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Testimony: 

Before the Subcommittee on Health, Committee on Energy and Commerce, 
House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 9:30 a.m. EST: 

Tuesday, March 6, 2007: 

Medicare Spending: 

Preliminary Findings Regarding an Approach Focusing on Physician 
Practice Patterns to Foster Program Efficiency: 

Statement of A. Bruce Steinwald: 
Director, Health Care: 

GAO-07-567T: 

GAO Highlights: 

Highlights of GAO-07-567T, a testimony before the Subcommittee on 
Health, Committee on Energy and Commerce, House of Representatives 

Why GAO Did This Study: 

Medicare’s current system of spending targets used to moderate spending 
growth for physician services and annually update physician fees is 
problematic. This spending target system—called the sustainable growth 
rate (SGR) system—adjusts physician fees based on the extent to which 
actual spending aligns with specified targets. In recent years, because 
spending has exceeded the targets, the system has called for fee cuts. 
Since 2003, the cuts have been averted through administrative or 
legislative action, thus postponing the budgetary consequences of 
excess spending. Under these circumstances, policymakers are seeking 
reforms that can help moderate spending growth while ensuring that 
beneficiaries have appropriate access to care. For today’s hearing, 
this subcommittee, which is exploring options for improving how 
Medicare pays physicians, asked GAO to share the preliminary results of 
its ongoing study related to this topic. GAO’s statement addresses 
(1) approaches taken by other health care purchasers to address 
physicians’ inefficient practice patterns, (2) GAO’s efforts to 
estimate the prevalence of inefficient physicians in Medicare, and (3) 
the methodological tools available to identify inefficient practice 
patterns programwide. GAO ensured the reliability of the claims data 
used in this report by performing appropriate electronic data checks 
and by interviewing agency officials who were knowledgeable about the 
data. 

What GAO Found: 

Consistent with the premise that physicians play a central role in the 
generation of health care expenditures, some health care purchasers 
examine the practice patterns of physicians in their network to promote 
efficiency. GAO selected 10 health care purchasers for review because 
they assess physicians’ performance against an efficiency standard. To 
measure efficiency, the purchasers we spoke with generally compared 
actual spending for physicians’ patients to the expected spending for 
those same patients, given their clinical and demographic 
characteristics. Most purchasers said they also evaluated physicians on 
quality. The purchasers linked their efficiency analysis results and 
other measures to a range of strategies—from steering patients toward 
the most efficient providers to excluding a physician from the 
purchaser’s provider network because of poor performance. Some of the 
purchasers said these efforts produced savings. 

Having considered the efforts of other health care purchasers in 
evaluating physicians for efficiency, GAO conducted its own analysis of 
physician practices in Medicare. GAO used the term efficiency to mean 
providing and ordering a level of services that is sufficient to meet 
patients’ health care needs but not excessive, given a patient’s health 
status. GAO focused the analysis on generalists—physicians who 
described their specialty as general practice, internal medicine, or 
family practice—and selected metropolitan areas that were diverse 
geographically and in terms of Medicare spending per beneficiary. GAO 
found that individual physicians who were likely to practice medicine 
inefficiently were present in each of 12 metropolitan areas studied. 

The Centers for Medicare & Medicaid Services (CMS), the agency that 
administers Medicare, also has the tools to identify physicians who are 
likely to practice medicine inefficiently. Specifically, CMS has at its 
disposal comprehensive medical claims information, sufficient numbers 
of physicians in most areas to construct adequate sample sizes, and 
methods to adjust for differences in beneficiary health status. 

A primary virtue of examining physician practices for efficiency is 
that the information can be coupled with incentives that operate at the 
individual physician level, in contrast with the SGR system, which 
operates at the aggregate physician level. Efforts to improve physician 
efficiency would not, by themselves, be sufficient to correct 
Medicare’s long-term fiscal imbalance, but such efforts could be an 
important part of a package of reforms aimed at future program 
sustainability. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-567T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact A. Bruce Steinwald at 
(202) 512-7101 or steinwalda@gao.gov. 

[End of figure] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today as you discuss options for improving how 
Medicare pays physicians. Your task is not simple, as you seek reforms 
that can help moderate spending growth while ensuring that 
beneficiaries have appropriate access to high-quality physician 
services and physicians receive fair compensation for providing those 
services. Medicare's current system of spending targets used to 
moderate spending growth and annually update physician fees is 
problematic. 

