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How to set Medicare reimbursement rates correctly

Posted Dec 06 2008 10:17am

For many illnesses, Medicare pays physicians a lump sum for the entire episode of care.  This is known at the prospect payment system (PPS).  But how does Medicare determine the payment amount?  How should Medicare determine the payment amount?

Medicare generally looks at 1) what treatments are generally used on average to treat a patient with this disease, 2) what treatments are used to treat patients with disease of varying severity, and 3) how much does each type of treatment cost.  Then they add up the costs and give the docs one lump sum payment.

The difficult part is determining the treatments that should be used.

Dennis Cotter writes in theHealth Affairs blog about Medicare’s reimbursement decisions regarding the PPS for end-stage renal disease (ESRD).  Cotter found that Medicare is much more likely to use historical, patient utilization data to determine the treatments included in the PPS rather than the treatments that should be used.  Cotter talks about the case of  erythropoiesis-stimulating agents (ESAs), a drug used to treat ESRD.  ESAs are billable separately from the PPS, giving docs an incentive to use higher quantities of ESAs.  n fact, “Large for-profit chain facilities used larger dose adjustments and targeted higher hematocrit levels compared to smaller nonprofit units.” 

How does Medicare determine how much of these separately billable ESA prescriptions is allowable?Historical data is often used because it is the status quo.  Using the status quo doesn’t upset pharmaceutical companies or compel docs to change their practice patterns.  However, using the status quo may mean wasting significant amounts of health care dollars.  Currently, ESA spending costs Medicare $2.5 billion.  If Medicare only reimbursed physicians for using the correct amount ESAs–rather than the historical amounts–the $2.5 billion could be reduced by 53%.

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