Although Medicare uses geographic adjustment factors to ensure payments to hospitals and doctors accurately reflect their costs of providing care, the data sources and methods used for making those adjustments are flawed, according to a new report from the Institute of Medicine (IOM).
Nearly 40 percent of hospitals get exemptions to how their adjustments are calculated, a fact that strongly indicates that Medicare's payment formulas are inadequate and unreliable, the committee wrote in the report.
"The Medicare program needs more precise and objective tools and methods to assure the nation that the billions being spent are appropriately and fairly disbursed," Committee Chair Frank Sloan, a professor of health policy and economics at Duke University, said in a statement.
Because salaries and benefits make up one of the largest costs of providing care, the committee recommends using Bureau of Labor Statistics data on health sector salaries to calculate wage adjustments for hospitals and private practice health professionals.
And Medicare should use the Office of Management and Budget's metropolitan statistical areas to set payment areas and labor markets, advises the IOM committee, as well as develop a new source of office rent data.
If passed into law, the committee's recommendations won't affect the total amount spent on Medicare, but rather some hospitals and doctors will be paid more and others will be paid less to stay budget-neutral under federal law.
Yet, not all agree with the proposed payment formulas. The American Hospital Association questions using BLS data as it ignores hospitals' pension, benefit and overtime costs, according to Reuters.
The report, commissioned by HHS, is the first of three to be issued by the committee. A second report will further discuss physician payment issues this summer. And a final report, expected in spring 2012, will evaluate the effects of adjustment factors on healthcare quality, population health, and the distribution of the healthcare work force.