Medicare: Focus on Physician Practice Patterns Can Lead to	 
Greater Program Efficiency (30-APR-07, GAO-07-307).		 
                                                                 
The Medicare Prescription Drug, Improvement, and Modernization	 
Act of 2003 (MMA) directed GAO to study the compensation of	 
physicians in traditional fee-for service (FFS) Medicare. GAO	 
explored linking physician compensation to efficiency--defined as
providing and ordering a level of services that is sufficient to 
meet a patient's health care needs but not excessive, given the  
patient's health status. In this report, GAO (1) estimates the	 
prevalence in Medicare of physicians who are likely to practice  
inefficiently, (2) examines physician-focused strategies used by 
health care purchasers to encourage efficiency, and (3) examines 
the potential for the Centers for Medicare and Medicaid Services 
(CMS) to profile physicians for efficiency and use the results.  
To do this, GAO developed a methodology using 2003 Medicare	 
claims data to compare generalist physicians' Medicare practices 
with those of their peers in 12 metropolitan areas. GAO also	 
examined 10 health care purchasers that profile physicians for	 
efficiency.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-307 					        
    ACCNO:   A68905						        
  TITLE:     Medicare: Focus on Physician Practice Patterns Can Lead  
to Greater Program Efficiency					 
     DATE:   04/30/2007 
  SUBJECT:   Beneficiaries					 
	     Evaluation methods 				 
	     Financial analysis 				 
	     Health care personnel				 
	     Health care programs				 
	     Health care services				 
	     Hospital care services				 
	     Medical economic analysis				 
	     Medical fees					 
	     Medicare						 
	     Patient care services				 
	     Physicians 					 

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GAO-07-307

   

     * [1]Results in Brief
     * [2]Background
     * [3]Physicians Who Treated a Disproportionate Share of Overly Ex

          * [4]In Identifying Overly Expensive Beneficiaries, We Found Sign
          * [5]Outlier Physicians Were Present in Every Metropolitan Area

     * [6]Health Care Purchasers Used Physician Profiling Results to E

          * [7]Health Care Purchasers in Our Study Profiled Physicians acro
          * [8]Health Care Purchasers Linked Physician Profiling Results to
          * [9]Physician Profiling Suggests Potential for Savings

     * [10]CMS Has Tools Available to Profile Physicians for Efficiency

          * [11]Medicare's Data-Rich Environment Is Conducive to Profiling f
          * [12]To Use Profiling Results in Medicare in Ways Similar to Othe

     * [13]Conclusions
     * [14]Recommendation for Executive Action
     * [15]Agency and Professional Association Comments and Our Evaluat

          * [16]CMS Comments
          * [17]Professional Association Comments

     * [18]Appendix I: Methodology for Identifying Physicians with a Di

          * [19]Method for Identifying Overly Expensive Beneficiaries

               * [20]Method for Identifying Outlier Physicians

     * [21]Appendix II: Health Care Purchaser Program Characteristics
     * [22]Appendix III: Distribution of Physicians by Their Proportion
     * [23]Appendix IV: Comments from the Centers for Medicare & Medica
     * [24]Appendix V: GAO Contact and Staff Acknowledgments

          * [25]GAO Contact
          * [26]Acknowledgments

               * [27]Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

April 2007

MEDICARE

Focus on Physician Practice Patterns Can Lead to Greater Program
Efficiency

GAO-07-307

Contents

Letter 1

Results in Brief 5
Background 7
Physicians Who Treated a Disproportionate Share of Overly Expensive
Patients Were Found in Each of 12 Areas Studied 10
Health Care Purchasers Used Physician Profiling Results to Encourage
Efficient Medical Practice 13
CMS Has Tools Available to Profile Physicians for Efficiency, but May Need
Some Additional Authorities to Use Results in Ways Similar to Other
Purchasers 17
Conclusions 21
Recommendation for Executive Action 22
Agency and Professional Association Comments and Our Evaluation 22
Appendix I Methodology for Identifying Physicians with a Disproportionate
Share of Overly Expensive Beneficiaries 26
Appendix II Health Care Purchaser Program Characteristics 34
Appendix III Distribution of Physicians by Their Proportion of Overly
Expensive Beneficiaries by Metropolitan Area 37
Appendix IV Comments from the Centers for Medicare & Medicaid Services 44
Appendix V GAO Contact and Staff Acknowledgments 47

Tables

Table 1: Percentage of Outlier Physicians in 12 Metropolitan Areas, 2003
12
Table 2: Proportion of Overly Expensive Beneficiaries and Outlier
Threshold Value by CBSA 33
Table 3: Characteristics of Health Care Purchasers' Physician Profiling
Programs 35

Figures

Figure 1: Average Medicare Expenditures, by Quintile, for Beneficiaries of
Nearly Average Health Status 11
Figure 2: Distribution of Total Per-Beneficiary Medicare Expenditures for
Survivors for Risk Categories 1-10 28
Figure 3: Distribution of Total Per-Beneficiary Medicare Expenditures for
Survivors for Risk Categories 11-31 29
Figure 4: Actual and Simulated Distribution of Generalists by their
Medicare Practice's Proportion of Overly Expensive Beneficiaries in a
Hypothetical Metropolitan Area 32
Figure 5: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Albuquerque, N.Mex. 37
Figure 6: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Baton Rouge, La. 38
Figure 7: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Cape Coral, Fla. 38
Figure 8: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Columbus, Ohio 39
Figure 9: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Des Moines, Iowa 39
Figure 10: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Miami, Fla. 40
Figure 11: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Phoenix, Ariz. 40
Figure 12: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Pittsburgh, Pa.
41
Figure 13: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Portland, Maine
41
Figure 14: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Riverside, Calif.
42
Figure 15: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Sacramento,
Calif. 42
Figure 16: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Springfield,
Mass. 43

Abbreviations

ACP American College of Physicians
AMA American Medical Association
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
  of 2000
CMS Centers for Medicare & Medicaid Services
FFS fee-for-service
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003
MedPAC Medicare Payment Advisory Commission
SGR sustainable growth rate

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United States Government Accountability Office
Washington, DC 20548

April 30, 2007

Congressional Committees

In recent years, we and others have reported that the Medicare program is
unsustainable in its present form.^1 Because of rising health care costs
and the aging of baby boomers into eligibility for Medicare, future
program spending is projected to encumber an escalating share of the
government's resources.^2 In their 2006 annual report, the Medicare
Trustees found that Part B assets now are substantially below appropriate
levels and that Medicare's Hospital Insurance Trust Fund--which funds the
Medicare Part A program--will be exhausted in 2018.^3 They concluded that
Medicare's financial challenges call for timely and effective action, and
that reforms must be prompt to allow time for health care providers,
beneficiaries, and taxpayers to adjust their expectations. Similarly, in
2006 testimony, the Comptroller General noted that dramatic health care
reform would require a long transition period, arguing for acting sooner
rather than later.^4

1GAO, Suggested Areas for Oversight for the 110th Congress,
[28]GAO-07-235R (Washington D.C.: Nov. 17, 2006); GAO, 21st Century
Challenges: Reexamining the Base of the Federal Government,
[29]GAO-05-325SP (Washington, D.C.: Feb. 2005); Congressional Budget
Office, The Long-Term Budget Outlook (Washington D.C.: Dec. 2005); The
Wall Street Journal, "Greenspan Expresses Concerns On Derivatives,
Medicare Costs," May 19, 2006, p. A7; USA Today, "Bernanke: Savings
situation getting dire," October 5, 2006,
http://www.usatoday.com/money/economy/fed/2006-10-04-bernanke-retirement-programs_x.htm
(accessed Dec. 13, 2006).

^2GAO, 21st Century: Addressing Long-Term Fiscal Challenges Must Include a
Re-examination of Mandatory Spending, [31]GAO-06-456T (Washington, D.C.:
Feb. 15, 2006).

^3See Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, 2006 Annual Report of the
Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds (Washington D.C.: May 1,
2006). Medicare Part A pays for inpatient hospital stays, skilled nursing
facility care, hospice care, and some home health care. Part B finances
physician, outpatient hospital, home health care, and other services.

^4 [32]GAO-06-456T .

Experts agree that physicians play a central role in the generation of
health care expenditures in total.^5 Their services are estimated to
account for 20 percent of total health care expenditures, whereas their
influence is estimated to account for up to 90 percent of this spending.^6
For example, physicians refer patients to other physicians; they admit
patients to hospitals, skilled nursing facilities, and hospices; and they
order services delivered by other health care providers, such as imaging
studies, laboratory tests, and home health services.

Based on the centrality of the physician's role with respect to the
consumption of health care services, some public and private health care
purchasers have initiated programs to identify "efficient" physicians and
encourage patients to obtain care from these physicians. (For the purposes
of this report, efficiency means providing and ordering a level of
services that is sufficient to meet a patient's health care needs but not
excessive, given the patient's health status.) These purchasers identify
efficient physicians by examining data obtained from medical claims to
measure an individual's performance relative to a benchmark, a method
known as profiling. Physician profiling activities occur in Medicare
today, but they focus largely on improper billing practices rather than on
efficient care delivery. Some policymakers have suggested using a
profiling approach in Medicare to pay physicians based on their meeting
quality and efficiency performance standards.^7 As a practical matter,
such an approach would be carried out by the Centers for Medicare &
Medicaid Services (CMS), the agency responsible for administering the
Medicare program.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) required us to study aspects of physician compensation, pertaining
only to physicians serving beneficiaries in traditional fee-for-service
(FFS) Medicare.^8,9 As discussed with the committees of jurisdiction, this
report explores key concepts involved in linking assessments of individual
physicians' performance--particularly measures of efficiency--to their
compensation. Specifically, this report (1) estimates the prevalence in
Medicare of physicians who are likely to practice medicine inefficiently,
(2) examines physician-focused strategies used by public and private
sector health care purchasers to encourage efficient medical care, and (3)
examines the potential for CMS to profile physicians in traditional FFS
Medicare for efficiency and use the results in ways that are similar to
other purchasers that encourage efficiency.

