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I -) '\ ') .,,., .-~ \ ? / d --~ ;;{ I BACKGROUND PAPER ON CATARACT SURGERY AND PHYSICIAN PAYMENT UNDER THE MEDICARE PROGRAM Louis P. Garrison, Jr., Ph.D. Sandra M. Yamashiro, M.P.A. Project HOPE Center for Health Affairs October 1985 Contractor Document Health Program, Office of Technology Assessment U.S. Congress, Washington, DC 20510 This paper was prepared by outside contractors for the OTA assessment Payment for Physician Services: Strategies for Medicare. The paper does not necessarily reflect the analytical findings of OTA, the assessment's advisory panel, or the Technology Assessment Board. 

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CONTENTS SECTION l: INTRODUCTION ANO SUMMARY. Purpose of the Paper Clinical and Economic Background. Analysis of Alternatives Pol icy Implications Organ1 zati on of Paper SECTION 2: CLINICAL ASPECTS OF CATARACT SURSERY Introduction Indications for Surgery History of Cataract Surgery Types of Cataract Surgery Extracapsular Cataract Extraction Intracapsular Cataract Extraction Methods of Optical Correction Intraocular Lens Implant. Contact Lens Spectacles . Refractive Keratoplasty. Recent and Future Advances in Cataract Surgery. SECTION 3 : ECONCMIC ASPECTS CF C.~ T AAACT SURGERY. . I ntroduct i on. Medicare Reimbursement Practices. Physician and lnpati ent Coverage Outpatient Coverage. Peer Review Organizations. Ut111 zati on and Expenoi tu res. Uti 1 izati on. Prices, lnccmes, and E~penditures Supply of Ophthalmologists. Market Relationships Summary SECTION 4: ANALYSIS CF THE IMPACT OF ALTERNATIVE PHYSICIAN PAYMENT METI-fOOS Introduction The Current System .. Effects Under Modified CPR Effects Under A Fee Schedule. Effects Under Packasing Effects Under Capitation . . . . . SECTIONS: RESULTS AND POLICY IMPLICATIONS. Comparison of Alternatives Equity ... ................ System-Wiae Versus Selective Reforms Tec~nologica1 Change ana Complexity .. Aging of the Population ......... Generalizabiiity to Gtrier Prccedures ........ __ .. ,.,. .. l-1 l-l 1-l l-3 1-4 1-7 2-l -8 2-l 2-2 -9 2-3 -10 2-4 -11 2-4 2-5 -12 2-6 -13 2-6 2-6 2-7 -14 2-8 -15 2-8 3-l -17 3-1 3-1 3-2 -18 3-7 -23 3-8 -24 3-9 -25 3-9 3-16 ;;.32 3-20 -:-36 3-23 -39 3-24 -40 4-l -43 4-l 4-4 -46 t-6 -48 4-11 -53 4-14 -56 4-21-63 S-1 -69 5-1 s-s -73 S-6 -74 5-8 -76 S-10-78 S-ll-79 -

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LIST OF TABLES Table No. l. Medicare Coverage of Cataract Surgery by Setting and Type of Input 3-3 2. Estimated Medicare Expenditures by Setting and Type of Input. 3-4 3. Estimated Number of Operations on Lens for Inpatients Discharged fran Short-Stay Nonfederal Hospitals--1980 to 1983 3-10 4. Regional Differences in Lens Operations, Rates (per 100,000 population) for Inpatients Discharged from ShortStay, Nonfederal Hospitals, 1983. 3-14 5. Definition of Impact 01mens1ons 4-2 6. Relative Impacts on Cataract Surgery under Modified CPR. 4-8 7. Relative Impacts on Cataract Surgery under a Fee Scheaule 4-13 7. Relative Impacts on Cataract Surgery under Packaging. 4-19 8. Relative Impacts on Cataract Surgery unaer Capitation. 4-24 :',.I~,'.'.:.-~~ ~,>.~t., ."".;.: ~., .. I ,, '! .. '' ... -: ',_-,' ', ;, 'I t., ~ t 

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-. 1 CONTENTS (continuedi References Appendix A. ACKNCWLECGMENTS B. ACRONYMS ANO GLOSSARY OF TERMS --:----/(/. ----- 

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SECTION l INTRODUCTION AND SUMMARY PWBP0SE Of THE PAPER General pressures to contain the costs of the Meaicare program have led Congress and the Health Care Financing Administration CHCFA) to examine alternative methods of P~Jing for medical services in general and for physician services in particular. Because physicians directly or indirectly control the large majority of medical expenditures, and because medical expenditures are so closely tied to the use of medical technologies, Congress requested the Office of Technology Assessment COTA) to examine alternative methods of paying physicians under the Medicare program, with particular attention to the impact on the use and costs of technology. As part of their study, OTA is examining the impact of alternative payment methods on a variety of specific medical technologies. This background paper is intended to provide OTA.a case study of how alternative methods of paying physicians mignt affect the efficiency, equity, quality of care, and related aspects of the provision of cataract surgery. CLINICAL AND ECONOMIC BACKGROUND This paper both describes current clinical and economic aspects of cataract surgery and analyzes how alternative methods of paying physicians might affect cataract surgery in the future. The description of current clinical and economic aspects presents a picture of a procedure that has undergone several recent dramatic changes. First, the proportion of extractions followed immediately by the insertion of an intraocular lens 1-1 

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CIOL) has grown significantly to the point where nearly 80 percent of extractions are followed by the insen.ion of a prosthetic lens (Stark et al., 1984). Second, one of the technical aspects of the procedure--the placement of the lens 1n the eye--has also changed in the past four years. Now 1n almost 80 percent of cases the lens is placed in the lens capsule behind the 1r1s, as opposed to around 40 percent of cases 1n 1981 <Stark et al, 1984). Third, on the economic front there has also ~een majcr change. With the advent of the Medicare Prospective Payment System CPPS) ana its associated Peer Review Organizations CPROs), there has been a shift of the operatjon from an inpatient setting to an outpatient setting. The volume of procedures continues to grow dramatically (projected at 900,000 in 1985), and it appears that the majority of these will be performed on an outpatient basis. It is estimated that as late as 1982 only 10 percent were performed on an outpatient basis. By way of summary, examination of the econcmic aspects of performing the procedure reveals several relevant findings. First, there is great variability in the amount that ophthalmologists receive for performance of the procedure. This variability, most easily discernible across geograpnic regions, is a feature common to many procedures reimbursed under the Medicare custanary, prevailing, and reasonable <CPR) system of payment for pnys1c1an services. Second, the amount paid to providers of cataract surgery supplies and services varies by setting. Hospital outpatient departments apparently receive more 1n many cases than either cer~ified ambulatory surgery centers (ASC> or hospitals would receive for an inpatient procedure under PPS. Seca~se of this, and because Medicare pays a greater snare of physician charges (under assignment) in outpatient settings, there are incentives to perform tne procedure on outpatient basis, when it is l-2 l' .. ;.. '" l \ I f,' t f i :~:, :, .. ,;, ,. 

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medically feasible. Third, fer ophthalmologists who perform cataract surgery, performance of the procedure is a relatively well-rewarded use of their time: their compensation per unit of time is nigher than for their practice in general. Fourth, the dramatic growth in the rate of cataract extraction has led sane to argue that unnecessary cataract surgery is now an issue. The usual difficulties of identifying and measuring unnecessary surgery are exacerbated in this case because of the very low risk of adverse outcomes and the subjective nature of benefits. ANALYSIS Of ALTERNATIVES Four general alternatives for paying physicians are considered in this analysis: l) a modified CPR system, resulting in lower payments for cataract surgery for all or some ophthalmologists; 2) a fee schedule aimed at reducing the level and variability of payments to ophthalmologists for cataract surgery; 3) a packaged fee that encompasses not only the ophthalmologist's payment, but also payment for other physician services and other inputs; and 4) a capitation system, which covers cataract surgery as one item under a broad set cf minimum medical benefits. Each cf these alternatives is compared with the current CPR system with regara to its impact en cataract surgery. The impacts cover a number of aimensions: efficient produc:t1on, efficient use, price and expenditures, access to care, quality of care/outcomes, the innovation and diffusion of technology, and financial risk-spreading. l-3 

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POLICY IMPLICATIQNS After each of these alternatives is analyzed in isolati~n, the pros and cons of adopting one versus all or scme mix of the alternatives are discussed. Each of the four alternatives would seem to have distinct advantages over the current systema In the case of a modified CPR system, these advantages may be small for cataract surgery in isolation but larger when applied to all procedures performed by opnthalmologists. The im~act of a fee schedule 1s seen as similar to a modified CPR system in application to cataract surgery, but offering perhaps a greater potential for correcting payment distortions that have arisen within and among specialties over tne years. Current developments in the economics of cataract surgery make tne use of packaging, at least in the short term, an option worth examining. The 1itt1e:available evidence suggests that the cost to Medicare of aoing cataract surgery on an outpatient basis in a hospital may currently exceed what cost would hav been on an inpatient basis. However, this difference is more apparent than real because of cost shifting within the hospital outpatient setting. For example, the cost of cataract surgery as an outpatient in a certified ambulatory surgery center CASC) is less than the typical inpatient cost. The higher payment in some cases on a hospital ou.tpatient basis is probably a by-product of cost-reporting methoos encouraged by "reasonable cost" reimbursement in that setting. In all 11ke11hood, outpatient cataract surgery (in either an ASC or hospital) is cost-effective, relative to inpatient surgery, for the vast majority of patients. It is argued that while capitation has a number of cesirable features, its wicespread application would be premature given uncertainties about possible impact.s on quality of care. The term 1'capita~i0n" is usec to l-4 

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cover a broad set of decentralized models: Medicare would pay a fixed per capita premium to an insurer or insurer/proviaer who woula either purchase or provide ~ataract surgery for those covered patients who need it. The ophthalmologists performing the surgery could be compensatea under a variety of schanes: fee-for-service, salaried, hourly, or some combination of these. The principal difference from the first three options is that the choice of the pr1c1ng system is left to the insurers and proviaers in local market areas. This is really a voucher-type scheme, as is currently available to Medicare beneficiaries who so choose. The impacts on patients under these capitation schanes are unknown and will certainly depend on what types of physician payment mechanisms are developed within these systems. The discussion in Section 4 high1ights salaried arrangements, to co~trast than with the other modes of payment. In sum, the substantial variability that exists in payments across ophthalmologists or across .settings is difficult to justify on cost or quality gro,.mds. Excessive payment to ophthal mol ogi sts for cataract surgery in some a.reas of the country may encourage the performance of unnecessary surgery, especially where there is an abundance of ophthalmologists. Higher payments to hospital outpatient departments may encourage provision in that setting,. rather than certified ASCs or private ophthalmology clinics and offices. This may not be an efficient use of resources. Oeve1opment of a more rational physician fee schedule, i.e., with more of a relationship between relative cost.sand fees, might well pranote more appropriate application of the procedure. Under a packaging scheme, by combining a more appropriate physician fee with appropriate payments to o~her inputs, the choice of more efficient settings and inputs could be encouraged as well. There is a justifiable reluctance to imp'1ement rapialy a wholly l-5 

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decentralized, capitated approach to physician reimbursement. The encouragement of capitation optio~s and relatea demonstration experiments is certainly feasible and desirable, and does not inhibit the implementation of a new centra11zea approach at the national level. Even a national fee-for service approach, as is currently embodied in the CPR system, would do well to approacn the packaging of services creatively. Optimal packaging under such a system should consider tradeoffs among numerous dimensions, including: provider risk, technical feas;bility of identifying outputs, administrative costs, monitoring costs, and incentives for efficient production and use. Technologies evolve, and the units of payment under fee-for-service systems should change with them. l-6 

