Statement by
Mark B. McClellan, M.D., PH.D.
Centers for Medicare and Medicaid Services
Department of Health and Human Services

Medicare Physician Payments
The House Committee on Energy and Commerce Subcommittee on Health

Thursday, November 17, 2005

Chairman Deal, Representative Brown, distinguished members of the Subcommittee, thank you for inviting me here today to discuss Medicare physician issues. The current Medicare physician payment system will result in multi-year reductions in physician payments, raising real concerns about this system’s ability to ensure access to care for Medicare beneficiaries. In addition, it does not create incentives for physicians to provide the highest quality care at the lowest overall cost. The existing system is designed to control spending in the aggregate, but in recent years it has not been successful in limiting spending growth by influencing the behavior of individual physicians. Fully addressing this situation will require legislative action by the Congress. The Administration looks forward to working with the Congress as it explores a legislative resolution to this challenge. The Centers for Medicare & Medicaid Services (CMS) has also taken a number of important first steps in developing the standards, information and systems needed to move us toward a payment system that encourages quality, supports physicians in their efforts to provide the most effective care, and avoids unnecessary costs. These steps will prepare us to quickly and efficiently implement a fully modified payment system should Congress make that possible. I will address many of the steps we are taking in collaboration with physician organizations and other private-sector groups to help implement this system later in my testimony.

On November 2, we released the final rule updating payments for physicians and several other types of non-physician practitioners who serve our Medicare beneficiaries. The update scheduled by law for 2006 and beyond is one of the biggest issues facing physicians. The final rule indicated that the current statutorily mandated formula will result in a 4.4 percent reduction in physician payments in 2006. Under current law, this same statutory formula will result in cuts in several succeeding years as well. We recognize, as does this Subcommittee, that sustained cuts in physician reimbursement raise real concerns about this payment system in terms of access to quality care for Medicare beneficiaries. We also recognize that the very rapid growth in physician-related Part B services has contributed significantly to the extent of this payment problem. For example, in 2004 this system experienced a 13 percent increase in spending, driven largely by increases in the volume and intensity of services on a per-beneficiary basis. Double-digit spending growth has persisted in the first half of 2005, according to our most recent figures. Simply increasing spending under the current volume-based payment system would have an adverse effect from the standpoint of Medicare’s finances and would drive up beneficiary premiums and cost-sharing. Furthermore, increasing spending under the current system would do nothing to promote better quality care.

Although CMS carefully examined the possibility of taking administrative action to address statutorily mandated cuts, we have concluded that we have no authority, under the existing statute, to make changes that will immediately or directly impact the physician update. Moreover, even if we took administrative actions suggested by the physician community, this step would add substantially to Medicare costs and beneficiary premiums, on top of the increased spending just described.

Physician Payments Based on Statutory Formula
Updates to Medicare physician payments are made each year based on a statutory formula established in section 1848(d) of the Social Security Act. The calculation of the Medicare physician fee schedule update utilizes a comparison between target spending for Medicare physicians’ services and actual spending. The update is based on both cumulative comparisons of target and actual spending from 1996 to the current year, known as the Sustainable Growth Rate (SGR), as well as year-to-year changes in target and actual spending. The use of SGR targets is intended to control the growth in aggregate Medicare expenditures for physicians' services. Target expenditures for each year are equal to target expenditures from the previous year increased by the SGR, a formula specified in the statute comprising the following four factors: (1) the estimated percentage change in fees for physicians’ services, (2) the estimated change in the average number of Medicare fee-for-service beneficiaries, (3) the estimated 10-year average annual growth in real gross domestic product (GDP) per capita, and (4) the estimated change in expenditures due to changes in law or regulations.

When actual spending exceeds targeted spending, the following year’s update is reduced to bring actual spending back in line with the targets. Unfortunately, actual spending has greatly exceeded targeted spending, and the formula results in negative updates to physician payments to correct this disparity. Recent rapid growth in the volume and intensity of physicians’ services per beneficiary is helping to drive the growth in Medicare physician spending and is a significant factor in the negative 4.4 percent update for 2006. We anticipate that physicians will experience negative updates in each of the next six years as well.

Some have suggested that CMS could retrospectively remove drugs covered under Part B from the definition of physicians’ services, and thus revise the SGR. However, as we have indicated in the past, retrospective removal of drugs from the SGR is statutorily difficult. For example, the statute requires the estimated SGR be refined twice based on actual data. We do not see a legal basis to re-estimate the SGR and allowed expenditures for a year after they have been estimated and revised twice. Further, our current estimate is that removing drugs retroactively from the SGR would not result in a positive update for several years. Consequently, CMS believes that statutory change is needed to improve the physician payments. Moreover, such changes should do more than simply add substantial taxpayer and beneficiary payments to the current payment system.

Increases in Utilization
For physicians’ services, increases in utilization and intensity during 2004 were 6.3 percent, and are estimated to be 5.6 percent for 2005 and projected to be 6.4 percent for 2006. These figures are much higher than the average utilization and intensity increase of about 1 percent per year between 1992 and 1999. This continued growth in the volume and intensity of physicians’ services has resulted in a high projected growth in spending for these services in 2006, which is a principal factor contributing to the increase in the 2006 Part B premium. As indicated in a letter from CMS to MedPAC on March 31, 2005, the rapid growth in services administered in physicians’ offices has resulted from rapid growth in intensity and utilization for office visits, lab tests, minor procedures, and physician-administered drugs.

Some of these increases in use of services are unquestionably related to improvements in the quality of health care. However, as noted in the MedPAC letter and in subsequent analysis by CMS and other groups, much of the spending increase cannot easily be explained by changes in treatments based on new medical evidence and valuable new technologies.