This spending target system--called the sustainable growth rate (SGR) 
system--adjusts Medicare's physician fees based on the extent to which 
actual spending aligns with specified targets. If the growth in the 
number of services provided per beneficiary--referred to as volume--and 
in the average complexity and costliness of services--referred to as 
intensity--is high enough, spending will exceed the SGR target. From 
1999--the first year that the SGR system was used to update physician 
fees--through 2001, physicians received fee increases annually. Since 
2002, actual Medicare spending on physician services has exceeded SGR 
targets, and the SGR systems has called for fee cuts to offset the 
excess spending. In 2002 the SGR system reduced physician fees by 
nearly 5 percent. Fee declines in subsequent years were averted only by 
administrative and legislative actions that modified or temporarily 
overrode the SGR system.[Footnote 1] In the absence of additional 
administrative or legislative action, the SGR system will likely reduce 
fees by about 5 percent a year for the next several years. 

The potential for a sustained period of declining fees has raised 
policymakers' concerns about the appropriateness of the SGR system for 
updating physician fees and about physicians' continued participation 
in the Medicare program. A particular concern is that the SGR system 
acts as a blunt instrument in that all physicians are subject to the 
consequences of excess spending--namely, downward fee adjustments-- 
that may stem from the excessive use of resources by only some 
physicians. However, as we have discussed in our prior work, the SGR 
system serves an important role in alerting policymakers to the need 
for fiscal discipline.[Footnote 2] Specifically, fee cuts under the SGR 
system signal to physicians collectively and to the Congress that 
spending due to volume and intensity has increased more than allowed. 

Some of the higher volume and intensity that drives spending growth may 
not be medically necessary. In fact, the wide geographic variation in 
Medicare spending per beneficiary--unrelated to beneficiary health 
status or outcomes--provides evidence that health needs alone do not 
determine spending.[Footnote 3] Medicare physician payment policy does 
little to change this situation; payments under the Medicare program 
are not designed to foster individual physician responsibility for the 
most effective medical practices. In contrast, some public and private 
health care purchasers have initiated programs to identify efficient 
physicians and encourage patients to obtain care from these physicians. 

With these circumstances in mind, and in fulfillment of a 2003 mandate 
to examine aspects of physician compensation in Medicare,[Footnote 4] 
we conducted a study focusing on efficiency with respect to physician 
practices. In our study, we use the term efficiency to mean providing 
and ordering a level of services that is sufficient to meet a patient's 
health care needs but not excessive, given a patient's health status. 
My remarks today will address (1) physician-focused approaches taken by 
other health care purchasers to address inefficient medical practices, 
(2) our efforts to estimate the prevalence of inefficient physicians in 
Medicare, and (3) the methodological tools available to the Centers for 
Medicare & Medicaid Services (CMS) to identify inefficient physician 
practice patterns programwide. My remarks today are based on our 
study's preliminary findings. 

In conducting our study, we interviewed representatives of 10 health 
care purchasers,[Footnote 5] including 5 commercial health plans, 1 
provider network, 1 trust fund jointly managed by employers and a 
union, and 3 government agencies--2 in U.S. states and 1 in a Canadian 
province. We selected these purchasers because their programs that 
examine physician practices explicitly assess efficiency--unlike many 
such programs that assess quality only. We also estimated the 
prevalence in Medicare of physicians likely to practice inefficiently. 
To do this work, we examined 2003 Medicare claims data from 12 
metropolitan areas. We ensured the reliability of the claims data used 
in this report by performing appropriate electronic data checks and by 
interviewing officials at CMS who were knowledgeable about the data. In 
addition, we discussed the facts contained in this statement with CMS 
officials. The study on which these remarks are based has been 
conducted beginning September 2005 in accordance with generally 
accepted government auditing standards. 

In summary, the health care purchasers we studied examined the practice 
patterns of physicians in their networks and used the results to 
promote efficiency. They adopted a range of incentives--from steering 
patients toward the most efficient providers to excluding a physician 
from the network--to encourage physicians to provide care efficiently; 
some reported savings as a result of these efforts. Using our own 
methodology to analyze the practice patterns of physicians in Medicare, 
we found that physicians who were likely to be practicing medicine 
inefficiently were present in all 12 of the metropolitan areas studied. 
CMS also has the tools to identify physicians in Medicare who are 
likely to practice medicine inefficiently, including comprehensive 
claims information, sufficient numbers of physicians in most areas to 
construct adequate sample sizes, and methods to adjust for differences 
in beneficiary health status. 

Some Health Care Purchasers Use Physician Profiling Results to 
Encourage Efficient Medical Practice: 

Consistent with the premise that physicians play a central role in the 
generation of most health care expenditures, some health care 
purchasers employ physician profiling to promote efficiency. We 
selected 10 health care purchasers that profiled physicians in their 
networks--that is, compared physicians' performance to an efficiency 
standard to identify those who practiced inefficiently. To measure 
efficiency, the purchasers we spoke with generally compared actual 
spending for physicians' patients to the expected spending for those 
same patients, given their clinical and demographic 
characteristics.[Footnote 6] Most purchasers said they also evaluated 
physicians on quality. The purchasers linked their efficiency profiling 
results and other measures to a range of physician-focused strategies 
to encourage the efficient provision of care. Some of the purchasers 
said their profiling efforts produced savings. 

