Paragon’s Joe Albanese Responds to Request for Information from the Senate Finance Committee

Addressing Payment Update Adequacy and Sustainability

Updating the Physician Fee Schedule (PFS) conversion factor for inflation would align the PFS with other Medicare fee-for-service (FFS) payment systems. Several policy experts have suggested basing such updates on the Medicare Economic Index (MEI). But Congress should be mindful of the flaws of the MEI, the evidence of current payment adequacy, and the limitations of FFS administrative pricing.

As the committee’s report points out, the MEI aggregates data from multiple sources to estimate clinical expenses, including cost data collected by an American Medical Association (AMA)-managed survey that has not been updated since 2006. The Centers for Medicare and Medicaid Services (CMS) has delayed rebasing and revising the MEI as the AMA updates this data. The role that the AMA plays in calculating this index—in addition to its existing influence over the calculation of PFS relative value units through the Relative Value Scale Update Committee (RUC)—means that using the MEI to update the PFS conversion factor would enable a professional association for one subset of health care providers to exercise even greater control over their own payment rates.

While policymakers have argued that adjusting the PFS conversion factor for inflation is necessary to maintain access to care for Medicare enrollees, this should be informed by the potential budgetary impact of such updates and the current metrics of access to care. If PFS conversion factor updates between 1998 and 2023 matched increases in the MEI, all else being equal, PFS spending would have been over $500 billion higher during that time. The Medicare Trustees and Medicare Payment Advisory Commission (MedPAC) also estimated that tying the PFS to the MEI would increase spending by tens of billions of dollars in the coming years.² Data from MedPAC and CMS indicate that overall access to care is currently good for Medicare patients in terms of surveyed ease of obtaining care, percentage of physicians accepting new patients, general clinician participation rates in Medicare, and other indicators.³ This does not necessarily obviate policies to improve payment accuracy or adequacy or to address specific access problems that may occur by specialty, geography, or beneficiary sub-population. But it does warrant appropriately balancing the benefits and costs of such policies.

Finally, it is important to acknowledge that a centralized, administrative approach to price-setting will always have flaws, as it will necessarily depend upon imperfect decisions about what data is available and appropriate to use as well as how to use it. In most markets, prices emerge organically based on the aggregated preferences and resource constraints of consumers and suppliers. Payment policy should ideally be guided by how much patients value a given health care service, with incentives for providers to furnish them economically. Lawmakers should consider ways to give FFS enrollees more control over health care financing, incorporate data from the private health care market, and require more provider accountability for the cost of care (described in the sections below).

Based on these factors, updating the PFS conversion factor with an administratively calculated external index is not an ideal way to achieve accurate payment rates. To the extent Congress adopts the MEI or another index for these purposes, it should consider limiting the size of annual updates, ensuring that commensurate cost increases are offset by other Medicare spending reductions (described in the next section), and making technical improvements to the underlying data, including by incorporating private market price information and ensuring that data sources are collected in a transparent fashion.

Part B Savings and Offsets

Policy changes that increase costs warrant offsetting reductions to Medicare expenditures. The PFS is within Part B, which is the fastest growing part of Medicare and directly crowds out other federal priorities, as it is mostly financed by general tax revenues.⁴ Therefore, Congress should achieve savings in the fastest-growing components of Part B benefits.

Payments for outpatient hospital services are increasing more than any other Part B benefit category, accounting for about half of the total estimated increase in FFS Part B.⁵ A major driver of this spending is the higher rate that Medicare pays hospitals relative to physician offices for the same services. This significantly disadvantages independent physician practices. Numerous policy experts have recommended “site neutral” payment policies as a way to reduce costs for patients and taxpayers by hundreds of billions of dollars and reduce the incentive to shift health care services to higher-cost settings.⁶ There are legitimate concerns about the impact of payment changes to rural hospitals, but they do not detract from the reality that payment differentials have driven significant increases in out-of-pocket patient costs, health care consolidation, and government spending for years.

Spending on Part B drugs has also risen by over 115 percent from 2014 to 2023.⁷ Unlike in Part D, where competition among plans kept costs lower than expected, FFS payment in Part B has not contained drug costs.⁸ While many policy changes could improve Part B drug payment, one option is to adjust Medicare rates for drugs acquired in the 340B discount program. This program allows hospitals serving vulnerable populations to acquire much cheaper drugs. However, it does not require them to pass savings to patients. Medicare also continues to buy these drugs at the same rate as non-discounted drugs. This perverse incentive has contributed to significant growth in the 340B program without benefiting patients. A CMS rule that reduced Medicare rates for these drugs saved Medicare $8.4 billion and patients $2.1 billion until the Supreme Court overturned it. Congress could allow Medicare rates to account for 340B discounts in addition to other reforms to the program.⁹

Congress could also embrace previously enacted policies to improve price accuracy in Part B. For example, competitive bidding for certain durable medical equipment reduced costs by about $3.1 billion, or 42 percent, between 2010 and 2015.¹⁰ A temporary gap period for this program started in 2024, but Congress could expand it.¹¹ Congress has also delayed the incorporation of private payer data into clinical laboratory payments multiple times. Finding a sound way to implement this policy would improve the accuracy of lab payments.