CMS has taken collaborative steps to better understand these concerning trends, including what changes in utilization are likely to be associated with important health improvements and which have limited or questionable health benefits. We have been reviewing the technical aspects of this situation in detail with health policy experts as well as the AMA and various specialty societies. For example, the AMA has provided us with some potential reasons accounting for growth. While it was not possible with available data to precisely analyze the impacts of every factor identified, we were able to assess the impacts of most of them. Generally, our results indicate that while the factors the AMA identified have contributed to higher spending, our preliminary analysis suggests that these identifiable factors do not account for a substantial part of the $10 billion spending growth between 2003 and 2004.

We appreciate the efforts of the AMA and the many specialty societies that assisted CMS in identifying these medical trends. They have helped further our understanding of the reasons for the growth in spending. I am sure that all stakeholders involved in these critical payment issues will benefit from an ongoing, evidenced-based analysis regarding these issues, particularly focusing on which changes in utilization are likely to be associated with important health improvements and which ones have health benefits that may be more questionable.

The fact is that the current payment system is simply not moving us toward the goal of supporting more efficient and better quality care while avoiding unnecessary costs and disease complications. We have seen rapid spending growth over the past few years, partially because our payments do not encourage and support physicians in their efforts to become more efficient or focused on innovative approaches to improving quality. The current system has not been entirely successful at focusing physicians on quality over increasing volume or intensity of services, regardless of quality. This outcome does not help physicians become more efficient and implement steps that improve quality and reduce overall costs, does not help our beneficiaries get the best care possible while keeping down out-of-pocket costs, and certainly does not help address Medicare’s long-term financial needs. CMS does not have the administrative authority to fix payment updates so that physicians do not experience multiple, significant negative updates in their payments over the next few years. Even if the Agency did have such authority, revising the annual updates upward each year would be extremely costly and doing so would not help address the root cause of rapid spending growth.

Moving Toward a New Model
Compensation for physicians who provide for our Medicare beneficiaries should encourage and support their efforts to provide the highest quality care in the most cost effective manner. Measuring the quality of care provided, and providing better incentives and support for evidence-based care that improves quality and avoids complications and their associated costs, can give us data we need to help physicians to improve quality and avoid unnecessary costs.

There are many promising ideas for improving the predictability and effectiveness of physician payments that do not add so greatly to Medicare’s expected spending growth. Pay-for-performance methods work. We have seen some encouraging results in our Premier hospital demonstration project and it has been successfully utilized in the private sector as well. Medicare should move forward with new financial models that encourage quality and efficiency, not only for its own fiscal health, but for the well being of our beneficiaries and to support physicians in what they want to do in the first place. It is clear that there is much potential for physicians to assist in our efforts to improve the value of our health care spending. For example, under the current system, there are substantial variations in resource use and spending growth for the same medical condition in different practices and different parts of the country, without apparent difference in quality and outcomes, and without a clear basis in existing medical evidence. A study published in 2003 looked at regional variations in the number of services received by Medicare patients who were hospitalized for hip fractures, colorectal cancer, and acute myocardial infraction. The researchers found that patients in higher spending areas received approximately 60 percent more care, but that quality of care in those regions was no better on most measures and was worse for several preventive care measures. Further, there are many examples of steps that physicians have taken to improve quality while helping to prevent complications and duplication of services and keeping overall costs down. Yet under our current payment system, physicians who take these quality focused steps get less reimbursement from Medicare.

The Administration supports legislative action to move toward a payment system for physicians that provides adequate reimbursement and promotes more efficient and higher quality care, without increasing the financial strain on the Medicare program. As the Budget reconciliation process moves forward, the Administration will work with the Congress on a fully-offset provision to address the negative physician update for 2006 and 2007, with differential updates for physicians who report valid, consensus-based quality measures. We also support the bipartisan Congressional interest in moving toward a performance-based payment system in Medicare that does not add to overall Medicare costs. We believe that this step would provide a transition to performance-based payments. These reforms to improve the effectiveness of physician payment in 2006 cannot be undertaken administratively. The pending negative updates are a result of continuing rapid growth in volume and the cost of physician-related Part B services, and this change would provide a stronger foundation for determining the extent to which an increased emphasis on supporting quality care can help physicians provide better care without increasing overall Medicare costs.

Supporting physicians in providing clinically proven, evidence-based care can result in better health outcomes for beneficiaries. Healthier beneficiaries are less likely to experience complications and acute conditions and Medicare dollars could be spent more effectively as a result.

CMS has already undertaken many collaborative steps to work with physicians and other health professionals to make progress toward better quality and avoiding unnecessary health care costs. These include a number of demonstration projects; several required by Congress under statute, aimed at encouraging quality care and designed to lay the groundwork for pay-for-performance systems in the future. These include the Physician Group Practice demonstration, the Health Care Quality Demonstration and the Care Management Performance Demonstration. These projects are helping us to examine our current systems to better anticipate patient needs, especially for those with chronic diseases, and explore how incentives can be better aligned with the kind of care we want.

On October 28 of this year, as another element of our activities to make sure that we are supporting quality measurement, reporting, and improvement as effectively as possible, we announced the Physician Voluntary Reporting Program (PVRP). In this program, physicians who wish to collaborate with us on implementing quality measures and on improving quality can voluntarily report on a number of validated, evidence-based quality indicators beginning January 1, 2006. PVRP is a substantial first step in developing the kinds of reporting mechanisms and data needed to support the creation of a revised physician payment methodology founded on payment for performance. We anticipate that over the next few years, the results of this program will prove to be very useful as we work with the Congress to move in that direction. I will discuss this program at greater length later in my testimony.

