate electronic data checks and by interviewing agency officials who were knowledgeable about the data.
section_title: What GAO Found
paragraphs: Consistent with the premise that physicians play a central role in the generation of health care expenditures, some health care purchasers examine the practice patterns of physicians in their network to promote efficiency. GAO selected 10 health care purchasers for review because they assess physicians' performance against an efficiency standard. To measure efficiency, the purchasers we spoke with generally compared actual spending for physicians' patients to the expected spending for those same patients, given their clinical and demographic characteristics. Most purchasers said they also evaluated physicians on quality. The purchasers linked their efficiency analysis results and other measures to a range of strategies--from steering patients toward the most efficient providers to excluding a physician from the purchaser's provider network because of poor performance. Some of the purchasers said these efforts produced savings. Having considered the efforts of other health care purchasers in evaluating physicians for efficiency, GAO conducted its own analysis of physician practices in Medicare. GAO used the term efficiency to mean providing and ordering a level of services that is sufficient to meet patients' health care needs but not excessive, given a patient's health status. GAO focused the analysis on generalists--physicians who described their specialty as general practice, internal medicine, or family practice--and selected metropolitan areas that were diverse geographically and in terms of Medicare spending per beneficiary. GAO found that individual physicians who were likely to practice medicine inefficiently were present in each of 12 metropolitan areas studied. The Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare, also has the tools to identify physicians who are likely to practice medicine inefficiently. Specifically, CMS has at its disposal comprehensive medical claims information, sufficient numbers of physicians in most areas to construct adequate sample sizes, and methods to adjust for differences in beneficiary health status. A primary virtue of examining physician practices for efficiency is that the information can be coupled with incentives that operate at the individual physician level, in contrast with the SGR system, which operates at the aggregate physician level. Efforts to improve physician efficiency would not, by themselves, be sufficient to correct Medicare's long-term fiscal imbalance, but such efforts could be an important part of a package of reforms aimed at future program sustainability.

section_title: Letter
paragraphs: I am pleased to be here today as you discuss options for improving how  Medicare pays physicians. Your task is not simple, as you seek reforms  that can help moderate spending growth while ensuring that beneficiaries  have appropriate access to high-quality physician services and physicians  receive fair compensation for providing those services. Medicare’s current  system of spending targets used to moderate spending growth and  annually update physician fees is problematic.
This spending target system—called the sustainable growth rate (SGR)  system—adjusts Medicare’s physician fees based on the extent to which  actual spending aligns with specified targets. If the growth in the number  of services provided per beneficiary—referred to as volume—and in the  average complexity and costliness of services—referred to as intensity—is  high enough, spending will exceed the SGR target. From 1999—the first  year that the SGR system was used to update physician fees—through  2001, physicians received fee increases annually. Since 2002, actual  Medicare spending on physician services has exceeded SGR targets, and  the SGR systems has called for fee cuts to offset the excess spending. In  2002 the SGR system reduced physician fees by nearly 5 percent. Fee  declines in subsequent years were averted only by administrative and  legislative actions that modified or temporarily overrode the SGR system.  In the absence of additional administrative or legislative action, the SGR  system will likely reduce fees by about 5 percent a year for the next  several years.
The potential for a sustained period of declining fees has raised  policymakers’ concerns about the appropriateness of the SGR system for  updating physician fees and about physicians’ continued participation in  the Medicare program. A particular concern is that the SGR system acts as  a blunt instrument in that all physicians are subject to the consequences of  excess spending—namely, downward fee adjustments—that may stem  from the excessive use of resources by only some physicians. However, as  we have discussed in our prior work, the SGR system serves an important  role in alerting policymakers to the need for fiscal discipline. Specifically,  fee cuts under the SGR system signal to physicians collectively and to the  Congress that spending due to volume and intensity has increased more  than allowed.
Some of the higher volume and intensity that drives spending growth may  not be medically necessary. In fact, the wide geographic variation in  Medicare spending per beneficiary—unrelated to beneficiary health status  or outcomes—provides evidence that health needs alone do not determine  spending. Medicare physician payment policy does little to change this  situation; payments under the Medicare program are not designed to foster  individual physician responsibility for the most effective medical  practices. In contrast, some public and private health care purchasers have  initiated programs to identify efficient physicians and encourage patients  to obtain care from these physicians.
With these circumstances in mind, and in fulfillment of a 2003 mandate to  examine aspects of physician compensation in Medicare, we conducted a  study focusing on efficiency with respect to physician practices. In our  study, we use the term efficiency to mean providing and ordering a level of  services that is sufficient to meet a patient’s health care needs but not  excessive, given a patient’s health status. My remarks today will address  (1) physician-focused approaches taken by other health care purchasers to  address inefficient medical practices, (2) our efforts to estimate the  prevalence of inefficient physicians in Medicare, and (3) the  methodological tools available to the Centers for Medicare & Medicaid  Services (CMS) to identify inefficient physician practice patterns  programwide. My remarks today are based on our study’s preliminary  findings.