^5GAO, Comptroller General's Forum on Health Care: Unsustainable Trends
Necessitate Comprehensive and Fundamental Reforms to Control Spending and
Improve Value, [33]GAO-04-793SP (Washington D.C.: May 1, 2004); Laura A.
Dummit, Medicare Physician Payments and Spending, National Health Policy
Forum, Issue Brief Number 815 (Washington D.C.: Oct. 9, 2006).

^6John M. Eisenberg, Doctors' Decisions and the Cost of Medical Care: The
Reasons for Doctors' Practice Patterns and Ways to Change Them, Health
Administration Press Perspectives (Ann Arbor, Mich.: 1986); Gail R.
Wilensky and Louis F. Rossiter, "The Relative Importance of
Physician-induced Demand in the Demand for Medical Care," Milbank Memorial
Fund Quarterly: Health and Society, 61(2): 252-277, spring 1983.

^7See H.R. 3617, 109th Cong. S2 (2005).

To estimate the prevalence in Medicare of physicians likely to practice
medicine inefficiently, we developed a profiling methodology using claims
data for beneficiaries in the traditional FFS program. We considered the
experience of other purchasers that conduct such analyses and used an
approach that was feasible and practical for our purposes. We focused our
analysis on generalists--physicians who described their specialty as
general practice, internal medicine, or family practice--in 12
metropolitan areas.^10 We selected areas that were diverse geographically
and in terms of Medicare spending per beneficiary. Using 2003 Medicare
claims data, we examined the degree to which a generalist physician
treated a large proportion of Medicare patients for whom Medicare spending
was unusually high, given their health status.^11 To identify such
patients, we assigned health status scores to all beneficiaries in the 12
areas, using a risk adjustment method similar to the one CMS uses to
adjust payments for Medicare enrollees in managed care plans.^12 We
grouped these patients into 31 cohorts by health status to remove
differences in spending associated with differences in health status. We
then identified within each cohort the top 20 percent of beneficiaries
ranked by spending for all Medicare services and referred to these
beneficiaries as "overly expensive" compared with others of similar health
status. We linked these overly expensive patients to the physicians they
saw and computed the percentage they represented of each physician's
Medicare practice. We determined whether a generalist physician had a
Medicare practice that, relative to the physician's peers in the same
metropolitan area, included a percentage of overly expensive patients that
was higher than would occur by chance if these patients were randomly
distributed across the area's generalist physicians.^13 We identified
these physicians as "outliers" relative to the practice patterns
prevailing in their area and concluded that they were likely to practice
medicine inefficiently.^14 Our results are not statistically generalizable
beyond the 12 areas we studied.

^8Pub. L. No. 108-173, S 953, 117 Stat. 2066, 2428. With respect to
physician compensation, the MMA included the requirement under which the
current study was done as well as several other requirements, which
directed us to study the following: the system for annually adjusting
physicians' fees and alternatives to this system (Pub. L. No. 108-173, S
953, 117 Stat. 2066, 2427-28), access to physician services by
beneficiaries in Medicare's FFS program (Pub. L. No. 108-173, S 604, 117
Stat. 2066, 2301-02), and adjustments in physician fees for area
differences in physicians' costs of operating a private medical practice
(Pub. L. No. 108-173, S 413(c), 117 Stat. 2066, 2277-78). In response, we
issued three reports: Medicare Physician Payments: Concerns about Spending
Target System Prompt Interest in Considering Reforms, [34]GAO-05-85
(Washington D.C.: Oct. 8, 2004); Medicare Physician Services: Use of
Services Increasing Nationwide and Relatively Few Beneficiaries Report
Major Access Problems, [35]GAO-06-704 (Washington D.C.: July 21, 2006);
and Medicare Physician Fees: Geographic Adjustment Indices Are Valid in
Design, but Data and Methods Need Refinement, [36]GAO-05-119 (Washington
D.C.: Mar. 11, 2005).

^9In 2005, most Medicare beneficiaries (88 percent) were in traditional
Medicare FFS. The rest were enrollees in Medicare Advantage plans, which
include managed care plans, private FFS plans, and Medical Savings
Account/High Deductible plans.

^10These metropolitan areas included Albuquerque, N.M.; Baton Rouge, La.;
Des Moines, Iowa; Phoenix, Ariz.; Miami, Fla.; Springfield, Mass.; Cape
Coral, Fla.; Riverside, Calif.; Pittsburgh, Pa.; Columbus, Ohio;
Sacramento, Calif.; and Portland, Maine.

We 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. The encounter and cost
information in the claims data we used are generally considered to be
reliable, as they are used by the Medicare program as a record of payments
to health care providers and are closely monitored by both CMS and
Medicare's fiscal intermediaries and carriers--contractors that process,
review, and pay claims for Medicare-covered services. In addition, we
examined the claims data files for obvious errors, missing values, and
values outside of expected ranges. We also interviewed experts at CMS who
regularly use the claims data for evaluation and analysis. We found the
claims data were sufficiently reliable for the purpose of our analyses.

^11We excluded generalist physicians from our study whose practices did
not include a sufficient number of Medicare patients to ensure the
statistical reliability of our analysis.

^12To account for differences in health status, CMS uses a risk adjustment
tool that assigns Medicare enrollees a health status score based on their
diagnoses and demographic characteristics.

^13We defined "higher" by setting a threshold percentage of overly
expensive patients for each area that would be exceeded by no more than 1
percent of generalist physicians if overly expensive patients were
randomly distributed across all generalist physicians.

^14See appendix I for further discussion of our methodology.

To examine physician-focused strategies used by public and private health
care purchasers to encourage efficient medical care, we interviewed
representatives of 10 health care purchasers,^15 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.^16 On the basis of discussions with industry
experts, we selected these plans because their physician profiling
programs explicitly assess efficiency--unlike many such programs that
assess quality only. To examine the potential for profiling in Medicare
and using the results to encourage efficiency, we reviewed CMS program
guidelines and memoranda, interviewed CMS officials, and analyzed how
certain components of physician-focused payment strategies would fit with
structural features of the Medicare program.

We conducted our work from September 2005 through April 2007 in accordance
with generally accepted government auditing standards.

Results in Brief

In each of the 12 metropolitan areas studied, we found generalist
physicians who, relative to their peers in the same area, treated a
disproportionate share of overly expensive Medicare patients. To identify
such patients while accounting for differences in health status, we
grouped beneficiaries into 31 health status cohorts and designated, for
each cohort, the top 20 percent of beneficiaries, ranked by Medicare
spending, as "overly expensive." We linked these patients to the
physicians who saw them and identified the physicians whose Medicare
practice included a percentage of overly expensive patients that was
higher than would occur by chance for their area. We concluded that these
physicians were likely to practice medicine inefficiently.

^15In this report we use the term 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.

^16Aetna, BlueCross BlueShield of Texas, Health Insurance BC (British
Columbia, Canada), Greater Rochester Independent Practice Association,
HealthPartners, Massachusetts Group Insurance Commission, Minnesota
Advantage Health Plan, PacifiCare Health Systems, UnitedHealthcare, and
the Hotel Employees and Restaurant Employees International Union Welfare
Fund.

Certain public and private health care purchasers routinely evaluate
physicians in their networks using measures of efficiency and other
factors. The 10 health care purchasers in our study profiled
physicians--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. Most of
the 10 we spoke with also evaluated physicians on quality. To encourage
efficiency, all 10 purchasers linked their physician evaluation results to
a range of incentives--from steering patients toward the most efficient
providers to excluding physicians from the purchaser's provider network
because of inefficient practice patterns.

CMS has tools to profile physicians for efficiency but would likely need
additional authorities to use results in ways similar to other purchasers.
CMS has a comprehensive repository of Medicare claims data to compute
reliable efficiency measures for most physicians serving Medicare patients
and has substantial experience using methods that adjust for differences
in patients' health status. However, CMS may not currently have the
flexibility that other purchasers have to link physician profiling results
to a range of incentives encouraging efficiency. Although CMS has
extensive experience in Medicare with physician education efforts, the
implementation of other strategies to encourage efficiency, for example,
tying fee updates of individual physicians to meeting efficiency
standards, would likely require legislation providing additional authority
to the agency.

In our view, physician profiling offers a promising, targeted approach
that could be one of an array of measures collectively aimed at realigning
the imbalance between Medicare's outlays and revenues. Given the
contribution of physicians to Medicare spending in total, we are
recommending that CMS develop a profiling system that identifies
individual physicians with inefficient practice patterns and, seeking
legislative changes as necessary, uses the results to improve the
efficiency of care financed by Medicare.