There is more evidence than ever before that these approaches can work, from the private sector and now in Medicare. Information we have gathered as a result of our Premier Hospital Quality Incentive demonstration has shown that financial incentives tied to improved quality may lead to measurable improvements. Furthermore, as shown by the MMA hospital update provision, small incentives to hospitals are sufficient to encourage provider interest in providing evidence-based, quality care. We will keep working together to provide more effective compensation for physicians, building on our demonstration programs and gaining insights from voluntary reporting effort to learn together how best to support physicians in their efforts to provide quality care at the lowest possible cost.

Developing Quality Measures
For several years, CMS has been collaborating with a variety of stakeholders to develop and implement uniform, standardized sets of performance measures for various health care settings. In recent months, thanks to the leadership of many physician organizations, these efforts have accelerated even further.

Our work on the quality measures has been guided by the following widely-accepted principles. Quality measures should be evidence-based. They should be valid and reliable. They should be relevant to a significant part of medical practice. And to assure these features, quality measures should be developed in conjunction with open and transparent processes that promote consensus from a broad range of health care stakeholders. It also is important that quality measures do not discourage physicians from treating high-risk or difficult cases, for example, by incorporating a risk adjustment mechanism. In addition, quality measures should be implemented in a realistic manner that is most relevant for quality improvement in all types of practices and patient populations, while being least burdensome for physicians and other stakeholders.

More than two years ago, CMS initiated a process with the National Committee for Quality Assurance (NCQA), the AMA’s Physician Consortium for Performance Improvement, and other stakeholders to develop measures that would be appropriate for the ambulatory setting. As part of this endeavor, CMS took the lead in supporting the National Quality Forum (NQF) endorsement of ambulatory care measures developed by the NCQA and the Physician Consortium. The NCQA is a private, not-for-profit organization dedicated to improving health care quality by providing information about health care quality to help inform consumer and employer choice. The NQF is a private, not-for-profit membership organization created to develop and implement a national strategy for healthcare quality measurement and reporting. The result of this activity has been the recent endorsement by the NQF of a set of ambulatory quality measures.

Examples of three ambulatory quality measures are the results of the hemoglobin A1C and LDL and blood pressure tests for diabetic patients. The clinical evidence suggests that patients who have a hemoglobin A1C test below 9 percent, an LDL less than or equal to 100 mg/dl, and blood pressures less than or equal to 140/80 mmHg have better outcomes. These measures are evidence-based, reliable and valid, widely accepted and supported, and were developed in an open and transparent manner. Evidence indicates that reaching these goals can lead to fewer hospitalizations by avoiding complications from diabetes such as amputation, renal failure, and heart disease.

Two quality measures endorsed by NQF for heart failure patients include placing the patient on blood pressure medications and beta blocker therapy. Here too, these therapies have been shown to lead to better health outcomes and reduce preventable complications. Together, diabetes and heart failure account for a large share of potentially preventable complications.

In addition to primary care quality measures, other specialties are developing measures. For example, measures of effectiveness and safety of some surgical care at the hospital level have been developed through collaborative programs like the Surgical Care Improvement Program (SCIP), which includes the American College of Surgeons. Preventing or decreasing surgical complications can result in a decrease in avoidable hospital expenditures and use of resources. For example, use of anti-biotic prophylaxis has been shown to have a significant effect in reducing post-operative complications at the hospital level. This measure is well developed and there is considerable evidence that its use could not only result in better health but also avoid unnecessary costs. These post-operative complication measures, which are in use in our Hospital Quality Initiative, are being adapted for use as physician quality measures. Application of this type of post-operative complication measure at the physician level has the potential to help avoid unnecessary costs as well as improve quality.

We also are collaborating with other specialty societies, such as the Society of Thoracic Surgeons (STS), to implement quality measures that reflect important aspects of the care of specialists and sub-specialists. The STS has already developed a set of 21 measures at the hospital level that are risk adjusted and track many common complications as outcome measures. STS is also conducting a national pilot program to measure cost and quality simultaneously, while communicating quality and efficiency methods across regional hubs with the objective of reducing unnecessary complications and their associated cost. The STS measures have been adapted to a set of five quality measures for physicians, such as for a patient who receives by-pass surgery with use of internal mammary artery.

Many other specialties have also taken steps to develop evidence-based quality measures. On July 14, 2005, I sent a letter to many specialty societies, summarizing some of the work to date and requesting an update on their efforts to develop quality and performance measures.

I want to thank the AMA and specialty societies for their very positive response to this effort to develop quality measures. Six months ago few specialties had quality measures. Today the majority of specialties have quality measures. Many specialties have created quality task forces and are participating in the quality measurement process. Activity is underway to prepare other measures for NQF endorsement.

CMS has had productive exchanges with most medical specialty organizations. I would encourage organizations that have not entered into discussions with us to initiate a dialogue as soon as possible so we can work together to develop clinically valid measures. In certain areas, compliance with evidence-based practice guidelines has the potential to be a quality measure.

The process we have used with the medical profession to develop quality measures beyond ambulatory care should greatly expedite and facilitate the development, acceptance and implementation of quality measures for additional specialties and services. By working in collaboration with the societies, there has been considerable progress in the measure development process. This preparation will facilitate the NQF endorsement process. However, measures that have not yet gone through the NQF endorsement process are still of great value. Physician reporting of these measures will help foster their acceptance in the medical community and help prepare physicians for their eventual adoption. Moreover, since there is likely to be reporting of the quality measures for a period of time before payment based on performance, NQF consensus is not required to begin reporting of such measures. The rapid progress to develop quality measures for the majority of specialties is a clear indication that quality measures are gaining acceptance as an important element in achieving better performance in our health care system.