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ORGANIZATION Of THE PAPER Section 2 of this paper presents an overview of the clinical aspects of cataract extrac~ion and IOL insertion. Section 3 summarizes the economic aspects of cataract surgery. This includes both basic data on trends in the rate of cataract extraction, and a summary of the current structure as it applies to cataract surgery. Section 4 presents an analysis of each of the four major alternatives as compared with the current CPR system. Section 5 concludes by considering the policy implications of these analyses and examines in ~articular the issue of which alternatives or mix of alternatives shoula be considered in the short run and over the longer run. 1-7 

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SECTION 2 CLINICAL ASPECTS OF CATARACT SURGERY INIBOQUCTION A cataract is "any opacity or cloudiness of the lens that prevents a clear image from forming on the r.etina" (Terry et al., 1985). If a cataract has advanced to the point where 1t interferes with activities that are important to a patient, surgery is genera~ly recommended. Surgical removal is the only method presently available for cataract elimination. Terry et al. (1985) provide an excellent summary of the clinical aspects of cataract surgery; this section relies ,heavily on their aiscussion. There are to main methods used by ophthalmologists in the Unitea States to remove cataracts: extracapsul~r cataract extraction (ECCE~ and intracapsular cataract extraction CICCE)~ The difference bet~een the t~o has to do with the extant to which the capsule holding the lens is removed. Under ICCE., the lens and its capsule are totally removed. Under ECCE, tne lens 1s ranoved from the capsule, and only the front part of the capsule is ranoved, leaving only the posterior portion of the capsule in the eye. Prior to the l970's, intracapsular cataract extraction was the met.nod most widely used 1n the United States. With the continuing development of new surgical technologies and techniques, extracapsular cataract surgery is becoming increasingly popular among U.S. ophthalmologists and patients. Advances 1n related technologies have decreased the risk associated with cataract surgery as well as increased the 11kelihooa of its overall success. For example, tJie aevelopment of extremely snarp neeales, very fine sutures, and intra-operative kerataneters, for measuring corneal curvature, has facilitated more effective wound closure. Surgical microscopes have 2-l I ; :. j :,, \, :\ ,1l;: ._: ~," I t ; 't t ; '" t ,.j : r J, '. '!'',, 4 .,. I 

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aided surgeons in ECCE, allowing them to increase the precision of their measurements tnrough enhanced vision and improved depth perception. In addition, the introduction in the early 19801s of viscoelastic substances for use during cataract surgery has enabled ophthalmologists to protect delicate 1ntraocular structures and to maintain the normal shape of the eye, while still allowing for the good visual capabilities needed for intraocular mani pu 1 at1 ons. After either method of cataract removal, corrective action must be taken to restore focus and useful vision to the eye. Corrective technologies include spectacles, contact lenses, implanteo intraocular lenses, and keratorefractive surgery. At present, the intraocular lens (lOL) implant is the most c:ommon method used. The IOL market appears quite c:cmpet1tive, with manufacturers continually marketing new IOLs and several lines of IOLs. There is no consenus on quality differentials amo~g many types of 1 enses. INQICAT!ONS fOB SUBGEBY With advances in technology and surgical techniques, the success rate for cataract surgery has greatly increased. Complication rates associatea with the surgery have dropped dramatically as a result (Terry et al., 1985). At the same time, persons age 65 and over (the population at greatest risk of developing cataracts) maintain increasingly higher daily activity levels. Many of these activities, such as driving, require good visual acuity. For example, Nadler and Schwartz (1980) demonstratea a si;nificant growth in the proportion of licensed drivers among those uver 65 during the period 1968-75, supporting the notion tnat the aemand by the elderly for better vision is increasing. With the major surgical indicator being whether or not a 

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cataract s inter'ferir.g with desired or essential activities, this demancr for better v1s1on as well as decreased risks associated with surgery has led to an increased demand for cataract surgery. Preoperative care generally includes a medical examination, a complete ocular history and an eye exam. A patient's overall health must be evaluated 1n order to identify any medical conditions which could interfere with 'f;he dec1 s1 on ti, perform or the outcome of the cataract surgery. In addition, an ocula, exam comprised of a functional exam, slit lamp exam, 1ntraocular pressure measurement, and retinal exam, if possible, should be performed (Terry et al., 1985). Of major importance is the de~ermination of the ability of the eye's corneal endothelium to withstana the cell loss res~lting fran cataract surgery. The calculation of predicted ICL power is also made preoperat1vely through a series of eye measurements. HISIPBX PE CATARACT SUBGEBY The method of extracapsular cataract extraction (ECCE) first became popular in the l93Cs. Early versions of ECCE involved removal of the cataraetcus lens, leaving the posterior portion of the capsule intact. At that time, cataracts were allowed to mature, thereby becoming more 11qu1f1ed, prior tc the operation. No dependable methoa existea at the time for ranoval of the soft cortical portion of the lens. Lens material left over in the eye often left a pat1ent w1th poor vision due to accompanying comp11cat1ons (Terry et al., l98S). In the late 19301s, a major advance in cataract surgery was 1ntrocuced--1ntracapsular cataract extraction CICCE). In ICCE, both the lens and capsule are removed, leaving no fragnents available to form a aense 2-3 .,.~., .. I 

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membranet. ICCE quicklJ became the more prevalent methoo of cataract extraction. I.n the late l960's, a procedure called phacoemulsification was developec1, involving the removal oi the cataractous lens through a smal 1 incision made into the anterior chamber. The lens was removed by suction through this incision in the form of particles formed after fragmentation with l high frequency ultrasonically-driven viorating probe. This procedure al lowed for a more rapid recovery due to the relatively smal 1 size of the incision. In the early l970's, ECCE began to regain some of its former popularity as a result of the development of new surgical technologies. Irrigation and aspiration devices were developed which allowed opht~almologists to remove, after expressing the larger bulk of the nucleus, the ranatning portions of the cataractous lens through small hollow tubes called cannulas. Leftover fragments were less of a problem. The introduction in 1977 of the posterior chamber intraocular lens, which requires an intact posterior capsule, further increased the utilization of ECCE. Recently, the use of Neodymium: YAG (Yytrium-aluminum-garnet) lasers has allowed for the re-entry into the capsule without surgery for treatment of post-operative opac1ficat1on. TYPE$ Of CATARACT SURGERY Extcacapsu1ar CaTaract Extraction E.xtracapsular cataract extraction involves the raTioval of the cataractous 1ens and the antericr portion of the lens capsule. This is achieved by making a small incision in the anterior chamber, excising ana 2-4 i1/ 

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removing the anterior capsule, expressing or phacoemulsifying the core of the cataract, and then aspirating remaining portions of the lens through a cannula. Using this method, the surgeon can leave intact the posterior portion of the lens capsule, which allows for the mainta1nance cf the normal position of the vitreous gel in the eye. This position is necess4ry for the support of posterior chamber intraocular lenses. The phacoemuls1fication procedure, as described above, entails the use of a high frequency ultrasonic vibrating needle to break up the hard nucleus of the cataractous lens. First, a small incision is made into the eye's anterior chamber. Then the cataract nucleus is phacoemulsified and aspirated. Because cf the small size of the incision required for phacoemulsif1cat1Qn and the decreased risk to the corneal endothelium, this technique is popular for younger patients, who generally have soft, easily emulsified nucleuses, as well as fer most elderly patients. For a small percentage of elderly patients, the cataract is very firm and therefore net amenable to phacoemulsification. In sasse cases the posterior capsule left in the eye after ECCE becomes opacif1ed. To restore vision the cloudy portion must be removea. This can be done either surgically with a fine needle or ncnsurgically using a laser. Xotca,apsyJac cataract Extraction lntracapsu1ar cataract extraction involves the removal cf the cataract and its surrounding capsule by making an incision in the limbal area (at the junction of the cornea and sclera) ana remcving the cataract in a single piece. The enzyme alpha-chymctrypsin is generally used to lyse (break up~ the ligaments which hola the lens in place. Cne aavantage of 2-5 I~ { .. t, ;, \/ \,1.,1, 

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ICCE is that it leaves a completely clear pupil. ICCE is often difficult in young patients whose lens is tightly held in place. The emerging eviaence appears to indicate that ICCE patients with implants have more postoperative complications, such as inflammation and retinal detachment, than ECCE patients with implants (Terry et al., 1985). In general, however, results are quite good under both ICCE and ECCE. MED:fOps Of OPTICAL COBBECTIQN IntraocuJac Lens ImpJant The intraocular lens implant is the most common methoa in the Uniteo States for restoring focus and correcting vision after cataract surgery. An artifi.cial lens 1s implanted inside the eye, allowing for good forward and peripheral vision. The distortion in visual objects is limitea, approxi_mately only l percent. This method is especially useful for eloerly persons who do not wish or are unable to wear contact lenses. There are three main types of lenses: 1) posterior chamber supported, 2) iris supported, and 3) anterior chamber supportea. A trend toward posterior lenses and away fran other types is indicated by recent manufacturer data (Stamper et al., 1984). Recent innovations include lenses that have ridges or bumps to reduce cracking from postsurgical laser treatment and lenses that absorb ultraviolet light. Contact Lens Contact lens, either hard or soft, can be used to correct the focus of the eye following cataract surgery. Objects are magnified only about 7 2-6 qEST COPY AVA!UlBtF. I?; : ___ ,.,, 

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percent and peripheral vision is maintained. Many elaerly patients have d1fficultywearing contact lenses, however, for they lack sufficient manual dexterity to handle them. Moreover, insufficient tear production or other intolerances of the eye to contact lenses may occur. Extended wear lenses, which can be worn 24 hours a day for weeks at a time, have recently become available and may be more convenient for elderly patients. One drawback to these lenses 1s tnat th4y are associated ~ith an increased incidence of corneal infections or formation of blood vessels in the cornea CLiesegang, 1984). Another potential drawback associated with these lenses is that they have been estimated to cost three times as much as intraocular lenses over a 20 year period due to replacement and periodic check-up costs (Cavanagh et al., 1980). Sgec;;tacJes Spectacles correct the focus of the eye, permitting good vision through the eye's central portion. Vision is distorted however by the magnification of objects in size by about 2S percent and the limited peripheral vision. Such distortions are a source of major oisappointment for many persons who expected to have more normal vision as a result of surgery. Persons who have had a cataract remcved from one eye, but retain normal vision in the other eye, cannot use spectacles to correct both eyes simultaneously due to the resulting difference in image size. Only persons who are not well-suited for intraocular lens implants and who are not able to wear contact lenses are recommended to use spectacles. 2-7 ; 'I ;t"r!i.1., r 

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Refractive KeratopJasty Keratomileusis, keratophakia, and epikeratophakia are surgical procedures that modify the corneal curvature in order to correct the large refractive errors produced by removal of a cataract CBarraquer, 1981). Keratanileusis involves the removal of part of the patient's cornea, reshaping it, and suturing the reshaped part to the original cornea (Swinger and Barraquer, 1981). In keratophakia, a cornea is obtained from a donor, reshaped to resemble a lens, and placeq between layers of the patient's own cornea tissue Cliesegang, 1984). Epikeratoph~kia also involves the reshaping of a donor cornea, in this case to resemble a contact lens. This lens is sutured into place over the externa1 surface of the aphakic eye. These procedures, as well as modifications of these techniques, are difficult ones to learn and are relatively experimental. RECENT AND EWIUBE ADVANCES IN CATARACT SURGERY In July 1982, the Neodymium:YAG laser was introduced for use in cataract surgery. The laser is used for nonsurgical removal of the posterior capsule if a secondary membrane develops <U~S. DHHS, 1984). A "secondary" cataract can thus be el 1minated by laser auring a relatively brief outpatient visit. Currently, YAG laser treatments are reimbursable through Medicare--although os of yet, no specific procedure code (under Current Procedural Terminology) has yet been identified for this procedure. Sane 20 to 40 percent of cataract patients are estimated to have secondary opacification of their lens. In the past they woula have been treatea in the office unoer a slit lamp by insertion of a neeole to open the capsul~. The use of the YAG laser reduces the ser1ous (but apparently rare) complications that accompany opening the capsule with a neeole. The 2-8 

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relative cost-effectiveness of this non-invasive YAG laser proceaure is open to question. ResEtarch is on-going in the area of innovative and i mprovea types of 1ntraocular lenses. Efforts are currently unden,ay to develop flexible 1ntraocular lenses which can be 1nf.erted into the 3 mm limbal inc1s10n made during the phacoemuls1f1cat1on procedure. Currently, the incision required for phac:oanuls1f1cat1on must be widened in order t,c, insert J lens, negating one of the advantages of this procedure. Other long-tenn research is being done 1n externally programmable variable focus lenses and injectable IOLs C 881, 1985 >. Research is in progress in the area of plastic implants within the corneal tissue in an attempt to modify the refractive characteristics of the cornea. Efforts are also being made to develop drugs aimed at preventing cataracts CT~rry et al., 1985). Certain drugs are at present being tes~ea on animals, but it is 1 i.kely that it will be a long time before drugs of this type will be available to the general puclic. 2-9 ;,>. '-:. 