In conducting our study, we interviewed representatives of 10 health care  purchasers, including 5 commercial health plans, 1 provider network, 1  trust fund jointly managed by employers and a union, and 3 government  agencies—2 in U.S. states and 1 in a Canadian province. We selected these  purchasers because their programs that examine physician practices  explicitly assess efficiency—unlike many such programs that assess  quality only. We also estimated the prevalence in Medicare of physicians  likely to practice inefficiently. To do this work, we examined 2003  Medicare claims data from 12 metropolitan areas. We ensured the  reliability of the claims data used in this report by performing appropriate  electronic data checks and by interviewing officials at CMS who were  knowledgeable about the data. In addition, we discussed the facts  contained in this statement with CMS officials. The study on which these  remarks are based has been conducted beginning September 2005 in  accordance with generally accepted government auditing standards.
In summary, the health care purchasers we studied examined the practice  patterns of physicians in their networks and used the results to promote  efficiency. They adopted a range of incentives—from steering patients  toward the most efficient providers to excluding a physician from the  network—to encourage physicians to provide care efficiently; some  reported savings as a result of these efforts. Using our own methodology  to analyze the practice patterns of physicians in Medicare, we found that  physicians who were likely to be practicing medicine inefficiently were  present in all 12 of the metropolitan areas studied. CMS also has the tools  to identify physicians in Medicare who are likely to practice medicine  inefficiently, including comprehensive claims information, sufficient  numbers of physicians in most areas to construct adequate sample sizes,  and methods to adjust for differences in beneficiary health status.
subsections: section_title: Some Health Care Purchasers Use Physician Profiling Results to Encourage Efficient Medical Practice
paragraphs: Consistent with the premise that physicians play a central role in the  generation of most health care expenditures, some health care purchasers  employ physician profiling to promote efficiency. We selected 10 health  care purchasers that profiled physicians in their networks—that is,  compared physicians’ performance to an efficiency standard to identify  those who practiced inefficiently. To measure efficiency, the purchasers  we spoke with generally compared actual spending for physicians’ patients  to the expected spending for those same patients, given their clinical and  demographic characteristics. Most purchasers said they also evaluated  physicians on quality. The purchasers linked their efficiency profiling  results and other measures to a range of physician-focused strategies to  encourage the efficient provision of care. Some of the purchasers said  their profiling efforts produced savings.
subsections: section_title: Health Care Purchasers Profiled Physicians across Several Dimensions to Evaluate Physician Performance
paragraphs: The 10 health care purchasers we examined used two basic profiling  approaches to identify physicians whose medical practices were  inefficient. One approach focused on the costs associated with treating a  specific episode of illness—such as a stroke or heart attack. The other  approach focused on costs, within a specific period, associated with the  patients in a physician’s practice. Both approaches used information from  medical claims data to measure resource use and account for differences  in patients’ health status. In addition, both approaches assessed physicians  (or physician groups) based on the costs associated with services that they  may not have provided directly, such as costs associated with a  hospitalization or services provided by a different physician.
Although the methods used by purchasers to predict patient spending  varied, all used patient demographics and diagnoses. The methods they  used generally computed efficiency measures as the ratio of actual to  expected spending for patients of similar health status. In addition, all of  the purchasers we interviewed profiled specialists and all but one also  profiled primary care physicians. Several purchasers said they would only  profile physicians who treated an adequate number of cases, since such  analyses typically require a minimum sample size to be valid.
section_title: Health Care Purchasers Linked Physician Profiling Results to a Range of Incentives Encouraging Efficiency
paragraphs: The health care purchasers we examined directly tied the results of their  profiling methods to incentives that encourage physicians in their  networks to practice efficiently. The incentives varied widely in design,  application, and severity of consequences. Purchasers used incentives that  included    educating physicians to encourage more efficient care,    designating in their physician directories those physicians who met  efficiency and quality standards,   dividing physicians into tiers based on efficiency and giving enrollees  financial incentives to see physicians in particular tiers,   providing bonuses or imposing penalties based on efficiency and quality    excluding inefficient physicians from the network.
section_title: Physician Profiling Has Potential for Savings
paragraphs: Evidence from our interviews with the health care purchasers suggests  that physician profiling programs may have the potential to generate  savings for health care purchasers. Three of the 10 purchasers reported  that the profiling programs produced savings and provided us with  estimates of savings attributable to their physician-focused efficiency  efforts. For example, 1 of those purchasers reported that growth in  spending fell from 12 percent to about 1 percent in the first year after it  restructured its network as part of its efficiency program, and an actuarial  firm hired by the purchaser estimated that about three quarters of the  reduction in expenditure growth was most likely a result of the efficiency  program. Three other purchasers suggested their programs might have  achieved savings but did not provide savings estimates, while four said  they had not attempted to measure savings at the time of our interviews.
section_title: Through Profiling, We Found That Physicians Likely to Practice Inefficiently in Medicare Were Present in All Selected Areas
paragraphs: Having considered the efforts of other health care purchasers in profiling  physicians for efficiency, we conducted our own profiling analysis of  physician practices in Medicare and found individual physicians who were  likely to practice medicine inefficiently in each of 12 metropolitan areas  studied. We focused our analysis on generalists—physicians who  described their specialty as general practice, internal medicine, or family  practice. We did not include specialists in our analysis. We selected areas  that were diverse geographically and in terms of Medicare spending per  beneficiary.
