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Financial Incentives, Health Care Delivery, and the Crucial Role of Academic Medicine

Sklar, David P. MD

doi: 10.1097/ACM.0b013e31828168c6
From the Editor

Editor’s note: The opinions expressed in this editorial do not necessarily reflect the opinions of the AAMC or of its members.

When I became a physician, one aspect of medical practice I resisted was learning about the financing and payment system for health care. I wanted my relationships with patients to be free of financial incentives that might affect my judgment, and I assumed that through my ignorance of the system I could protect myself and my patients from undue financial influences. I had heard stories of doctors who had gone to small towns and become the wealthiest persons there through the success of their medical practices, and although I felt that physicians should be rewarded for hard work and dedication, I also worried about disproportionate wealth made possible by others’ misfortunes.

Fast forward 40 years. After I had been practicing and teaching at an academic health center for more than 30 years, in 2011 and 2012 I had the opportunity to participate in the Robert Wood Johnson Health Policy Fellowship. This is a program for midcareer physicians that provides an extensive orientation to health policy principles followed by almost a year of service in a major Senate, House, or Executive Branch committee or office involved in health policy. As I considered what a year in Washington, DC, might mean for me, I realized that to fully understand the forces driving health system reform, I would have to immerse myself in the financial underpinnings of the health care system.

This decision led me to the Senate Finance Committee, which has jurisdiction over Medicare, Medicaid, the Affordable Care Act, and other areas in health care associated with expenditures of federal funds. I arrived in the midst of discussions about the sustainable growth rate (SGR) formula and its mandated cuts to physician payments in Medicare, scheduled to be a 27% reduction. A long parade of physician specialty groups demanded that the SGR-mandated cuts be overridden by Congress, as had been done numerous times before. But this time the SGR issue coincided with discussions about the burgeoning U.S. debt level and the impact of future Medicare and Medicaid spending on future budgets. The SGR options became tied into the larger budgetary questions.

I quickly learned that health care financing is intimately connected to the overall success of the U.S. economy, and I realized that physicians in particular have a responsibility to become knowledgeable about health care financing and how the payment system for physicians and other providers has contributed to our current financial problems. I came to believe it is critically important that academic physicians have an understanding of the financing of health care so that they can provide leadership in policy discussions, create innovative payment and delivery models that improve health care, and teach students about the financing system so that future physicians can be competent stewards of our health care financing resources. Below, I share three key points that I believe are relevant to our current health system financing crisis.

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The Effect of the SGR

The current crisis in physician payment in fee-for-service Medicare is based on the SGR, a system to control physician spending in Medicare, implemented in 1997. The basic principle of the system is that physician spending in Medicare should be targeted to the previous year’s spending plus a small increment based on the increasing number of beneficiaries, increases in practice costs, changes in laws and regulations, and growth in the economy. If spending exceeded the target, the next year’s physician payment would be decreased. The idea was to counteract incentives for increased volumes of services in the fee-for-service system by using decreased payments to penalize physicians if they increased services beyond what was felt to be a sustainable rate. Physician payment is based on the product of the relative value for each procedure or service a physician performs and a conversion factor, which is an amount of money that can be adjusted up or down. If physician spending exceeded the target, the conversion factor would typically be adjusted down so that a physician would get less money for the same procedure regardless of the effort and cost involved in the procedure.

The SGR affects physician payment through determining the target and ultimately the conversion factor. Over the past 10 years, physician spending has exceeded the target, resulting in mandated reductions in the fee schedule. Congress has overridden the decreases each year but has not changed the formula or done anything about the cumulative deficits that now would require almost $300 billion to meet budgetary baseline expectations over the next 10 years. The accumulated deficits have created a requirement for reductions in physician payment that have led to the annual SGR crisis. Although legislators in both parties agree that the current SGR mechanism should be changed, they cannot agree on what to do about the accumulated debt or how to control future spending.

The Medicare Payment Advisory Commission (MedPac) identified several problems with the current SGR mechanism in a report to Congress on alternatives to the SGR.1 In that report, the authors said that

an expenditure target, however designed, cannot substitute for improvements to Medicare’s payment system; at best it may be a useful complement…. An expenditure target first alerts policy makers that spending is rising more rapidly than anticipated and makes it more difficult to increase payment rates.

