SEPTEMBER 6-7, 2012
The Medicare Payment Advisory Commission’s (MedPAC) meeting on March 8th and 9th continued
work on their next Report to Congress and discussed proposed recommendations and future
directions for payment systems covered under Medicare. These recommendations inform
deliberations by the Centers for Medicare and Medicaid Services (CMS) and may also influence
congressional consideration of changes to the health reform law.
Context for Medicare Payment Policy
In making recommendations to Congress in its next March Report, the Commission is advised to
consider (1) the trends and factors behind health care spending growth, (2) the effects of spending
growth on beneficiaries, families, and federal and state budgets, and (3) variation in the quality and
supply of health care services. Although Medicare has recently experienced lower than anticipated
spending growth, it has steadily consumed a significantly larger share of GDP (17.9% in 2010) and
federal spending (13% in 2010). As the Commission drafts their Report to Congress over the
upcoming year, the main drivers behind the scope, substance, and tone of their recommendations
will include effects of the economic downturn on beneficiaries, changing demographic and health
trends, and consequences of other federal policies (i.e. expiring Medicare provisions,
sequestration, tax provisions). The Commissioners also noted that through its recommendations,
MedPAC should continue to drive transformational change, emphasize opportunities to increase
value, and provide practical avenues for improvement.
Geographic Adjustment of Payments for the Work of Physicians and Other Health
The Commission discussed the early findings of a congressionally mandated study on the necessity
of a geographic adjustment in the calculation of physician work payment under the Physician Fee
Schedule (PFS). Specifically, when determining Medicare payment, Physician Work Relative Value
Units (PE RVUs) are adjusted by the Geographic Practice Cost Index (GPCI), which adjusts for the
level of input prices in the area in which the physician practices. GPCIs have traditionally been
utilized to compensate providers for costs outside of their control, (i.e. high cost of living) and are
also intended to ensure sufficient beneficiary access to care in high-costs areas. Current legislation
extended use of a GPCI floor until December 31, 2012, which places a lower limit (1.00) on
payments to physicians in lower-cost areas can receive.
For information, visit, or contact
Marian Lowe, Partner, Strategic Health Care, at 202-266-2606 or at [email protected]
The mandated report will also consider arguments against a geographic adjustment, including that
it may undercut competition in the national labor market, that it promotes unequal payment for
equal levels of physician work, and that certain characteristics of rural practice with lower cost of
living actually require higher levels of pay to attract physicians. Policy options suggested by
MedPAC include eliminating the work GPCI entirely or retaining a ¼ work GPCI without the floor.
The Commission also debated whether to move away from the GPCI and towards a simpler and
more transparent cost of living adjustment for physician work.
Medicare Payment for Ambulance Services
MedPAC was also directed to report to the Congress on payment for ambulance services by June
15, 2013. The commission’s early discussion of the topic is intended to aide congressional
consideration of extension of several add-on policies that expire at the end of 2012. There are
three temporary payment policies covering ground rural and urban, ground super-rural, and air
grandfathered urban locations that will expire at the end of the year. These temporary policies
accounted for 7% of total ambulance payment (total spending is ~$6billion) in 2011. MedPAC staff
also noted the unusual growth patterns in both basic life support (BLS) and dialysis transports as
well as significant and unexplained variations in spending across states. The staff included
summaries of literature on both ambulance cost analyses and HHS OIG findings of fraud and abuse.
Finally, MedPAC staff offered policy options that could deal with the expiring temporary payment
policies, the increase in dialysis transports, and increase in BLS nonemergency transports. The
Commissioners did not appear to hold strong opinions on any policy options, although they did
appear significantly concerned that growth in the number of dialysis transports was inappropriate.
Approaches to Bundling Post-Acute Care Services
Overall, bundling post-acute care (PAC) would fit into MedPAC's broad payment reform future
outlook by improving payment and outcomes in the short-term while creating a foundation for
long-term reforms and designs, such as ACOs. MedPAC staff addressed three design considerations
for bundling PAC services: 1) making bundles out of PAC only or out of combined inpatient and
PAC; 2) including or excluding readmissions; and 3) counting a long or short time period for the
bundled services. For the first option, MedPAC staff argued that a combined hospital-PAC bundle
would increase the incentive to coordinate care, but could also allow the consideration of payment
to affect the decision to refer patients for PAC. For the second option, MedPAC staff believed that
including readmissions in the bundle would again set up stronger incentives for coordinated care,
but that the payment system would be terribly complex, since payment would need to be funneled
to multiple providers and planned or unrelated readmissions should not be cause for financial
penalty. For the third option, MedPAC staff noted that a shorter time period would cover services
more related to the initial hospital stay, but the longer time period would include the most PAC
services and would encourage more coordination of care.
The Commissioners presented varying opinions on the PAC issues presented by MedPAC staff.
