A story in the New York Times reports on the ‘deeply flawed system’  that determines reimbursement pay to  doctors and hospitals. It is a timely topic indeed, since the new health care laws require by the end of this year the Secretary of Health and Human Services Kathleen Sebelius to send Congress a plan to revise the way Medicare adjusts payments to reflect regional differences in hospital wages.

The potential for such a plan to have major economic as well as political implications is significant, given that wages can represent 65% or even more of a hospital’s costs – a figure that varies widely from region to region (a nurse in San Francisco makes twice the wage of a nurse in a same-sized city in the midwest).

It is the difference in hospital costs, in fact, that is the major driver behind the $15,000 difference between the cost of a standard angioplasty by a Stanford-trained surgeon in a southern California hospital and by a Stanford-trained surgeon in a super-deluxe private hospital in Mexico.

Under the new health law, geographic adjustments may not increase total costs to Medicare.

The story is based on a study commissioned by the White House in March of 2010 and was conducted by the National Academy of Sciences on Medicare payment practices.

The report criticizes Medicare’s current distribution method for its budget of tens of billions of dollars using an algorithm including  regional variations in wages, rents and other costs, hospital market classifications and doctor payment zones.  The current system defines 441 hospital labor markets and 89 doctor payment zones; more than a third of these ‘zones’ are actually state-wide blanket rates. 

In its report, an expert panel from the Institute of Medicine issued the consensus that the system of paying doctors has “fundamental conceptual problems;”  the report was even harsher in its assessment of the payout system for hospitals, describing the method as “so unrealistic that almost 40 percent of them have been reclassified into higher-paying areas”

In a wonderful illustration of an answer of the ‘easier said than done’  variety, the study recommends a  solution:  to recreate the payment system as one that  “recognizes a single set of 441 payment areas for doctors and hospitals alike.”

That  makes perfect sense if the purpose of the study was really to find out if Medicare payments are fair and balanced (that’s the real fair and balanced I am talking about, not the fair and balanced like Fox News).  The thing is, that was not really the purpose of the study – the real purpose of the study was votes, and the lawmakers who sought to get them by contending that doctors and hospitals in the states of Iowa, Minnesota, Wisconsin (for example)  have been shortchanged by flaws in the Medicare system.  

This history of underpayments, they say, has had the resulting effect of driving away quality health care, and making accessibility to specialists an expensive proposition for residents of these  states.  They need the study to increase Medicare payments so that the new voters they will attract with their proposed Medicare laws will have access to better health care.

Since the total Medicare budget is not increasing but merely being redistributed,  naturally there will be winners and losers – with, in all likelihood,  more losers in midwestern states where payments to doctors in rural areas would decrease to offset the increases in payments to urban doctors.

This argument did not find purchase with the expert panel behind the study, which reported that the geographic adjustments would be made in the name of increased Medicare payment accuracy, and not for purposes of addressing real or forecasted shortages in access to specialists or other health care services.

A representative of the Iowa Medical Society expressed his disappointment that the report failed to acknowledge the reality that Medicare’s payment algorithm overemphasizes the importance of geographic differences in office rents. 

The importance of this issue was echoed by the chairman of the study panel, who noted that Medicare’s current measure of assessing regional differences in commercial office rents is based on published rental rates for two-bedroom apartments, which does not accurately reflect the prices doctors are paying for office space, unless of course that doctor’s office space is in a two-bedroom apartment.

The panel will analyze the impact of its recommendations in a report next spring.