Health Care Purchasers Profiled Physicians across Several Dimensions to 
Evaluate Physician Performance: 

The 10 health care purchasers we examined used two basic profiling 
approaches to identify physicians whose medical practices were 
inefficient. One approach focused on the costs associated with treating 
a specific episode of illness--such as a stroke or heart attack. The 
other approach focused on costs, within a specific period, associated 
with the patients in a physician's practice. Both approaches used 
information from medical claims data to measure resource use and 
account for differences in patients' health status. In addition, both 
approaches assessed physicians (or physician groups) based on the costs 
associated with services that they may not have provided directly, such 
as costs associated with a hospitalization or services provided by a 
different physician. 

Although the methods used by purchasers to predict patient spending 
varied, all used patient demographics and diagnoses. The methods they 
used generally computed efficiency measures as the ratio of actual to 
expected spending for patients of similar health status. In addition, 
all of the purchasers we interviewed profiled specialists and all but 
one also profiled primary care physicians. Several purchasers said they 
would only profile physicians who treated an adequate number of cases, 
since such analyses typically require a minimum sample size to be 
valid. 

Health Care Purchasers Linked Physician Profiling Results to a Range of 
Incentives Encouraging Efficiency: 

The health care purchasers we examined directly tied the results of 
their profiling methods to incentives that encourage physicians in 
their networks to practice efficiently. The incentives varied widely in 
design, application, and severity of consequences. Purchasers used 
incentives that included: 

* educating physicians to encourage more efficient care, 

* designating in their physician directories those physicians who met 
efficiency and quality standards, 

* dividing physicians into tiers based on efficiency and giving 
enrollees financial incentives to see physicians in particular tiers, 

* providing bonuses or imposing penalties based on efficiency and 
quality standards, and: 

* excluding inefficient physicians from the network. 

Physician Profiling Has Potential for Savings: 

Evidence from our interviews with the health care purchasers suggests 
that physician profiling programs may have the potential to generate 
savings for health care purchasers. Three of the 10 purchasers reported 
that the profiling programs produced savings and provided us with 
estimates of savings attributable to their physician-focused efficiency 
efforts. For example, 1 of those purchasers reported that growth in 
spending fell from 12 percent to about 1 percent in the first year 
after it restructured its network as part of its efficiency program, 
and an actuarial firm hired by the purchaser estimated that about three 
quarters of the reduction in expenditure growth was most likely a 
result of the efficiency program. Three other purchasers suggested 
their programs might have achieved savings but did not provide savings 
estimates, while four said they had not attempted to measure savings at 
the time of our interviews. 

Through Profiling, We Found That Physicians Likely to Practice 
Inefficiently in Medicare Were Present in All Selected Areas: 

Having considered the efforts of other health care purchasers in 
profiling physicians for efficiency, we conducted our own profiling 
analysis of physician practices in Medicare and found individual 
physicians who were likely to practice medicine inefficiently in each 
of 12 metropolitan areas studied. We focused our analysis on 
generalists--physicians who described their specialty as general 
practice, internal medicine, or family practice. We did not include 
specialists in our analysis. We selected areas that were diverse 
geographically and in terms of Medicare spending per beneficiary. 

Under our methodology, we computed the percentage of overly expensive 
patients in each physician's Medicare practice. To identify overly 
expensive patients, we grouped the Medicare beneficiaries in the 12 
locations according to their health status, using diagnosis and 
demographic information. Patients whose total Medicare expenditures-- 
for services provided by all health providers, not just physicians--far 
exceeded those of other patients in their same health status grouping 
were classified as overly expensive. Once these patients were 
identified and linked to the physicians who treated them, we were able 
to determine which physicians treated a disproportionate share of these 
patients compared with their generalist peers in the same location. We 
classified these physicians as outliers--that is, physicians whose 
proportions of overly expensive patients would occur by chance less 
than 1 time in 100. We concluded that these outlier physicians were 
likely to be practicing medicine inefficiently.[Footnote 7] 

Based on 2003 Medicare claims data, our analysis found outlier 
generalist physicians in all 12 metropolitan areas we studied. In two 
of the areas, outlier generalists accounted for more than 10 percent of 
the area's generalist physician population. In the remaining areas, the 
proportion of outlier generalists ranged from 2 percent to about 6 
percent of the area's generalist population. 

