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Potential savings in Medicare's payments for health care

Why Area Is Important


Medicare expenditures are growing faster than the overall economy and are expected to continue to do so, leading to concerns about the program's long-term sustainability. Furthermore, it is widely recognized that Medicare's contribution to the nation's long-term fiscal shortfall is considerable.

The primary drivers of increased Medicare spending are growth in the volume of services (the number of services provided per beneficiary) and the intensity of services (services' complexity and costliness). The behavior of physicians is particularly critical to attempts to control these increases, because physicians not only provide services, but also order services such as imaging studies and home oxygen.

Medicare, which is administered by the Centers for Medicare & Medicaid Services (CMS), an agency of the Department of Health and Human Services (HHS), helps pay for hospital, physician, and other inpatient and outpatient services for about 38.7 million aged and 7.6 million disabled beneficiaries. According to the 2010 Medicare Trustees Report, about $336 billion was spent on health care (excluding Medicare's managed care and prescription drug spending for beneficiaries in those programs) in 2009. Medicare is funded primarily by tax revenues and beneficiaries' premiums.

What GAO Found


Some Medicare spending for services provided and ordered by physicians may not be warranted, and Medicare's review of claims is not always sufficiently targeted and systematic. For example, the wide geographic variation in Medicare spending per beneficiary—unrelated to health status or outcomes—suggests that health needs alone do not determine spending. In other cases, such as home oxygen, Medicare simply overpays. Additionally, Medicare pays for portions of some services twice because it fails to take into account the extent to which services that are commonly furnished together overlap.

GAO has reviewed four specific areas in which a potential for savings exists:

  • Physician practice patterns. Some private and public health care purchasers have initiated programs to identify inefficient physicians—that is, physicians who provide and order a level of services that is excessive, given the patient's health status—and to encourage patients to receive their care from other, more efficient physicians. GAO profiled Medicare generalist physicians and identified those whose practices included a higher proportion of overly expensive patients (after adjusting for health status) than would occur by chance. GAO concluded that these physicians were likely to practice medicine inefficiently. GAO also profiled Medicare physicians in four specialties—cardiology, diagnostic radiology, internal medicine, and orthopedic surgery—and showed that expenditures for institutional services grew as the level of resource use increased.
  • Imaging services. From 2000 through 2006, expenditures for imaging services paid under the Medicare physician fee schedule more than doubled in nominal terms, increasing to about $14 billion. Spending on advanced imaging services such as CT scans, MRIs, and nuclear medicine, rose faster—17 percent per year—than spending on less complex services, such as ultrasound or X-ray. Although overall spending on imaging declined to $12.1 billion in 2007—primarily due to a cap imposed on certain imaging fees by the Deficit Reduction Act of 2005—utilization continued to increase. While much of this growth may be appropriate, several other trends--including a shift toward provision of imaging services in physicians' offices where there is less oversight, broader use of imaging by nonradiologists, and an almost eight-fold geographic variation in spending on in-office imaging in 2006—raise concerns that imaging services may be over utilized.
  • Home oxygen. In 2009, Medicare spent $2.15 billion to provide home oxygen for beneficiaries with conditions such as chronic pulmonary disease. GAO reported more than a decade ago that Medicare payment rates for home oxygen were significantly higher than those of the Department of Veterans Affairs, and the HHS Office of Inspector General has reported several times that oxygen payment rates were excessive. Congress has reduced or limited payments several times—most recently in 2009. However, according to GAO's analysis, payment rates remain higher than those of some other national payers. Additionally, the average monthly Medicare payment for home oxygen per beneficiary in 2009 was up to 44 percent higher than suppliers' overall costs. Nearly all beneficiaries who receive home oxygen use a stationary oxygen concentrator and about two-thirds also use portable oxygen equipment. Although portable oxygen equipment typically requires refills, stationary concentrators do not.[1] However, Medicare's bundled payment for stationary concentrators includes a payment for oxygen refills. Consequently, in 2008, in about one-third of instances in which Medicare paid for a stationary concentrator, it was also paying for oxygen refills that were not provided.
  • Physician payments. Medicare's physician fees may not always reflect efficiencies that occur when services are commonly furnished together. For example, certain portions of practice expenses such as a nurse's time preparing a patient for a medical procedure or a technician's time setting up the required equipment are incurred only once when services are provided together; and certain portions of physician work activities—such as reviewing the patient's medical record—occur only once when services are provided together, yet payment for these overlapping portions is generally included in the fee for each service, resulting in excessive payments by Medicare. CMS has implemented a multiple procedure payment reduction (MPPR) for certain imaging and surgical services when two or more related services are furnished together. Under the MPPR, the full fee is paid for the highest-price service and a reduced fee is paid for each subsequent service, but the policy has not been systematically applied to services commonly furnished together. Looking only at those services that had the greatest impact on Medicare expenditures, GAO identified areas, such as physical therapy, in which efficiencies for services commonly furnished together were not taken into account.

[1]Stationary oxygen concentrators are electrically powered machines that extract oxygen from the air.