Our experience with hospital quality measures is that after a measure is endorsed additional work with stakeholders is necessary to assure successful implementation. The Hospital Quality Alliance played an important role in implementation of the hospital quality measures by facilitating hospital adoption and understanding of technical concerns. The Ambulatory Care Quality Alliance (AQA) can serve a similar role to help with physician adoption of the ambulatory quality measures. The AQA is a consortium led by the American Academy of Family Physicians, the American College of Physicians, America’s Health Insurance Plans and the Agency for Healthcare Research and Quality, CMS and other stakeholders, including the AMA and other physician groups, as well as representatives of private sector purchasers and consumers.

Resource Use
CMS is taking steps toward implementing the MedPAC recommendation to use Medicare claims data to measure fee-for-service physicians’ resource use and to share these results with physicians confidentially to educate them about how they compare with aggregated peer performance. We are using existing claims data to simulate and test the measurement and quantification of individual physician patterns of practice, incorporating both services they order (including facility services) as well as services they furnish. Resource use is often measured for episodes of care and periods of time (e.g., 3 months). The most widely used measure is total expenditures per episode of treatment or period of time. Other measures of resource use are possible, such as examining the percent of a physician’s patients who have a particular service ordered. This can indicate potential variations in practice that may affect costs significantly without evidence-based benefits for patients. For example, MRI scans may be ordered for patients with non-specific lower back pain, a condition that studies of Medicare data have shown is often used in cases where there is not clear evidence of medical benefit. By comparing relative use of such a service among physicians, a data-driven foundation for identifying opportunities to avoid some medical costs without reducing patient health may be developed. As a next step, we are planning to begin pilot projects to share the results with physicians confidentially to educate them about how they compare to peers in an effort to decrease the use of inappropriate services. Sharing both quality and resource use data will help physicians understand how to provide the best care, at the best price.

CMS is also supporting the development of more evidence-based care. For example, CMS recently launched the “Fistula First” initiative, which is designed to give patients with end stage renal disease the ability to receive life-sustaining dialysis through a method that performs better than other procedures while requiring less maintenance. By funding and overseeing this initiative, CMS is using its leadership position to partner with the medical community and improve the lives of patients.

Quality Improvement Demonstrations and Pilots Underway
In addition to our work on establishing quality measures, we have begun a number of demonstration and pilot projects to test pay-for-performance principles. Pay-for-performance initiatives are currently underway in a variety of health care settings where people with Medicare receive services, including physicians’ offices and hospitals. Because patients with chronic conditions often require treatment across several settings of care, CMS is pursuing pay-for-performance initiatives to support improved coordination of care. CMS will seek input concerning actions we can take administratively to best implement a pay-for-performance system to achieve our goals of promoting better quality and reducing program costs. We want to provide the public with an opportunity to present ideas and suggestions about how pay-for-performance payment mechanisms should be structured, including a public dialogue on key technical and statutory issues.

The Physician Group Practice demonstration is assessing large physician groups’ ability to improve care that could result in better patient outcomes and efficiencies. Ten large (200+ physicians), multi-specialty physician groups in various communities across the nation are participating in the demonstration. These physician groups will continue to be paid on a fee-for-service basis, but they may earn performance-based payments for implementing care management strategies that anticipate patients’ needs, prevent chronic disease complications, avoid hospitalizations, and improve the quality of care. The performance payment will be derived from savings achieved by the physician group and paid out in part based on the quality results, which CMS will assess. Providing performance-based payments to physicians has great potential to improve beneficiary care and ensure fair and appropriate payment in the Medicare program.

In addition, CMS is preparing to implement the Medicare Health Care Quality Demonstration. This demonstration program, mandated by the MMA, is a five-year program designed to reduce the variation in utilization of heath care services by encouraging the use of evidence-based care and best practice guidelines. Detailed proposals are due at the end of the year. CMS is also implementing the Medicare Care Management Performance Demonstration, a 3-year pay-for-performance pilot, mandated by the MMA, with small- and medium-sized physician practices that will promote the adoption and use of effective health information technology that achieves improvements in the quality of care and reductions in preventable costs for chronically ill people with Medicare. This demonstration will provide performance payments for physicians who meet or exceed performance standards in clinical delivery systems and patient outcomes, and will reflect the special circumstances of smaller practices. It also will give CMS the opportunity to provide technical assistance to small providers in adopting information technology that is effective in improving quality and avoiding costs, as CMS has already been working to do in limited pilots. This demonstration project is currently under development and will be implemented in Arkansas, California, Massachusetts, and Utah. We are supporting an evaluation of this demonstration with AHRQ and insights from health IT implementation that produces improvements in quality and efficiency will be shared broadly through AHRQ’s National Resource Center.

Quality Improvement Organizations Assist Physicians’ Offices
We recognize that taking advantage of performance-based payment reforms may be more difficult for small providers, rural providers, and providers in underserved areas. Consequently, CMS has enhanced its efforts to give such providers assistance with proven system advancements and quality improvement initiatives. Beginning August 1 of this year, under our new three-year contract with the quality improvement organizations (QIOs), the QIOs began offering assistance in clinical process redesign to physicians’ offices who are seeking to achieve substantial improvements in care through the adoption of health information technology, patient-focused care processes, and clinical measures reporting. In each state, QIOs will use the tools and methods developed in the Doctors Office Quality - Information Technology (DOQ-IT) two-year pilot project to help primary care physicians make changes to clinical processes to improve quality. This initiative is part of CMS's overall commitment to supporting physicians and other providers who are committing to success in our developing programs of public reporting and pay-for-performance.