Addressing Concerns Regarding Budget Neutrality in the PFS

The PFS budget neutrality adjustment, coupled with a statutory freeze on base conversion factor changes, has led to negative payment updates every year since 2021. Refining the budget neutrality adjustment to account for over- or underestimates in utilization from previous years is a reasonable way to improve this metric, but Congress should not increase the threshold for budget neutrality updates or index it to inflation.

Increasing or indexing this threshold would allow for CMS to make greater changes to Medicare spending in annual rulemaking. This would increase the agency’s influence over the program outside of Congress and undermine the very purpose of budget neutrality requirements. In the PFS and other FFS payment systems—including the Outpatient Prospective Payment System, which has no statutory budget neutrality threshold—these adjustments are intended to protect the public from increases in Part B expenditures due to routine technical updates to Medicare payment calculations. Such increases can lead to higher premiums for seniors. Furthermore, instituting annual conversion factor updates would already mitigate the impact of budget neutrality adjustments on the PFS.

Incentivizing Participation in Alternative Payment Models

Participation in advanced alternative payment models (APMs)—particularly those developed by the Center for Medicare and Medicaid Innovation (CMMI) and within the Medicare Shared Savings Program—is another key issue. As the committee’s report notes, the main mechanism by which Medicare has incentivized advanced APM participation is financial bonuses for qualifying participants, which will expire after 2026. Increased participation is not a goal for its own sake but was originally premised on the expectation that it would yield cost savings and quality improvements in the health care delivery system. After years of these incentives, it is clear that they are empirically and conceptually flawed.

First, the bonuses themselves are not effective. A recent literature review found no substantial causal evidence that they induced physicians to join advanced APMs who would not have otherwise done so.¹² Second, most APMs fail to achieve Medicare savings. The Congressional Budget Office found that CMMI lost $5.4 billion from 2011 to 2020 rather than saving $2.8 billion, as expected.¹³ It is difficult to distinguish the impact of advanced versus ordinary APMs, as some models have both advanced and non-advanced tracks without separate evaluation results. A few of these models have saved money in their official evaluations overall, such as the Medicare Shared Savings Program and Maryland Total Cost of Care. As Table 1¹⁴ shows, however, APMs with only advanced tracks have not generally reduced spending. Given the questionable impact of APM bonuses and APMs themselves, it does not make sense to simply prioritize participation.

The strategy of adopting widespread payment changes by encouraging more participation in advanced APMs is also often fundamentally at odds with their design. Most models are targeted toward providers who meet specific criteria for specialty, patient subpopulation, or geography, which leaves many clinicians unable to qualify. Furthermore, in order for CMMI to test the impact of payment changes, it must by design exclude providers and beneficiaries from model participation as a control group. Finally, relying on financial incentives to induce participation in APMs that are mostly voluntarily means that it will be difficult to determine whether cost savings are due to policy changes or selection biases (i.e., clinicians who participate in models only if they are likely to benefit or be successful).

For these reasons, incentivizing voluntary adoption of payment changes is no substitute for pursuing permanent reforms through Congress—and CMMI APMs are a particularly flawed forum for doing so. Lawmakers should revisit appropriated funding for CMMI ($10 billion every decade) and exercise more oversight over its APM design, implementation, management, and evaluation processes. Additionally, advanced APM participation bonuses should be allowed to expire. If Congress retains some form of APM incentives, it should not increase net Medicare spending and should be designed to simply correspond with the level of financial risk borne by providers. Currently, clinicians receive bonuses only if they meet specific thresholds of Medicare revenue or patients coming from advanced APMs. Bearing a “nominal” level of financial risk (at least 8 percent of Medicare revenue) is only one criterion for advanced APM participation—along with use of health information technology and alignment with quality metrics. Incentivizing greater financial risk-bearing would be a simpler and more effective way to focus providers on value rather than administratively complex and burdensome aspects of APM design. Tying incentives to risk could also reward providers on a continuous scale rather than in a “pass/fail” fashion and encourage a wider array of risk-bearing payment arrangements beyond CMS-managed APMs, including with other payers such as Medicare Advantage (MA) plans.