Actions Needed


GAO has reported that significant potential for savings exists by profiling physician practice patterns to encourage more efficient provision of health care services, introducing prior approval requirements and other front-end approaches to better manage the use of imaging services, reducing and restructuring payments for home oxygen, and reforming payments for physician services so that when two services overlap, only one payment is made for the overlapping portion.

  • Profiling physicians' practice patterns. GAO recommended in April 2007 that CMS develop a profiling system to identify individual physicians with inefficient practice patterns and use the results to improve the efficiency of care financed by Medicare. Physicians play a central role in the generation of health care expenditures. About 20 percent of services are provided by physicians. However, they influence up to 90 percent of spending by, for instance, referring patients to other physicians; admitting patients to hospitals, skilled nursing facilities, and hospices; and ordering services delivered by other health care providers, such as imaging studies, laboratory tests, and home health services. GAO found that providing feedback to physicians on their practice patterns is a promising step toward encouraging efficiency in Medicare. However, GAO noted that CMS would likely have to seek legislative changes to maximize the usefulness of profiling—for example, changes that would allow CMS to incentivize beneficiaries to select efficient providers. The Medicare Improvements for Patients and Providers Act of 2008 directed the Secretary of HHS to establish a confidential physician feedback program. The Patient Protection and Affordable Care Act[1] expanded the program and also requires the Secretary of HHS to adjust payments to those physicians whose practice patterns promote both high-quality and the efficient use of health care services. The feedback program is in its early stages and potential savings to the $336 billion Medicare program will depend on implementation details.
  • Better management of imaging services. GAO recommended in June 2008 that CMS examine the feasibility of adding more front-end management approaches, such as prior authorization, for imaging services. In this way, CMS might be able to improve its efforts to be a prudent purchaser of imaging services, which cost Medicare over $12 billion in 2008. However, the Secretary of HHS has not implemented or examined the feasibility of these practices, saying in 2008 that it is concerned about administrative burden as well as the advisability of prior authorization for the Medicare program. It also questioned how prior authorization would fit within its current postpayment review program. Specific savings estimates are not available and would depend on the number of Medicare imaging services deemed inappropriate by additional front-end approaches. However, GAO continues to believe that additional front-end management would help Medicare become a more prudent purchaser of imaging services and could generate savings.
  • Reducing payments for home oxygen. GAO suggested in January 2011 that Congress consider reducing Medicare home oxygen rates to align them more closely with the costs of supplying home oxygen. Congress has required the Secretary of HHS to institute competitive bidding for home oxygen and other durable medical equipment. Prices from the first round of competitive bidding took effect in nine geographic areas in January 2011. According to CMS, the bid prices for home oxygen and other durable medical equipment for 2011 are 32 percent less than Medicare paid in 2010. However, this payment reduction will result in a payment reduction only in the nine geographic areas. In 2011, the process to expand competitive bidding to an additional 91 areas is expected to begin. Eventually competitive bidding is expected to expand beyond these first 100 areas. Certain geographic areas, such as rural areas, are exempt from competitive bidding until 2015. It will be several years before competitive bids affect Medicare payments for home oxygen nationwide. Therefore, GAO continues to believe it would be appropriate for Congress to consider reducing Medicare home oxygen payment rates.
  • Reducing payments for overlapping physician services. In a July 2009 report, GAO recommended that CMS systematically review services commonly furnished together and implement a MPPR to capture efficiencies, where appropriate, for these services, focusing on those services that have the greatest impact on Medicare spending. GAO identified several areas, including physical therapy, where an MPPR could be applied to reflect efficiencies in overlapping services. GAO also recommended in this report that CMS expand the scope of its MPPR by applying it to nonsurgical and nonimaging services, such as physical therapy, thereby saving an estimated $500 million. Further, GAO recommended that the MPPR be applied to the part of the payment that covers a physician's work; according to GAO's estimates, if that were done only for imaging it would result in savings of $175 million. CMS has taken some steps to implement GAO's recommendations, but GAO cannot estimate the full extent of savings if CMS were to systematically review services commonly furnished together and eliminate duplicate payments. Under a Medicare budget neutrality provision, savings obtained from any significant change in physician payments for a particular service or set of services are added to the total amount available for paying physicians and are redistributed. Therefore, GAO also suggested in this report that Congress exempt savings attributable to the implementation of policies that reflect efficiencies occurring when services are furnished together from the budget neutrality requirement.

In summary, GAO has identified numerous opportunities for savings in Medicare, and CMS has taken actions to address several of them. However, many actions remain to be taken, which could increase efficiencies and reduce Medicare's spending. Increased congressional attention may be warranted in these areas.

[1]The Patient Protection and Affordable Care Act was signed by the President in
March 2010.

Framework for Analysis


The information contained in this analysis is based primarily on the related GAO products under the "Related GAO Products" tab, supplemented by the 2010 Medicare Trustees Report, the 2011 Proposed Rule for Medicare Physician Payment, the Patient Protection and Affordable Care Act, and data from CMS's Web site.

Area Contact


For additional information about this area, contact James C. Cosgrove at (202) 512-7114 or


Related GAO Products