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SECTION 3 ECONOMIC ASPECTS OF CATARACT SURGERY INTROQUCJION With the number of cataract surgeries performed in the United States increasing and sinee a large percentage of these operations is covered by Medicare, total Medicare expendit~res for lens procedures continue to increase as well. Determining the total cost of cataract surgery to Medicare would be quite complicated, however, since the procedure can be performed in a variety of settings, involves several different inputs, and reimbursement policy varies by the setting. In addition, significant regional variation exists 1n allowable chargGa for physician services. The following section will attempt to clarify Medicare re1mbursement practices for cataract surgery by reviewing the basics of the reimbursement system and examining differences in Medicare expenditures between settings. Next, recent utilization and expenditures patterns for cataract surgery will be discussed. Finally, data on physician supply are presentad, and market relationships among the supply of ophthalmologists, rates of cataract extraction, and physician charges are examined. MEP1GABE REIMBURSEMENT PRACTICES The amount of money reimbursed by Medicare for cataract surgery is determined by a complex and often confusing formula. Both patients and physicians alike are often uncertain as to exactly how reimbursement amounts are calculated. At present, MeGicare reimburses for physician services at different levels depending en where the procedure is performeo. Other 3-1 

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inputs, such as operating roan time, equipment, lenses and other supplies, are also reimbursed at different levels according to surgical setting. Table l summarizes the Medicare payment provisions for different sett1ngs and resources. Table 2 presents ranges of estimated charges to Medicare for each type of resource 1n each setting. The payment provisions in Table l must be applied to the charges in Table 2 to determine the patient's versus Medicare's payment in each instance. Phy31s1aa and Ingatjent coverage Physician services for Medicare beneficiaries are paic for under Part B, which also covers outpatient services and requires a premium payment by the beneficiary. The amount paid for a physician service is determined through a fee screen system cal led CPR < for --:,.,stanary, preva i 1 i ng, and reasonable"). ~or covered serv1ces, the amount paid by Medicare is a proportion (usually 80 percent) of the "allowable charge," which is the lowest of the physician's actual charge, the physician's customary <or usual) charge for the service, or the charge commonly prevailing in the mean (defined as the 75th percentile in the area charge distribution but constrained in its rate of increase by the Medicare Economic Index). A Medicare beneficiary with Part B coverage must pay a standard yearly deductible for physician and other outpatient services, which as of January l, 1984 was $7S. In addition, the patient is usually liable for 20 percent of the cost of services acove the aeductible. However, the amount cf out-of-pocket expenses to the patient varies depending on whetner a physician accepts assignment, on whether tne beneficiary has supplanental insurance coverage, and on tne type of setting in whicn tne proceaure is 3-2 / 1:.:--

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w I w J;_: n-.: ~., -i r.:-::-, c..:i -o -< ~lo -:i:::::. ~.: ~---,, :~,, tX, r-~ m Table 1.--Medicare Coverage of Cataract Surgery by Setting and Type of Resource Input -------------------------____ l_OJlill ... eou..t ____ Ophthalmologist's ttme Assistant surgeon A~esthes1olog15t ttospttal tzation (Roan and ancillartes) a OR ttme, equipment, and supplies IOL ----------------aUsually about 201 of Part B pays 801 of allowable. Subject to deductible Part B pays 801 of allowable Part B pays 801 of allowable Part A pays under PPS (ORG 39) sub-Ject to deductible and copayment Part A pays under PPS subject to deductible and co payment Part A pays under PPS subject to deductible and copayment. Nothing extra for IOL. surgeon's fee. Setting Hospital Ou1~1J.ent Part B pays l0OI of allowable under assignment (not subject to deduct-tble); BOI otherwise (subject to deductt b 1 e) Part B pays 801 of allowable Part B pays 801 of allowable Not app ltcab 1 e Part B pays 801 on reasonable cost basts Part B pays 801 on reasonable cost basts IC /7 ---------------------Certtf ted Ambulatory S~t!Jr~-.Cnt,r Part B pays 1001 of allowable under assignment (not subject to deduct-tble); BOS other-wtse (subject to deductible) Part B pays 801 of allowable Part B pays 801 of allowable Not app 11 cab 1 e Patd by Medtcare as Level 4 ASC Part B pays 801 on reasonable cost basts .. Nonce rt 1 f 1 ed Ambulatory Sftll!mJ___ Part B pays 801 of allowable. Subject to deductible Part B pays 80% of allowable Part B pays 80% of allowable Not appl tcable Not nnmbursed Part B pays 80% on reasonable cost basts 

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w I Table 2.--Esttnaated Per Case Charges to Medtcare Patients for Cataract Surgery by Sett1ng and Type of Input ------------------------------------------------__ fi:iOUf CfL Ophthalmologtst1i t1nie Asststant surgeon Anesthestologtst Uo!>pitaltzatton OR ttru&, equtpment, and supp11t:s IOL ----------------Setting Cert1f1ed Noncertif1ed Hosp1 ta 1 Ambu 1 atory Ambu 1 atory Inp111Jtnt _____ Qu1pA11 .... 0t----Surg~~CJultt-_____ SUiJ-.D9---S 960 2000 S 440 -600 S 200 -550 $1200 1500 ( Included 1n ORG payment) (Included 1n ORG paymerit) s 960 S 960 2000 $960 -2000 S 440 -600 $ 200 550 Not applicable $1000 2000 (includes lens charges) $ 250 -790 ----------------S 440 600 S 200 550 Not app 11 cab 1 e $ 485 -553 S 280 -400 S 440 600 S 200 -550 Not applicable Not re1mbursable S 144 -408 Source: Based on tables tn Kusserow (1985). 7\ :~l.i 

PAGE 25

 performed. With regara to oth~r surgical resources, such as OR time ano IOLs, out-of-pocket costs vary accoraing to the level of supplemental insurance coverage, the type of surgical setting, and a pa~ient's recent hospitalization history Conl~ applicable to hospital inpatient care). From the physician's standpoint. total reimbursement for services pertormed is dependent on many factors including the amount charged, type of surgical setting. acceptance of assignment or not. the amount and types of the patient's supplemental insurance coverage, and the patient's ability to pay. For inpatient procedures, Medicare Part B pays 80 percent of a physician's CPR fee as well as those of selected surgical team members--anesthesiologist. surgical assistant, and consulting physician. For this procedure, an ophthalmologist's f~e generally covers presurgical prep time, surgical time, cataract extraction, IOL implantation Cif performed), and postoperative care needed to stabilize a patient's condition (usually up to 12 weeks). A physician who is accepting assignment for a case can bill Medicare directly for 80 percent of the allowable fee. The remaining 20 percent is billed directly to the patient or the patient's supplemental private insurer. If not under assignment, the physician bills the pat1ent directly for 100 percent of the actual fee. A Medicare beneficiary can then request reimbursement from Medicare for 80 percent of the attending physician's allowable fee. In either case, Medicare will pay a maximum amount of 80 percent of the allowable physician fee for cataract surgery. Wide variation exists among maximum allowable charges by physicians for cataract surgery. These charges vary among states ana regions as well as within a state. For example, the maximum allowable charge in Minnesota ranged from se2s to S928 in 1984. In California, charges were much hi;her, ranging from Sl,054 to Sl,786 (HCFA, 1984). This amount of variation is 3-5 2/ 

PAGE 26

common to many physician procedures reimbursed under Medicare (Jencks and Dobson, l 985 ) Hospital resources required for inpatient cataract surgery, including the prosthet.1 c 1 ntraocul ar 1 ens, are reimbursable under the DRG payment system. Items covered by the CRG payment include operating room time, surgical equipment and clothi~g, anesthesia, and other supplies. Cataract surgery falls under ORG 39, Lens Procedure, tne second most frequent CRG during FY 1984, and 98 percent of ORG 39 cases in 1981 involved cataract removal or IOL implant CProPAC, 1985). An approximate average payment for CRG 39 (before adjustments) can be estimateo by multiplying its DRG weight by the national urban stanoarcized amount. In FY 1985, using a weight of .4958, the average payment woula total Sl,48l. With adjustments for area wage differences, hospital teaching status, etc., hospitals under PPS 1n FY 1984 had an average payment per case_ of Sl,148 CProPAC, 1985). The current weight for DRG 39 is slightly lower than it was in FY 1984; for FY 1986, it has been recalibrated upwaras to S121 ( SO FR 3 57 23 > ProPAC, at the request of the Amer1c.an Academy of Ophthalmology CAAO), recently examined PPS payments for DRG 39. AAO made this reques~ because they believed that the current DRG reimbursement for cataract surgery was inadequate due to the changes which haa occurrea in cataract surgery s1nce l981--the base year upon wnich currentDRG payments are basea. Intraocular lens implantation, which is currently the predominant methoo of optical correction following surgery, was much less common in 1981. As a result, 1984 payments based on 1981 cataract sur;ery charses will not reflect the cost of an ICL which ranges 1n price frcm Sl95 to S395 <Stamper et a 1 l 984) 3-6 '.;_J 

PAGE 27

ProPAC Cl98S) noted in their first annual report that l) the percent of procedures involving IOLs had increased from 58 percent to 85 percent, 2) the most common type of IOLs had become the posterior chamber lens, and 3) utilization of ECCE had increased from 29.4 percent of all procedures to 51.9 percent. Also, between 1981 and 1984, it was noted that the use of Healan, a viscoelastic material, had increased, and more importantly, the average length-of-stay decreased from 3.2 days to 2.3 days for all discharges and to 2.1 days for discharges fran hospitals under PPS. Because these changes are offsetting in terms of costs, ProPAC recommended that DRG 39 should bs recalibrated to reflect these changes .. in the same manner as other DRGs to reflect changes in practice since 1981 (ProPAC, 1985). Thus, the recalibration for DRG 39 was part of a system-wide reca 11 brati on. Outpatient Coverage Physicians who accept assignment are reimbursed at 100 percent of their allowable fee and other surgical personnel at 80 percent for catarac~ surgery performed in an outpatient basis in either hospitals oi Medicare certified ambulatory surgical centers CASCs). Ophth~lmologists doing cataract surgery in non-certified outpatient settings, such as private offices, are reimbursed by Medicare at 80 percent of the allowable fee. IOL and equipment reimbursement varies among the three outpatient settings, however. In a hospital outpatient setting, equipment and IOLs are reimbursable at reasonable cost. In a Medicare certified ASC, equipment and personnel are reimbursed under the.Prospective Group 4 rate (47 FR 34084). 3-7 )j 