Over the past year, the CMS California QIO, Lumetra, has been piloting CMS DOQ-IT assistance efforts for over 500 physicians and their offices in California. Many of these physicians’ offices are small offices with one or two physicians and are located in rural or underserved areas of California. Lumetra staff and consultants provide consultation and assistance for these offices, supporting the clinical process changes and improvements resulting from the incorporation of health information technology in their offices, which in turn will allow them to utilize electronic health records, electronic prescribing, decision support and clinical practice guidelines relevant to their patient population, and electronic billing and communications. In addition, QIO staff will assist these offices in implementing office redesign to enhance patient management, and increase office efficiency. All of these efforts are designed to result in enhanced patient safety and better quality of care. Our goal is to help support effective physician office enhancements to become standard in all medical practices in the coming years and CMS QIO efforts will help ensure that physicians’ offices can accomplish these enhancements.

The QIOs also have implemented quality improvement projects that lead to better care in rural and underserved areas. For example, Qualis Health, the CMS Alaska QIO, has worked with the almost exclusively rural Alaska providers to increase the rates of preventive services available to rural Alaska residents. Mountain Pacific QIO, the CMS QIO in Hawaii, is working to implement telehealth services to bring care not otherwise available to rural Hawaii beneficiaries.

Physician Voluntary Reporting Program
On October 28, 2005, CMS announced another step in these efforts to provide better support for quality care, the implementation of the Physician Voluntary Reporting Program (PVRP). This program builds on work being done under a number of current demonstrations, such as the Physician Group Practice demonstration, which involve many of the same kinds of quality measures to be reported under the PVRP.

Under the PVRP, beginning in January 2006, Medicare physicians who choose to participate will be able to voluntarily report information to CMS about the quality of care they provide to Medicare beneficiaries. There will be no penalty for those who choose not to participate, nor will claims be denied if they do not include this information. Physicians who wish to report will select those measures relevant to the services they actually provide. The measures they report will come from a group, selected by CMS, of 36 evidence-based clinically valid measures, widely recognized as being appropriate for indicating quality of care. The measurements were previously developed in a collaborative fashion by CMS and a number of stakeholders, including the AMA and other relevant specialty and quality groups. When CMS made the decision to implement the PVRP, we selected from this pre-existing, widely agreed upon body of measures. Twenty-nine of the measures have been endorsed, or submitted for National Quality Forum (NQF) endorsement and the remaining seven will be submitted for endorsement.

Our initial measures for this voluntary reporting program were intentionally selected to cover a broad range of medical practice where broadly-supported, evidence-based quality measures have been developed, including not just ambulatory care and preventive medicine but also physician care provided by specialists. The 36 measures cover diagnoses such as diabetes and heart failure that constitute significant amounts of Medicare spending. The 36 measures involve care by physicians in specialties that cover about 65 percent of Medicare physician spending.

The measures we are using also include NQF endorsed preventive measures such as whether the beneficiary received a flu shot, pneumococcal vaccination or mammography. In addition, NQF has endorsed a number of measures developed by the Society of Thoracic Surgeons (STS) for coronary artery bypass surgery such as pre-operative beta blocker. These STS measures were endorsed for hospitals to report and our PVRP allows physicians to report these measures. We are also allowing physicians to report three measures that were endorsed by the NQF for hospitals and are being reported by hospitals right now as part of their reporting of 10 measures under section 501(b) of the MMA. These measures, important for services physician provide in emergent care, are: aspirin at arrival and beta blocker at arrival for heart attack patients, and the timing of antibiotic administration for hospitalized pneumonia beneficiaries. As part of the PVRP, we expect to identify the least burdensome ways to reliably report physician quality measures for hospital-based care.

We are also using three measures for end-stage renal disease (ESRD): the dialysis dose, the hematocrit level and receipt of an AV fistula. These are important measures for treating ESRD beneficiaries. They are already being used by ESRD facilities, and were developed with significant stakeholder support and consensus and have been submitted to NQF for endorsement.

We are also using four assessment measures developed by the Assessing Care of Vulnerable Elders (ACOVE) project (assessment for falls, hearing acuity and urinary incontinence in elderly patients and assessment of osteoperosis in elderly female patients), and three measures developed by the RAND QIT project. ACOVE measures were developed with significant input from the physician and research communities and submitted for peer review and then re-reviewed. We expect these ACOVE and RAND QIT measures to be submitted to NQF.

The PVRP relies on existing administrative systems for initial quality reporting. In the years ahead, it is expected that electronic record systems can be developed that would provide information that is needed to measure and report on quality while fully protecting patient confidentiality. As part of the Administration’s quality improvement efforts, we expect to continue to make progress toward the widespread use of electronic health records that, among other things, would greatly facilitate the accurate and efficient use of information on quality measures and quality improvement. Progress on supporting measurement for quality improvement efforts can occur in conjunction with these steps toward more widespread availability of electronic health records. Indeed, increased emphasis on quality reporting and quality improvement would facilitate more the adoption of effective health IT systems.

In the short term, information on a broad range of quality measures can be obtained adequately using existing claims and the administrative claims system. In particular, with adequate guidance for appropriate coding practices by physicians’ offices, HCPCS codes established by Medicare and reportable on existing claims forms, the so-called G-codes, can be the vehicle to report the information on claims. While HCPCS codes generally represent services furnished, the G-codes would report information on the quality measures, and could potentially be a basis for payment based on the report of such information. This reporting mechanism allows collection of information on the quality measures via an existing system familiar to the physician community. Furthermore, it allows collection of the quality measures to begin, on a voluntary basis, on January 1, 2006.

