Proposed physician- hospital DRG rankles AMA

Seven-hospital project saved HCFA $40 million

In past "bundled payment" projects, physicians found themselves the key agents for imposing hospital cost efficiencies — not a position to be cherished. Now, it appears the federal government will expand physician involvement in these strategies in the future, despite physician protests.

Doctors have held the line on containing their costs, so why should they bear the cost-cutting burden for hospitals, which have proved less capable of reducing inpatient cost growth?

That’s the argument AMA physicians are vehemently pushing with HCFA, which recently proposed a demonstration project that will tie physician payments to hospital DRG payments — paying physicians on a per-case or per-DRG basis.

The more effective place to cut expenditures would be in the skyrocketing growth rate of hospital outpatient services, some experts argue, where federal efforts to regulate payments remain at a standstill year after year. (See chart below.)

HCFA officials say the so-called "PHO of Excellence" project is designed to encourage physician-hospital partnerships in managing acute care costs and financial risks for Medicare patients. Skeptical physicians argue it is designed to cut costs, and to make physicians the primary agents of cost reductions. Despite physician protests, however, the fact that HCFA documented $40 million in a similar four-year demonstration project for coronary artery bypass graft (CABG) surgery last year makes it unlikely they’ll back off expanding the model to many other acute care treatments, experts say.

Under the proposed demonstration project, a single payment will be made for a DRG representing the physician/hospital partnership, and it would cover all costs incurred during a hospital stay. It is modeled after the famed CABG demonstration projects achieved through physician- hospital partnerships and bundled payment agreements. This "center of excellence" concept now is expected to spread across many more DRGs. A likely place for the new initiative to start would be the more prevalent DRGs, if not all DRGs.

According to HCFA’s most recent statistics, the following are the top five most common DRGs:

• 127 — heart failure and shock;

• 89 — simple pneumonia and pleurisy, age greater than 17 and with complications and/or comorbidities;

• 14 — specific cerebrovascular disorders except transient ischemic attack;

• 88 — chronic obstructive pulmonary disease;

• 209 — major joint and limb reattachment of the lower extremity. (See chart above for volume comparisons.)

Here’s how HCFA officials describe the prospects of a broader DRG-MD payment initiative in a prepared press statement: "Combining both the Part A and Part B payments recognizes physicians as the responsible party for directing patient care, as well as the potentially and substantially larger impact that physicians’ behavior can have on hospital costs relative to their own."

This will put physicians in an extremely tough position, warns Mark Segal, AMA’s director of regulatory affairs. The AMA opposes the project for three key reasons:

Looming Medicare pay cuts. Congress is aiming toward significant Medicare payment reductions, Segal points out. Even though the bulk of those reductions are targeted toward hospitals, "We would question why physicians would want to align themselves with the hospital in the face of these large anticipated cuts when physicians have been able to hold their own expenditure growth at 5% to 6%, a rate lower than hospitals," wrote AMA Executive Vice President A. John Seward, in a recent letter to HCFA.

Undue internal political pressure upon physicians from hospital officials. The project’s financial incentives — basically aimed at getting hospitals to lower costs — place the burden on physicians to drive those cost-cutting measures. That requirement, however, can put physicians in an uncomfortable position in the hospitals where they have to win admitting privileges. "Physicians feel vulnerable to the power and influence of the hospital because it is the hospital that can offer and remove physician privileges," Seward wrote.

Escalating outpatient expenditures that need to be regulated. Here are some key figures on how physicians and hospitals compare in their cost-cutting achievements:

— In 1994, hospital expenditures reached $341.7 billion, or 41% of all personal health care expenditures, a decline from the 46.7% peak in 1980. In 1960, hospital expenditures were 38.9%; in 1980, expenditures topped out at 46.7%. In response, prospective payment came along in the 1980s and managed care pressures heated up in the 1990s, bringing hospitals’ claims on the dollar down to 41%.

— From 1990 to 1994, physician payments experienced the slowest rate of growth since the 1960s. Physicians’ share of the total health care dollar dropped from 22.9% in 1990 to 21.9% in 1994. In 1960, physicians claimed 22.2% of the health care dollar, but in 1980 this figure dropped to 20.5%.

Physicians experienced an increase with the prospective payment system as services tended to be shifted to the physician setting. By 1990, physicians were peaking at 22.9%. After that growth spurt, however, physicians experienced more payment declines through the resource-based relative value scale and managed care pressures. By 1994 physicians reached their slowest growth rate ever, claiming 21.9%.

If you isolate the Medicare economy, you get a more precise picture:

— All hospital Medicare inpatient expenditures were $148.5 billion in 1994. But a key factor lies in the outpatient piece. All hospital outpatient Medicare payments mounted to $2.7 billion in 1994 — a whopping 26.4% annual growth rate. Total hospital outpatient payments reached $3.6 billion.

— All physician payments for Medicare were $39 billion — an average annual growth rate of 13.9% from 1970-1994.

Overall, it is the growth rate that concerns health economists the most. Here’s how HCFA’s summary of these trends describes the urgency of outpatient costs: "The rate of increase in Medicare hospital outpatient payments has grown substantially more rapidly than that for total Medicare payments," says the 1996 Health Care Financing Review: 1996 Statistical Supplement.

The 37-fold increase for outpatient services far outpaces the 10-fold increase in total Medicare hospital payments since 1974, and the 13-fold increase in total Medicare payments, the report states.

Also, these hospital outpatient numbers do not reflect physician payments. Payments for hospital outpatient services do not include the fees for physicians’ professional services, but they do include salaries of medical and ancillary staff employed in the hospital outpatient department.

Given the continued growth trend of outpatient care, the best place to cut health care expenditures might be to regulate hospital-based outpatient care, suggests Seward. That’s been on the drawing board for years in the form of ambulatory patient groups (APGs), but each year Congress passes by APGs to focus on other matters, such as more tightly regulating physician payments and encouraging capitation among providers and insurers.