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Management Issue 5:
Avoiding Waste and Promoting Value in Health Care

Why This Is a Challenge

In an era of fiscal belt-tightening and expanding enrollment of "baby boomers" into the Medicare system, the Department must be vigilant in reducing waste and increasing value in its health care programs. The Institute of Medicine (IOM) estimated that about 30 percent of U.S. health spending in 2009-roughly $750 billion-was wasted. Waste in health care programs is a multidimensional problem. The IOM report identified six major areas of waste: unnecessary services, inefficient delivery of care, excess administrative costs, inflated prices, prevention failures, and fraud.

As described in Challenge 3, Preventing and Detecting Medicare and Medicaid Fraud, curbing fraud is vital to conserving scarce health care resources, and the Department must continue to direct all necessary resources toward fraud prevention, detection, and remediation. However, while all fraud is waste, not all waste is fraud. Challenge 2, Identifying and Reducing Improper Payments, and Challenge 4, Ensuring Patient Safety and Quality of Care, describe opportunities to address waste and increase value by reducing improper payments and ensuring patient safety and quality of care. Maximizing efficiencies and value derived in health care requires the Department to continue to focus on other areas prone to waste as well.

One area is payment inefficiency. OIG has found, for example, payment inefficiencies in Medicare's bundled payment for global surgery fees, which has not been adjusted to reflect evolving physician practices that result in fewer services' typically being provided than assumed in the payment model. Similarly, OIG work in evaluating Medicare payment for two medications used to treat wet age-related macular degeneration revealed substantial opportunities for Medicare to save money by paying on the basis of the cost of the less expensive drug, which is equally effective according to preliminary results of a clinical study. OIG work on evaluating drug pricing showed shifts in utilization patterns for drugs coinciding with changes in Medicare payment and coding policies. Utilization of a more expensive respiratory drug increased when Medicare's reimbursement for that drug was more favorable to suppliers compared to reimbursement for a less expensive alternative drug and decreased when Medicare changed its pricing policy.

The Department is implementing a variety of policy changes designed to shift from volume-driven payment to value-driven payment. These include, for example, the Hospital Value-Based Purchasing Program, the Readmissions Reduction Program, the Hospital Acquired Conditions Program, and the End Stage Renal Disease (ESRD) Prospective Payment System. They also include broader delivery reforms that pair payment incentives with changes aimed at producing better coordinated, higher quality, and more efficient and effective care. Examples include the MSSP, as well as models being tested under the auspices of the Center for Medicare and Medicaid Innovation (CMMI), such as the Pioneer ACO Program, the Independence at Home Program, and the Bundled Payment for Care Initiative.

These reforms rely significantly on complex data, advanced health information technology, and sophisticated quality and performance measurement. To ensure reliable results, data must be accurate, complete, and timely. Measures must be appropriate and meaningful. Outcomes must be correctly assessed to ensure correct payment. The growing linkage of payment with quality presents new challenges for administering Medicare and Medicaid payment systems.

The Hospital Acquired Conditions Program provides an example of the challenges in designing and implementing initiatives in ways that achieve their goals. OIG reviewed the incidence of adverse events among hospitalized Medicare beneficiaries and found that very few of the events that beneficiaries experienced were covered by the Hospital Acquired Conditions policy. Further, for the few incidents that were covered by the policy, none of the events in OIG's review were documented in the claims data in a way that would enable CMS to identify them as hospital-acquired conditions and apply appropriate payment denial for increased costs associated with those events.

Opportunities afforded by innovations in science and information technology and advances in evidence-based medicine and quality measurement are fueling transformations in health care aimed at improving care and lowering costs. To meet this challenge, the Department must design and oversee payment systems that produce the greatest health benefits to patients at the lowest cost.

Progress in Addressing the Challenge

A piggy bank and stethoscope

The Department is implementing policy changes, including a number of ACA-related changes, designed to reduce waste and increase value in the health care programs through enhanced payments for positive patient outcomes and/or financial penalties for negative patient outcomes. For example, the Hospital Value-Based Program provides financial incentives to hospitals for achievements and improvements in measures related to patient outcomes, patient experiences, and processes of care. CMS issued a final rule to implement its Hospital Readmissions Reduction Program, effective October 1, 2012, under which Medicare payments may be reduced to applicable hospitals with high patient readmission rates. In that same final rule, CMS also continued its list of existing hospital-acquired conditions with some updated billing codes and added two new conditions to this list. The Department continues to administer the MSSP and to foster a variety of payment and delivery models in the Medicare and Medicaid programs. CMS intends to learn from the Nursing Home Value-Based Purchasing demonstration to inform improved payment in this postacute care setting.

In addition, the Department continues to implement the Competitive Bidding Program for DME, which holds promise for addressing prior OIG findings that Medicare paid significantly more than market prices for many types of DME.

What Needs To Be Done

The Department should continue to seek opportunities to harness the promise of value-driven payment. The Department should continuously evaluate the effectiveness of payment policies and scrutinize payment systems to ensure that quality, efficiency, and payment accuracy goals are met. For example, the Department could strengthen its Hospital-Acquired Conditions policy by improving compliance with present-on-admission coding rules and, if supported by evidence of effectiveness, further expanding the list of hospital-acquired conditions. Timely implementation of the new payment adjustment under ACA section 3008 for conditions acquired in hospitals, slated to go into effect in 2015, will further strengthen the Department's efforts to improve patient care and reduce wasteful expenditures on hospital-acquired conditions. The Department should also consider revising its payment policy for the drugs used to treat wet age-related macular degeneration and apply the lessons learned from the utilization changes in the respiratory drugs to design payments and monitor billing to avoid unintended consequences.

For newly implemented programs, such as the MSSP and CMMI demonstration programs, the Department must vigilantly monitor implementation, ensure efficient and effective operations, evaluate program outcomes, and assess the effectiveness of oversight strategies. The Department should implement a comprehensive and flexible oversight strategy, with robust tools to prevent, detect, and remedy instances of fraud, waste, and abuse.

Key OIG Resources

Management Issue 6: Ensuring Efficiency and Effectiveness of Medicare and Medicaid Program Integrity Contractors

Office of Inspector General, U.S. Department of Health and Human Services | 330 Independence Avenue, SW, Washington, DC 20201