Under our methodology, we computed the percentage of overly expensive  patients in each physician’s Medicare practice. To identify overly  expensive patients, we grouped the Medicare beneficiaries in the   12 locations according to their health status, using diagnosis and  demographic information. Patients whose total Medicare expenditures— for services provided by all health providers, not just physicians—far  exceeded those of other patients in their same health status grouping were  classified as overly expensive. Once these patients were identified and  linked to the physicians who treated them, we were able to determine  which physicians treated a disproportionate share of these patients  compared with their generalist peers in the same location. We classified  these physicians as outliers—that is, physicians whose proportions of  overly expensive patients would occur by chance less than 1 time in 100.  We concluded that these outlier physicians were likely to be practicing  medicine inefficiently.
Based on 2003 Medicare claims data, our analysis found outlier generalist  physicians in all 12 metropolitan areas we studied. In two of the areas,  outlier generalists accounted for more than 10 percent of the area’s  generalist physician population. In the remaining areas, the proportion of  outlier generalists ranged from 2 percent to about 6 percent of the area’s  generalist population.
section_title: CMS Has Tools Available to Profile Physicians for Efficiency
paragraphs: Medicare’s data-rich environment is conducive to identifying physicians  who are likely to practice medicine inefficiently. Fundamental to this  effort is the ability to make statistical comparisons that enable health care  purchasers to identify physicians practicing outside of established  standards. CMS has the tools to make statistically valid comparisons,  including comprehensive medical claims information, sufficient numbers  of physicians in most areas to construct adequate sample sizes, and  methods to adjust for differences in patient health status.
Among the resources available to CMS are the following:    Comprehensive source of medical claims information. CMS maintains a  centralized repository, or database, of all Medicare claims that provides a  comprehensive source of information on patients’ Medicare-covered  medical encounters. Using claims from the central database, each of which  includes the beneficiary’s unique identification number, CMS can identify  and link patients to the various types of services they received and to the  physicians who treated them.
Data samples large enough to ensure meaningful comparisons across  physicians. The feasibility of using efficiency measures to compare  physicians’ performance depends, in part, on two factors: the availability  of enough data on each physician to compute an efficiency measure and  numbers of physicians large enough to provide meaningful comparisons.  In 2005, Medicare’s 33.6 million fee-for-service enrollees were served by  about 618,800 physicians. These figures suggest that CMS has enough  clinical and expenditure data to compute efficiency measures for most  physicians billing Medicare.
Methods to account for differences in patient health status. Because  sicker patients are expected to use more health care resources than  healthier patients, the health status of patients must be taken into account  to make meaningful comparisons among physicians. Medicare has  significant experience with risk adjustment. Specifically, CMS has used  increasingly sophisticated risk adjustment methodologies over the past  decade to set payment rates for beneficiaries enrolled in managed care  plans.
To conduct profiling analyses, CMS would likely make methodological  decisions similar to those made by the health care purchasers we  interviewed. For example, the health care purchasers we spoke with made  choices about whether to profile individual physicians or group practices;  which risk adjustment tool was best suited for a purchaser’s physician and  enrollee population; whether to measure costs associated with episodes of  care or the costs, within a specific time period, associated with the  patients in a physician’s practice; and what criteria to use to identify  inefficient practice patterns.
section_title: Concluding Observations
paragraphs: Our experience in examining what health care purchasers other than  Medicare are doing to improve physician efficiency and in analyzing  Medicare claims has enabled us to gain some insights into the potential of  physician profiling to improve Medicare program efficiency. A primary  virtue of profiling is that, coupled with incentives to encourage efficiency,  it can create a system that operates at the individual physician level. In this  way, profiling can address a principal criticism of the SGR system, which  only operates at the aggregate physician level. Although savings from  physician profiling alone would clearly not be sufficient to correct  Medicare’s long-term fiscal imbalance, it could be an important part of a  package of reforms aimed at future program sustainability.
Mr. Chairman, this concludes my prepared remarks. I will be pleased to  answer any questions you or the subcommittee members may have.
section_title: GAO Contacts and Acknowledgments
paragraphs: For future contacts regarding this testimony, please contact   A. Bruce Steinwald at (202) 512-7101 or at steinwalda@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. Other individuals who made  key contributions include James Cosgrove and Phyllis Thorburn, Assistant  Directors; Todd Anderson; Alex Dworkowitz; Hannah Fein;   Gregory Giusto; Richard Lipinski; and Eric Wedum.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.