Rethinking the Value of Medical Services

by Brian Klepper and David Kibbe

One of American politics’ most disingenuous conceits is that health care must cost what we currently pay. Another is that the only way to make it cost less is to deny care. It has been in industry executives’ financial interests to perpetuate these myths, but most will acknowledge privately that the way we value and pay for medical services is a deep root of America’s health care cost explosion.

When the Resource-Based Relative Value Scale (RBRVS) became the framework for Medicare payment nearly twenty years ago, it equated a medical service’s “value” with four categories of physician work inputs: time, mental effort and judgment, technical skill and physical effort, and psychological stress. The assessment process, handled from the outset by the American Medical Association’s (AMA) secretive, specialist-dominated Relative Value Scale Update Committee (RUC), delineates and quantifies a service’s inputs in terms of its Relative Value Units (RVUs) which, with a monetary multiplier, define its worth.

In 1989, RBRVS’ lead architect, William Hsaio, confidently suggested that the process would be rational and reliable:

We found that physicians can rate the relative amount of work of the services within their specialty directly, taking into account all the dimensions of work. Moreover, these ratings are highly reproducible, consistent, and therefore probably valid.

But Dr. Hsaio did not anticipate that special interests would capture the process and manipulate it to financial advantage. Twenty years after RBRVS was adopted, “mental effort and judgment” has been hijacked to favor specialist physicians and hospitals, primary care has been stifled, and the relative value system has become a study in caprice and distortion.

Getting Values Wrong

The resulting inconsistencies in how we value services are breathtaking. For an unexceptional example, compare the reimbursements for a moderately complex primary care office visit for an established patient (CPT 99214) with an ophthalmologist’s 10-15 minute cataract extraction with implantation of an intra-ocular lens.

A primary care office visit can be classified as a 99214 if it requires 25 minutes of face time and has two of three components: a detailed history, a detailed examination or medical decision-making of moderate complexity.

Keep in mind that, in primary care, new signs and symptoms must be weighed against the whole of medicine. Is a persistent cough a bronchial infection, tuberculosis, lung cancer or something else? The variation across patients is staggering as well. Primary care doctors typically see conditions ranging from sprains and hernias to infectious diseases and vascular ailments, and must be a specialist in dealing with this complexity. In 2011, Medicare pays $111.36 for a 99214.

By contrast, specialist physicians in many disciplines face less patient variation, at least compared to primary care doctors’ experience, but their work may have more “wow.” Cataract removal, a 50 year old procedure that has been highly refined and automated, immediately improves sight, a dramatic impact. Many ophthalmologists operate “focused factories,” processing an assembly line of 20 or more cataract patients. With pre-screened patients and a controlled clinical environment, the risks are relatively predictable, the mental demands limited and the work repetitive. For cataract extraction, Medicare currently reimburses the ophthalmologist $697.12, and requires a $139.24 patient co-payment, for a total of $836.36.

In other words, relying on the RUC’s assessment using RBRVS, Medicare values the ophthalmologist’s work 7.5 times more than the primary care specialist’s. The valuation assumes that the complexity and skill required in the two encounters are heavily weighted toward the ophthalmologist, though it could be reasonably argued that the mental effort, judgment and skill required by the primary care doctor are greater.

But there is a more serious flaw in the approach. RBRVS bases value on the demands of physician work, but ignores the actual benefit to the patient or society. It doesn’t consider whether the service followed evidence-based guidelines (and whether it was appropriate or even necessary) or whether the hoped for health outcome was achieved.

We need both primary care specialists and procedural specialists. The policy questions are whether one should be valued at so much more than the other, and whether we need more procedural specialists than primary care doctors, or the opposite as other developed nations have settled on. The way we pay for services should reflect our decisions. But also, we need a payment approach that is fair, consistent, transparent and more congruent with modern notions of value.

The flaws in our medical services valuation and payment system create incentives for unnecessary and unnecessarily complex services that expose patients to gratuitous risk (and sometimes, harm), and that artificially increase cost for purchasers. This one mechanism is largely responsible for taking the health care industry and the larger economy to the edge of an economic precipice.

What Should CMS Do Now?

Against the intensifying national economic crisis, CMS could immediately and substantially reduce unnecessary cost by revamping this system. It should aggressively identify and reassess over-valued specialty services, while re-valuing primary care. Equally important, the definition of value must be broadened beyond physician work inputs to quantitative measures of impact, efficacy and efficiency, using the plentiful evidence now available in both clinical encounter and financial claims data.

Adjusting the current approach to payment will be opposed by procedural specialists and powerful health care interests that have fed for decades off the specialty-based largess. But ultimately, it would serve their interests and those of the American people by stabilizing a system wildly out of control.