CMS said our recommendation was timely and characterized our focus on the
need for risk adjustment in measuring physician resource use as
particularly helpful. The agency also noted that nationwide dissemination
of reports of physician resource use would generate significant recurring
costs. While our report notes that CMS is familiar with key methodological
tools needed to conduct such an effort, we agree that any such undertaking
would need to be adequately funded. The agency was silent on a strategy
for using profiling results beyond physician education. We believe that
the optimal profiling effort would include financial or other incentives
to curb individual physicians' inefficient practices and would measure the
effort's impact on Medicare spending. Both the American Medical
Association (AMA) and the American College of Physicians (ACP) said that
quality standards should be the primary focus of a physician profiling
system.

Background

Since 1992, physicians in Medicare have been paid under a national fee
schedule in conjunction with a system of spending targets. Under the
design of the fee schedule and target system, annual adjustments (updates)
to physician fees depend, in part, on whether actual spending has fallen
below or exceeded the target. Fees are permitted to increase at least as
fast as the costs of providing physician services as long as the growth in
volume and intensity of physician services remains below a specified
rate--currently, a little more than 2 percent a year. If spending
associated with volume and intensity grows faster than the specified rate,
the target system reduces fee increases or causes fees to fall. The target
system in place today, called the sustainable growth rate (SGR) system,
was implemented in 1998. This system acts as a blunt instrument in that
all physicians are subject to the consequences of excess spending--that
is, downward fee adjustments--that may stem from the excessive use of
resources by some physicians relative to their peers.

Medicare spending on Part B physician services has grown rapidly in recent
years. From 2000 through 2005, program spending for Part B FFS physician
services grew at an average annual rate of 9.8 percent, outpacing average
annual Medicare aggregate spending growth of 8.7 percent for this period.
Since 2002, actual Medicare spending on physician services has exceeded
SGR targets, and the SGR system has called for fee cuts to offset the
excess spending. However, the cuts were overridden by administrative
action or the Congress five times during this period. In a 2004 report on
the SGR system,^17 we found that possible options to modify or eliminate
the system would increase the growth in cumulative spending over a 10-year
period, usually by double-digit percentages. The difficulty of stabilizing
physician fees in the face of the need to maintain fiscal discipline has
spurred congressional interest in other ways to restrain spending growth.

^17 [37]GAO-05-85 .

As concern about the long-term fiscal sustainability of Medicare has
grown, so has the recognition that some of the spending for services
provided and ordered by physicians may not be warranted. For example, the
wide geographic variation in Medicare spending for physician
services--unrelated to beneficiary health status or outcomes--provides
evidence that health needs alone do not determine spending. Furthermore,
several studies have shown that in some instances growth in the number of
services provided may lead to medical harm.^18 Payments under the Medicare
program, however, generally do not foster individual physician
responsibility for quality, medical efficacy, or efficiency. In
recognition of this, the Institute of Medicine has recently recommended
that Medicare payment policies should be reformed to include a system for
paying health care providers differentially based on how well they meet
performance standards for quality or efficiency or both.^19 In April 2005,
CMS initiated a demonstration mandated by the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) to test this
approach.^20 Under the Physician Group Practice demonstration, 10 large
physician group practices, each comprising at least 200 physicians, are
eligible for bonus payments if they meet quality targets and succeed in
keeping the total expenditures of their Medicare population below annual
targets.^21

Several studies have found that Medicare and other purchasers could
realize substantial savings if a portion of patients switched from less
efficient to more efficient physicians. The estimates vary according to
assumptions about the proportion of beneficiaries who would change
physicians.^22 In 2003, the Consumer-Purchaser Disclosure Project, a
partnership of consumer, labor, and purchaser organizations, asked
actuaries and health researchers to estimate the potential savings to
Medicare if a small proportion of beneficiaries started using more
efficient physicians. The Project reported that Medicare could save
between 2 and 4 percent of total costs if 1 out of 10 beneficiaries moved
to more efficient physicians. This conclusion is based on information
received from one actuarial firm and two academic researchers. One
researcher concluded, based on his simulations, that if 5 to 10 percent of
Medicare enrollees switched to the most efficient physicians, savings
would be 1 to 3 percent of program costs--which would amount to about $5
billion to $14 billion in 2007.

^18Elliott S. Fisher and H. Gilbert Welch, "Avoiding the Unintended
Consequences of Growth in Medical Care: How Might More Be Worse?" Journal
of the American Medical Association, vol. 281, no. 5 (1999): 446-453; E.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; E.S. Fisher, et
al., "The Implications of Regional Variations in Medicare Spending. Part
2: Health Outcomes and Satisfaction with Care," Annals of Internal
Medicine, vol. 138, no. 4 (2003): 288-298; and Joseph P. Newhouse, Free
for All? Lessons from the RAND Health Insurance Experiment (Cambridge,
Mass.: Harvard University Press, 1993).

^19Institute of Medicine, Rewarding Provider Performance: Aligning
Incentives in Medicare (Pathways to Quality Health Care Series) - Summary
(Washington D.C.: 2007).

^20Pub. L. No. 106-554, app. F, S 412(a), 114 Stat. 2763, 2763A-509-515.

^21We are currently conducting a study of the demonstration, as required
by BIPA (Pub. L. No. 106-554, app. F, S 412(b), 114 Stat. 2763,
2763A-515).

The Congress has also recently expressed interest in approaches to
constrain the growth of physician spending. The Deficit Reduction Act of
2005 required the Medicare Payment Advisory Commission (MedPAC) to study
options for controlling the volume of physicians' services under Medicare.
One approach for applying volume controls that the Congress directed
MedPAC to consider is a payment system that takes into account physician
outliers.^23

22See Consumer-Purchaser Disclosure Project, More Efficient Physicians: A
Path to Significant Savings in Health Care (Washington D.C.: July 2003).

^23Medicare Payment Advisory Commission, Report to the Congress: Assessing
Alternatives to the Sustainable Growth Rate System (Washington, D.C.: Mar.
2007).

Physicians Who Treated a Disproportionate Share of Overly Expensive Patients
Were Found in Each of 12 Areas Studied

In each of the 12 metropolitan areas studied, we found physicians who
treated a disproportionate share of overly expensive patients. Using 2003
Medicare claims data, we identified overly expensive beneficiaries in the
12 areas and computed the percentage they represented in each generalist
physician's Medicare FFS practice. We then identified outlier generalist
physicians as those with practices that, relative to their peers, had a
percentage of overly expensive patients that was unlikely to have occurred
by chance. We concluded that such physicians are likely to practice an
inefficient style of medicine. The proportion of generalist physicians
found to be outliers varied across the 12 areas. In two areas, they
accounted for more than 10 percent of the areas' generalist physician
population.^24

In Identifying Overly Expensive Beneficiaries, We Found Significant Variation in
Medicare Spending on Patients with Similar Health Status

We classified beneficiaries as overly expensive if their total Medicare
expenditures--for services provided by all health providers, not just
physicians--ranked in the top fifth of their health status cohort for 2003
claims.^25 We developed 31 health status cohorts of beneficiaries based on
the diagnoses appearing on their Medicare claims and other factors.^26

Within each health status cohort, we observed large differences in total
Medicare spending across beneficiaries. For example, in one cohort of
beneficiaries whose health status was about average, overly expensive
beneficiaries--the top fifth ranked by expenditures--had average total
expenditures of $24,574, as compared with the cohort's bottom fifth,
averaging $1,155.^27 (See fig. 1.) This variation may reflect differences
in the number and type of services provided and ordered by these patients'
physicians as well as factors not under the physicians' direct control,
such as a patient's response to and compliance with treatment protocols.
Overly expensive beneficiaries accounted for nearly one-half of total
Medicare expenditures even though they represented only 20 percent of
beneficiaries in our sample.

^24The population of generalist physicians studied excluded those who had
small Medicare practices (see app. I).

^25Expenditures identified were for services from inpatient hospital,
outpatient, skilled nursing facility, physician, hospice, durable medical
equipment, and home health providers.

^26For decedents, we also took into account the number of months they were
enrolled in Medicare FFS during 2003. For more detail on the development
of the cohorts, see appendix I.

^27See figures 2 and 3 in appendix I for a depiction of beneficiary
expenditures at the 20th, 50th, and 80th percentile for each health status
cohort.

Figure 1: Average Medicare Expenditures, by Quintile, for Beneficiaries of
Nearly Average Health Status

Note: Beneficiaries who died during 2003 are excluded in this figure.

Outlier Physicians Were Present in Every Metropolitan Area

Based on 2003 Medicare claims data, our analysis found outlier generalist
physicians in all 12 metropolitan areas we studied. Our methodology
assumed that, if overly expensive beneficiaries were distributed randomly
across generalists, no more than 1 percent of generalists in any area
would be designated as outliers. Across all areas, the actual percentage
of outlier generalists ranged from 2 percent to over 20 percent.

To identify outlier generalist physicians, we compared the percentage of
overly expensive beneficiaries in each physician's Medicare practice to a
threshold value--the percentage of overly expensive beneficiaries in a
physician's Medicare practice that would be expected to occur less than 1
time out of 100 by chance.^28 We classified those who exceeded the
threshold value for their metropolitan area as outliers. That is, all
physicians had some overly expensive patients in their Medicare practice,
but outlier physicians had a much higher percentage of such patients.

The Miami area had the highest percentage--almost 21 percent--of outlier
generalists, followed by the Baton Rouge area at about 11 percent. (See
table 1.) Across the other areas, the percentage of outliers ranged from 2
percent to about 6 percent.