PAGE 28

IOLs are reimbursed on a reasonable cost basis at 80 percent. For noncertified ASCs, no Medicare reimbursement is available for equipment charges, but IOLs are reimbursable under Part Bat 80 percent of allowable charges. e,ec Bev 1ew Pcgao1 zat1 AO$ cc=sosl PROs, whieh were to be 1n place 1n each state by October l, 1984, are responsible for monitoring ut111zat1on and quality of care for Medicare patients. Their main objective in monitoring utilization is to contain the growth of Medi care expenditures by reducing the number of unnecessary hospital admissions. With regard to cataract surgery, a majority of PROs have contracted with HCFA to reduce the number of procedures done in an inpatient setting by a particular number or percentage of procedures. Percentage reduction goals range as high as 95 percent in Maryland (AAO, 1985 >. In recent Congressional testimony, the American Acaaemy of Opht:~almology expressed concern that some PROs are attempting to turn cataract surgery into an outpatient only procedure without proper concern for individual patient needs. Based on a review of screening criteria usea by PRO~ in 18 states, they noted that only six PROs permit consideration of additional factors in determining a person's eligibility for inpatient cataract surgery. Six PROs require a person to nave extremely severe me~ical conditions, such as renal failure, in order to qualify for inpatient care. PROs are intended to providequality assurance within the Meaicare PPS. When they pranulgate guiaelines ana goals such as those aevelopec for 3-8 ... ~) </ / / 

PAGE 29

cataract surgery, their scope of influence expands beyond inpatient care alone to the costs and qual~ty of care in the entire system. Indeed, HCFA administrator Carolyne Davis stated in recent congressional testimony that medical reviews by PROs had already led to the decline of inpatient cataract surgery from the second most frequent inpatient procedure t~ the sixth most frequent procedure. The AAO has disputed the validity of this claim, stating that the drop in inpatient cataract surgery-cases was due to administrative actions begun prior to recent PRO activities. Recent technological advances have made it technologically feasible to perform high-quality cataract extraction on an outpatient basis. It seems likely that this increased feasibility, the establishment of PRO guidelines, and the incentives under PPS htve all three played a part in the shift to the outpatient basis. UTILIZATION AND EXPENDITURES The number of cataract operations being performed in the United States has been increasing steadily over the last lS years. According to estimates from the Hospital Discharge Survey (HOS) from the National Center for Health Statistics CNCHS), approximately 171,000 inpatient cataract extractions wer~ performed in 1971. By 1983, tne number of extractions had risen to approximately 630,000, an increase of over 268 percent {see Table 3.) Similar utilization rates are indicated by data available through the Hospital Record Survey (HRS) of the Commission on Professional and Hospital 3-9 :?c; ,_ / 

PAGE 30

Table 3.--Estimated Number of Operations on Lens for Inpatients Discharged from Short-Stay, Nonfederal Hospitals--1980 to 1983 l9SO 1981 1982 1983 l9SO 1981 1982 1983 RATE PER 100,000 POPULATION AJJ 65 Years ang Oyer Lens Insertion Lens Insertion Extcac;t1ons 0 Lens Extcact1ons of Lens 209 86 237 l30 261 182 1708 1257 271 222 1826 lSS9 VOLUME IN TiiCUSANOS All 65 ):'.i:~CS acg Oyer Lens Insertion Lens Insertion extcas;:t1oos of Lens Ex:tcas;t1ons 0t Lens 467 l9l 540 297 -599 418 458 337 630 516 S00 427 Source: NCiS Hospital Discharge Survey, 1980-1983. See NCHS (1985) for explanation of survey. 3-lO ) 1 -"'V ;, ,. ; I ', t-,. ,, 

PAGE 31

Activities (Stark et al., 1984). Obtaining a precise estimate of the number of cataract operations performed annually has become increasingly difficult because of the previously cited shift to an outpatient basis and because few data are available on those procedures performed on an outpatient basis. Because lens insertion has become routine following cataract extraction (see Table 3}, estimates of lens implant volume now provide a better indication of the total volume of cataract surgery. Through survey of IOL manufacturers by the Food and OrugAdministration CFOA), more accurate data are available on the number and types of intraocular lens being implanted in the United States. Between February 1984 and February 1985, approximately 817,000 IOLs were implanted--78 percent of the posterior chamber type <Stark, 1985). These latest figures reflect the continuing trend toward higher utilization of IOLs and of cataract surgery in general-a 29 percent increase in lOLs over the previous .year. For the same perioa a year earlier, a recent article by Stark et al. (1984) indicatea that 631,000 IOLs were implanted. From August 1983 to February 1984, the majority of these lenses were of the posterior chamber type--69.4 percent. This represented a nearly 12 percent increase in posterior chamberlenses over the prior year (Stark et al., 1984). The figures of Stark et al. (1984) underscore the aramatic increase in the insertion of posterior chamber lenses. The rise 1n these types of lenses has corresponded to a decline 1n the use of iris fixation and iriaocapsular lenses. They fell from 38 percent of insertions in mia-1980 to less than 2 percent by 1984 <Stark et al., 1984). The use of anterior lenses went from 32 percent to 30 percent over this same perioa, though usage reachea 41 percent in mid-1982. The latest figures <Stark, 1985) suggest that use of anterior chamber :enses has declineo even further to 3-ll J) 

PAGE 32

approximately 22 percent. Although these FDA-based data on IOL insertions include both primary (i.e., immediately following extraction) and secondary insertions (i.e., at a later time or as a replacement), they do not allow a precise separatiQn between the two. Stark et al. (1984) estimate, however, that a much greater proportion of anterior implants are done secondarily, as compared with posterior implants. The increasing use of posterior lens implant is mirrored in the data on method of extraction. ProPAC (1985) presents HOS data showing an increase in ECCE from 29 percent of extractions in 1981 ta 52 percent 1n 1983 among hospital inpatients age 65 and over. A survey of ophthalmologists, conducted in early 1984 by Dowling ana Bahr (1985), provides further documentation of these trends as well as scme additional insights. They found a high usage of both IOLs and ECCE. As of early 1984, 70 percent of tbe 387 ophthalmologists surveyed performed less than one-half of their operations on an ambulatory basis. However, of these respondents, 78 percent indicated that they expected to switch to an ambulatory basis in the future. Ophthalmologists in the South and West were more likely to do ECCE~ IOL implants, and ambulatory surgery. The post-1980 growth in cataract extraction continues a trend that has occurred since the late 1960s. As Table 3 suggests, population growth 1s only one factor. Trends 1n cataract surgery in the U.S. for the perioo 1968-76 were examined by Nadler and Schwart: (1980). They demonstratea that the 53 percent growth in the annual volume of ICCEs, the predominant methoa during this period, could not be attributed to either population grcwth or changes in age distribution. They indicatea that a range of meaical, social and economic factors including the growth of public insurance coverage ana changes in surgical indicators were responsible for the aifference. They also noted that from 1966-78 the average LOS aecreased from 7.6 days to 4.8 3-12 ( ) \ ;/ I 

PAGE 33

aays. This trend has continued with the average LOS decreasing from 3.2 days to 2.3 days between 1981 and 1984 CProPAC, 1985). A number of factors, including improvements in surgical procedures and technologies, have contributed to this decline. Despite the continuing growth in the aggregate amount of cataract surgery, significant regional and inter-area differences exist. As has been emphasized by Wennberg (1984), this phenomenon is common to much of surgical practice. He cited lens operations as one of a number of procedures which show high variation across small areas of the country. He attributes this phenomenon to the "practice style factor"--a group of subjective factors related to personal attitudes of each practicing physician. Nadler and Schwartz (1980) also noted variations in the rate of lens extraction by region: the South had a significantly lower rate of extraction throughout the early 70 's. Table 4 presents regional estimates for 1983, which is probably the last year for which inpatient data will provide a usable estimate. The rate of cataract extraction per 100,000 population is the lowest in the South, though not far below the Northeast. Indeed, the rate of !CL implantation is higher in the South than in the Northeast. Rates of both extraction and implantation are higher in the North Central and West. Interestingly, the South and West have higher rates of implantation relative to extraction. This accords with the findings of Dowling and Bahr (1985) cited above. The consequences of practice variation are borne by both patients and payers of care alike. Recent testimony before the Senate Special Committee on Aging focused on the potential cost savings to Medicare of reducing "unnecessary" elective surgery through the use of second opinion programs. Cataract surgery was one of the procedures consiaered to be acne 3-13 

PAGE 34

Table 4.--Regional Differences in Lens Operations, Rates (per 100,000 population) for Inpatients Oi!charged from Short-Stay, Nonfederal Hospitals, 1983. LENS PRCCEDURE REGION Ngctheast Ngctb Ceotc aJ South west Total Extractions 235 335 226 307 Lens Implants 182 267 198 251 At t1me of extraction 168 2S2 188 236 3-14 --:::, ~--.~. i ;>t1':.J V ,; : :. / .: ,, j' / .-J ,.'' 

PAGE 35

unnecessarily a significant proportion of the time. However, the estimates are of questionable relevance to Medicare since they are sometimes based on Medicaid populations or may be out of date because of recent technological changes in cataract surgery. In any case, the estimates of savings for Medicare must be treated with caution for other reasons as well. The potential cost savings of second opinion programs are likely to be overstated fran society's point of view because the benefits to patients of unnecessary surgery are ignored. Consider the following definition: unnecessary surgery operations are those for which the expected benefit to the patient is less than the expected incremental cost to society <Pauly, 1979). With regard to cataract surgery, there might be two types of unnecessary surgery. One type woula be when the cataract is removed early in the progression of the disease before vision has greatly deteriorated. After IOL insertion, the net improvement in vision may be small, yet the patient could have good vision. A second type would be when the IOL insertion does not improve vision much for a person with other serious eye problems. Vision may improve slightly, but remains poor. In both cases, it is more a question of small, but positive benefits, rather than an adverse outcome for the patient. No study has yet estimated the frequency of these types of outcomes. Thus, it is impossible to estimate the net loss to society from unnecessary cataract surgery. This also raises an issue that has been cited by the Inspector General (Kusserow, 1985) and others (Tayler, 1981): A very small percentage cf ophthalmologists appear to engage in what are sometimes called "cataract surgery mills." They are involved in hundreds of procedures a year ana receive hundreds of thousands of aol1ars from ~edicare. The impact of such a$sembly-line medicine on quality of care is unknown. Because of economies 3-15 A I v' I 

PAGE 36

of scale, it certainly reduces costs Cif only in terms of surgeon's t~me), but since average revenue per procedure is constant, the ophthalmologist receives a huge income. There would seem to be gains in access to care through such practice, but questions of unnecessary surgery and quality of care need to be addressed. ec1s,a, Incomes, and ;xpendjtuces Prevailing charges (as defined under the CPR reimbursement system) for physicians for cataract surgery vary widely among states as well as within individual states. For l984, prevailing charges, which represent the maximum amount reimbursable under Medicare provisions, ranged from $687 in Nebraska to Sl786 1n California CHCFA, 1984). It has long been known <Institute of Medicine, 1976) that variations in Medicare prevailings cannot be well explained by cost-of-living differences although there 1s some relat1onsnip. In addition, Mitchell et al. (1984) found significant var1at1on in total physician charges--including surgeon, anesthesiologist, assistant surgeon, and other surgery--for DRG 39 bet~een New Jersey ana North Carolina. Total charges were 42 percent in New Jersey, which was higher than in North Carolina. They estimate that half of this differential can be attributed to greater service intensity and the remainder to a higher ccst-of-11v1ng 1n New Jersey. Differential utilization of assistant surgeons was responsible for the vast majority of the noteo service intensity variation. As background, it is useful to compare not only prevailing fee levels across geographic areas, but also prevailings for cataract surgery with other procedures ano inccmes of ophtr.almoiogists with incomes of ot.ners. 3-16 ~. ) ___ ) 