CMS uses G-codes when a new or revised service is introduced in such a way that there is insufficient time to establish a more permanent Current Procedural Terminology (CPT) code. CPT contains a set of supplemental codes, called Category II codes, that can be used for performance measurements. According to the CPT book, Category II codes are intended to facilitate data collection about the quality of care rendered by coding certain services and test results that support performance measures. Some organizations have expressed concern about our use of G-codes in the PVRP. We envision the time when G-codes used to report on quality measures under the PVRP are transitioned to Category II codes, as appropriate Category II codes are available.

We have converted the 36 quality measures into a series of G-codes that could then be reported by a physician on a claim in a way that is simple and does not burden physicians. Each code has a numerator (the appropriate G-code that would be reported) and a denominator (specifically defined by appropriate procedure and diagnosis codes). We have released instructions about the numerator and denominator for each measure in a recent Change Request (CR 4183). As an example, we have established four G-codes for the hemoglobin A1c measure. A physician would use G-8016 to report that the hemoglobin A1c was 9 or less, use G-8015 to report that the value was above 9, use G-8017 to report that the beneficiary was not a candidate for the measure, and use G-8018 to report that the physician had not treated the beneficiary for a sufficient period of time. While there are four codes to select from for the reporting of this measure, only a single G-code would be reported on the claim form. The instructions specify the particular HCPCS procedure and ICD diagnosis codes for which the measure should be reported.

CMS is sensitive to the need to keep the reporting requirements for physicians simple and useful. Currently, additions and deletions to the body of procedures codes are made every year, often as the result of new services, revision of existing codes, and physician requests for code changes. CPT code changes are announced around October 1, and effective the following January 1. In the 2006 edition of CPT, there are approximately 450 code changes (221 additions, 129 revisions, and 97 deletions). CMS typically adds a few G-codes every year as well, announced in the annual physician fee schedule, released in early November and effective the following January 1. Physicians and vendors of the electronic billing systems they use are accustomed to making timely adjustments for these coding changes each year.

While there are a total of 104 G-codes for the 36 measures, physicians would report only a single G-code for a measure. The number of new codes is in line with the average number of new codes per year. Further, although there are 36 measures, the number of measures that would actually be reported by an individual physician will be a subset of those measures, based on their specialty and the range of conditions they treat. Moreover, many of the measures are likely to be reported only once per year, further minimizing the reporting burden. Finally, in this voluntary pilot program, physicians who decide to participate would only report the measures that they determine are relevant and practical for their practice.

We expect that reporting of a G-code would be a reasonably straight forward matter. Item 24 of the universally familiar HCFA-1500 form will be used to report the new G-codes, precisely as physicians have been doing for years to report and bill for their other procedure codes. All a physician needs to do to report is put the appropriate G-code(s) on one of the lines within Item 24, exactly as a physician would list a HCPCS code in order to bill any given service. While we encourage physicians to submit G codes when applicable, failure to provide a G-code will not result in denial of a claim that would otherwise be approved.

Electronic systems have the potential to make reporting a fairly simple and routine matter. However, we recognize that software vendors may need to make adjustments to their products in order to integrate reporting of the quality measures. We want to work with physicians and software vendors to identify the specific steps needed to facilitate quality reporting that is as simple and reliable as possible, and we expect the PVRP process will help make sure we achieve this goal.

We plan to provide feedback to physicians who submit the data in 2006 about their reporting rate. The goal is to begin to use this information to assist physicians in improving their reporting rate, reducing their reporting burden, and supporting better quality of care. During the pilot, the feedback will be provided directly to the reporting physician and will not be made available to the public. The other primary goal of the PVRP is for CMS to seek and obtain practically relevant input from participating physicians on ways to improve the ease and completeness of reporting and usefulness of the quality measures, such as by promoting reports and analysis through electronic medical record systems. Practical issues related to the least burdensome approach to collecting the kind of data that are needed to construct a system that rewards quality care and good outcomes, rather than volume, are important to address promptly as we work to establish a more effective payment system for physicians.

We look forward to working with the physician community to ensure the program’s success in achieving both of these goals. We are gratified by expressions of support for the program that we have already received. Specifically, the Consumer Purchaser Disclosure Project, a coalition of the nation’s leading consumer, employer and labor organizations, supported by the Robert Wood Johnson Foundation and the Leapfrog Group, and led by the Pacific Business Group on Health, has expressed strong support for the PVRP. The Alliance of Specialty Medicine, a coalition of 13 medical specialty societies, has also recognized the PVRP as an important step in moving toward a pay-for-performance system for physicians. We look forward to working with them and many other members of the physician community as we move forward. We are already working on potential improvements in the program based on specific comments and suggestions we have received from interested parties. For example, it has been suggested that we consider allowing measures to be reported independent of the payable claim. We appreciate these constructive comments and are considering them as we work toward developing the easiest reporting system, while minimizing unnecessary costs to both physicians and CMS.

Medicare’s Hospital Performance-Based Payments Have an Impact
The experience with MMA section 501(b) – under which hospitals that report on ten quality measures receive an update that is 0.4 percentage points higher – suggests that relatively small payment incentives can have a significant impact on provider behavior. Virtually all hospitals are submitting the required data. There is an increasing belief that linking a portion of Medicare payments to valid measures of quality would support better health care.