Table 1: Percentage of Outlier Physicians in 12 Metropolitan Areas, 2003

Metropolitan area    Percentage of outlier physicians 
Miami, Fla.                                      20.9 
Baton Rouge, La.                                 11.2 
Cape Coral, Fla.                                  6.3 
Portland, Maine                                   5.8 
Riverside, Calif.                                 5.8 
Phoenix, Ariz.                                    5.2 
Sacramento, Calif.                                5.2 
Des Moines, Iowa                                  4.8 
Columbus, Ohio                                    4.6 
Pittsburgh, Pa.                                   3.8 
Springfield, Mass.                                2.9 
Albuquerque, N. Mex.                              2.0 

Source: GAO analysis of 2003 CMS claims and enrollment data.

Note: Outlier percentages greater than 1 percent indicate that an area has
an excessive number of outlier physicians.

In 2003, outlier generalists' Medicare practices were similar to those of
other generalists, but the beneficiaries they treated tended to experience
higher utilization of certain services. Outlier generalists and other
generalists saw similar average numbers of Medicare patients (219 compared
with 235) and their patients averaged the same number of office visits
(3.7 compared with 3.5). However, after taking into account beneficiary
health status and geographic location, we found that beneficiaries who saw
an outlier generalist, compared with those who saw other generalists, were
15 percent more likely to have been hospitalized, 57 percent more likely
to have been hospitalized multiple times, and 51 percent more likely to
have used home health services. By contrast, they were 10 percent less
likely to have been admitted to a skilled nursing facility.^29

28In determining the threshold value, we assumed that if all generalists
practiced at a similar level of efficiency, overly expensive beneficiaries
would be randomly distributed across all generalists, within a geographic
area. Under this assumption, in an area such as Phoenix, Ariz., where 19
percent of the beneficiaries were overly expensive, one would expect that
the percentage of overly expensive patients in generalist physicians'
practices would cluster around 19 percent. However, no more than 1 percent
of generalists would have practices in which more than 29 percent of the
patients were overly expensive. See appendix I for further detail on our
methodology for calculating threshold values.

Health Care Purchasers Used Physician Profiling Results to Encourage Efficient
Medical Practice

Consistent with the premise that physicians play a central role in the
generation of health care expenditures, some health care purchasers use
physician profiling to promote efficiency. The 10 health care purchasers
in our study profiled physicians--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. Most of the 10 we spoke with 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.

Health Care Purchasers in Our Study 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.^30 One approach focused on the costs associated with treating
a specific episode of an illness--for example, a stroke or heart
attack--and assessing the physician's performance based on the resources
used during that episode. The other approach focused on costs, within a
specific time period, associated with the patients in a physician's
practice. Both approaches shared common features. That is, both 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.

^29These findings were derived from logistic regressions in which health
status, geographic area, and beneficiary contact with an outlier
generalist were the explanatory variables used to predict whether a
beneficiary was hospitalized, used home health services, or was admitted
to a skilled nursing facility.

^30See appendix II for the names and characteristics of these health care
purchasers.

Although the method used by purchasers to estimate expected spending for
patients varied, all used patient demographics and diagnoses. The programs
generally computed efficiency measures as the ratio of actual to expected
spending for patients of similar health status. Ratios greater than 1.0
(indicating that actual equals expected spending) suggest relative
inefficiency while ratios below 1.0 suggest efficiency, although
purchasers were free to set their own threshold. For example, one
purchaser scrutinized physicians with scores above 1.2 for inefficient
delivery of care. Some purchasers also took account of additional
information before making a final judgment. For example, two purchasers
told us that they reexamined the results for physicians who exceeded the
threshold for inefficiency to see if there were factors, such as erroneous
data, that made an otherwise efficient provider appear inefficient.

While our focus was on purchasers who profile for efficiency, purchasers
in our study included quality measures as part of their profiling
programs. For example, most purchasers evaluated physicians on one or more
quality measures, such as whether patients with congestive heart failure
were prescribed beta blockers. Some purchasers included factors related to
patient access in their evaluations of physicians, such as whether the
physician was in a specialty that was underrepresented within the network
or within a particular geographic area covered by the network.

Purchasers varied with respect to the types of physicians profiled for
efficiency. 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 a minimum number of cases;
for example, one did not profile psychiatrists because it felt the volume
of data was not sufficient to do statistical profiling. Typically such
analyses require a minimum sample size to be valid. Purchasers differed on
the inclusion of physician groups and individual practitioners. Four of
the purchasers profiled physician group practices exclusively, three
profiled individual physicians exclusively, and the remaining three
profiled both.

To perform their profiling analyses, eight of the purchasers used
episode-grouping models, which group claims into clinically distinct
episodes of care--such as stroke--adjusted for case severity or patient
health status. This approach can assign one physician primary
responsibility for the episode even if the patient sees multiple
physicians. Two purchasers used a population-based model, which aggregated
patient claims data to classify a patient's health status score for
patients in the population to estimate expected expenditures for the
patients a physician treats.

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

The health care purchasers we examined directly tied the results of their
profiling methods to incentives that encourage physicians to practice
efficiently. In some cases, purchasers implemented these incentives
directly, while in other cases, incentives were implemented at the
discretion of their clients.^31 We found that the incentives varied widely
in design, application, and severity of consequences--from steering
patients toward the most efficient providers to excluding a physician from
the purchaser's provider network because of inefficient practice patterns.
The following were commonly reported incentives:

           o Physician education: Some health care purchasers told us that
           they shared their profiling results with physicians to encourage
           more efficient care delivery or to foster acceptance of the
           purchaser's physician evaluation methods. For example, one
           purchaser's profiling report compared a physician's utilization
           patterns to a benchmark measure derived from the practice patterns
           of the physician's peer group, such as cardiologists compared with
           other cardiologists in the network or primary care physicians
           compared with other primary care physicians in the network. No
           purchaser employed education as the sole method of motivating
           physicians to change their practice patterns.

           o Publicly designating physicians based on efficiency or quality:
           Some purchasers encouraged enrollees to get their care from
           certain physicians by designating in their physician directories
           those physicians who met quality or quality and efficiency
           standards. Other purchasers offered financial incentives to their
           enrollees to encourage them to patronize such physicians. The
           incentives may generate higher patient volume for the designated
           physicians, thereby achieving savings for the purchaser or their
           clients.

           o Using tiered arrangements to promote efficiency: Several
           purchasers used profiling results to group physicians in
           tiers--essentially groups of physicians ranked by their level of
           efficiency. Enrollees selecting physicians in the higher tiers
           compared with those in lower tiers will obtain financial
           advantages--such as lower deductibles or copayments. From the
           purchaser's point of view, tiering has the advantage of affording
           enrollees freedom of choice within the purchaser's network, while
           making it advantageous for them to seek care from the network's
           most efficient physicians. Several reported that a portion of
           their enrollees or employers of enrollees responded to the
           incentives offered by the tiered arrangements to switch to more
           efficient physicians.

           o Bonuses and penalties: Two of the purchasers in our study used
           bonuses or financial penalties to encourage efficient medical
           practices. They awarded bonuses to physicians based on their
           efficiency and quality scores. To finance bonuses, one purchaser
           withholds 10 percent of each physician's total reimbursement
           amount and with those funds pays bonuses to only those physicians
           who have high quality and efficiency scores. The amount withheld
           from physicians who did not meet standards serves as an implicit
           financial penalty.

           o Network exclusion: One purchaser terminated its contractual
           relationship with physicians in its network when it determined
           that the physicians were practicing inefficiently. In an effort to
           control costs, the purchaser stated that it excluded about 3
           percent of the physicians in its network in 2003. Although the
           purchaser has not ruled out similar actions in the future, it had
           not excluded additional physicians for reasons of inefficiency at
           the time of our interview.

           Evidence from our interviews with the health care purchasers in
           our study suggests that physician profiling programs may have the
           potential to generate savings for health care purchasers or their
           clients. Three of the 10 purchasers provided us with estimates of
           savings attributable to their physician-focused efficiency
           efforts. One placed more efficient physicians in a special network
           and reported that premiums for this network were 3 to 7 percent
           lower than premiums for the network that includes the rest of its
           physicians. Another 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. By examining the
           factors that contributed to the reduction, 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. The third purchaser reported a "sentinel"
           effect--the effect of being scrutinized--resulting from its
           physician profiling efforts. This purchaser estimated that the
           sentinel effect associated with its physician efficiency program
           reduced spending by as much as 1 percent. Three other purchasers
           suggested their programs might have achieved savings for
           themselves or their clients but did not provide us with their
           savings estimates, while four said they had not yet attempted to
           measure savings at the time of our interviews.
		   
		   CMS Has Tools Available to Profile Physicians for Efficiency, but
		   May Need Some Additional Authorities to Use Results in Ways
		   Similar to Other Purchasers

           Medicare's data-rich environment is conducive to conducting
           profiling analyses designed to identify physicians whose medical
           practices are inefficient compared with their peers. CMS has a
           comprehensive repository of Medicare claims data and experience
           using key methodological tools. However, CMS may not have
           legislative authority to implement some of the incentives used by
           other health care purchasers to encourage efficiency.
		   
		   Medicareï¿½s Data-Rich Environment Is Conducive to Profiling for
		   Efficiency

           Fundamental to profiling physicians for efficiency is the ability
           to make statistical comparisons that enable health care purchasers
           to identify physicians practicing outside of established norms.
           CMS has the resources to make statistically valid comparisons,
           including comprehensive medical claims information, tools to
           adjust for differences in patient health status, and sufficient
           numbers of physicians in most areas to construct adequate sample
           sizes. As with the development of any new system, however, CMS
           would need to make choices about its design and implementation.