PAGE 37

Though based on data from an earlier period, Hsiao and Stason (1979) present evidence that office visits and nonsurgical procedures are generally significantly underpaid as compared to surgical procedures. They found that ICCE provided, by a large margin, the highest hourly physician remuneration among a set of common surgical procedures in the late 70s. Currently, with the cataract extraction/IOL procedure running between 45 minutes and one hour and a half 1n duration, fees of over SlOOO imply large hourly compensation, even after accounting for several follow-up visits. And the hourly remuneration 1s certainly much higher than for comprehensive eye exams, for which the prevailing fee is roughly between 35 and 50 dollars. When relative rewards do not reflect relative costs, there is a potential for distorting the behavior of physicians and patients away from what is socially cost-effective. Finding that ophthalmologists are relatively well-rewaraed for cataract surgery does not necessarily mean that they are overpaid: They may simply be underpaid for other procedures. This raises the question of how they stand relative to other physicians and other professionals. Reliable estimates of the incomes of ophthalmologists are not readily available--the AMA's Socioeconanic Monitoring System which proviaes the most up-to-date estimates of physician incomes, does not sample enough ophthalmologists to prepare an annual estimate. Estimates for 1981 from a Meqjca] Economics survey (Owens, 1983) suggest that they still earn more than the average physician, but that the relative differential has narrowed. In general, physicians average real incomes (adjusted for inflation) did not change during the l970's (Glandon and Shapiro, 1981)--~iis occurrea in the face of a significant increase in physician supply. Recent anecdotal eviaence suggests considerable downward pressure on physician's net incomes due to 3-17 

PAGE 38

fee discounting resulting from competition and to increasing malpractice premiums. As in the l9701s, however, the latest NJiA (1984) figures do not show a decline in either nominal or real income. For 1983, average nominal income (before taxes) for surgeons was Sl4S,S00, an increase from l982's average of $130,S00. The median naninal income for all physicians grew from Sll2,000 in 1982 to Sl2S ,000 n 1983 That ophthalmologists earn more than less specialized physicians seems appropriate given the additional training and skill required. Whether the observed differential is appropriate is unknown. Dresch (1981) determined through sophisticated econometric estimation techniques that physicians' training is in general a very profitable investment comparec to alternative occupations. He estimated in addition that the rates of return for ophthalmologist training are over 20 percent higher than tt1ose for family practice training, a specialty which is itself a profitable investment. He argues that this evidence supports the hypothesis that the medical profession wields substantial monopoly power. Econanists have claimed (Sloan, 1970; Dresch, 1981; Burstein and Cromwell, l98S) that physicians on average earn excess profits or monopoly rents, presumably due to restrictions on entry. As has been pointeo out frequently by other economists (see, for example, Reinhardt, 1984), since phisician expenditures are only 20 percent of total health expenditures, reducing them by even l0 percent would make only a smal 1 difference in total expenditures. In summary, although relative prices and incomes in physician markets are distorted for numerous reasons, it is not clear, for example, how much the price of cataract sursery should be reduced to correc~ the aistortions. Fur'thermore, the answer aepends on what is done to other prices in the system. 3-18 

PAGE 39

According to estimates by ProPAC (1985), the costs to Medicare as well as charges for cataract surgery on a per case basis have risen between 1981 and 1984. In 1981, average total charges were Sl683, with Meaicare paying S82S, or 49.0 percent of charges. For discharges under the PPS in 1984, charges were $2,312 per case and payments were Sll48, or 49.S percent. This increase occurred despite the fact that average length of stay fell frcm 3.2.to 2.1 days. ProPAC (1985) attributes the low payment-to-charges ratio on several factors: 1) many cataract patients are subject to a deductible ($3S6 in 1984) because the extraction is likely to be their first admission within a spell of illness; and 2) non-reimburseable charges for short hospital stays, such as private room charge differentials. As shown in Table 2, comparing Medicare expenditures for cataract surgery in different surgical settings (excluding non-certified ASCs), Medicare certified ASCs appear to be the least costly setting. Given that only ranges ?f estimates are available from the Inspector General's study, it is difficult to make precise comparisons. Furthermore, attention must be paid to the difference between payments by Medicare and total payments. Physician charges (for the ophthalmologist, assistant surgeon, and anesthesiology) are more or less the same in each setting although the patient's share will be less in hospital outpatient and certified ASCs because of Medicare reimbursement rules. In practice, total physician charges and costs to patients may be least in ASCs (either certified or not) because the use of assistant surgeons and anesthesiologists may be less. The Office of Inspector General (1985) has argued that assistant surgeons are not needed for most routine cataract surgery. For the nonphysician component (including hospitalization and supplies), ASCs also appear less costly to Medicare anG the patient. Indeed, care in the hospital outpatient qesr COPY AVAil:~6U: 

PAGE 40

setting could turn out to cost Medicare more than inpatient care under current reimbursement rules. The Inspector General (Kusserow, 1985) has argued that an excessive markup by suppliers and providers is being charged on IOLs, for which average charges are ranging between S300 and $400. Production costs appear far below this, and prices 1n Europe are much less. In addition, hospitals in the U.S. can purchase them on volume discounts for under SlSO. Patients pay 20 percent of charges for these lenses when they are implanted on an outpatient basis. Given that reliable estimates are unavailable on the volume of cataract surgery in various settings, it is impossible to develop a precise estimate of total expenditures (either to society or Medicare). Nonetheless, it 1s clear that cataract surgery is a big business in and of 1tself. With total charges running between S3000 to SSOOO and volume approaching 900,000 procedures per year, expenditures are well over 2 billion dollars. This area is in the range of costs of the Ena-Stage Renal Disease program CSl.S billion in 1982, according to Eggers, 1984), which has received great attention because of its magnitude. SWPPLY OE QPHIHAL~10LCGISTS According ta the Bureau of Health Professions CBHP, l98S), the supply of practicing ophthalmologists stood at 13,680 in 1981. The supply of ophthalmologists in the U.S. is projected by BHP to reach 16,590 by the year 1990, an increase of 2S.6 percent over 1981. By the year 2000, the supply is projected to total l9,090, an increase of lS.l percent over 1990 figures. The Graduate Meaical Eaucation National Acvisory Committee (GMENAC) 3-20 

PAGE 41

projected a supply of 16,950 ophthalmologists for 1990--nearly the same as those of BHP (Wills et.al., 1981), though using a slightly different measure. Both projections of growth exceed that of the population, so that access to ophthalmological services in the aggregate should increase. Wills et al. (1981) present the estimates of future needs for ophthalmclog1sts generated by a "Delphi Panel" of physicians as part of the GMENAC study. The estimates of the Delphi Panel implied needs for 14,700 ophthalmologists in 1990. GMENAC reviewed these estimates and ultimately reduced the requirements to 11,600, seeing much less need in the care of refractive errors than did the Delphi Panel. Thus, GMENAC preoicteo a significant surplus based on the supply projection cited above. The estimates of the Delphi Panel implied need for 919 FTE ophthalmologists to deal with the cataract sur~ical workload. This was based on a projecteo 1990 procedure rate of 182 per 100,000 population and an average operative time of l.7 hours. In contrast, the 1978 AAO Manpower Study estimated needs for 20,840 ophthalmologists in 1977, which--when inflateo for population growth--would imply needs for 23,400 for 1990. This would suggest a shortage in 1990. The significant difference between the AAO and the GMENAC Delphi Panel estimates is largely due to a longer patient care workweek and a smaller medical (i.e., nonsurgical) workload projected by the Delphi Panel (Wills et al., 1981). Although the median estimate of the Delphi Panel was 182 cataract extractions per 100,000 population, GMENAC revised this to 206. The AAO study used a rate of 156 per 100,000 population with an average procedure time of l.5 hours. In 1983 the in-hospital rate alone was 271. Although there are indications that the average procedure time may have fallen slightly, the cataract surgery workload is increasing. The 3-21 

PAGE 42

substantial forecasting errors in both the GMENAC and AAO estimates and projections shoula make one hesitate about pronouncing on future shortages and surpluses. If past trends continue, a growing supply of ophthalmologists should lead to better access to their services. Newhouse et al. (1982), using data on al 1 phys1c1ans 1n 23 states, sho~.,ed that all towns with population greater than 30,000 had an ophth~lmologist in both 1970 and 1979. Over this n1ne year period, towns with population bet~een lO and 20 thousand experienced the most rJpid growth in having an ophthalmologist present, increasing from 54 percent (of 182 ,towns) in 1970 to 62 percent (of 206 towns) in 1979. Towns smaller than this scmetimes haa ophthalmologists though there was only negligible growth in the percent of towns covered over this period. Despite the diffusion of ophthalmclogists to smaller towns, substantial regional variations exis~. According to a study by Applied Management Sciences CAMS, 1983), the North Central region haa the smallest per capita supply of ophthalmologists 1n 1979--4.62 per 100,000 population compared to 4.94 1n the South, 5.86 in the West, and 6.62 in the Northeast for 1979. The ranking of regional distribution was unchanged from 197S. Based on AMA data for 1983, the supply of ophthalmologists (using a more restricted definition, viz., nonfederal, office-based, patient-care) varied by region as follows at the end of l98l: 4.04 in the North Central region, 4.44 in the South, S.S9 in the West, ana 5.83 in the Northeast. Regional patterns change only slowly. 3-22 

PAGE 43

MARKET RELATIONSHIPS Basea on the preceding indicators of regional supply and the cataract surgery rates shown in Table 4, there is no simple relationship between the number of the ophthalmologists and the number of cataract procedures. The North Central region had the fewest ophthalmologists per 100,000 population and the highest cataract surgery rate among the four regions. The complexity of these market relationships is underscored by recent cross sect1ona1, multivariate analyses. Relationships among the distribution of ophthalmologists and other socioeconomic factors were examined in a recent report done for the AAO (Orkand Corp., 1981). Contrary to expect1,1tions, there aid not appear to be a positive correlation between ophthalmologist supply and the number of elderly 1n the general population. For ~e ten states with the greatest proportion of persons 6S years and over in 1979, the mean number of ophthalmologists per 100,000 was lower than that for all states--4.3 versus 5.0. The same result was noted by AMS (1983). That study also found a positive correlation between per capita income and ophthalmologist supply. In its cross-sectional analyses of the supply of vision care providers in counties and states during the 1970s, AMS (1983) found a strong positive relationship between the supply of optanetrists and ophthalmologists. There were more vision care providers of both types in states with higher income and greater populations; however, the percent of the population over age 65 was often negatively related to supply. Finally, controlling for other factors, the prevailing charge for lens extractions was positively, but not significantly, relatea to increases in supply. Using more recent data from ther Area Resource File (November 1984), several simple correlations among fee levels and ophtha1mclogist supply were ~EST CQPY AVAILABlf 

