Policing Cost Containment: The Medicare Peer Review Organization Program

Policing Cost Containment: The Medicare Peer Review Organization Program Timothy Stoltzfus Jost* I. INTRODUCTION It is commonly believed that the United States Government is spending too much on health care and must constrain many of its expenditures. To accomplish this, the largest federal health care program, Medicare, has relied primarily on restructuring the ways in which it pays for medical services. Specifically, it has adopted payment strategies, such as diagnosis-related group prospective payment for hospitals (DRGPPS), resource-based relative value schedule payment for physicians (RB-RVS), and capitation.' These payment strategies attempt both to pay for health care services on a per-unit basis (such as per-hospital admission) and to hold down per-unit costs. Most of these strategies also define broadly the units of care paid for (hospital admissions for DRG-PPS, patients for capitation)-a way of minimizing opportunities for providers to compensate for reduced prices by increasing volume. While some of these strategies achieve considerable success in holding down costs, they are not without risks. In particular they increase, on one hand, the potential problem of professionals and institutions providing more and more units of services to increase their income, or, on the other, use fewer resources for each unit of services to reduce their costs. For example, institutions could react to per-admission payment by increasing the number of patients they admit and by decreasing the services they provide for each admission. Some of these responses could result in increased costs. They could * The author is a professor in the Colleges of Law and of Health and Hospital Administration at Ohio State University. He is co-author of HEALTH LAW: CASES, MATERIALS AND PROBLEMS, and has written extensively on health care regulation. He also authored a recent study on Medicare Peer Review Organizations, and has served as a consultant to the Institute of Medicine. 1. Under a capitation payment system, the HMO is paid a flat rate per patient per period of time, and must then provide all of the patient's care (or a specified type of care) for that period of time without additional charge. 484 University of Puget Sound Law Review [Vol. 14:483 also contribute to patient harm if patients are provided too few or too many services or services of inadequate quality. The federal government has in turn established regulatory programs that rely on payment denial and civil sanctions to address these pernicious responses to its payment strategies. The Medicare Utilization and Quality Peer Review Organization (PRO) program is the most important of these programs. This Article will first examine the problem of health care cost inflation and the payment strategies the Medicare program has adopted to address that problem. It will then discuss the perverse incentives that these payment strategies create, and the role of the PRO program in addressing harmful provider behavior encouraged by those perverse incentives. The Article examines evidence on whether the PRO program is succeeding or failing in this mission, and suggests possible means of improving the effectiveness of the PRO program in policing cost containment. Specifically, it recommends clarifying and strengthening the deterrent role of the PROs, crafting PRO procedures to maximize PRO effectiveness, and networking between PROs and other regulatory entities to enhance PRO effectiveness. II. HEALTH CARE COSTS The United States spends a great deal on medical care. In 1990 we spent an estimated $647 billion on health care--$2,511 per person.2 There is, of course, no "right" amount for a society to spend on health care, but there are clear signs that Americans are spending too much. We are certainly spending more than we have ever spent before. Between 1967 and 1990 the proportion of our gross national product spent on health care grew from 6.3 percent to 12 percent.3 We are also spending more than other nations. In 1987, for example, we spent 11.2 percent of our GNP on health care, contrasted with Canada, which spent 8.6 percent, Germany, which spent 8.2 percent, Japan, which spent 6.8 percent, and the United Kingdom, which spent 6.1 percent.4 As an example, we spend more on health care than we do on groceries, owner-occupied housing, 2. Health Care Financing Administration, DEPARTMENT OF HEALTH & HuMAN SERvicES, MEDICARE AND MEDICAID FACT SHEET: STATISTICAL HIGHLIGHTS 1 (1990) [hereinafter HHS HCFA]. 3. Id. 4. Schieber & Poullier, InternationalHealth Care Expenditure Trends: 1987, 8 HEALTH AFFAIRS 169, 170 (1989). 1991] Policing Cost Containment 5 or transportation. Government spending, the focus of this Essay, is of particular concern. The Health Care Financing Administration (HCFA) estimates that public expenditures on health care reached $269 billion in 1990, and federal health expenditures reached $196 billion.' Yet even this level of expenditures falls far short of the level necessary to meet the health care needs of all Americans: At least 31.5 million Americans are at any one time without private or public health insurance.7 These persons receive far less medical care than the insured population.' If the medical needs of the uninsured are to be met, additional resources-certainly including additional public funds-should be made available.' Unless we are to dramatically increase total health care expenditures, therefore, the cost of existing health care must be controlled before medical care can be made more widely available. Well-publicized constraints on public spending, including public resistance to increased taxes and competing priorities for available funds, however, necessitate tight control over gov5. STATISTICAL ABSTRACT OF THE UNITED STATES 426 (1990). The fact that we are spending a lot on health care, of course, does not mean that we should spend less. Americans also, no doubt, spend a greater proportion of their wealth on recreation or on luxury items than do the citizens of many other nations and yet, do not fret about spending "too much" on these things. Rather, we trust people to purchase no more than they want of these items, given all of their other needs and desires. The markets for most goods and services operate to ensure that resources are allocated optimally. Few economists, however, trust the market for health care to operate that way. Too many factors distort both the demand and supply for health care to have any confidence that market forces can tell us how much to spend on it. See B. FURROw, S. JOHNSON, T. JOST, & R. SCHWARTZ, HEALTH LAw: CASES, MATERIALS AND PROBLEMS 396-401 (1987). 6. HHS, HCFA, supra note 2, at 1. 7. BUREAU OF THE CENSUS, U.S. DEPT. OF COMMERCE, HEALTH INSURANCE COVERAGE 1986-88 2 (1990). 8. Hadley, Steinberg & Feder, Comparison of Uninsured and Privately Insured Patients; Condition on Admission, Resourse Use, and Outcome, 265 J. A.M.A. 374 (1991). 9. The medical nee (...truncated)