Most Commissioners were in favor of the combined hospital-PAC bundle, but were mostly divided
on the inclusion of readmissions and the length of time to be counted. Some Commissioners
favored more inclusive bundles, while others favored more exclusive bundling, suggesting that
bundles should be clinically based. Several Commissioners even proposed completely different
policies, including paying for PAC on the basis of current data or creating different bundles at the
individual and organizational levels. Other Commissioners criticized the proposals, stating that the
For information, visit, or contact
Marian Lowe, Partner, Strategic Health Care, at 202-266-2606 or at [email protected]
proposal would not include physicians in the relevant decisions, or would punish hospitals for
treating sicker patients. Critical to this discussion will be whether the PAC bundling policies ‘go big’
in terms of a policy that would apply across all DRGs or are limited to a small range of DRGs such as
the common services that are both high volume and high cost like cardiac and joint replacement
Competitively-Determined Plan Contributions
MedPAC staff introduced competitively-determined plan contributions (CPCs), a new topic debated
by MedPAC. A CPC would include two parts used to buy Medicare coverage: competitively
determined Federal contributions and individual premiums that would vary based on plan choice
and the amount of Federal contribution. MedPAC staff described how Medicare Part D is an
example of a CPC approach, where the coverage consists of a direct subsidy and a base premium.
MedPAC staff then discussed CPC design issues, including whether to use a standardized benefit,
and how to determine the Federal contribution amount. Finally, MedPAC staff covered several
tangential issues, such as the role of FFS Medicare in CPCs, and how to deal with low-income
beneficiaries. Since the topic was new to MedPAC, the Chairman asked the Commissioners to keep
their comments brief. However, the Commissioners seemed a bit skeptical about CPCs, worrying
about rebates, lack of mobility between plans, interactions with current plans, and evidence from
Part D that shows patients might not take advantage of a range of choices.
Improving Medicare's Payment System for Outpatient Therapy Services
An exception policy allowing payments to outpatient therapy providers to rise above the
congressionally mandated caps will expire at the end of 2012, and MedPAC is required to provide
recommendations to the Congress on alternative policy options. Commissionsers and staff shared
concerns about growth in spending without a cap in place, but also registered concerns that the
current exception process is too automatic and involves almost no review by CMS contractors.
MedPAC staff suggested several possible policy directions to improve the payment system. The
first policy option would improve management of the therapy benefits in the short term by using
new Secretarial powers to review possible fraud in high-use geographic areas, reducing the
certification period from 90 to 45 days, and eliminating certain ICD-9 codes. The second policy
option would collect information on functional status of patients over the long term using a
standardized instrument, in order to report therapy needs to CMS and to move towards a bundled
payment system. The third policy option would completely reform the payment system over the
long term by designing an episode-based system or adopting a private sector approach (prior
authorizations). The Commissioners appeared to be interested in preventing fraud, but did not
seem as interested in completely revamping the entire payment system. One Commissioner
seemed to speak for the room when she said that setting up a standardized instrument for data
collection in the short room would be a good start, and perhaps the episodic payment system could
come later.
Refining the Hospital Readmissions Reduction Program
MedPAC staff reviewed the PPACA hospital readmission reduction program that will take effect on
October 3rd, using three specific conditions (AMI, heart failure, pneumonia) for now and adding at
least four more conditions in 2015. Conditions with above average readmission rates based on
Hospital Compare data for the specific conditions would receive a penalty applied to base
operating payments and capped at 1% for 2013. The total penalties would sum to about 0.24% of
For information, visit, or contact
Marian Lowe, Partner, Strategic Health Care, at 202-266-2606 or at [email protected]
total inpatient payments in 2013, and 33% of hospitals would not be eligible to be penalized.
MedPAC staff discussed several long term problems with the program that include calculation of
the penalty amount, random variation, unrelated or planned readmissions, and socioeconomic
status (SES) factors. The calculation of the penalty sets up counterintuitive incentives because the
penalty increases as national readmission rates decrease. MedPAC proposed solutions that include
using a fixed multiplier or switching to all-condition readmissions. Random variation can have a
large affect on hospitals with a small number of cases. To increase the sample size, MedPAC
proposed solutions that include switching to all-condition readmissions, using more years of data,
or aggregating performance of hospitals in a larger system. Unrelated or planned readmissions can
cause the readmission rates to rise because the current system does not allow for many
exceptions. MedPAC staff proposed a switch to one of two other all-condition measures that
would allow exceptions for unrelated and planned readmissions. Hospitals that serve patients with
certain SES factors, such as low incomes, have higher than national average readmissions and could
be punished for circumstances outside of their control. MedPAC proposed solutions that include
adding SES factors to risk adjustment models, comparing similar hospitals when calculating the
penalty, and providing more financial assistance to hospitals with high low-income shares of
Overall, the Commissioners supported the cause of reducing readmissions and were particularly
concerned with the interaction between readmission and SES factors. However, most
Commissioners seemed hesitant to commit to any of the staff's proposals, perhaps because
adjusting the program would involve changing law, rather than regulation. Some Commissioners
pointed to the fact that readmissions are currently in a decreasing trend and adopted an "if it's not
broke, don't fix it" approach. Other Commissioners described further problems they envisioned
with the entire program, such as the difficult and often opposite relationships between general
admissions, readmissions, and mortality. Some Commissioners requested more data, while a small
group of Commissioners suggested that the program should not be changed too hastily.
Commission deliberations on the readmission program reforms will continue at subsequent
The next MedPAC meeting is scheduled for October 4-5.
For information, visit, or contact
Marian Lowe, Partner, Strategic Health Care, at 202-266-2606 or at [email protected]

090612 MedPAC Meetings summary