PAGE 44

estimated by the authors for the 1110 counties that had at least one ophthalmologist in 1981. The correlation bet'#een the per capita ophthalmologist supply and prevailing charges for cataract extractions was positive and sign1ficant~ but small (.08). There was a very hiSh correlation C.95) between cataract extraction fees in 1984 and those for 1978. This suggests that regional variations have not changed over time under the CPR system. Correlations among prevailing charges for cataract extraction and eye exams 1n 1984 were lower (between .35 and .SO). Though this partly is a function of less variability in eye exam fees, the relative charges for ophthalmology procedures (i.e., lens extraction versus eye exams) are clearly not as stable across areas. In swmnary, there is little indication that relationships among fees, ophtnalmalogist supply, and cataract extraction reflect any simple econcmic logic of markets. SUMMARY This review of some of the economic aspects of cataract surgery suggests several findings relevant to alternatives for paying ophthalmologists for th.is procedure: 1. Given the excellent outcomes of IOL insertion and low complication rates, the demand for the procedure will grow as the populat1 on ages. 2. As with virtually all surgical procedures, Meoicare allowables for ophthalmologist fees for cataract extraction vary ;reatly across areas of the country. Cataract surgery is an important 

PAGE 45

part of the ophthalmological workload, and results in a significant share of income for many ophthalmologists. The procedure appears to be a well-rewarded use of the surgeon's time. Sane would argue that excess profits are being maoe. 3. The dramatic shift of this procedure to outpatient surgery will continue and 1s unlikely to be reversed. The cause of the shift 1s probably a function of both relative reimbursement (inpatient versus hospital outpatient) and PRO initiatives, reflecting perhaps a growing consensus among ophthalmologists that the patient is generally better served in an outpatient setting. However, the potential importance of the financial incentives should not be ignored. 4. The cost to Medicare of cataract extraction in a hospital outpatient department may be higher than in certified ASCs and even higher than in inpatient departments. The difference coulo be a combination of cost-shifting, excess profits, and inefficiency in the hospital setting. 5. The supply of ophthalmologists, both absolutely and on a per capita basis, will continue to grow. An improved geographic distribution can be expected to improve access. The impact of this on expenditures for cataract surgery is hard to predict, but seans unlikely to reduce either prices or volume under current payment arrangements. 6. Sane are concerned about the volume of unnecessary cataract surgery although there is little hard evioence on the size of the problem. There are significant variations in procedure rates across small areas as well as larger geographic regions. The 3.,.zs C// I 

PAGE 46

patterns are too complex to be accountea for by a simple economic market model. 3-26 ~:/ >-

PAGE 47

SECTION 4 ANALYSIS OF THE IMPACT OF ALTERNATIVE PHYSICIAN PAYMENT METHODS INTROQUCTION The preceding section demonstrated the complexity of Medicare payment for cataract surgery. The amount paid for this relatively homogeneous procedure varies greatly for two reasons. First, there is great variability in the allowable payment to physicians under Medicare's current CPR system. Second, there is vari abi 1 i ty in the payment to other provide rs depending on where the operation is performed, especially hosp1tal outpatient versus certified ambulatory surgical center. Not only is the Meaicare payment variable, but also the amount borne by the patient under cost sharing can vary greatly by setting, by whether the physician accepts assignment, and by the extent to which the patient has a Medigap policy. However, for purposes here the essence of the curr~nt system is that ophthalmologists derive greater income the more cataract surgery they perform, and that cataract surgery appears to be a relatively well-rewarded use of their time. Thus, reimbursement for cataract surgery typifies tne incentives that character~ze fee-for-service practice in general. This section of the paper considers how alternative methoas of paying ophthalmologists might affect the provision and cost of c~taract surgery. The dimensions to be considered are shown in Table 5 and include efficient production, efficient use, access, quality of care, price, expenaitures, and others. The questions addressed by each dimension are also shown in the table. Four alternatives are consioerea: l. mooifications to the current CPR system, 4-l I _,, f I', -___ / BEST etJPY AVAH}RU 

PAGE 48

Table 5--0efinition of Impact Dimensions P1roeos100 Efficient production Efficient use Price and expenditures Access Quality of care/ outccmes Technology innovation and diffusion Financial r1sk spread1ng auestions Is the output (i.e., extraction and IOL insertion) produced with the cost-minimizing set of inputs (ophthalmologist time and other resources)? How closely do the benefits to patients correspond to the costs to society? Will the amount of unnecessary surgery change? What is likely to happen to the price (physician and other charges) for the procedure and, considering the impact on volume, the impact on total expenditures? What 1s the likely impact on the patients' distance to the closest ophthalmologist who aoes lens extraction for Meaicare patients? ls assignment affected? Fran a clinical standpoint# how will outcomes be affected in terms of either complications or the 1mprov~ent to vision? Will a change in reimbursement slow the aevelopment of improved extraction techniques or new lenses? Will 1t affect the adoption of new techniques or devices by practicing ophthalmologists? Is there a change in what party (ophthalmologist, hospital, ASC operator, patient) bears the risk for unexpected large costs? 4-2 .': _.... :~ ~: :._. --~ -:. ; ,. ~-' ?~ : [ r t,.) t .. ; 

PAGE 49

2. use of fee schedules, 3. packaging of physician payment with other input payments, ana 4. payment under capitation. The method of analysis is to consider each option separately and compare its likely ;~pacts on cataract surgery on each dimension with the current system. In the next section the various combinations of options will be considered, as well as the representativeness of the results for surgery in general. This approach is based on the presumption that there is no one best pricing system for all markets, types of physicians, or times. Any pricing system represents a tradeoff among efficiency, equity, risk-spreading, access, quality of care, and other dimensions. The best pricing system in a given situation will depend on these tradeoffs. It is easy to think of many mundane examples of different pricing for the same commodity. Bananas, for example, are usually sold in bunches and priced by the pound in supermarkets. This seems to make sense in that the edible part of the banana bears a more or less constant ratio to the gross weight. In other settings, such as cafeteria lines, bananas are sometimes priced on a per item basis. For gifts, bananas may be sold as part of a package deal in a fruit basket. When one considers the tradeoffs among transactions costs, the amount of product needed at the time, and other factors, it is not difficult to explain such patterns of pricing. The point is that no one pricing methoa is preferred in all situations. 

PAGE 50

Il1E CURRENT SYSTEM Before analyzing each of the alternatives, it i~ useful to briefly review the current system. The current CPR system for paying for physician services is a type of fee-for-service system: a price is paid for each unit of service. Although the relative fee levels under CPR were originally based on historical charges, over the years--with growing levels and types of Medicare controls-it has gradually become a complex administered price system. As a result, historical regional variations 1n charges have become institutiona11zed and perpetuated over the years. The inflationary pressures inherent in the CPR mechanism (Yett et al., 1983) have maae the Medicare Economic Index more of a factor over time. Once this constraint is effective, the ratio of prevailing fees across areas becomes fixed. Even in a fee-for-service system, sane packaging of items must occur: the long time practice of packaging surgical procedures with related follow-up care is a prime example. This has been maintained despite the general tendency toward the unbundling of procedures (Mitchell et al., 1984) as well as a related expansion in the medical terminology to describe them. Several features of the CPR reimbursement system are likely to affect the performance of cataract surg~ry. An important result of the institutionalization of historical charge patterns is that the relative prices, either for cataract surgery across different regions, or for cataract surgery versus other procedures, are unlikely to reflect their actual relative costs in terms of resource use. Differences in the relative profitability of procedures can be expected to affect the willingness of physicians to proviae them. When Medicare aaopteo 100 percent reimbursement under Part 8 for outpatient surgery unaer assignment, this proviaed sane incentive for ophthalmologists to move the procedure to an 4-4 I/_ ..... 

PAGE 51

outpatient basis, especially since patients need not pay a oeductible or coinsurance. But until facilities were available and hospital administrators had sane incentive to move the procedure out of the usual inpatient setting, the ~hift to outpatient surgery was gradual. As described above, changed Medicare incentives under PPS and PRO regulations have recently resulted in a dramatic shift of the procedure to an outpatient basis. But, under current reimbursement provisions, this has a greater impact on the cost that patients bear and the cost to Medicare than on the remuneration to ophthalmologists. Assignment and the fee freeze are also important features of the current CPR system. Actually, the fee freeze and participating physicians program might be considered as options unaer the category of modifications to the CPR system. Conceptually, assignment on a case-by-case basis allows physicians to price discriminate among patients: Those who can bear more will have to pay a higher out-of-pocket amount (or their supplemental "Medigap" policy will). A change to assignment in all cases, as under the current participating physicians program, effectively reduces the average payment to physicians. For cataract surgery, this provision may interact with the reimbursement of outpa~ient surgery at 100 percent Ci.a., no deductible and coinsurance) to limit greatly the ability of ophthalmologists to price discriminate. The remainder of this section considers each of the four alternatives in turn, first, describing the 1ncent1ves under each, and second, identifying the likely impacts related to cataract surgery. 4-5 l/ } I 

PAGE 52

EFFECTS UNQEB MODIFIED CPR There are many options available for altering the way in which physicians are paid under the current Medicare CPR system. For example, the percentile for setting the prevailing change could be lowered; the frequency of updating of prevailings could be reduced (as under the current freeze); or inter-area differences could be eliminated. Most changes under consideration come to one result for cataract surgery: they either reduce the payment to all ophthalmologists for the procedure or they reduce the payment to selected groups of ophthalmologists, such as those who currently receive relatively high levels of reimbursement. Lowering the percentile at which prevailing charges are calculatea or updating ~he prevailing charge less frequently are examples which woula tend to lower the payment for all ophthalmologists. Tying geographic differentials more tightly to costs of living would lower the payment for at least selected groups of ophthalmologists. It is also possible to lower the paymen~ for the procedure by bundling sane preoperative services into the current payment for the proced1.1re al though the amount of these services may be small in this particular instance. Allowing the discounting of fees resulting from competition among providers would also amount to a reduction in the fee to ophthalmologists.. A slightly different option under a modified CPR woula be to give beneficiaries a financial incentive--such as reduced patient cost sharing--to use lower priced physicians. The essence of the preceding types of modifications is that they aim to reduce the current levels of payment for cataract surgery as well as otner services. !n general, they are unlikely to eliminate the biases that have been institutionalized in the relative rates of remuneration across specialties or among different types of proceaures witnin a specialty. Cne 4-6 .. ', .. ( /; ,.;s ,_,, 

PAGE 53

exception to this would be to allow carriers to negotiate aiscounts with providers. The negotiations might lead to a price which better approximates average cost. However, regional variations unrelated to cost may persist. At this point it would become difficult to draw a distinction between a modified CPR system and what some would consider a fee schedule, which will be discussed next. Even under the current CPR system, the charging patterns of local physicians becomes less relevant as the prevailing rate becomes constrained by the Medicare Econan1c Index. For analytical purposes, proposed modifications to CPR reimbursement can be thought of as a simultaneous reduction in the level and variability of payment for cataract surgery. Table 6 summarizes the likely impacts, relative to what woula occur without such a change, under this type cf modification to the CPR system. It is assumed that a modified CPR would still result in separate payments to the anesthesiologist, a surgical assistant, and the operator of the outpatient facility. Given current regulations and patterns of practice, it seems unlikely that such a change in CPR would result in a shift back to the inpatient provision of cataract surgery. Thus, to the extent that outP.atient provision is a mere efficient setting, which seems likely, a modified CPR would maintain the current level of productive efficiency. The major impact of such a change is that it reduces the absolute rewards to ophthalmologists for providing cataract surgery, both necessary and unnecessary. To the extent one believes that there is a significant amount o.f unnecessary ca tar act extraction, as some do, the reaucea payment under a mooified CPR system might reduce the amount. However, this coulo be offset by two factors. First, substantially lower per unit payments for surgery would recuce ophthalmologists' incomes greatly. They woula be 4-7 (/i; -I ,I 

