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P E R S P E C T I V E S
V A R I A T I O N S
W E B  E X C L U S I V E   

7 October 2004  
  

Perspective: 
Quality As A System Property: 
Section 646 Of The Medicare 
Modernization Act

John Wennberg and his research on variations played
a key role in the passage of a demonstration to improve quality in Medicare.

By Paul Harrington

ABSTRACT:

The Medicare Trustees’ 2004 report indicates that the Part A Hospital Insurance trust fund will be exhausted by 2019. Medicare’s sustainable growth rate (SGR) formula for physician reimbursement is widely recognized as being flawed; if it is not reformed, it may result in reduced access to physician services for beneficiaries. MedPAC proposes an alternative to the SGR formula that involves explicit consideration of Medicare program objectives and ensures that payments for physician services be adequate to maintain access. Section 646 of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 may provide answers regarding providing high-quality care in fee-for-service Medicare.

There is widespread agreement that Medicare faces serious challenges, among them the large degree of variation in spending and quality across geographic areas. In this brief commentary I discuss these problems and a demonstration project designed to address them. I highlight the role played by John Wennberg, whose research underpins the special collection of Health Affairs essays and this comment.¹

Medicare challenges. Challenges to Medicare are abundantly clear in the 2004 report by the Medicare Trustees, which indicates that the Part A Hospital Insurance trust fund will be exhausted by 2019—seven years earlier than indicated by the 2003 Trustees Report. The outpatient drug benefit enacted in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) will add greatly to the overall cost of Medicare. Total Medicare spending is projected to increase at a faster pace than either workers’ earnings or the economy overall.²

In addition, Medicare’s sustainable growth rate (SGR) physician reimbursement formula is widely recognized as being fatally flawed and, if not greatly reformed, may result in reduced access to physician services by Medicare beneficiaries. As Glenn Hackbarth, chair of the Medicare Payment Advisory Commission (MedPAC), indicated in recent testimony before Congress, although the SGR system was meant to control the volume of physician services and thus total spending for those services, it disconnects payment from the cost of producing services. He therefore recommended instead an approach that involves explicit consideration of program objectives and ensures that payments for physician services are adequate to maintain beneficiaries’ access to necessary, high-quality care.³

The demonstration. The Medicare Health Care Quality Demonstration Programs, enacted as Section 646 of MMA, may provide answers regarding providing this high-quality care within fee-for-service (FFS) Medicare. As John Wennberg indicated in a recent letter to the Centers for Medicare and Medicaid Services (CMS), its focus on provider accountability for the integration of care for managing patients with chronic disease, supported by reforms in the reimbursement system, may well prove more effective in improving the cost and efficiency of care for chronically ill Medicare patients than strategies that depend on disease management companies that are not directly associated with provider organizations (as in Section 721 of MMA).⁴ It provides an opportunity for the CMS and participating health care organizations to develop and test a comprehensive approach for reducing medical errors, involving patients in the choice of preference-sensitive care, and improving management of chronic illness. Given the necessity of reforming the SGR reimbursement formula, the demonstration projects could develop new payment methodologies that will promote the integration of the various components of the health care delivery system and result in shared savings that can be used to further improve care.

Like most new Medicare policy, the work leading to the enactment of Section 646 spanned multiple years and involved the work of many people. In spring 2001 Wennberg approached Sen. James Jeffords (I-VT) and proposed that he introduce legislation authorizing a new demonstration project establishing new systems of care for Medicare beneficiaries that would operate under global budgets and be accountable for patients’ health outcomes. As Senator Jeffords indicated in Health Affairs, he was well acquainted with Wennberg’s development of the Dartmouth Atlas of Health Care.⁵ Knowing that Vermont received the lowest Medicare payments per beneficiary of any state and at the same time received the country’s second-highest health quality ranking, Senator Jeffords was predisposed to agreed with Wennberg’s key finding that there was no direct relationship between the intensity of health services and positive health outcomes in a population.⁶

At the meeting with Senator Jeffords, Wennberg indicated that leaders from several integrated health care systems had begun discussions about five years earlier on the challenges of improving quality and efficiency in the current health care environment. And while these systems each had unique strengths and served diverse communities, they were united in their commitment to helping improve both the quality and efficiency of health care.

These leaders proposed that a new system of care for Medicare beneficiaries be tested in demonstration projects that implement the principle of ensuring that effective care is provided and medical errors minimized by expanding the quality agenda to address variations in discretionary treatments—such as elective surgery—and inefficiencies in the management of chronic illness. The key to their proposal was the opportunity for participating health care organizations to seek changes in Medicare reimbursement to support the expanded quality agenda. These organizations included the Marshfield Clinic, Dartmouth-Hitchcock Medical Center, the Mayo Clinic, Intermountain Health Care, and the University Medical Center Alliance in Memphis.

Senator Jeffords agreed with their recommendations and directed that his staff collaborate with Wennberg and his colleagues to draft legislation that would identify these barriers to progress in Medicare and to define the key elements of a demonstration program to address them. The goals of the legislation were to encourage shared decision making for specific treatments and to reward systems for improving quality and achieving efficient allocation of resources. After extensive work and multiple drafts, Senator Jeffords introduced the legislation in December 2001 as S. 1756, the Medical Excellence Demonstration Program Act of 2001.

