From time to time, proposals have surfaced calling for "areawide payment incentives" for physicians. Under these proposals, geographic market areas would be designated, and within them targets would be set for total Medicare Part A and Part B expenditures. Physicians in a given area would be rewarded or penalized depending on how close aggregate charges came to these targets. I refer to these proposals as "global budgets" for all Medicare services in given geographic areas.
The rationales behind these proposals have varied. In an early proposal, Peter Fox argued that global budgets are the only way to address the "blank-check mentality" associated with fee-for-service Medicare. More recently, John Wennberg and colleagues have observed that Medicare spending per capita in some regions of the United States is more than twice as high as in other regions, with no obvious improvements in compliance with the standards of medical practice recommended by evidence-based medicine. Wennberg et al. (2002) maintain that regional budget caps benchmarked to the lowcost areas could save Medicare USD 40 billion per year after adjusting for regional spending differences related to age, sex, and illness.
These global budget proposals appear to be a logical extension of capitation to a more expansive geographic area. This analogy is valid in part, which implies that global budgets share the same drawbacks as capitation payments to private plans in Medicare. Among them is the administrative formula used to determine the payment level. Fox advocated adjusting the target level only for the age composition of beneficiaries within the area, with annual increases initially tied to historical rates of increase in Medicare expenditures. Basing the rates of increase on historical trends obviously would build Medicare's past inefficiencies into future payment rates, but Fox thought the increases would moderate over time if the areawide incentives were successful. In Wennberg's proposal, the capitation payments would be based on the same factors (with the addition of the regional illness burden) that were used until recently to pay local HMOs.
In addition to the problems with local capitation, the global budget proposal is missing a piece. In the absence of compulsion, individual physicians always will do better by pursuing their own financial interests. This will contribute to the deficit; but since each physician bears only a small part of that cost, he or she will disregard the areawide expenditure target.
If physicians learn over time that their efforts to "game the system" are self-defeating, they might learn not to disregard the expenditure target. However, if physicians' services are substitutes or complements for other services (including hospital services), adverse effects on total spending may result. For example, if price reductions for physician services cause physicians to substitute more drug prescriptions for those services, total costs could be adversely affected. In addition, it is doubtful that physicians could internalize the incentives to keep their expenditures within the target. Wennberg and colleagues were aware that a global payment system would generate "perverse incentive effects". They proposed, therefore, that Comprehensive Centers for Medical Excellence (CCMEs), based on hospitals, provider networks, or organizations representing regional coalitions, be established in each region to manage the capitation payments. To qualify, a CCME would have to establish best-practice models of medical care. Staffand group-model HMOS that employ salaried physicians would be the best models for these organizations.
For CCMEs to constitute a national program, however, they would have to be established in every region of the country. This would be problematic because staff- and group-model HMOs have not been able to thrive except in areas with high population and physician densities. It would be extremely difficult to form these HMOs in rural areas. Another problem is that successful CCMEs easily could become local monopolists. We showed that monopolists paid by global budgets may supply too few services, resulting in long waiting lines. Waiting lines have developed in such global budget organizations as the U.S. Veterans Administration medical service and foreign national health services. I do not see how they could be prevented in a regional capitation system.
In practice, neither SGR nor its predecessor, VPS (volume performance standards), has performed as hoped. From 1980 through 1989 annual growth in Part B spending per beneficiary, adjusted for inflation, ranged from a low of 1.3 percent to a high of 15.2 percent, with a mean of 8.0 percent. This is not a record to which to aspire. The SGR formula also produced volatile updates, Hackbarth wrote, which in 2003 led Congress to replace the GDP factor with a ten-year rolling average of GDP growth. Furthermore, volume continued to grow strongly even in years when the updates were small or negative. Finally, growth in volume per beneficiary varied widely across services, with the highest growth of 45 percent from 1999 to 2003 found in diagnostic imaging services. Poor performance aside, a global budget program would face exceptional political obstacles. Unless all doctors were included in the CCME - which would defeat the purpose of promoting CCMEs as "centers of excellence" for high-quality care - the excluded physicians would be barred from participating in Medicare. This would violate section 1802, title XVIII, of the Social Security Act, which states that any willing provider must be accepted by Medicare.
To implement the CCME program, section 1802 would have to be amended to exclude providers not affiliated with CCMEs. This would cause a firestorm of protest from the medical profession and from excluded hospitals whose survival would be threatened by withdrawal of Medicare patients. One possible alternative would be to designate the CCME as a "preferred provider" for Medicare (that is, Medicare patients could use the CCME under preferred terms). Medicare's efforts to encourage entry of regional preferred provider organizations (PPOs) have, however, not been successful to date. Further subsidies appear to be needed to entice regional PPOs into Medicare, which could defeat any cost-saving potential from the CCME program.
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