For measuring hospital inpatient utilization, we used DRG-based quantity measures that are designed to reflect “true” medical inputs. (DRG prices are set to reflect the average of patients' hospital-borne costs within a large sample of hospitals.) We included outlier payments, which constitute 3.7 percent of total payments to short-stay hospitals, in our measure of utilization because they represent real resources spent for patients with unusually high health care costs.
For payments to physicians under the Medicare Part B (physician services) program, we relied primarily on relative value units, which Medicare uses as a measure of the amount of time spent on an office visit, for example. In practice, Medicare reimburses physicians in New York more for an office visit than for an identical office visit in Wisconsin by paying more per relative value unit. Our method “undoes” this differential by recreating Part B spending using the same dollar payment per relative value unit whether the doctor is in Wisconsin or New York. Thus, if Part B spending is higher in New York, it's because more services are provided, and not because prices are higher.
Other Medicare spending categories were calculated to measure, indirectly, the actual service provided to the patient. These adjustments relied in turn on the CMS regional wage index as the primary mechanism to adjust Medicare expenditures. The wage index is particularly useful when the price-adjustment mechanism used by Medicare to reimburse providers is too complex to unravel or requires additional data sets (such as nursing home risk-adjustment assessments). This index is the primary means to adjust expenditures for the variety of Medicare spending components exclusive of Part A inpatient and Part B physician payments.
For Medicare outpatient payments, only 60 percent of the base payment is eligible for adjustment by the local wage index. Medicare assumes that 60 percent of expenses represent local purchases (and hence local prices) for employees, rents, and other input costs. The remaining 40 percent of Medicare outpatient payments are assumed to not require local price adjustment because they are bought on a national market.10
A similar logic was used for other categories of Medicare expenditures, although we assumed a 75/25 mix—a rough average among the different categories of expenditures such as nursing homes—rather than the 60/40 mix described above.11 –13 The adjustment factors for these smaller components of overall Medicare spending may be imperfect. But these imperfections have little impact on our overall estimates of Medicare spending because they are small relative to inpatient and physician charges that rely on DRGs and RVUs, respectively.
For payments to physicians under the Medicare Part B (physician services) program, we relied primarily on relative value units, which Medicare uses as a measure of the amount of time spent on an office visit, for example. In practice, Medicare reimburses physicians in New York more for an office visit than for an identical office visit in Wisconsin by paying more per relative value unit. Our method “undoes” this differential by recreating Part B spending using the same dollar payment per relative value unit whether the doctor is in Wisconsin or New York. Thus, if Part B spending is higher in New York, it's because more services are provided, and not because prices are higher.
Other Medicare spending categories were calculated to measure, indirectly, the actual service provided to the patient. These adjustments relied in turn on the CMS regional wage index as the primary mechanism to adjust Medicare expenditures. The wage index is particularly useful when the price-adjustment mechanism used by Medicare to reimburse providers is too complex to unravel or requires additional data sets (such as nursing home risk-adjustment assessments). This index is the primary means to adjust expenditures for the variety of Medicare spending components exclusive of Part A inpatient and Part B physician payments.
For Medicare outpatient payments, only 60 percent of the base payment is eligible for adjustment by the local wage index. Medicare assumes that 60 percent of expenses represent local purchases (and hence local prices) for employees, rents, and other input costs. The remaining 40 percent of Medicare outpatient payments are assumed to not require local price adjustment because they are bought on a national market.10
A similar logic was used for other categories of Medicare expenditures, although we assumed a 75/25 mix—a rough average among the different categories of expenditures such as nursing homes—rather than the 60/40 mix described above.11 –13 The adjustment factors for these smaller components of overall Medicare spending may be imperfect. But these imperfections have little impact on our overall estimates of Medicare spending because they are small relative to inpatient and physician charges that rely on DRGs and RVUs, respectively.