Klepper and Kibbe have been frequent contributors to this blog

Brian Klepper, PhD is a health care analyst, consultant and commentator. He is Managing Principal of Healthcare Performance Inc., a business development practice based in Atlantic Beach, FL, and Chief Development Officer for WeCare TLC, LLC, an onsite clinic firm based in Longwood, FL.

David C. Kibbe, MD, MBA is well known as an innovator and independent thought leader in the fields of primary care EHR technology and consumer health IT in the United States. HIs writings have had a strong influence on the "modular approach" to EHRs, and to the development of Clinical Groupware. A co-developer of the ASTM Continuity of Care Record standard, or CCR, that utilizes XML for computable health information exchange, he is an experienced clinician who practiced medicine in private and academic settings for more than 15 years. Dr. Kibbe has taught informatics at the School of Public Health, University of North Carolina at Chapel Hill, and founded two health care IT companies.

The Debt Deal: There Will Be Blood on the Floor on November 23rd

The debt deal is finally done. But it really isn’t an agreement on what cuts will be made, just the process that will be used to make them.

The real work is left to the Congressional appropriators for the first $917 billion and for a super-committee of Congress for the second $1.2 trillion to $1.5 trillion in ten-year cuts.

That second tranche is where health care will make its contribution. The super-committee has to make its decisions by November 23rd and, as a practical matter, the Congress can only accept what the super-committee decides or face the consequences of the automatic $1.2 trillion fallback cuts.

When it comes to health care and the super-committee, all federal health care spending is on the table—–Medicare, Medicaid, the new law, benefits, and provider payments.

Since the budget window for the deal is ten years, it is not likely that any changes will be made to entitlement eligibility—such as delaying the Medicare eligibility age from 65 to 67. It just wouldn’t be fair to tell a 60-year-old their Medicare eligibility age is being raised. But we could see more means testing of Medicare premiums.

It is possible that the super-committee could deal with real systemic health care reform—–particularly in the way we pay providers. But I doubt it. The committee isn’t going to have a lot of time to take up so complex a matter as systemic health care payment reform given that they will have to deal with hundreds of billions more in cuts from lots of federal programs. I don’t see the committee as having the expertise, will, or the time to tackle real health care reform.

The real potential for cuts will be to provider reimbursement.

So, all of those provider organizations that thought they scored big by limiting their contribution during the health care reform debate are likely be on the defensive in ways they could not have imagined 18 months ago.

Physicians, facing a 29.5% Medicare Sustainable Growth Rate (SGR) fee schedule cut on January 1, 2012, need to be really worried. That 29.5% cut is part of the existing budget baseline from which the super-committee needs to cut hundreds of billions more—much less find tens of billions of dollars to put these doc cuts off again. Hospitals who got off with a $150 billion contribution to the Affordable Care Act have to be in the bull’s eye this time. Drug companies are a particularly juicy target for liberals who don’t like them and conservatives who wish the Part D program had never been passed. Medicare Advantage insurers have recently been reporting record profits—not something you want to be doing when the Congress is looking for lots of cash.

While there is a 2% cap on any cuts that could occur to Medicare in the $1.2 trillion default trigger, there are no limits to what the super-committee can cut. As an order of magnitude, it looks to me like the cuts Medicare will have to eventually sustain from the super-committee will have to approach to the cuts the program saw under the new health care law--largely because of the impact the SGR formula has on the baseline the committee will have to use.

Medigap insurers could also be at risk. A proposal to reduce first dollar Medigap coverage continues to hang-on and would likely at least be on the super-committee’s table. Its $50 billion value is just too big to ignore. But that is offset by how unpopular such direct cuts to millions of Medigap policyholders would be.

I would not be surprised to see the super-committee take a hard look at reducing Medicaid spending by giving the states more flexibility and less money.

The debt ceiling formula the Congress and the President just agreed to is a particular problem for the physicians. They are the ones who agreed to support the new health care law (the AMA anyway) without getting a fix to the Sustainable Growth Rate dilemma. Now, the debt deal seals the physician fee baseline at a level that presumes the 29.5% fee cuts are in effect. It is from this point that the super-committee has to start its work.

Given how reluctant Congress has been to cut the docs in past years, just how the heck are they going to accomplish net Medicare cuts and take care of the docs this time?

And just think of the impact big provider cuts could end up having on health care cost trends as providers attempt to shift the impact of these cuts to the entire health care system--just as health care cost trend has finally been slowing down.

If you thought we had a tense few weeks over the debt ceiling, you had better clear your calendar for the weeks leading up to the November 23rd super-committee deadline. The debt deal was only about process, this next big fight is going to be about real and significant cuts and there will be be some significant blood on the floor when it is over!