           Among the resources available to CMS are the following:

           o Comprehensive source of medical claims information: CMS
           maintains a centralized repository (database) of all Medicare
           claims that provides a comprehensive source of information on
           patients' Medicare-covered medical encounters. The data are in a
           uniform format, as Medicare claim forms are standardized. In
           addition, the data are relatively recent: CMS states that 90
           percent of clean claims are paid within 30 days and new
           information is added to the central database weekly. 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--including, for example, hospital, home health, and
           physician services--and to the physicians who treated them.

           o Data samples large enough to ensure meaningful comparisons
           across physicians: The feasibility of using efficiency measures to
           compare physicians' performance depends on two factors--the
           availability of enough data on each physician to compute a
           reliable efficiency measure and numbers of physicians large enough
           to provide meaningful comparisons. In 2005, Medicare's 33.6
           million FFS enrollees were served by about 618,000 physicians.
           These figures suggest that CMS has enough clinical and expenditure
           data to compute reliable efficiency measures for most physicians
           billing Medicare.

           o Methods to account for differences in patient health status:
           Because sicker patients are expected to use more health care
           resources than healthier patients, patients' health status needs
           to be taken into account to make meaningful comparisons among
           physicians. The 10 health care purchasers we examined accounted
           for differences in patients' health status through various risk
           adjustment methods. 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.^32

           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, among other things, whether to
           profile individual physicians or group practices; which risk
           adjustment tool was best suited for the 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 physicians' practice; and what
           criteria to use to define inefficient practices.

           CMS would also likely want to take steps similar to those of other
           purchasers to supplement its efficiency assessments with
           additional information before using the results to do more than
           share information with physicians. For example, some purchasers in
           our study reviewed their profiling results for physicians who did
           not meet the efficiency standard to validate the accuracy of their
           assessments. Such validation of profiling results would be
           appropriate if CMS were to institute financial incentives for
           physicians to improve the efficiency of the care they provide and
           order for Medicare beneficiaries.
		   
		   To Use Profiling Results in Medicare in Ways Similar to Other
		   Purchasers Would Likely Require Additional Authorities

           Some of the actions health care purchasers take as a result of
           their physician profiling may not be readily adaptable to
           Medicare, given the program's structural underpinnings, but they
           may be instructive in suggesting future directions for Medicare.
           Although Medicare has extensive experience with physician
           education efforts, the implementation of other strategies to
           encourage efficiency would likely require legislation providing
           authority to the Secretary of Health and Human Services.

           Educational outreach to physicians has been a long-standing and
           widespread activity in Medicare as a means to change physician
           behavior based on profiling efforts to identify improper billing
           practices and potential fraud. Outreach includes letters sent to
           physicians alerting them to billing practices that are
           inappropriate.^33 In some cases, physicians are given comparative
           information on how the physician varies from other physicians in
           the same specialty or locality with respect to use of a certain
           service. A physician education effort based on efficiency
           profiling results would therefore not be a foreign concept in
           Medicare. For example, CMS could provide physicians a report that
           compares their practice's efficiency with that of their peers.
           This would enable physicians to see whether their practice style
           is outside the norm. In its March 2005 report to the Congress,^34
           MedPAC recommended that CMS measure resource use by physicians and
           share the results with them on a confidential basis. MedPAC
           suggested that such an approach would enable CMS to gain
           experience in examining resource use measures and identifying ways
           to refine them while affording physicians the opportunity to
           change inefficient practices.^35

           Another application of profiling results used by the purchasers we
           spoke with entailed sharing comparative information with
           enrollees. CMS has considerable experience comparing certain
           providers on quality measures and posting the results to a Web
           site. Currently, Medicare Web sites posting comparative
           information exist for hospitals, nursing homes, home health care
           agencies, dialysis facilities, and managed care plans. In its
           March 2005 report to the Congress, MedPAC noted that CMS could
           share results of physician performance measurement with
           beneficiaries once the agency gained sufficient experience with
           its physician measurement tools.

           Several structural features of the Medicare program would appear
           to pose challenges to the use of other strategies designed to
           encourage efficiency. These features include a beneficiary's
           freedom to choose any licensed physician permitted to be paid by
           Medicare; the lack of authority to exclude physicians from
           participating in Medicare unless they engage in unlawful, abusive,
           or unprofessional practices; and a physician payment system that
           does not take into account the efficiency of the care provided.
           Under these provisions, CMS would not likely be able--in the
           absence of additional legislative authority--to designate
           preferred providers,^36 assign physicians to tiers associated with
           varying beneficiary copayments, tie fee updates of individual
           physicians to meeting performance standards,^37 or exclude
           physicians who do not meet practice efficiency and quality
           criteria.

           Regardless of the use made of physician profiling results, the
           involvement of, and acceptance by, the physician community and
           other stakeholders of any actions taken is critical. Several
           purchasers described how they had worked to get physician buy-in.
           They explained their methods to physicians and shared data with
           them to increase physicians' familiarity with and confidence in
           the purchasers' profiling. CMS has several avenues for obtaining
           the input of the physician community. Among them is the federal
           rule-making process, which generally provides a comment period for
           all parties affected by prospective policy changes. In addition,
           CMS forms federal advisory committees--including ones composed of
           physicians and other health care practitioners--that regularly
           provide it with advice and recommendations concerning regulatory
           and other policy decisions.
		   
^31Clients can be employers or organizations that contract with the
purchasers.

^32Our estimate of the prevalence of physicians likely to practice
inefficiently, discussed earlier in this report, relied on a risk
adjustment methodology similar to that CMS uses to adjust Medicare
payments to health plans in Medicare Advantage.

^33Other forms of physician education include face-to-face meetings,
telephone conferences, seminars, and workshops.

^34MedPAC, 2005.

^35In several testimonies before the Congress in the last half of 2005,
CMS officials said that they were taking steps to implement this
recommendation. See Value-Based Purchasing for Physicians Under Medicare:
Hearing Before the House Subcommittee on Health, Committee on Ways and
Means, 109th Cong. (2005) (statement of Mark B. McClellan, MD, Ph.D.,
Administrator of CMS).

^36Preferred providers refers to those providers who meet a purchaser's
utilization, price, and quality standards. Patients who choose providers
who are not preferred are assessed higher copayments.

^37Medicare fee updates are annual adjustments made to physicians' fees.
		   
		   Conclusions

           The health care spending levels predicted to overwhelm the
           Medicare program call for action to be taken promptly. To address
           this looming problem, no single action or reform is likely to
           suffice, and policymakers are seeking solutions among an array of
           reform proposals. Our findings suggest that physician profiling is
           one promising, targeted approach toward curbing excessive spending
           both for physician services and for the services that physicians
           order.

           Our profiling of generalist physicians in 12 metropolitan areas
           found indications of inefficient physician practices occurring in
           areas with low spending per beneficiary as well as in areas with
           high spending. To ensure that our estimates were fair, we adjusted
           them to account for the fact that some physicians have sicker
           patients than others; in addition, our efficiency standards were
           based on actual practices by local physicians rather than on a
           single measure applied to all physicians, regardless of geographic
           area. Notably, two areas--Miami and Baton Rouge--had particularly
           large proportions of outlier physicians compared with the other
           areas.

           Some health care purchasers seek to curb inefficient practices
           through physician education and other measures directed at
           physicians' income--such as discouraging patients from obtaining
           care from physicians whom the purchaser, through profiling, ranks
           as inefficient. If similar approaches were adopted in
           Medicare--that is, profiling physicians for efficiency and
           strategically applying the results--the experience of other
           purchasers suggests that reductions in spending growth could be
           achieved. The adoption of a profiling system could require the
           modification of certain basic Medicare principles. For example, if
           CMS had the authority to rank-order physicians based on efficiency
           and tier beneficiary copayments accordingly, beneficiaries could
           retain the freedom to choose among providers but would be steered,
           through financial incentives, toward those identified as most
           efficient. CMS would likely find it desirable to base the tiers on
           both quality and efficiency. It would also be important to develop
           an evaluation component to measure the profiling system's impact
           on program spending and physician behavior.

           In addition, a physician profiling system in Medicare could work
           in ways that would be complementary to the SGR system. That is, if
           Medicare instituted a physician profiling system that resulted in
           gains in efficiency, over time the rate of growth in volume and
           intensity of physician services could decline and the SGR targets
           would be less likely to be exceeded. At the same time, under a
           profiling system that focused on total program expenditures,
           Medicare could experience a drop in unnecessary utilization of
           other services, such as hospitalizations and home health care.
           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.
		   
		   Recommendation for Executive Action

           Given the contribution of physicians to Medicare spending in
           total, we recommend that the Administrator of CMS develop a
           profiling system that identifies individual physicians with
           inefficient practice patterns and, seeking legislative changes as
           necessary, use the results to improve the efficiency of care
           financed by Medicare. The profiling system should include the
           following elements:

           o total Medicare expenditures as the basis for measuring
           efficiency,

           o adjustments for differences in patients' health status,

           o empirically based standards that set the parameters of
           efficiency,

           o a physician education program that explains to physicians how
           the profiling system works and how their efficiency measures
           compare with those of their peers,

           o financial or other incentives for individual physicians to
           improve the efficiency of the care they provide, and

           o methods for measuring the impact of physician profiling on
           program spending and physician behavior.
		   