Evidence exists that some hospital admissions are preventable. Heart failure patients have a readmission rate of 21 percent over 30 days, yet research shows that about half of the readmissions are preventable. For example, providing angiotensin-converting enzyme inhibitor (ACEI) drugs to heart failure patients is an example of high quality care, yet ACEI prescriptions are found in only 66 percent of audited patient records. Giving beta-blocker drugs to patients with acute myocardial infarction (AMI) can reduce rehospitalizations by 22 percent, but only 21 percent of eligible AMI patients receive a prescription for a beta-blocker. Pneumonia is a very common cause of hospital admissions for people with Medicare, but many of these cases could be prevented through pneumococcal and influenza vaccinations. Studies have shown that proper adherence to vaccination protocols can reduce hospitalizations for pneumonia and for influenza by about half, with reduced diseases, mortality, and potential savings for the Medicare Program.

If physicians are supported in their efforts to better manage patient care, preventable and costly hospitalizations, readmissions and admissions for complications may be avoided. Too often, costs of avoidable admissions are greater than the costs of services for physicians better managing beneficiaries on an ambulatory basis. As Congress considers modifying the payment system for physicians, we should work together to ensure that the physician payment system supports and encourages physicians to reduce unnecessary Medicare spending by avoiding unnecessary services such as preventable hospital admissions. This could result in more effective expenditure of Medicare dollars.

The Premier Hospital Quality Incentive Demonstration is a demonstration project that tests if providing financial incentives to hospitals that demonstrate high quality performance in a number of areas of acute inpatient care will improve patient outcomes and reduce overall costs for Medicare. Hospital participation is voluntary. We believe that creating incentives to promote the use of best practices and highest quality of care will stimulate quality improvement in clinical practice and may result in cost savings. Under the Premier demonstration, a hospital can receive bonuses in its Medicare payments based on how well it meets the quality measures. Poorly performing hospitals will face financial penalties in the third year.

I am pleased to report that evidence from the first year of the Premier Hospital Demonstration shows that performance-based payments may work to improve quality and help prevent complications in Medicare. The demonstration tracks hospital performance on a set of 34 widely-accepted measures of processes and outcomes of care for five common clinical conditions. The 20 measures now included in Medicare’s national hospital quality reporting program are a subset of these measures.

Quality of care improved in all of the five clinical areas for which quality was measured. Composite quality scores improved between the first and last quarters of the first year of the demonstration:

  • From 87 percent to 91 percent for patients with acute myocardial infarction (heart attack).
  • From 65 to 74 percent for patients with heart failure.
  • From 69 percent to 79 percent for patients with pneumonia.
  • From 85 percent to 90 percent for patients with coronary artery bypass graft.
  • From 85 percent to 90 percent for patients with hip and knee replacement.

In the Premier demonstration, top performing hospitals received bonuses based on their performance of evidence-based quality measures for inpatients with the five conditions. A hospital received a bonus in its Medicare payments based on how well it met the quality measures related to each condition.

Overall, these conditions account for a substantial portion of Medicare costs. If we achieve improvements in aspects of care that are proven to help patients avoid complications, patients are less likely to require more costly follow-up care for such conditions, and they are more likely to have a better quality of life.

Promoting Coordinated Care and Disease Management
CMS recognizes that many patients require care in a variety of settings. Therefore, CMS has projects in operation or in the planning stages that will use pay-for-performance systems to support physician efforts to coordinate care and execute an effective patient management plan for beneficiaries with chronic illnesses.

  • Medicare Health Support Program – This program is testing a population-based model of disease management. Under the program, nine participating organizations are being paid a monthly per beneficiary fee for managing a population of beneficiaries with advanced congestive heart failure and/or complex diabetes. These organizations must guarantee CMS a savings of at least 5 percent plus the cost of the monthly fees compared to a similar population of beneficiaries. Payment is contingent upon performance on quality measures and beneficiaries and provider satisfaction. The program will generate data on performance measures that will be useful in improving the Medicare program as a whole.

  • Disease Management Demonstration for Severely Chronically Ill People with Medicare – This demonstration, which began enrollment in February 2004, is designed to test whether applying disease management and prescription drug coverage in a fee-for-service environment for beneficiaries with illnesses such as congestive heart failure, diabetes, or coronary artery disease can improve health outcomes and reduce costs. Participating disease management organizations receive a monthly payment for every beneficiary they enroll to provide disease management services and a comprehensive drug benefit, and must guarantee that there will be a net reduction in Medicare expenditures as a result of their services. To measure quality, the organizations must submit data on a number of relevant clinical measures.

  • Disease Management Demonstration for Chronically Ill Dual-Eligible Beneficiaries – Under this demonstration, disease management services are being provided to full-benefit dual eligible beneficiaries in Florida who suffer from advanced-stage congestive heart failure, diabetes, or coronary heart disease. The demonstration provides the opportunity to combine the resources of the state’s Medicaid pharmacy benefit with a disease management activity funded by Medicare to coordinate the services of both programs and achieve improved quality with lower total program costs. The demonstration organization is being paid a fixed monthly amount per beneficiary and is at risk for 100 percent of its fees if performance targets are not met. Savings above the targeted amount will be shared equally between CMS and the demonstration organization. Submission of data on a variety of relevant clinical measures is required to permit evaluation of the demonstration’s impact on quality.

  • Care Management For High Cost Beneficiaries – This demonstration program will test models of care management in a Medicare fee-for-service population. The project will target beneficiaries who are both high-cost and high-risk. The payment methodology will be similar to that implemented in the Chronic Care Improvement Program, with participating providers required to meet relevant clinical quality standards as well as guarantee savings to the Medicare program.

Private Sector Initiatives Pave the Way for Improved Quality and Efficiency
The private sector also has recognized opportunities to improve quality and efficiency of care through better measurement of the delivery of care in coordination with better reimbursement models. In fact, the Leapfrog Compendium on Pay-For-Performance includes over 100 projects related to physicians. For example, the Bridges to Excellence (BTE) program, a not-for-profit organization of employers, providers, and plans has three programs to promote and reward improvements in the quality of patient care for physicians’ offices, diabetes care, and cardiac care. To date participating employers have paid over $1.65 million in bonus payments to over 800 physicians in the four participating markets for exceeding National Committee for Quality Assurance performance criteria. Thus far, results indicate that physicians can and do participate and report their performance accurately.

