Reduce Medicare's Payment Rates Across the Board in High-Spending Areas

In some parts of the country, Medicare's spending per beneficiary is unusually high, a circumstance that appears to be attributable, at least in part, to differences in local patterns and professional norms of medical practice, and not just to higher local prices for "inputs" (goods and services used in the production of services, such as professional labor, office space, and so forth) or to unusually sick populations. Researchers have questioned whether the additional services provided in such high-spending areas produce improvements in patients' health that are commensurate with their cost.

In parts of the country where per-beneficiary spending is unusually high, after accounting for differences in prices and beneficiaries' health status, this option would apply across-the-board reductions to Medicare payment rates for services covered under Parts A and B (the fee-forservice parts of the program). The first step in determining those reductions would be to define the geographic areas to be used for measuring and comparing spending per beneficiary; the size of such areas has a substantial effect on the amount of change in mandatory spending that the option would produce. For this option, each metropolitan statistical area (MSA) designated by the Office of Management and Budget would constitute an area. Then, in each state, all nonmetropolitan regions-- all parts of the state not included in an MSA--would constitute a single additional area.

Payment rates in the fee-for-service program would depend on each area's "relative spending"--defined as the spending per beneficiary in that area, adjusted to reflect the price of inputs and the health status of beneficiaries in that area, divided by the average spending per beneficiary nationwide. (Adjustments for health status would be based on Medicare's hierarchical condition categories, which are currently used to adjust payment rates for Medicare Advantage plans.) Fee-for-service payment rates under this option would be reduced in areas where relative spending exceeded 1.1--that is, where adjusted spending was at least 10 percent higher than the national average; reductions would equal one-half of the difference between the region's relative spending and the threshold of 1.1. For example, a region with relative spending of 1.2--that is, adjusted spending 20 percent above the national average--would have Medicare payment rates reduced by 5 percent, or 1.2 minus 1.1, divided by 2.

The reduction in payment rates in high-spending areas would be phased in over five years and capped at 20 percent. It would apply to all payments--including those to hospitals, physicians, and providers of post-acute care-- made on the basis of a fee schedule. Moreover, the reduction in fee-for-service payment rates would indirectly reduce Medicare's payments to private Medicare Advantage plans by reducing the benchmark payment rates for those plans. If implemented, this option would reduce Medicare spending by an estimated $12 billion over 5 years and by almost $48 billion over 10 years.

An argument in favor of this option is that it would bring about more equity among regions in Medicare's spending. The option also might encourage initiatives in high- spending areas to reduce the utilization of health care resources, especially services thought to have only marginal benefits for patients, and would encourage providers to deliver services more efficiently. Reductions in Medicare's Part B expenditures would also lower beneficiaries' premiums and out-of-pocket payments.

An argument against this option is that it would not target specific medical providers or specific types of services. In high-spending areas, all medical providers would face reductions in payment rates, regardless of whether their practice patterns contributed to the area's unusually high level of spending. Thus, payments for all services, regardless of a service's value to a patient, would be reduced. Medicare beneficiaries might face difficulties in obtaining certain medical services if providers became less willing to offer them. In addition, by reducing the revenue of providers, this option might limit their ability to deliver high-quality care.