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1994.09.28 : Medicare Payment Methods

Contact:  Anne Verano     (202) 690-6145
Wednesday, Sept. 28, 1994                           


     MEDICARE PAYMENT METHODS USED BY PRIVATE INSURERS, MEDICAID


     Medicare's payment methods for hospitals and physicians are
increasingly being adopted by private insurers and state Medicaid
programs, according to two studies funded by the Health Care
Financing Administration.

     "For the first time, we have completed research that clearly
shows Medicare's major impact on the way our nation pays its
hospitals and doctors," said HCFA Administrator Bruce C. Vladeck,
who oversees the Medicare program.  

     A study by the Rand Corporation finds that about two-thirds of
the Blue Cross and Blue Shield (BCBS) plans surveyed use Medicare's
prospective hospital payment approach for at least one of their
plans covering hospital services.  Moreover, 21 states use a similar
approach for their Medicaid program.

     Under Medicare's system, hospital payment for each patient is
determined by the diagnostic-related group (DRG) used to classify
the nature of the hospital stay. 

     DRG-based prospective payment systems offer great flexibility,
which accounts for their appeal to private payers and states.  For
example, BCBS plans use DRGs to establish different relationships
among the hospitals participating in their managed care plans and
traditional indemnity plans.  Medicaid programs tailor prospective 
payment systems to respond to the special needs of their clientele
and the state's hospital system. 

     In addition, DRGs can reduce payers' short-run costs for
hospital care by minimizing opportunities for cost shifting by other
payers and by providing a framework for negotiating price schedules
for other than full charges.  However, there is little information
on long-run effects on expenditures or on a community's hospital
costs, the study says.

     The second study, by Health Economics Research Inc., focuses on
the adoption of Medicare's physician reimbursement system, which
relies on a fee schedule based on values assigned to each physician
service.  These "values" for physician work represent the relative
resources involved in providing a service.  This scale of values is
commonly known as a resource-based, relative value scale (RBRVS).

     Medicare began using the fee schedule for reimbursing
physicians in January 1992.  The Medicare physician fee schedule is
being phased in over four years and will be fully implemented in
January 1996.

     According to the researchers, 19 of 24 BCBS plans responding to
their survey now use systems based on RBRVS.  About one-third of
state Medicaid programs have RBRVS-based payment systems, and
another 11 are currently considering it.  RBRVS also is being
installed in some state workers' compensation programs.

     "This study confirms that the relative value principles are
now widely accepted among private and public payers," Vladeck said.

     Study results show that payers most likely to adopt an RBRVS-
based payment system include BCBS plans, preferred provider
organizations and certain health maintenance organizations.  Payers
with larger enrollee size and physician expenditures, and those with
existing physician participating agreements, also are apt to use
RBRVS.

     The rapid adoption of Medicare's physician payment approach by
other payers may be due to several expected benefits, the study
says.  These include controlling costs, reducing administrative
expenses, avoiding cost shifting and redistributing payments to
primary care providers to improve beneficiary access to care.  Some
payers also intend to use RBRVS to improve physician profiling to
limit increase in utilization and intensity of services.  Concerns
about balance billing limitations may inhibit adoption. 

     The reports are available in paper copy and microfiche from the
U.S. Department of Commerce, National Technical Information Service
(NTIS), 5285 Port Royal Road, Springfield, Va. 22161;  phone: (703)
487-4650.  The NTIS accession numbers are PB94-176518 for the Rand
report and PB94-139573 for the Health Economics Research report.

     HCFA is the federal agency which administers the Medicare and
Medicaid programs that help pay the medical bills of 67 million
Americans.  HCFA's estimated FY 1994 expenditures will total nearly
$250 billion.