A large health plan in New Hampshire launched a quality improvement incentive program in 1998, rewarding primary care physicians for the provision of quality care. The metrics for its quality improvement incentive program are the Health Plan Employer Data and Information Set (HEDIS) measures. The program uses claims and administrative data from its disease management program to assess physician practice performance. Incentive payments are awarded to practices scoring greater than the network average. In 2001, the average physician bonus payment was $1,183 and the highest bonus payment was $15,320. In the first year, the plan's average rates for mammography, immunization, and pediatric exams showed increases. Adult female patients receiving Pap smear tests rose from an overall rate of 80 percent in 1999 to 98.5 percent in 2000 for the top quartile of physician practices. For all performance measures for which 1999 baseline data were available, the average incentive program physician practice conformity with performance measures rose from 51.2 percent to 65.6 percent in 2000.

In 2003 a large health plan in Massachusetts launched a group practice incentive program for groups of specialists. Group practices are measured in three categories: patient satisfaction and access, quality of care, and cost. Group practices that perform better than average on the quality measures earn a bonus that could total up to fifteen percent of the regular fees paid to that physician group.

An Illinois coalition of employers initiated a program in 2000 that provides incentives to physicians for monitoring diabetes patients. Compensation is awarded to physicians in the program who meet annual goals in diabetic treatment thresholds. To gain physician buy-in into the program, a committee of physicians developed the performance goals. The coalition and medical group administrators negotiated the amount of the financial incentives a medical group could receive if they met the goals. Results reveal that diabetic care for patients in the program is significantly better than state averages and cost trends for diabetics are better than trends for all other conditions.

A Hawaiian medical association launched a voluntary practitioner quality and service recognition program. Practitioners who enroll share in a multimillion dollar budget earmarked to recognize practitioners for adhering to recognized standards of quality and clinical practices proven by research to improve clinical outcomes. Each program participant receives an award based on his or her scoring in each of the program components – quality indicators, patient satisfaction, and business operations. Practitioners are measured on a total of 68 clinical measures. Analysis of data on key clinical quality indicators over the six years of the program demonstrates statistically significant improved performance.

In Minnesota a Health Partner’s program recognizing outcomes offers annual bonus awards to primary care clinics that achieve superior results in effectively promoting health and preventing disease. Eligible primary care groups are annually allocated a pool of bonus dollars that is awarded if a group reaches specific comprehensive performance targets. Since 1997, bonus awards have totaled over $2.5 million. The impact on quality of care has been substantial. The proportion of diabetes patients meeting optimal care standards nearly tripled since 1999 and the rates of optimal coronary artery disease patients reaching all treatment targets doubled. The rate of members receiving all preventive care doubled. Tobacco use assessment at all visits increased from 45 percent to 85 percent over four years and more patients are routinely provided assistance to quit. Tobacco use rates dropped ten percent to an all time low. Diabetes eye and kidney complications rates dropped by nearly 50 percent and costs are trending significantly below costs for all other patients. In Minnesota death from heart disease dropped to the lowest rate in the nation and continues to decline.

A health care leadership association of health plans, physician groups, and health systems in California, recently implemented coordinated, state-wide pay-for-performance initiatives. Based on a comparison of data from the first year (2003) and test year (2002) nearly 150,000 more California women received cervical cancer screenings, 35,000 more California women received breast cancer screenings, 10,000 additional California children received two needed immunizations, and 18,000 more Californians received a diabetes test. The program paid an estimated $50 million to 215 California physician groups in the pay-for-performance program in 2003 (paid out in 2004), and an estimated total of $100 million to the same physician groups under all of the association’s quality programs.

The American Society of Clinical Oncology’s Quality Oncology Practice Initiative (QOPI) is an oncologist-led, practice-based quality improvement initiative. QOPI’s goal is to promote excellence in cancer care by helping practices create a culture of self-examination and improvement. The process employed for improving cancer care includes measurement, feedback, and improvement tools for medical oncology practices. Practicing oncologists and quality experts developed the QOPI quality measures, which are derived from clinical guidelines or published standards, adapted from the National Initiative on Cancer Care Quality (NICCQ), and are consensus-based and clinically relevant. Although the measures are not yet linked to financial reimbursement, QOPI is an example of a specialty society-driven quality initiative that can be easily linked to a pay-for-performance program.

Results of these and many more provider-led initiatives, including those in the private sector, lay a sound foundation for CMS to move forward collaboratively with the Congress and with leading provider organizations toward adapting efficiency and performance based payments for Medicare.

These approaches are also aligned with emerging requirements from medical specialty boards for maintenance of certification. While recertification has traditionally involved demonstrating cognitive knowledge only, all boards are moving to link maintenance of specialty certification with demonstrated efforts to improve clinical care quality and performance. We recognize that providers need to be actively engaged in establishing this new direction and will continue close consultation and collaboration to assure improved quality and reduced burden for busy practitioners.

Mr. Chairman, thank you again for this opportunity to testify on physician payments within the Medicare program. We look forward to working with Congress and the medical community to develop a system that ensures appropriate payments for providers while also promoting the highest quality of care, without increasing overall Medicare costs. As a growing number of stakeholders now agree, we must increase our emphasis on payment based on improving quality and avoiding unnecessary costs. I would be happy to answer any of your questions.

Last Revised: November 17, 2005