REVIEW OF PSRO MEDICAL COST CONTROL

WEDNESDAY, JUNE 27, 1979

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON OVERSIGHT,
COMMITTEE ON WAYS AND MEANS,

Washington, D.C.

The subcommittee met at 9 a.m., pursuant to notice, in room 1302, Longworth House Office Building, Hon. Sam Gibbons (chairman of the subcommittee) presiding.

[Press release announcing hearing follows:]

[Press release of June 18, 1979]

WAYS AND MEANS OVERSIGHT SUBCOMMITTEE TO REVIEW MEDICAL COST CONTROL EFFECTIVENESS

The Oversight Subcommittee of the House Ways and Means Committee will hold a hearing June 27 to continue its review on whether Professional Standards Review Organizations (PSROs) are doing the job they are supposed to in holding medical costs down in a cost-effective manner Chairman Sam M. Gibbons announced.

The review of the seven-year old program designed to control Medicare and Medicaid expenditures will begin at 9 a.m., in Room 1302 of the Longworth House Office Building.

"I am concerned by reports that some PSROS spend more than they save," said Chairman Gibbons, "and therefore may be part of the medical cost problem rather than the solution."

Congress created PSROS in 1972 to monitor both the quality and cost of care. The Subcommittee has established previously that there was more emphasis on quality than cost control during the program's early years. One issue is whether there is now an increased emphasis on health cost control and more balance between these objectives.

"PSROS can do a good job and can hold down medical costs down for everyone," said Chairman Gibbons.

"But we still don't know whether the entire program is cost-effective," he added, "If it costs us more than a dollar to save a dollar, it's hard to see how we're being well served by the present program. If PSRO's are to be retained as recommended by the Administration, we must learn how to make them more effective."

The Subcommittee will hear from representatives of the Congressional Budget Office, the General Accounting Office, the Health Care Financing Administration of HEW and the American Association of Professional Standards Review Organizations.

Mr. GIBBONS. The subcommittee will be in order.

Today we are going to talk about the PSRO organizations. Seven years ago Congress created Professional Standards Review Organizations to monitor medicare and medicaid costs to insure patients were receiving quality service and that the Government was paying only for necessary care. Today we want to ask again whether these objectives are being met. We want to know whether PSRO's are

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cost-effective or whether they cost more money than they save. We now spend $155 million a year on the PSRO program.

A year ago we held a similar hearing to ask the same questions. At that time we didn't get any good answers or any substantial answers that really answered the questions that we wanted.

An HEW study had found that PSRO's were not cost effective. Independent work by GAO confirmed that individual PSRO's were claiming exaggerated cost savings and that all these evaluations of PSRO's were fraught with errors and data problems.

In spite of these problems, the administration felt the PSRO program should be continued. This subcommittee, while supporting the objectives of the program, urged that changes be made by HCFA to improve PSRO performance. Today we want to ask again whether PSRO's are cost-effective and whether HCFA has done all it can and should do to improve their performance.

Studies completed within the last year show mixed answers to the question of cost effectiveness, but it also seems clear that plenty of room for improved performance remains. Today we will hear about HCFA's most recent evaluation of the PSRO program as well as critiques of their findings by GAO and CBO. In addition, CBO will raise some questions about basic features of the PSRO program that may hamper its potential effectiveness as well as important considerations for expanding the program in a way that permits evaluations of effectiveness in the future. We will also hear about the results of a GAO study which indicate again that PSRO's can be made more effective than they presently are.

I hope that HCFA is well prepared today to share their views on these issues and to bring us up to date in those areas that have been of concern to the subcommittee over the last 2 years. I do feel somewhat encouraged that, since our initial hearing on this matter, more emphasis is being given to the need for PSRO's to save money. In the early days of the program, the emphasis in the PSRO program was to insure the quality of care, with little regard for its twin objective of containing costs. The changing times have helped others to come to our point of view. Now let us begin so that we can learn how PSRO's are doing.

Let me say I am very sorry that the HCFA did not get its testimony in until today. We don't expect that kind of performance from a Government agency, and frankly we are not going to put up with it in the future.