CMS Has Tools Available to Profile Physicians for Efficiency: 

Medicare's data-rich environment is conducive to identifying physicians 
who are likely to practice medicine inefficiently. Fundamental to this 
effort is the ability to make statistical comparisons that enable 
health care purchasers to identify physicians practicing outside of 
established standards. CMS has the tools to make statistically valid 
comparisons, including comprehensive medical claims information, 
sufficient numbers of physicians in most areas to construct adequate 
sample sizes, and methods to adjust for differences in patient health 
status. 

Among the resources available to CMS are the following: 

* Comprehensive source of medical claims information. CMS maintains a 
centralized repository, or database, of all Medicare claims that 
provides a comprehensive source of information on patients' Medicare- 
covered medical encounters. Using claims from the central database, 
each of which includes the beneficiary's unique identification number, 
CMS can identify and link patients to the various types of services 
they received and to the physicians who treated them. 

* Data samples large enough to ensure meaningful comparisons across 
physicians. The feasibility of using efficiency measures to compare 
physicians' performance depends, in part, on two factors: the 
availability of enough data on each physician to compute an efficiency 
measure and numbers of physicians large enough to provide meaningful 
comparisons. In 2005, Medicare's 33.6 million fee-for-service enrollees 
were served by about 618,800 physicians. These figures suggest that CMS 
has enough clinical and expenditure data to compute efficiency measures 
for most physicians billing Medicare. 

* Methods to account for differences in patient health status. Because 
sicker patients are expected to use more health care resources than 
healthier patients, the health status of patients must be taken into 
account to make meaningful comparisons among physicians. Medicare has 
significant experience with risk adjustment. Specifically, CMS has used 
increasingly sophisticated risk adjustment methodologies over the past 
decade to set payment rates for beneficiaries enrolled in managed care 
plans. 

To conduct profiling analyses, CMS would likely make methodological 
decisions similar to those made by the health care purchasers we 
interviewed. For example, the health care purchasers we spoke with made 
choices about whether to profile individual physicians or group 
practices; which risk adjustment tool was best suited for a purchaser's 
physician and enrollee population; whether to measure costs associated 
with episodes of care or the costs, within a specific time period, 
associated with the patients in a physician's practice; and what 
criteria to use to identify inefficient practice patterns. 

Concluding Observations: 

Our experience in examining what health care purchasers other than 
Medicare are doing to improve physician efficiency and in analyzing 
Medicare claims has enabled us to gain some insights into the potential 
of physician profiling to improve Medicare program efficiency. A 
primary virtue of profiling is that, coupled with incentives to 
encourage efficiency, it can create a system that operates at the 
individual physician level. In this way, profiling can address a 
principal criticism of the SGR system, which only operates at the 
aggregate physician level. Although savings from physician profiling 
alone would clearly not be sufficient to correct Medicare's long-term 
fiscal imbalance, it could be an important part of a package of reforms 
aimed at future program sustainability. 

Mr. Chairman, this concludes my prepared remarks. I will be pleased to 
answer any questions you or the subcommittee members may have. 

GAO Contacts and Acknowledgments: 

For future contacts regarding this testimony, please contact A. Bruce 
Steinwald at (202) 512-7101 or at steinwalda@gao.gov. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this statement. Other individuals who made 
key contributions include James Cosgrove and Phyllis Thorburn, 
Assistant Directors; Todd Anderson; Alex Dworkowitz; Hannah Fein; 
Gregory Giusto; Richard Lipinski; and Eric Wedum. 

FOOTNOTES 

[1] For example, the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) specified a minimum update of 1.5 
percent for both 2004 and 2005. Pub. L. No. 108-173, § 601(a)(1), 117 
Stat. 2066, 2300. 

[2] GAO, Medicare Physician Payments: Trends in Service Utilization, 
Spending, and Fees Prompt Consideration of Alternative Payment 
Approaches, GAO-06-1008T (Washington, D.C.: July 25, 2006) and Medicare 
Physician Payments: Concerns about Spending Target System Prompt 
Interest in Considering Reforms, GAO-05-85 (Washington, D.C.: Oct. 8, 
2004). 

[3] Elliot S. Fisher, et al., "The Implications of Regional Variations 
in Medicare Spending. Part 1: The Content, Quality, and Accessibility 
of Care," Annals of Internal Medicine, vol. 138, no. 4 (2003): 273-287. 

[4] MMA, Pub. L. No. 108-173, § 953, 117 Stat. 2066, 2428. 

[5] In our study, we use "purchaser" to mean health plans as well as 
agencies that manage care purchased from health plans; one of the 
entities we interviewed is a provider network that contracts with 
several insurance companies to provide care to their enrollees. 

[6] Generally, estimates of an individual's expected spending are based 
on factors such as patient diagnoses and demographic traits. 

[7] Our approach to estimating outlier physicians was conservative in 
that it captures only the most extreme practice patterns; therefore, 
our analysis does not mean that all nonoutlier physicians were 
practicing efficiently. 

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