PAGE 54

Table 6--Relative Impacts on Cataract Surgery under Modified CPR P1rn1os100 Efficient production Efficient use Price and expend 1 tu res ~ccess Quality of care/ outccmes Technology innovation and diffusion Financial risk-spreading BeJatjye Impacts Shift to outpatient provision would probably continue, which appears efficient on the surface. Reduced rewards would lessen the payof~ to physicians of providing unnecessary care. But reduced costs to patients might increase their demand. Volume could go up or down. Proportion of appropriate care could change in either direction. Total physician expenditures could rise or fall (relative to what would have happened other~ise), as may total expenditures. A fall seems more 11kely. In the short run, a reduction in incomes shoula not greatly affect the geogiaphic diffusion of ophthalmologists. Reductions in fee levels (in urban areas) could encourage diffusion. A fall in the assignment rate as a result of lower prevailings wculd reduce access to care, increasing the out-af-pccket liability of patients. Should not be greatly affected. Largely a matter of tec~nology and professional standards. Little or no impact on lens quality. Probably not greatly affected since lens reimbursement would still be separate. Current incentives to improve in lens quality woula persist. S1m11ar to current situation. Physicians bear scme risk (extra visits); ASC some (long CR times); Medicare.bears some risk for hospitalizations; and hospitals sane risk for long stays. 4-8 -~ :...., .. ... ... r, .. : J: .. =... .. :. t'j:r;i:i ;iOL~ ... : : ~l"!.,.t..i1u t 

PAGE 55

tempted ~o do more surgery. Second, the growing supply of ophthalmologists will increase the aggregate supply of ophthalmological surgery in any case. The total amount of unnecessary surgery could increase even if individual surgeons do less of it on average. As was discussed above, the seriousness of this problem is unknown. Interpreting such changes from the patient's point of view is complicated by assumptions about assignment and special provisions for outpatient surgery. Lower fees for cataract surgery could mean less assignment, and therefore higher out-of-pocket costs to patients. Demand could fall. This could reduce volume and help to weed out some of the less necessary procedures. On the other hand, in competitive markets, 100 percent reimbursement for outpatient surgery (i.e., with no deductible or coinsurance under assignment) is a very attractive feature for patients. Ophthalmologists could move toward high volume, .low cost proauction to take advantage of this provision. However, the incentive to do so would on'ly be greater than it currently is because of increasing competitive pressures. Thus, the total. volume of procedures could increase or decrease relative to what would occur otherwise, though a decline seems more likely. This, coupled with declines in per case remuneration, would tend to reouce physician and total expenditures, compared to what would occur otherwise. A reduction 1n the variation in remuneration for cataract surgery would provide sane incentive for ophthalmologists to abando, the high-reward urban areas, where the fees have historically been higher, fort.~ areas of historically iower fees. This could, probably over five years or so, ,esult in a greater ~iffusion of ophthalmologists so that geographic access is improved. Lower prevailings coulo lead to a fall in the rate of assignment. This could reduce access to care and increase out-of-pocket costs for some. 4-9 </ -~ I 

PAGE 56

Or if mandatory assignment is the mooification to CPR under consiaeration, then access, in theory, might worsen if ophthalmologists are-willing to supply less at the lower price. In practice, given the relatively high rewards for this procedure even under assignment, access seems unlikely to be a problem. Cataract surgery as it is currently practiced has already achieved the status of a highly technical and highly effective procedure. The current technique and devices are thus already a matter of professional standards and would most likely not be affected greatly by lower physician remuneration. Quality of care coula fall, however, if practice sh~fts to assembly line medicine with little concern for appropriate follow-up care. Cont1nuat1on of a fee-for-service system for physicians would have little or no impact on lens quality, which is most affected by the level of reimbursement available for lenses. T~ the extent that unnecessary surgery is reduced, the average outcome would improve. Perpetijat1on of a fee-for-service system with separate payment for the lens ,_ould maintain the same incentive for technology and diffusion that exists under the current system. There are th~s. incentives for cost decreasing lenses as well as cost-increasing lenses that provide better results for patients. The Sharing of risk among the various parties would be similar to the current situation. Physicians currently bear sane small risk of the patient developing complications and requiring greater than the average number of v1sits in the follow-up period. The outpatient.facilities bear some small risk for longer than average OR times or equipment use. Ar.a Meaicare ana hospitals bear scme risk for hospitalization shoula complications occur. Costs to patients woula not be greatly affected for those unaer assignment, 4-10 

PAGE 57

especially given the special outpatient provisions. However, if assignment were reduced, out-of-pocket liabilities would increase It is difficult to predict whether this would be a major problem. EFFECTS UNDER A FEE SCHEDULE The preceding section suggested that the current CPR system becomes s1mi1ar to a fee schedule if .most of the allowable charges become ,constrained by the Medicare Econanic Index. The CPR (or a moaified CPR) system differs from a fee schedule primarily by a change in the method by which the relative fees are established. An important result of this would presumably be less variability in the amounts paid for a given procedure. This fee schedule option holds the definition of units of service to the same as those under the CPR system. The determination of the relative prices used in the fee scale could result from a.variety or a combination of processes. They could be derived from estimates of the relative resource costs or relative charges, or frcm a consensus-based estimation of relative values by professional experts, or from a price determined by negotiation with providers. Medicare would presumably pay the same fee to providers of a g1 ven type or in a given area. ~ssi gnment cou 1 a be mandatory or .case-bycase. Depending on the fee level, access to care would be ~ffected in either case. The key difference between instituting a fee schedule versus con~inuing CPR or adopting a modified CPR is that a completely new origin for the fee schedule might reduce the amount of aistortion in relative prices for different services, and secondly, that the system woula be less complex to aaminister. Table 7 summarizes the relative impacts on various 4-ll ./ l 

PAGE 58

dimensions of cataract surgery that are likely under a fee schedule. As under CPR and modified CPR, the procedure would probably continue to be done on an outpatient basis which currently appears to be the most efficient moae of production. The closer relationship of the fee schedule to relative costs and relative values would presumably provide a better indication of the cost and value of the procedure to society. The subsidy toward overprov1s1on C1.e., moral hazard) that exists under any insured fee-forserv1ca system would persist. Perhaps a closer approximation of the fee to average cost of production would result in an improvement in this tradeoff despite the fact that the net cost to the patient remains substantially below the total cost to society. The government and taxpayers woula have a better idea of total cost of coverage for cataract surgery. It can be assumed that a fee schedule would reduce the profitability of cataract surgery relative to other ophthalmological procedures. This would rec:2uca incentives to provide both unnecessary and necessary cataract surgery. A fee schedule would thus result in lower physician and therefore lower total expenditures compared with current projections. The lower rewards would affect surgeons in the urban areas (those areas with relatively high fees) to a greater degree, so that the incentives for being in urban areas would be somewhat diminished over the long run. This may eventually improve geographic access to surgeons. Lower fees woula reauce supply in given market areas, and could increase the financial buraen on patients if assignment is not accepted. Given the projectea increase in ophthalmologist supply, access seems unlikely to be a major problem. In terms of surgical techniques used or the quality of lenses inserted, there is little reason to expect a shift to a fee scheaule to have mucn impact. Again, as under a mooified CPR system, lower fees coulc 4-12 

PAGE 59

Table 7--Relative Impacts on Cataract Surgery under a Fee Scheoule Dimension Efficient production Efficient use Price and expenditures Access Qua 1 ity of care/ outcomes Technology innovation and diffusion Financial riskspread1 ng BeJative Impacts Similar to current situation: shift to outpatient would continue. Woulo use same combination of inputs, which is presumed to be more efficient than inpatient surgery. Should promote better use if price is closer to minimum average cost but (with moral hazard) the net effect is hard to judge. Lower relative rewards would decrease incentives to perform unnecessary surgery. Relative reward for surgical procedure would fall. Physician and total expenditures would probably decrease relative to current trajectory, yet both wi 11 sti 11 probab 1 y rise. Would probably improve diffusion over the longer term and increase geographic access as ophthalmologists are encouraged out of urban areas because of fall in returns to surgery. Financial acc:ass could worsen if assignment is not accepted. Increases in supply will counteract access problems. Should not be greatly affected for procedure itself. Expect no impact on quality of lens. Could be an aoverse impact on postoperative care, particularly for those with complications. Probably not greatly changed since reimbursement for lens separate. Current incentives to improve lens quality would persist. Similar to current situation: physicians bear some risk (extra visits, longer OR times); Medicare, hospital (and patient) bear risk for hospitalization due to complications. If assignment not accepted, patient burden woula increase. 4-12 

PAGE 60

encourage high volume practices, and this may affect postoperative care. Outcomes could worsen for those with poorly hanaled complications. The extent to which this is currently a problem in high volume practices is unknown. This would ~lso imply that the incentives for the development of improved lenses and other technological innovations would remain approximately the same as under the current system. With regard to financial risk-spreading, a fee schedule would be similar to the proposed modifications to CPR. Canplications result in greater use in physician's time for which they bear the risk. More serious complications can result in hospitalization for which Medicate bears the risk under PPS, and the hospital bears the risk that cnarges will exceea Medicare reimbursement levels. In dddition, patient out-of-pocxet liability could increase if assignment is not accepted. It is hard to predict whether this would be a major problem, especially if current special outpatient provisions continue~ EFFECTS UNQEB PACKAGING The term "packaging" of services is meant to imply that a greater number of inputs would be covered under a single fixed payment than is now the case. For example, ophthalmologists are reimbursed separately from anesthesiologists, assistant surgeons, and the provider of facilities and supplies. However, the current payment to the ophthalmclogist is alreaay a package in that it reflects payment for not only the procedure but for related postoperative care and the inputs that the ophthalmologist employs ;n the office. 4-14 

PAGE 61

There are a large number of alternatives for the packaging of services that vary along four different aimensions: l) the scope of services ccvered might include some or all of ambulatory, physician, inpatient, and other supplies and services; 2) the recipient of the payment could be the physician, the hospital, a financial intermediary, or a corporate group .practice; 3) the unit of payment could vary frcm an ambulatory case to an inpatient episode of care; and 4) the method of determining the fee level cou 1 d vary from relative va 1 ue sea 1 es to a charge-based determi nation. These dimensions and the numerous alternatives under each suggest a large number of possibilities for packaging. In order to make a comparison it is necessary to reduce this number to a plausible subset that capture the essence of what is intended by the notion of packaging. The first alternative to be discussed is the MCORG Ci.e., medical doctor diagnosis-related group): a package that would include the payment to the physieian on a diagnosis-related basis similar to the Medicare PPS, or even linked directly to the DRGs under Medicare PPS. Under the latter, the physician payment would be included as part of the relative weight under PPS. A question about the recipient of the payment would then arise: Should Medicare pay the hospital who would then pay the physician, or should Medicare pay sane third party which would reimburse both? The question may be moot considering the recent rapid decline in inpatient cataract extractjon, although there will always be sane seriously ill patients requiring inpatient surgery. Thus, the plausible alternative becomes a fixed payment to the ophthalmologist or to the outpatient surgical facility that covers the physician fees, the cost of OR time, the lens, and other supplies. 4-15 d' <.' -, ./ / 