MedPac further noted that if expenditure targets were to be retained, they should apply to all providers and total spending in the system and not just physicians. They also suggested that targets could be made regional, or could be broken down by specialty or through physician and hospital groups, as in the accountable care organization models.1

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The Impact of Fee for Service

The control mechanism for spending in the current system assumes the continued use of the fee-for-service payment systems. Fee for service is a wonderful system to encourage productivity, but it provides payments only when defined services occur, such as procedures, imaging, or office visits. There are no payments if a doctor’s advice helps to keep a patient healthy and out of the hospital. The current control system (the SGR) attempts to penalize growth in services by reducing payment for each service to a lower amount. However, if payment for services is reduced, physicians can compensate to some extent by producing more services, particularly if improvements in the technology allow for greater efficiency. Emmanuel et al,2 in their recommendations of how to contain future health care spending, identified movement from fee for service to alternative payment systems as a key solution. They suggested that within 10 years, 75% of payments in Medicare and Medicaid should be based on alternatives to fee for service such as bundling and global payments.

An underlying assumption of fee for service is that patients seek out services on the basis of their needs and desires and that physicians compete to provide the services on the basis of effectiveness and cost. However, patients often lack the information to compare the cost and effectiveness of providers, to make informed choices. In their recommendations, Emmanuel et al2 identified lack of transparency as a major impediment to health system reform. In addition to lack of information for patients, there is also no incentive within the fee-for-service system to manage patients’ problems to avoid procedures and expenses. There is no penalty for overtesting or overtreatment, but there are significant risks in the liability system for undertreatment or undertesting.

All of these factors have led to a recognition that fee-for-service payment systems should be transitioned to other payment systems that will reduce incentives for increasing the volume of services. This is particularly important for those patients with multiple chronic illnesses, who consume a far greater portion of health care resources than do others in the system. Such patients currently move between numerous specialists in a fragmented, uncoordinated way that increases costs without providing high-quality care. Alternative systems of payment have in common the goal of reducing costs through a prospective payment for care. Bundled payments identify procedures for aggregating prospective payments, and global payments identify populations for avoidance of hospitalization and other expensive services.

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Should Delivery Systems Be Aligned With New Payment Systems?

More than once, I have heard the suggestion that payment system reform should be linked to delivery system reform. Sometimes these terms are used interchangeably, but they are different. Payment system reform refers to the way in which fees are negotiated and paid between insurance companies or the government and providers of health services. Delivery system reform refers to how health services are organized and made available to patients. Delivery system reform includes such concepts as use of the Internet or telemedicine to provide advice and treatment to patients rather than requiring an office visit. Delivery system reform also includes identification of certain patients who are at an increased risk for an illness and the need to intervene to prevent the illness. The use of the patient-centered medical home has been one example of a delivery system reform intended to improve chronic care management and reduce hospitalization. The payment system for this delivery system reform is currently evolving and includes fee for service, capitated payments, and bonus payments.3

Part of this evolution includes the idea that the elimination of the SGR formula to control Medicare spending, the movement away from fee-for-services payment, and the linking of alternative payment systems to innovative care delivery are critical steps in reforming our current health care system. Transparency of costs will aid in this transition. As Congress addresses our current fiscal crisis, elimination of the SGR will require assurances that future spending in governmental programs can be slowed and controlled. Whether another target mechanism like the SGR is adopted or whether a global budget mechanism will be used with implementation by insurance companies will depend on political decisions. Some combination of growth of Medicare Advantage programs and movement from fee-for-service Medicare toward alternative payment systems may be the most palatable solution. Either way, costs will have to be controlled, and many experts I have spoken to think that this will be best accomplished through payment and delivery system reform.

As our health care system evolves away from fee for service to other payment systems and incorporates new delivery systems, it will be critical to make sure that the quality of care provided is not adversely affected or that costs do not increase. All of this change will require the involvement and expertise of our academic medical community, particularly our health services researchers. In addition, the changes brought on by payment system reform and delivery system reform will have a profound impact on the education of our next generation of health care providers. Who are better qualified than academic physicians to create the vision of our nation’s future health care delivery system, the payment system that will support it, and the roles of our future clinicians, researchers, and educators?

David P. Sklar, MD

Editor’s note: The opinions expressed in this editorial do not necessarily reflect the opinions of the AAMC or of its members.

1. Medicare Payment Advisory Commission. Report to the Congress: Assessing Alternatives to the Sustainable Growth Rate System. March2007. Washington, DC Medicare Payment Advisory Commission Accessed November 20, 2012
2. Emmanuel E, Tanden N, Altman S, et al. A systematic approach to containing health care spending. N Engl J Med. 2012;367:949–954
3. Bitton A, Martin C, Landon B. A nationwide survey of patient centered medical home demonstration projects. J Gen Intern Med. 2010;25:584–592
© 2013 by the Association of American Medical Colleges