		   Agency and Professional Association Comments and Our Evaluation

           We obtained written comments on a draft of this report from CMS
           (see app. IV). We obtained oral comments from representatives of
           the American College of Physicians (ACP) and the American Medical
           Association (AMA).
		   
		   CMS Comments

           CMS stated that our recommendation was very timely and that it
           fits into efforts the agency is pursuing to improve the quality
           and efficiency of care paid for by Medicare. CMS also found our
           focus on the need for risk adjustment in measuring physician
           resource use to be particularly helpful. CMS noted that its
           current measurement efforts involve evaluation of "episode
           grouper" technology, which examines claims data for a given
           episode of care, and called it a promising approach. We do not
           disagree, but we also believe that approaches involving the
           measurement of total patient expenditures are equally promising.

           CMS said that the agency would incur significant recurring costs
           to develop reports on physician resource use, disseminate them to
           physicians nationwide, and evaluate the impact of the program.
           While our report notes that CMS is familiar with key
           methodological tools needed to conduct such an effort, we agree
           that any such undertaking would need to be adequately funded. CMS
           was silent on a strategy for using profiling results beyond
           physician education. We believe that the optimal profiling effort
           would include financial or other incentives to curb individual
           physicians' inefficient practices and would measure the effort's
           impact on Medicare spending.
		   
		   Professional Association Comments

           AMA and ACP raised three principal concerns about physician
           profiling: the relative importance of quality and efficiency, the
           adequacy of risk adjustment methods, and the ways profiling
           results would be used. Both said that quality standards should be
           the primary focus of a physician profiling system. AMA said
           including incentives that promote the provision of high-quality
           care might increase costs initially but could reduce costs in the
           long term. Although we agree that quality is an important measure
           of physician performance, given growing concern about Medicare's
           fiscal sustainability, we believe that a focus on the efficient
           delivery of care is essential.

           With regard to the use of risk adjustment methods in assessing
           physician efficiency, both AMA and ACP said that this technique
           has significant shortcomings. For example, AMA said that
           diagnostic information included in the claims data used in risk
           adjustment may not adequately capture differences in patient
           health status. AMA also said that these data lack information on
           other factors that affect health status and spending, such as
           differences in patient compliance with medical advice. ACP echoed
           this concern. We believe that these claims data limitations are
           not of sufficient importance to preclude their use for profiling
           physicians treating Medicare patients. As our report notes, risk
           adjustment methods using claims information are now used by many
           private payers in measuring physician resource use. Moreover,
           Medicare currently uses one such risk adjustment method to set
           payment rates for managed care plans.

           Finally, both AMA and ACP expressed reservations about linking the
           results of profiling to physician reimbursement. The AMA stated
           that it was acceptable to use profiling results for the purpose of
           physician education, but an exclusive focus on costs was not.
           Although all of the purchasers we interviewed included physician
           education in their profiling programs, none of them relied on it
           as the sole means for encouraging physicians to practice
           efficiently. Similarly, we believe that, to restrain the growth in
           Medicare expenditures, a physician profiling system would need
           financial or other incentives to motivate physicians to practice
           medicine efficiently.

           We are sending a copy of this report to the Administrator of CMS.
           We will also provide copies to others on request. In addition,
           this report is available at no charge on the GAO Web site at
           http://www.gao.gov .

           If you or your staff have questions about this report, please
           contact me at (202) 512-7101 or [email protected] . Contact
           points for our Offices of Congressional Relations and Public
           Affairs may be found on the last page of this report. GAO staff
           who made key contributions to this report are listed in appendix
           IV.

           A. Bruce Steinwald
		   Director, Health Care

           List of Committees

           The Honorable Max Baucus
		   Chairman
		   The Honorable Charles E. Grassley
		   Ranking Member
		   Committee on Finance
		   United States Senate

           The Honorable John D. Dingell
		   Chairman
		   The Honorable Joe L. Barton
           Ranking Member
		   Committee on Energy and Commerce
		   House of Representatives

           The Honorable Charles B. Rangel
		   Chairman
		   The Honorable Jim McCrery
           Ranking Member
		   Committee on Ways and Means
		   House of Representatives

           The Honorable Frank J. Pallone, Jr.
		   Chairman
		   The Honorable Nathan Deal
		   Ranking Member
		   Subcommittee on Health
		   Committee on Energy and Commerce
		   House of Representatives

           The Honorable Pete Stark
		   Chairman
		   The Honorable Dave Camp
		   Ranking Member
		   Subcommittee on Health
		   Committee on Ways and Means
		   House of Representatives
		   
		   Appendix I: Methodology for Identifying Physicians with a
		   Disproportionate Share of Overly Expensive Beneficiaries

           We developed a methodology to identify physicians whose practices
           were composed of a disproportionate number of overly expensive
           beneficiaries--that is, beneficiaries whose costs rank them in the
           top 20 percent when compared to the costs of other beneficiaries
           with similar health status. We focused our analysis on
           generalists--physicians who described their specialty as general
           practice, internal medicine, or family practice--in the following
           12 metropolitan areas: Albuquerque, N.M.; Baton Rouge, La.; Des
           Moines, Iowa; Phoenix, Ariz.; Miami, Fla.; Springfield, Mass.;
           Cape Coral, Fla.; Riverside, Calif.; Pittsburgh, Pa.; Columbus,
           Ohio; Sacramento, Calif.; and Portland, Maine.^1 We selected these
           metropolitan areas to obtain a sample of physicians that was
           geographically diverse and represented a range in average Medicare
           spending per beneficiary. We assigned physicians to a particular
           metropolitan area based on where the plurality of their Medicare
           expenditures was generated. Our results are not statistically
           generalizable.

           To conduct our analysis, we obtained 2003 Centers for Medicare &
           Medicaid Services (CMS) data from the following sources: (1) the
           Standard Analytic Files, a repository of Medicare claims
           information that include data on physician/supplier, durable
           medical equipment, skilled nursing, home health, hospice, and
           hospital inpatient and outpatient services and (2) the Denominator
           File, a database that contains enrollment and entitlement status
           information for all Medicare beneficiaries enrolled and/or
           entitled in a given year. To assess beneficiary health status, we
           used commercially available software developed by DxCG, Inc. This
           software uses beneficiary characteristics--age, sex, and Medicaid
           status--and diagnosis codes included on medical claims to assign
           each beneficiary a single health "risk score"--a summary measure
           of the beneficiary's current health status corresponding to the
           beneficiary's expected health care costs relative to the costs of
           the average Medicare beneficiary.^2 We analyzed the Medicare
           practices of 7,105 physicians who provided services to 1,283,943
           beneficiaries.
		   
		   Method for Identifying Overly Expensive Beneficiaries

           Because our method for identifying overly expensive beneficiaries
           requires comparable information on total beneficiary costs, we
           developed a slightly different methodology for two groups of
           beneficiaries--survivors (beneficiaries who did not die in 2003)
           and decedents (beneficiaries who died in 2003). Decedents
           typically have annualized costs that are much higher than
           survivors^3 but usually have less than 12 months of Medicare
           enrollment in their last year of life. We included survivors in
           our analysis if they had (1) 12 months of Medicare fee-for-service
           (FFS) enrollment in 2003 and (2) were not covered by other health
           insurance for which Medicare was determined to be a secondary
           payer.^4 Decedents were included if they were continuously
           enrolled in Medicare FFS as of January 2003 and met the second
           criterion. Beneficiaries included in our analysis had at least one
           office visit with a generalist physician in one of the selected
           metropolitan areas.

           Using DxCG software, we examined the diagnosis codes on survivors'
           2003 hospital inpatient, outpatient, and physician claims and
           generated a separate health risk score for each beneficiary. The
           risk scores reflect the level of a beneficiary's relative health
           status, and in our analysis, ranged from .01 (very healthy) to
           30.84 (extremely ill). Next, using their risk scores, we assigned
           survivors into 1 of 31 discrete risk categories. The categories
           were ordered in terms of health status from very healthy (category
           1) to extremely ill (category 31). Finally, we calculated each
           survivor's total 2003 Medicare costs from all types of providers
           (hospital inpatient, outpatient, physician, durable medical
           equipment, skilled nursing facility, home health, and hospice). We
           included costs from all Medicare claims submitted on survivors'
           behalf, including claims from locations outside the selected
           metropolitan areas. Within each risk category, we ranked survivors
           by their total costs. Survivors who ranked in the top 20 percent
           of their assigned risk category were designated as overly
           expensive.^5 Figure 2 and figure 3 show the range of costs in the
           31 risk categories for survivors in our sample.

           Figure 2: Distribution of Total Per-Beneficiary Medicare
           Expenditures for Survivors for Risk Categories 1-10

           Figure 3: Distribution of Total Per-Beneficiary Medicare
           Expenditures for Survivors for Risk Categories 11-31

           The methodology we used to identify decedents who were overly
           expensive was identical to that used for survivors, with one
           exception. Before ranking decedents by their total costs, we
           further divided them within each risk category by the number of
           months they were enrolled in Medicare FFS during 2003. This was
           necessary because decedents varied in the number of months they
           incurred health care costs. For example, decedents who died in
           October had up to 10 months to incur costs while those who died in
           January had 1 month or less to incur costs.

           The proportion of overly expensive beneficiaries varied across the
           areas we examined. We identified overly expensive beneficiaries
           within health status cohorts that spanned all 12 of the
           metropolitan areas. As a consequence, it was possible that some
           areas would have proportionately more overly expensive
           beneficiaries than others. For example, the Miami Fort
           Lauderdale-Miami Beach, Fla., Core-Based Statistical Area (CBSA)
           had the highest proportion of overly expensive beneficiaries, .28,
           and the Des Moines, Iowa, CBSA had the lowest proportion with .13.
           The remaining areas had proportions that ranged from .13 to .21.
		   
		   Method for Identifying Outlier Physicians

           For each generalist physician, we determined the proportion of his
           or her Medicare patients that were overly expensive. Physicians'
           proportions of overly expensive beneficiaries varied substantially
           both across and within metropolitan areas. For example, in Miami,
           where the overall proportion of overly expensive patients was .28,
           individual physicians' proportions ranged from .08 to .98.
           Similarly, in Sacramento, the overall proportion was .16, with
           individual physicians' proportions ranging from .05 to .60. To
           ensure that our estimate of each physician's proportion of overly
           expensive beneficiaries was statistically reliable, we excluded
           physicians with small Medicare practices.^6

           We classified generalists as outliers if their practice was
           composed of such a high proportion of overly expensive
           beneficiaries that the proportion would only be expected to occur
           by chance no more than 1 time out of 100. In order to determine
           this proportion (threshold value) we conducted separate Monte
           Carlo simulations for each area.^7

           In each simulation, which we repeated 200 times for each
           metropolitan area, we randomly classified each of a generalist's
           patients into one of two categories--overly expensive or other.
           The probability of a beneficiary being randomly assigned to the
           overly expensive category was equal to the proportion of
           physician-patient pairings in the metropolitan area in which the
           patient was an overly expensive beneficiary.^8 We then determined
           the percentage of generalists for each proportion of overly
           expensive patients.^9 The results generated by each of the 200
           simulations were averaged to determine an expected percentage of
           generalists at each proportion of overly expensive beneficiaries.
           We defined the outlier threshold value as the point in the
           expected distribution where only 1 percent of physicians would
           have a proportion of overly expensive beneficiaries that large or
           larger.

           To illustrate our method, we present in figure 4 the actual and
           expected distributions of generalists in a hypothetical
           metropolitan area. The dotted line represents the distribution of
           generalists by their proportion of overly expensive beneficiaries
           that would be expected if such patients were randomly distributed
           among generalists. The solid line shows the actual distribution of
           generalists by their proportion of overly expensive patients. The
           vertical line (outlier threshold value) denotes the 99th
           percentile of the expected distribution--.25. That is, by chance,
           only 1 percent of generalists would be expected to have a
           proportion of overly expensive beneficiaries greater than .25. As
           shown by the area under the solid line and to the right of the
           vertical line, about 11 percent of generalists in this
           hypothetical example had actual proportions of overly expensive
           beneficiaries that exceeded .25--these generalists would be
           classified as outliers in our analysis.

^1These areas were based on the following Core-Based Statistical Areas (an
umbrella term for micropolitan and metropolitan statistical areas):
Albuquerque, N.M.; Baton Rouge, La.; Des Moines, Iowa;
Phoenix-Mesa-Scottsdale, Ariz.; Miami-Fort Lauderdale-Miami Beach, Fla.;
Springfield, Mass.; Cape Coral-Fort Myers, Fla.; Riverside-San
Bernardino-Ontario, Calif.; Pittsburgh, Pa.; Columbus, Ohio;
Sacramento-Arden-Arcade-Roseville, Calif.; and Portland-South
Portland-Biddeford, Maine.

^2For example, a beneficiary with a risk score of .5 is expected to have
one-half the health care costs of the average Medicare beneficiary,
whereas a beneficiary with a score of 2 is expected to have costs that are
twice the national average. CMS uses such measures to prospectively set
payment rates for managed care plans, known as Medicare Advantage.

^3GAO, Medicare+Choice: Payments Exceed Cost of Fee-for-Service Benefits,
Adding Billions to Spending, [40]GAO/HEHS-00-161 (Washington D.C.: Aug.
23, 2000).

^4We excluded beneficiaries for whom Medicare was a secondary payer
because we were not able to determine their total costs. Such persons,
though eligible for Medicare, may have some of their health care costs
covered by employer-sponsored or other private insurance. We also excluded
beneficiaries who had End Stage Renal Disease.

^5Our objective was to group together beneficiaries with generally similar
health statuses. To assess whether our method of assigning beneficiaries
to risk categories achieved this objective, we ranked beneficiaries within
each risk category by their risk score and divided them into two
equal-sized groups. Despite having slightly lower risk scores,
beneficiaries who were placed in the bottom half group were on average
about 1 percent more likely to be classified as overly expensive than
beneficiaries in the top half group. Consequently, across all risk
categories, beneficiaries had roughly the same chance of being classified
as overly expensive based on their 2003 expenditures.

^6Because the composition of a physician's practice may change during the
year--a physician may acquire new patients while other patients may die or
leave--the proportion of overly expensive patients associated with a
particular physician can be treated as a sample statistic. To ensure
reliability of this statistic, we limited our analysis to physicians who
treated a substantial number of patients. We established a minimum
practice size for physicians included in our analysis so that we would be
95 percent confident that our estimate of the true proportion of a
physician's practice comprised of overly expensive patients was accurate
within 10 percent. See William G. Cochran, Sampling Techniques (New York:
John Wiley and Sons, 1977), 75-76. Because the precision of our estimate
is a function of the overall proportion of overly expensive patients
within a metropolitan area, the minimum sampling size varied across
metropolitan areas.

^7Monte Carlo simulation is a statistical technique by which a quantity is
calculated repeatedly, using randomly selected "what-if" scenarios for
each calculation.

^8In the simulations, only the beneficiary's status, in terms of being
overly expensive, was randomized. The numbers of patients in each
generalist's practice, and the number of generalists each patient saw,
remained the same in each simulation.

^9In determining the distribution of generalists, the proportion of overly
expensive beneficiaries was rounded to one-half percent intervals.

           Figure 4: Actual and Simulated Distribution of Generalists by
           their Medicare Practice's Proportion of Overly Expensive
           Beneficiaries in a Hypothetical Metropolitan Area

           Table 2 shows that the proportion of overly expensive
           beneficiaries and the outlier threshold value varied across
           metropolitan areas. In general, areas that had higher proportions
           of overly expensive beneficiaries also had higher outlier
           threshold values. (See table 2.)

           Table 2: Proportion of Overly Expensive Beneficiaries and Outlier
           Threshold Value by CBSA
		   
                                               Proportion of overly   Outlier 
                                                          expensive threshold 
CBSA                                             beneficiaries^a     value 
Miami-Fort Lauderdale-Miami Beach, Fla.                     0.28      0.43 
Riverside-San Bernardino-Ontario,                           0.21      0.31 
Calif.                                                                     
Cape Coral-Fort Myers, Fla.                                 0.23      0.30 
Phoenix-Mesa-Scottsdale, Ariz.                              0.19      0.29 
Baton Rouge, La.                                            0.19      0.28 
Pittsburgh, Pa.                                             0.16      0.26 
Sacramento-Arden-Arcade-Roseville,                          0.16      0.25 
Calif.                                                                     
Columbus, Ohio                                              0.16      0.25 
Springfield, Mass.                                          0.17      0.25 
Albuquerque, N.Mex.                                         0.13      0.22 
Portland, Maine                                             0.13      0.22 
Des Moines, Iowa                                            0.13      0.21 

           Source: GAO analysis of 2003 Medicare claims data.

           aThe figures presented in this column reflect the proportion of
           beneficiaries in each metropolitan area who were classified as
           overly expensive. By contrast, the outlier threshold values are
           based on the proportion of physician-beneficiary relationships in
           a metropolitan area that involved an overly expensive beneficiary.
           Because some beneficiaries saw more than one generalist in 2003,
           the proportion of overly expensive beneficiaries in an area may
           differ slightly from the proportion of doctor-patient
           relationships involving overly expensive beneficiaries. For
           example, in the Phoenix-Mesa-Scottsdale, Ariz., CBSA, where 19
           percent of beneficiaries were overly expensive, 20 percent of
           physician-beneficiary relationships involved an overly expensive
           beneficiary. Overly expensive beneficiaries in that CBSA saw
           slightly more generalists than other beneficiaries and accounted
           for a proportionately larger share of all doctor-patient
           relationships than their share of the overall beneficiary
           population.
		   
		   Appendix II: Health Care Purchaser Program Characteristics

           In 2005 and 2006 we interviewed representatives of 10 health care
           purchasers who had implemented a physician profiling program. We
           also conducted some follow-up contacts to ensure the data were
           current. We had at least one purchaser from each major geographic
           area of the country as well as one Canadian province. These
           purchasers represented a mix of traditional health insurance plans
           and organizations that arrange care for select groups of patients.
           Five were commercial health plans, three were government agencies,
           one was a provider network that contracts with several insurance
           companies to provide care to their enrollees, and one was a
           trust-fund jointly managed by employers and a union.