PAGE 62

Postponing for the moment the question of whom to pay, the issue of what to include in the package can be addressed. There coulo be a smaller package that includes only the ophthalmologist's fee, the assistant surgeon's fee, and the anesthesiologist's fee. A larger package would include the payment for hospitalization, CR equipment and time, and supplies, 1nclud1ng the lens. Or there could be two separate packages. The major advantage of a larger package 1s that it does not distort the choice among the relative use of inputs, as does a system which attempts to set an adlninistered price for each input. It implicitly provides an incentive to use inputs on a cost-minimizing basis. If the combination of inputs is considerec1 to be mere or less fixed, as would seem to be the case for outpatient cataract surgery, then the advantage of a large package is diminished as well. However, if an ambulatory surgery center is less costly to Medicare (either truly or because of overcharging by hospital outpat}ent departments), then including other inputs in the package might be beneficial w1 th regard to the choi ca among outpdti e,rt sett1 ngs. The remaining choices in the care of the patient woula seem to be: l) using an assistant surgeon versus some other trained assistant, 2) using an anesthesiologist, nurse anesthetist, or ophthalmologist-aaministered anesthetic, and 3) using an ASC versus a hospital outpatient department versus a phys1c1ans office. It 1s not clear how many ophthalmologists would really regard these issues as matters of choice since local practice style may be an important factor. Packaging the reimbursement in this fashion woula shift much of the aaministrative burden frcm the Meoicare carrier to the opntha1molcgist, who woula have to monitor charges by facilities, lens suppliers, anesthesiologists, and assistant surgeons. This aces not appear to be a 4-16 

PAGE 63

good use of the time of ophthalmologists, though it might be a good use of the time of the business manager for the ophthalmologist or ophthalmological group practice. Currently, the weakest link in Medicare's cost containment efforts for this procedure is their inability to control cost in the hospital outpatient setting, which is reimbursed under a reasonable cost basis. Either a package, or a single flat fee comparable to the treatment of a certified ASC, would provide sane protection for Medicare. Indeed, ophthalmologists may well prefer to let Medicare set a flat payment level to c,ver facilities and supplies in all outpatient settings, rather tnan have to negotiate and purchase the inputs themselves. If the payment level is adequate, the ophthalmologist gets the inputs without much hassle. The'major problem area is payments for other physician services: assistant surgeons, anethesiologists, and consultants. Leaving this out of the package opens Medicare to substantial financial risk. For purposes of this analysis, it is useful to consiaer the option of a packaged fee that includes not only physician inputs but also facility fees and charges for supplies. The impact would not be too different from a two-part package that separates the ophthalmologist's fee from the fixea, prospective facility fee. A hospital outpatient surgery facility would have to compe~e with a freestanding ASC f.or the ophthalmologist's business. It is important for cost-containment purposes to put the other physician fees in either of the two parts. Ophthalmologists would probably prefer not to have the problem negotiating with facilities and anesthesiologists to determine payment. They would prefer to have Medicare set the payment at an adequate level and take care of the billing. The problem for Medicare ana its intermediaries is that they have much less knowledge of local conditions 4-17 r ~'/ __ _, 

PAGE 64

and constraints than do ophthalmologists. It 1s assumed that postoperative ccmp.lications that resulted 1n hcspitalizaticn would be covered under PPS. As indicated in Table 8, packaging provides a greater incentive than fee-fer-service medicine to use the cost-minimizing combination of inputs. The cost of cataract surgery to society fer the procedure itself might be reduced through the use of nonphysician surgical assistants and the use of nurse anesthetists rather than anesthesiologists. Furthermore, such a package payment would presumably result in the optimal choice bet~een hospital outpatient versus care, which might well depend on local area population characteristics and ~~isting facilities. A packaging approach would ~~ovide the ophthalmologist, as the patient's agent, with a better understanding of the overall ccst of the procedure and probably the out-of-pocket cost tc the patient as well. lf anything, this would seem to have sane tendency to promote a mere efficient use of the procedure in that the physician as agent will be more attuned to recommending a cost-effective course of action. On the other hand, cphthalmdlogists would tend to shy away from these patients who might have higher costs because of likely complications, though this appears a minor issue because the complication rate is low and because tney might be handled on an inpatient basis. Under packaging, the total charges for the procedure would be much more controllable; however, control of the volume of procedures remains problematic. The incentives for unnecessary surgery would be similar to those under modified CPR and a fee schedule. It is assumed here that the relative reward for cataract surgery woula be reauced scmewhat. Recucea per unit reimbursement might encourage ophthalmologists to do more proceaures to offset the fall in income. Total physician expenditures (as a share of the 4-18 .. \ t ..... .If ~-. t: .-! ~-

PAGE 65

Table a--Relative Impacts on Cataract Surgery under Packaging Dimension Efficient production Efficient use Price and expenditures Access Quality of care/ outcomes Technology innova~ion and diffusion Financial riskspreading Relative Impacts Greater incentive to use cost-minimizing production, which is probably outpatient surgery. Should improve sanewhat as doctors and patients see the total costs better; might reduce access for those with other complications. Total charges for procedure would be more controllable and less inclined toward inflation. Still a problem 1n controlling volume and unnecessary surgery. Total expenditures should decline relative to what would have occurred othenise. Would probably improve diffusion of ophthalmologists and therefore geographic access. Impacts on financial access would depend on assignment and ccpayment provisions. Unlikely to fall in short-run because of professional standards and high-quality lens technology. Use of nonphysicians as substitutes could r~uce quality of care. There might be some incentive to postpone hospitalization where it is appropriate. There would be less incentive to use higher quality supplies and lenses. Would reduce incentives for new lens development and diffusion. Would encourage cost-reaucing innovations. Physicians would bear more of the risk of unexpected costse Would probably negotiate fixed rate with anesthesiologists, assistants and OR operators to reduce variability. Then only major risk with regard to hospitalization. Under PPS, Medicare and hospital would bear part of this. 4-19 HEST COPY AVAiLABLE 

PAGE 66

package) are likely to decrease relative to what would have occurrea under the CPR system. Since a packaged fee set closer tc average total cost would reduce the relative rewards for surgical procedures, the geographic diffusion of ophthalmologists might improve over the longer term, which would improve access. It 1s assumed that mandatory assignment applies. However, financial access could be affected by any changes in cost-sharing provisions. In the very short run, the quality of care and resulting outcomes are unlikely to fall because of the continuation of current professional standards, which involve the use of high quality lenses. A shift to the use of nonphysicians for surgical assistance or anesthesia could result in lower quality of care and poorer outcomes. It is unclear whether the aecline would be significant. Over the longer run there would be less of an incentive to use new and innovative lenses Cif more costly). This woula ob.v1ously reduce the incentives to develop more costly new lenses and for them to be acioptad. There would be an incentive to adopt cost-reducing technological innovations. Although the physician under a packaging scheme would bear much more of the risk of unexpected costs, in the case of cataract surgery this may be a small risk. The ophthalmologist would probably have little difficulty in negotiating fixed payment rates with anesthesiologists, assistants, or facilities. The remaining major risks would be hospitalization for complications, which would most likely be covered under Medicare PPS. In sum, adoption of a packaging approach might ao much to slow the rate of inflation in total charges for cataract surgery. Its ability to control the total volume of procedures and therefore total expenaitures is less certain. 4-20 ( 'c) 

PAGE 67

EFFECTS UNDER CAPITATION The multitude of options under capitation parallels the multitude under a packaging scheme. Alternatives could vary with regard to scope of services covered, the recipient of the payment, the unit of payment, and the method of determining the level of the capitation amount. One major alternative 1s the option of capitating outpatient services (i.e., Part 8) rather than cap1tat1ng on the basis of Part A and Part 8 together. Or it would be possible to capitate physician inpatient care along with Part A. Or in the case of ophthalmology, the logical extension of packaging might be a fixed fee to provide all vision care for a Medicare patient. Such a scheme presents obvious difficulties since routine eye care is not a coverea benefit. Ophthalmologists would be unwilling to bear the risk associateo with sporadic demands such as cataract surgery.. For this reason, this alternative is not consiaered here. Capitation is discussed here primarily as a decentralized approach to physician pricing decisions. A fixed, capitated amount is given to a provider or 1nsurer/proviaer organization (perhaps through a voucher) to cover all services Cor perhaps outpatient services) for a Medicare beneficiary. The provider has discretion about how to pa~ physicians. The usual cap1tated schemes that come to mind include such entities as health maintenance organizations CHMOs), or individua1 practice arrangements CIPAs). For these types of organizations a fixed annual premium is paid to the carrier/provider organization, and the physicians are often paid on a salary basis, but may be paid on a fee-for-~~rvice basis. For example, these various capitated arrangements are allowed unoer current Medicare provisions whereby eligible delivery systems receive a fixed payment equal 4-21 

PAGE 68

to 951 of the average annual per capita cost for Medicare recipients in their area. Other interesting but less tested versions of this model contemplate a physician gatekeeper in which a primary care physician or group of physicians accepts the premium payment. This gatekeeper manages the case of the individual patient with regard to all care or ambulatory services, paying for needed specific services on a per unit b~sis from the capitatea amount. Such a model has sane of the desirable properties of a prepaid group practice in that there is sane incentive for the physician to prevent the provision of unnecessary service. A major difficulty facing this type of arrangement is the substantial risk that the indiviaual physician misht face. This risk must be limited through some mechanism, such as pooling or stop-loss provisions. The key feature of capitation. as compared to the previously discussed alternatives, is the strong incentive to monitor and reduce utilization. The other methods provide sane limitation on per unit cost, but by not controlling volume, they may not effectively control total costs. There is considerable eviaence that inpatient admission and surgery rates ar significantly lower for members of HMOs (Luft, l98l). Capitation, on the other hand, provides an incentive to underprqvide care that must be guarded against. For example, there is sane eviaence that HMOs may underprov1de necessary care as well as limit unnecessary care CLoGerfo et a 1 l 97 9) An important aspect of capitation is that it aecentralizes the decisionmaking about what type of pricing and utilization review is usea in practice. Thus, for example, under an IPA arrangement an ophthalmologist might well be reimbursed on a fee-for-service basis by t..ne carrier. / / t .L '..t 4-22 

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Presumably the carrier through utilization review and other monitoring devices would have sufficient control of utilization'rates. Salaried physician arrangements are quite common under prepaia capitated practices, but other types of arrangements including packaged fees, fee scheoules, ana variable fees to different physicians are a~ option under these types of plans. Thus, the decentralization implicit in capitation allows greater flexibility in payment methods than do the previous three options. With regardto cataract surgery, the details of the particular capitation scheme may not be essential for discerning the general impacts, but they may wel 1 matter when it comes to operating a capitation scheme fn practice. For example, if the capitation payment is well above the expectea actuarial cost of providing treatment, then there may be incentives for overutilization, unnecessary care, and delivery frills as the medical plans compete for patien~s. Table 9 summarizes the relative impacts along a variety of dimensions. Capitation offers a much greater incentive for efficient production than the current method of reimbursement. It gives the proviaer an incentive to use the proper type of outpatient facility and the necessary amounts of ophthalmologist time and other ancillary physician inputs. The biggest problem with capitation is the incentive for underprovision and the use of lower quality inputs. Schanes such as the Enthoven plan CEnthoven, 1980) at~empt to guard against this through a competition among providers, open enrollment, and other features. The level of protection that such safeguards woula provide in practice remains unknown. The price being paid per cataract extraction/IOL insertion under a capitated seheme may not be directly observable. However, theory woulo suggest that ophthalmologist reimbursement would be pushed to the point of 4 .... 23 iEST COPY 1WAILABLE ./ '--': _/ 

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Table 9--Relative Impacts on Cataract Surgery under Capitation P1ro10s100 Efficient production Er~1c1ent use Pr1ce and expenditures Access Qua 11 ty of ca re/ outcomes Technology innovation and di f fusi "n Financial .risk spread1ng BeJatiye Impacts Greater incentive to use cost-minimizing production, especially if capitation covers inpatient and outpatient. Allows flexibility within the plan or organization as to method of ophthalmologist reimbursement. Would be sane incentive to underprovision. Key question: could that be offset by competition among plans/providers or controlled by other plan features? