NCPA - National Center for Policy Analysis

Big Flaws in How Medicare Pays Hospitals, Doctors

June 9, 2011

Medicare pays more to doctors and hospitals in expensive parts of the country.  But the Institute of Medicine (IOM) says Medicare's methods of evaluating regional costs are disturbingly imprecise and need to be overhauled, says Kaiser Health News.

The IOM says Medicare needs to make a "significant change" to the ways it evaluates salaries of health care workers and real estate costs.  Major changes to these calculations would affect the bottom lines of thousands of practitioners and institutions, but the report did not gauge the impact.

The report's recommendations include:

  • Medicare should stop relying on hospital reports to calculate regional wages for health care workers and instead use data from the Bureau of Labor Statistics.
  • Medicare should broaden how it measures hospitals' and doctors' business costs.
  • In addition to salaries of traditional employees such as doctors and nurses and administrative assistants, Medicare should factor in what hospitals pay the increasing number of other professionals now being employed -- information technology and computer experts, for example.
  • Medicare should replace its method of estimating the rents that doctors and other providers pay for their offices and clinics; Medicare currently uses data for the cost of two-bedroom apartments that the government collects when setting the price of subsidized housing for the poor, but the committee said that doesn't reflect commercial rent prices.

If all its recommendations were adopted, they would represent the biggest transformation in Medicare's geographic payment adjustments in two decades.

Source: Jordan Rau, "Big Flaws in How Medicare Pays Hospitals, Doctors," Kaiser Health News, June 1, 2011.  "Geographic Adjustment in Medicare Payment," Institute of Medicine, June 1, 2011.

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