           Table 2 presents the basic characteristics of each purchaser's
           profiling program and includes, among other things, (1) the
           approximate number of covered lives and physicians profiled; (2)
           the year the purchaser began profiling physicians; (3) whether the
           purchaser profiled individual or group practices or both; (4)
           whether the purchaser also used quality measures, such as
           adherence to clinical practice guidelines, to evaluate physicians;
           and (5) the unit of resource use employed to measure efficiency.
           The purchasers with the classification of "Episode" used an
           episodic grouper, which links claims into an episode of care that
           may span multiple encounters and multiple providers. By adjusting
           for the severity of like illnesses, episode groupers allow
           purchasers to measure payments to a particular physician or
           physician group relative to their peers. The purchasers with the
           classification "Patient" used a person-based method of
           categorizing illness severity. This method allows the purchaser to
           compare actual expenditures relative to an estimate of what was
           expected to have been spent given the level of "sickness" of the
           patients in a particular practice.

Table 3: Characteristics of Health Care Purchasers' Physician Profiling
Programs

                                                                                     Unit of    
                 Approximate                                                         resource   
                   number of Approximate                    Year                     use        
                     covered   number of               physician Type of    Quality  employed   
                       lives  physicians               profiling practice   measures to measure 
Purchaser name    affected^a    profiled Locations         began profiled   used     efficiency 
Aetna              500,000^b      15,000 Multistate^c       2004 Group      Yes      Episode    
BlueCross             60,000      26,000 Texas              2004 Group and  Yes      Episode    
BlueShield of                                                    individual                     
Texas                                                                                           
Greater              120,000         640 New York           1996 Individual Yes      Episode    
Rochester                                                                                       
Independent                                                                                     
Practice                                                                                        
Association                                                                                     
Health Insurance   4,100,000       8,000 British            1997 Individual No       Patient    
BC (British                              Columbia                                               
Columbia,                                                                                       
Canada)                                                                                         
HealthPartners       650,000      27,000 Minnesota        1989^d Group      Yes      Episode    
Hotel Employees      130,000       2,000 Nevada             2000 Group and  Yes      Episode    
and Restaurant                                                   individual                     
Employees                                                                                       
International                                                                                   
Union Welfare                                                                                   
Fund                                                                                            
Massachusetts        268,000      19,000 Massachusetts      2004 Individual Yes      Episode    
Group Insurance                                                                                 
Commission                                                                                      
Minnesota            115,000           e Minnesota          2002 Group^f    No       Patient    
Advantage Health                                                                                
Plan                                                                                            
PacifiCare       1,500,000^h      14,000 California       1993^i Group      Yes      Episode    
Health Systems^g                                                                                
UnitedHealthcare  10,600,000      80,000 Multistate^j       2005 Group and  Yes      Episode    
                                                                 individual                     
Source: Health care purchasers.

aThis column describes the total number of patients or plan members who
are potentially affected by the profiling program. In some cases, their
exposure may be limited to having access to purchaser evaluations of the
profiled physicians.

bThis figure refers to the number of Aetna enrollees in plans that
included the Aexcel network.

cIn 2006, Aetna's Aexcel network was available in Dallas, Tex.;
Jacksonville, Fla.; Seattle, Wash.; Atlanta, Ga.; Connecticut; Houston,
Tex.; Los Angeles, Calif.; metropolitan Washington, D.C.; metropolitan New
York, N.Y.; Northern New Jersey; Arizona; Austin, Tex.; Chicago, Ill.;
Cleveland, Ohio; Columbus, Ohio; Maine; Northern California; Orlando,
Fla.; San Antonio, Tex.; South Florida; and Tampa, Fla.

dHealthPartners began profiling at this time for more limited purposes,
such as negotiating fee schedules, rather than trying to influence
physician and patient behavior.

eMinnesota Advantage Health Plan had about 50 provider groups at the time
of our interview, each of which may have included physicians and
institutional providers together.

fMinnesota Advantage combined individual practitioners into a single
entity for the purposes of profiling.

gWhen we began our study, PacifiCare Health Systems and UnitedHealthcare
were separate organizations with their own physician profiling programs.
Although PacifiCare Health Systems merged with UnitedHealth Group, of
which UnitedHealthcare is a part, in December 2005, as of December 2006,
the profiling programs continued to be separate.

hThis figure represents the number of PacifiCare Health Systems enrollees
who have access to some profiling data. A smaller number of enrollees in
select areas have reduced copayments if they patronize physicians rated as
higher quality, lower cost providers.

iPacifiCare Health Systems began profiling in 1993; in later years the
effort was enhanced to include, among other measures, indicators of
quality, patient safety, and patient satisfaction.

jUnitedHealthcare profiled physicians in their provider networks in Iowa,
Illinois, Indiana, Kansas, Kentucky, Michigan, Ohio, Wisconsin, North
Carolina, Washington, Florida, Georgia, Louisiana, Tennessee, Arizona,
Colorado, Texas, Nebraska, Mississippi, and Utah.

Appendix III: Distribution of Physicians by Their Proportion of Overly
Expensive Beneficiaries by Metropolitan Area

This appendix displays the distribution of generalist physicians by the
proportion of overly expensive beneficiaries in their Medicare practice
for each of the 12 metropolitan areas in our study. The vertical line in
each chart represents the outlier threshold value for that area. If the
proportion of overly expensive beneficiaries in a physician's practice
exceeded this value, then the physician was designated an outlier
physician.

Figure 5: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Albuquerque, N.Mex.

Figure 6: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Baton Rouge, La.

Figure 7: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Cape Coral, Fla.

Figure 8: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Columbus, Ohio

Figure 9: Percentage of Generalist Physicians by Their Medicare Practice's
Proportion of Overly Expensive Beneficiaries--Des Moines, Iowa

Figure 10: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Miami, Fla.

Figure 11: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Phoenix, Ariz.

Figure 12: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Pittsburgh, Pa.

Figure 13: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Portland, Maine

Figure 14: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Riverside, Calif.

Figure 15: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Sacramento,
Calif.

Figure 16: Percentage of Generalist Physicians by Their Medicare
Practice's Proportion of Overly Expensive Beneficiaries--Springfield,
Mass.

Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

A. Bruce Steinwald, (202) 512-7101 or [email protected]

Acknowledgments

In addition to the contact above, James Cosgrove and Phyllis Thorburn,
Assistant Directors, and Todd Anderson, Hannah Fein, Gregory Giusto,
Richard Lipinski, and Eric Wedum made key contributions to this report.

(290413)

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www.gao.gov/cgi-bin/getrpt?GAO-07-307 .

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Highlights of [49]GAO-07-307 , a report to congressional committees

April 2007

MEDICARE

Focus on Physician Practice Patterns Can Lead to Greater Program
Efficiency

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) directed GAO to study the compensation of physicians in traditional
fee-for service (FFS) Medicare. GAO explored linking physician
compensation to efficiency--defined as providing and ordering a level of
services that is sufficient to meet a patient's health care needs but not
excessive, given the patient's health status. In this report, GAO (1)
estimates the prevalence in Medicare of physicians who are likely to
practice inefficiently, (2) examines physician-focused strategies used by
health care purchasers to encourage efficiency, and

(3) examines the potential for CMS to profile physicians for efficiency
and use the results. To do this, GAO developed a methodology using 2003
Medicare claims data to compare generalist physicians' Medicare practices
with those of their peers in 12 metropolitan areas. GAO also examined 10
health care purchasers that profile physicians for efficiency.

[50]What GAO Recommends

Given the contribution of physicians to Medicare spending in total, GAO
recommends that CMS develop a system that identifies individual physicians
with inefficient practice patterns and, seeking legislative changes as
necessary, uses the results to improve the efficiency of care financed by
Medicare.

Based on 2003 Medicare claims data, GAO's analysis found outlier
generalist physicians--physicians who treat a disproportionate share of
overly expensive patients--in all 12 metropolitan areas studied. Outlier
generalists and other generalists saw similar numbers of Medicare patients
and their respective patients averaged the same number of office visits.
However, after taking health status and location into account, GAO found
that Medicare patients who saw an outlier generalist--compared with those
who saw other generalists--were more likely to have been hospitalized,
more likely to have been hospitalized multiple times, and more likely to
have used home health services. By contrast, they were less likely to have
been admitted to a skilled nursing facility.

Certain public and private health care purchasers routinely evaluate
physicians in their networks using measures of efficiency and other
factors. The 10 health care purchasers in our study profiled
physicians--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. Most of
the 10 purchasers also evaluated physicians on quality. To encourage
efficiency, all 10 purchasers linked their physician evaluation results to
a range of incentives--from steering patients toward the most efficient
providers to excluding physicians from the purchaser's provider network
because of inefficient practice patterns.

CMS has tools available to evaluate physicians' practices for efficiency
but would likely need additional authorities to use results in ways
similar to other purchasers. CMS has a comprehensive repository of
Medicare claims data to compute reliable efficiency measures for most
physicians serving Medicare patients and has substantial experience using
methods that adjust for differences in patients' health status. However,
CMS may not currently have the flexibility that other purchasers have to
link physician profiling results to a range of incentives encouraging
efficiency. Implementation of other strategies to encourage efficiency
would likely require legislation.

CMS said that our recommendation was timely and that our focus on the need
for risk adjustment in measuring physician resource use was particularly
helpful. However, CMS only discussed using profiling results for educating
physicians. GAO believes that the optimal profiling effort would include
financial or other incentives to encourage efficiency and would measure
the effort's impact on Medicare. GAO concurs with CMS that this effort
would require adequate funding.

References

Visible links
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-07-235R
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-06-456T
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-06-456T
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-04-793SP
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-85
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-06-704
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-05-119
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-05-85
  40. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-00-161
  49. http://www.gao.gov/cgi-bin/getrpt?GAO-07-307
*** End of document. ***