I just want to serve notice on it right now that when we ask for statements from a Federal agency, those statements had better be here on time, and we are going to the top about it from now on.

Our first witness today is Mr. Robert D. Reischauer, Deputy Director, Congressional Budget Office. Mr. Reischauer, will you come forward.

STATEMENT OF ROBERT D. REISCHAUER, DEPUTY DIRECTOR, CONGRESSIONAL BUDGET OFFICE, ACCOMPANIED BY PAUL B. GINSBURG AND DANIEL KORETZ

Mr. REISCHAUER. Mr. Chairman, I would like to thank you for this opportunity to appear before the subcommittee and to take the oppor

tunity to introduce two of my colleagues who have been working on the PSRO study at CBO. They are Dr. Daniel Koretz on my right and Dr. Paul B. Ginsburg on my left.

I would like to ask to have my prepared statement introduced into the record and to confine myself to a summary of that statement in my oral presentation.

Mr. GIBBONS. All right, sir, it will be done at this time.

Mr. REISCHAUER. It is now 7 years since the PSRO program was initiated. It therefore is an appropriate time to ask whether the program is meeting its goals of curtailing unnecessary health care utilization and expenditures by Federal beneficiaries, and of assuring the quality of care received by these patients. The answers to such questions should influence whether the program should be continued or changed, whether funding should be maintained, cut back, or increased, and whether additional evaluations of the program are needed. It is worth noting that the importance of these questions extends beyond the PSRO program itself, since some recent health insurance and cost containment proposals include the use of PSRO-type organizations to solve health-care utilization problems.

In order to help the Congress answer these questions about PSRO effectiveness, the CBO has prepared an analysis of the PSRO program at the request of this subcommittee. CBO's evaluation is being released today. This morning I would like to summarize the CBO paper's findings with respect to the following three issues.

Do PSRO's reduce inpatient use of hospital facilities by Federal beneficiaries?

Do the reductions in health-care expenditures attributable to PSRO's exceed the costs of the program?

What would be the best way to proceed in order to learn how to improve the performance of the program?

Turning to the first of these issues, the HCFA study, which to date is the best available evaluation of the program, concluded that PSRO concurrent review has reduced medicare days of care by 1.5 percent. CBO's reanalysis of HCFA's data suggests that the reduction in medicare days of care is closer to 2 percent. While PSRO's were active in only about half of the Nation at the time the data were collected, the program has since expanded to include most of the Nation. Accordingly, the CBO estimate of a 2-percent reduction projects the effects of PSRO's to the Nation as a whole. CBO's estimate differs from HCFA's primarily because CBO took regional differences into account. The conclusion that PSRO's reduce medicare days of care, however, is subject to very important qualifications:

First, the conclusion is based on only one good study and does not reflect any sort of research consensus. Most of the other available evaluations of the program suffer from the use of inadequate data and unsound methods. Moreover, those evaluations' findings are inconsistent.

Second, the HCFA evaluation does have some weaknesses. The most serious ones stem from the way in which the program itself was implemented and from the lack of sufficient pre-PSRO data. The HCFA analysis generally handled these problems well, but some of the problems are such that they cannot be fully corrected in the analysis. Moreover, as the General Accounting Office will explain, some avoidable

problems of data quality remain. Therefore, the estimate of a 2percent reduction is still uncertain.

Third, the calculations are based only on medicare patients. The results probably cannot be generalized to medicaid and other patient groups. Furthermore, the reduction in days of care will probably be offset to some degree by increases in other types of care, such as care in nursing homes and ambulatory care.

Knowing that the PSRO's reduced medicare care by 2 percent in the Nation as a whole offers little insight into the individual PSRO effectiveness. Some PSRO's are effective in reducing utilization while others are ineffective. Identifying the better PSRO's would be helpful in managing the program for two reasons:

First, HCFA might choose to increase funding to the more effective ones or decrease funding for others.