Reducing Physician Reporting Burden Related to MIPS

The committee’s report correctly notes that the Merit-Based Incentive Payment System (MIPS) has increased administrative burden on clinicians without improving quality of care.¹⁵ In fact, these failures have occurred in other Medicare quality programs as well.¹⁶ This has been due to both operational flaws—such as excessively complex, numerous, and ineffective measures—as well as more fundamental shortcomings—such as the inherent fixation on “measurable” quality outcomes at the expense of less tangible measures of value and a limited ability to detect the underlying driver of those outcomes. Furthermore, quality metrics prioritized by government agencies are unlikely to align with what patients value, as their preferences are diverse and ever-changing. Patients exercising their preferences about where to receive care can be a better indicator of provider quality than measures designed through bureaucratic processes.

Therefore, it is important that Congress not simply replace MIPS with another pay-for-performance program based on CMS-designed quality metrics. Instead, to the extent Congress articulates a role for CMS in quality measurement, it should be as a facilitator of more transparent information that patients and others can use to make their care decisions. For example, CMS could collect and publish data about provider outcomes on platforms such as Medicare’s Care Compare or Plan Compare.¹⁷

Supporting Chronic Care in the Primary Care Setting 

Moving away from an FFS payment methodology toward greater use of capitation through hybrid payments, particularly for ongoing care management, is a sensible way to encourage greater accountability for the quality and cost of care among providers. As mentioned above, pursuing permanent payment reforms would also be preferable to continuing to rely on using APMs to enact policy changes in a piecemeal fashion

However, those same APMs also suggest that there is a relatively small body of evidence for the success of hybrid payments for primary care. Table 2¹⁸ lists CMMI models that use hybrid payments for primary care. None has led to net savings to the Medicare program, and several have not yet begun or been evaluated. Consequently, Congress should identify what factors may allow hybrid payment models to succeed or not in a primary care environment. For example, burdensome quality reporting requirements may detract from the success of a model testing new approaches to payment.

Furthermore, a key limitation to incorporating hybrid or capitated payments for just one setting of care or payment system is that individual providers—even primary care providers who refer patients to specialists or undertake care management duties—are typically not responsible for all the care their patients receive. This is why capitated reimbursement at the payer level, as in MA, is a conceptually simpler way to achieve accountability for patients’ total cost of care.

Finally, permanent changes to FFS payment systems could also advance a unified approach to risk adjustment in traditional Medicare and MA. However, Congress should avoid adding complexity to payment policy without improving the financing or provision of care, such as tying hybrid payments to quality metrics or establishing separate conversion factors or budget neutrality adjustments within the PFS.

Ensuring Accuracy of Values within the PFS

The committee’s report crucially identifies the importance of maintaining accurate prices within the PFS, including relative values of health care services. Misestimating the value of such services reduces access to undervalued care, increases the cost of ineffective care to patients and taxpayers, and generally distorts the health care sector.

Currently, the RUC plays a significant role in setting relative values in the PFS due to historical deference by CMS. Besides creating the perception that professional medical societies are influential in setting their own payment rates, the RUC’s recommendations have also been found to lead to inaccuracies in Medicare pricing.¹⁹

Establishing new panels or committees to assist CMS with setting relative rates, or deferring to new third-party entities, would not necessarily address the methodological shortcomings inherent to centralized, administrative price-setting, however. Other administrative FFS payment systems contain numerous instances of inaccurate pricing. As mentioned above, Medicare payment policies encourage greater health care consolidation by paying hospitals at a higher rate than physician offices for the same routine services. MedPAC has also long recommended reducing the generous payment rates for post-acute care.²⁰ There are certainly other, unknown cases of inaccurate pricing as well. There is no reason to expect that a new committee would be able to set PFS rates any better.

Prices are most accurately determined by the value a service provides within real-world resource constraints. This can be particularly true for routine, discretionary, and non-emergency health care services. The major flaw of the American health care system is that government policies exercise too strong an influence on private actors, which undermines the pressure to price services competitively and in accord with their actual value. Therefore, rather than adopting a new approach to administrative price setting, policymakers should explore ways to shift more financing to Medicare in order to empower them as consumers. Incorporating more data from the private health care market to inform the development of relative value units could also offer better empirical insights about actual consumer behavior versus administratively re-creating market prices based on input costs.

I appreciate your attention to these key issues in Medicare payment and the opportunity to offer my perspective.

Joe Albanese
Senior Policy Analyst
Paragon Health Institute