'But 'twas a famous victory.' (Omnibus Budget Reconciliation Act of 1989)

`But 'Twas a Famous Victory'

And everybody praised the Duke, Who this great fight did win.

"But what good came of it at last?"

Quoth little Peterkin.

"Why, that I cannot tell," said he;

"But 'twas a famous victory."

Robert Southey

"The Battle of Blenheim"

In my first installment addressing physician payment reform, ("Do These Guys Know Why They're Applauding," 16(2):25-26, March-April 1990), I questioned the rationality and fairness of the resource-based relative value scale (RBRVS) and suggested that it the potential to lower primary care physician income while not reducing the income of more procedurally oriented specialties. This potential results brom the different price elasticities of demand across physician services.

The prospect under the RBRVS system of pricing some customers out of the primary care market (absent a social safety net better than the one extant) is real, as is the likelihood that increased demand will absorb whatever idle capacity exists at the more invasive end of the medicap spectrum. At the very least, the increase in the Part B copayment for all those services that are "winners" (have price increases), inasmuch as those services will remain the most frequently consumed even with lessened demand, coupled with an increased demand at the margin for all those services that are "losersc (have price, decreases), will result in a further increase in Medigap insurance premiums that will almost certainly pricesome enrollees out of that market.

For sake of argument, however, let us make two wholly unrealistic assumptions. First, let's assume that the contemplated changes in prices will have absolutely no volume effects on any services anywhere in the United states; i.e., the quantity of each service consumed under RBRVS regulated rates will be exactly what it would have been had the existing structure of charge been continued.

Second, let's assume that, as promised by the politicians, RBRVS will initially produce budget neutrality; i.e., the total additional payments for all of the "winners" will exactly equal the reductions in payments to the "losers." In other words, we adopt the politically naive (and hence unrealisitc) position that the bureaucratic structure won't give the winners any less than it takes from the losers: that physician payment reform (PPR) won't be manipulated or perverted for the purposes of achieving overall fiscal policy objectives, i.e., deficit reduction.

Given these assumptions, if RBRVS was the only element in PPR, what would have been accomplished? The primary accomplishment would be fractionalization of the medical profession, encouragement of internecine warfare, and reduction of the profession's political clout. What would not have been accomplished is any cost savings.

In 1984-86, for example, physician Medicare beas were "frozen." In terms of cost savings, the freeze produced a large yawn. Through a combination of slightly increased intensity (largely technology driven), a larger volume of patients (as a result of demographic growth and the inpatient-to-outpatient change of venue occasioned by Medicare itself through the prospective pricing system for hospitals), and through the process of "unbundling" (physicians' extracting legitimate items of billable service from previous coding practices that bundled several such services into a single code/charge), total Medicare payments to physicians scarcely missed a beat in their ongoing rate of growth. Because total outlays or cost (TC) is the product of price and quantity (P x Q), freezing P had little effect on total cost because of the increase in Q.

Similarly, regulating P under RBRVS, taken alone, may not produce any savings (lowering growth in TC) unless one also regulates Q or, what is effectively the same thing, regulates TC. Obviously, if I control both TC and P in the equation TC = P x Q, I have, de facto, regulated Q.

Regulating TC, of course, is what expenditure targets (ETs) were all about. The AMA opposed ETs, which would have imposed a legislative formula on annual changes in RBRVS rates. The concept was to begin with the premise that TC for 1993, say, would be a certain percentage larger than TC for 1992, the increase reflecting growth in the number of enrollees, growth in technology-driven intensity, and inflation as measured by the Medicare Economic Index, adjusted for any changes in law or regulation along the way. This ordinary aggregate growth rate in TC would ultimately be reflected in ordinary 1993 RBRVS rate increases reflecting both the projected 1993 TC and the aggregate quantity of projected units of service in 1993, Q. (*)

This ordinary increase, however, would be diminished to penalize bad behavior. "Bad behavior" is defined as exceeding the "right" TC in a prior year. The "right" or "targeted" TC For a prior year in this example would be a projected TC for 1991 based on the actual 1990 TC, taking into account the factors listed above. (The reason for keying on 1991 instead of 1992 is that data for 1992 would not be available in time to set 1993 rates, which must be done in 1992.) In board terms, if actual 1991 TC exceeded targeted 1991 TC, the percentage by which actual exceeded target would then be deducted from the ordinary increase that otherwise would have been applied to 1992 rates to establish 1993 rates.

As the AMA will be happy to tell you, it succeeded in defeating ETs. Instead, we have Volume Performance Standard Rates of Increase (VPSRI). To whatever extent actual percentage rates of increase in TC exceed VPSRI rates of increase in TC, that excess reduces rates of increase in RBRVS rates. If that sounds a lot like ETs, we have had a successful communication.

What is different about VPSRI is that the Secretry of Health and Human Services and the Physician Payment Review Commission each makes recommendations to Congress as to RBRVS rate increases each year, taking into consideration all of the factors listed above plus matters of patient access to services, age composition of enrollees, and anything else they want to consider. Congress then has the option to set the next year's RBRVS percentage rate increases, but if it chooses not to act, we revert to the formula approach.

The AMA tells us that having avoided the automatic formula approach in the Congress is a major victory. The relevant history, of course, is the prospective pricing system for hospitals, in which there is a statutory formula for annual increases in DRG rates in the event Congress chooses not to set the rate increases legislatively. Congress has not defaulted, but has indeed legislated DRG rate increases each year. In every year, the rate of increase passed by Congress is less than the rate increase called for by the formula. The victory celebration over. Ets would seem to have been premature.

(*) The former would be divided by the latter to give a rate per average unit of service (and, consequently, an increase over the comparable 1992 rate. This 1993 rate would then be adjusted upward or downward to reflect (1) differential relative values of actual individual services compared to the global average unit of service, and (2) other variations such as geographic distinctions in resource costs.

Hugh W. Long, PhD, is Associate Professor of Health Care Management, A.B. Freeman School of Business, Tulane University, New Orleans, La.