Second, identifying the characteristics of the better ones might provide a basis for overall program improvement. Unfortunately, there are no reliable studies that identify the most effective PSRO's. HCFA's 1978 ranking of PSRO's used methods that tend to overestimate the effectiveness of older PSRO's. Such a ranking could result in rewarding or sanctioning the wrong PSRO's and giving the wrong characteristics credit for PSRO effectiveness.

Let me now turn to the second issue, which was whether the estimated 2-percent reduction in utilization translates into a net saving in health expenditures. In other words, are the savings greater than the costs of the program itself? CBO estimates that this ratio is about 0.7 to 1; in other words, the program saves about 30 percent less than it costs. HCFA, on the other hand, has estimated the ratio to be 1.1 to 1; that is, the program saves about 10 percent more than it costs. To calculate such a ratio, however, one must define what is meant by savings and make many assumptions.

Savings can be defined in one of two ways: First, the total savings that result from PSRO-induced reductions in utilization; or second, the resulting savings to the Government-in this case, through lowered medicare reimbursement.

The importance of the difference between these two definitions can be illustrated by an example. Suppose the medicare days of care decreased as a result of PSRO activities but hospitals made up every cent in lost revenues by charging nonmedicare patients higher prices. Medicare savings might then be substantial, but total savings would

be zero.

HCFA chose to use the second definition, savings to the Government. In fact, the HCFA analysis assumes that total savings were zero and that all of the reported savings that is, medicare savingsare nothing more than cost transferred to other patients or third-party payers.

In contrast, CBO felt that the first definition-reduction in total hospital expenditures should be used in measuring PSRO accomplishments. If PSRO's are working, they should be freeing resources now consumed in the delivery of hospital care so that those resources can be put to other uses.

The assumptions required for the savings estimates are numerous. Among them, for example, are assumptions about increases in outpatient care that might accompany decreases in hospital utilization, and

about the degree to which hospital costs vary in proportion to utilization charges. The necessity of making these assumptions means that any savings to the cost estimates, including both those of HCFA's and CBO's, have wide margins of error.

If there were any savings, they would have to be compared to the magnitude of the problem the program is designed to remedy. It is worth nothing therefore that if HCFA's estimate were correct, the net savings would amount to less than one-tenth of 1 percent of relevant medicare expenditures.

Let me now turn to the third issue, which is, how can the program be improved? Some people have argued that existing PSRO activities might be improved by moving toward focused review. That is, rather than reviewing all cases, PSRO's could review only those cases that are most in need of review. Along these lines, a new review system based on criteria of severity of illness and intensity of services, rather than on specific norms for length of stay, which are the usual criteria, is now being tested in some PSRO's.

Other people have argued that the overall effectiveness of the program may change as the program expands into other types of medical care, such as review of ambulatory care, long-term care, and hospital ancillary services.

Unfortunately, the information needed to design a more effective program does not now exist. Since there is no reliable indication of which PSRO's are more effective, one can't ascertain which characteristics should be emulated.

Moreover, good evidence on the effects of possible program changes, such as focused review, is lacking. With the continuation of present policies, such evidence is unlikely to become available in the near future. This lack of information is not primarily the result of inadequate evaluations. It is largely a result of the way in which the program itself has been implemented, which has seriously handicapped even the better evaluations. The crux of the problem is that PSRO areas have chosen for themselves whether or not to undertake PSRO activities.

In other words, the active PSRO areas are self-selected, which distorts any assessment of their effectiveness. This problem continues to be severe, and unless changes are made, we will continue to lack the information needed for careful program assessment.

In most instances, the only reliable method for evaluating a program of this sort is to implement the program only partially at first. It is necessary to produce two groups that are essentially alike before the program is begun. One group the experimental one-then gets the program, while the other group does not. The latter group serves as a comparison group. If the two previously alike groups differ in relevant ways after the program has begun, the differences can be attributed to the program. If the program is evaluated without a comparison group, all sorts of trends can be mistakenly identified as program effects.

For example, many evaluations of PSRO's reportedly decline in average length of hospital stay after the program began. Other data, however, suggested that there had been a trend in the preceding years toward shorter length of stay, independent of any effects of PSRO's. In such an instance, attributing the shortened length of stays to