After further consultation with key staff at the CMS, the Agency for Healthcare Research and Quality (AHRQ), the White House, and Wennberg’s group, Senator Jeffords and a bipartisan group of senators reintroduced a revised bill in May 2003 as S. 1148, the Medicare Quality Improvement Act. The legislation was enacted in November 2003 as Section 646, Medicare Health Care Quality Demonstration Programs of H.R. 1, the recently passed MMA of 2003 (P.L. 108-173).

Addressing barriers to progress. Elliott Fisher assisted me in summarizing the barriers to progress identified by the health systems and describing how the Section 646 demonstration would address them. Barrier 1: unduly narrow definition of “quality,” addressed by a definition of quality in Sec. 646 that encompasses safety, evidence-based practice, patient-centered care, and resource efficiency. Barrier 2: inadequate information system, addressed by information systems that build on existing information technology (IT) and claims data to support quality improvement and research. Barrier 3: serious gaps in the scientific basis of clinical practice, addressed by a public-private partnership of health care organizations and governmental agencies to improve quality and the scientific basis of practices. Barrier 4: financial incentives that penalize improved quality and efficiency, addressed by development of alternative payment systems that reward providers for improved performance. Barrier 5: slow pace of translating new knowledge into practice, addressed through phased-in implementation of a demonstration program that meets the foregoing goals while broadening participation incrementally to ensure widespread adoption of successful innovations.⁷

The legislation provides clear guidance on the criteria that participating health care providers must meet, but it sets no limits on the numbers who may eventually enroll. Early implementation in pilot sites as a joint public- private initiative to develop a successful model could be rapidly followed by a full-scale, five-year demonstration program in multiple sites across the county. It thus offers the possibility that a successful model could be rapidly expanded, to improve the quality and efficiency of care provided to all Medicare beneficiaries.

Implementation. A meeting held in March 2004 with Department of Health and Human Services (HHS) Secretary Tommy Thompson on the Section 646 demonstration projects secured his endorsement. Based on his strong belief that the quality and safety of our health care system will be improved through better use and wider application of IT, he was emphatic in insisting that the demonstration process be up and running before the end of the year.⁸ Thompson asked CMS administrator Mark McClellan to lead the effort to develop a competitive bidding process for the demonstration project.

McClellan felt that the first step in implementing Section 646 would be to explore a number of key questions: identifying the specific performance objectives; identifying the financial incentives that should be built into the demonstration to encourage and reward the achievement of the performance objectives; understanding how Medicare will be able to have higher-quality, less costly practices adopted where the country most needs them (for example, in the costly areas that have no better, if not worse, health outcomes); and how a “population payment” demonstration can be conducted under the usual Medicare laws and beneficiary protections.⁹

Wennberg and others have ably documented the shortcomings of our current health care system, and improvement objectives have been clearly expressed.¹⁰ What has so far eluded those committed to health care improvement is a government-supported process that, if followed, would not only transform those early-adopter health care systems, but would also serve as examples for nationwide improvement and the development of population-based, integrated health care systems. Many believe that Section 646 provides such an opportunity. Those who have been involved in the effort hope that it will provide a clear demonstration of how the U.S. health care systems can meet Medicare’s program objectives by delivering affordable, high-quality care for America’s seniors.

The views presented here are those of the author and not necessarily those of the Vermont Medical Society. The author is grateful to John Wennberg and Elliott Fisher for their support in writing this paper and to Elaine Harrington for her editorial assistance.

NOTES

1. A special collection of papers and commentaries on variations is available at content.healthaffairs.org/cgi/content/full/hlthaff.var.136/DC1.
2. Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (Washington: Boards of Trustees, 23 March 2004), 20.
3. G.M. Hackbarth, MedPAC, “Payment for Physician Services in the Medicare Program,” Testimony before the House Energy and Commerce Subcommittee on Health, 5 May 2004.
4. John Wennberg, Dartmouth Medical School, personal communication with Stuart Guterman, Centers for Medicare and Medicaid Services, August 2004.
5. J.M. Jeffords, “Saving Lives while Saving Money,” Health Affairs, 13 February 2002, content.healthaffairs.org/cgi/content/abstract/hlthaff.w2.120 (23 August 2004).
6. Committee on Ways and Means, U.S. House of Representatives, 2000 Green Book (Washington: U.S. Government Printing Office, 6 October 2000), 106–107; and S.F. Jencks et al., “Quality of Medical Care Delivered to Medicare Beneficiaries: A Profile at State and National Levels,” Journal of the American Medical Association 284, no. 13 (2000): 1670–1676.
7. Elliott Fisher, Dartmouth Medical School, personal communication with the author, March 2004.
8. Tommy Thompson, U.S. Department of Health and Human Services, “Health Information Technology: Improving Quality and Value of Patient Care,” Testimony before the House Energy and Commerce Subcommittee on Health, 22 July 2004.
9. Mark McClellan, CMS, personal communication with Elliott Fisher, April 2004.
10. J.E Wennberg, E.S. Fisher, and J.S. Skinner, “Geography and the Debate over Medicare Reform,” Health Affairs, 13 February 2002,
content.healthaffairs.org/cgi/content/abstract/hlthaff.w2.96 (23 August 2004).

Paul Harrington (pharrington{at}vtmd.org) is executive vice president of the Vermont Medical Society in Montpelier. A former Vermont state legislator, he served as majority health policy director for the U.S. Senate Committee on Health, Education, Labor, and Pensions and as a board member of the Vermont Health Care Authority.

DOI: 10.1377/hlthaff.var.136
©2004 Project HOPE–The People-to-People Health Foundation, Inc.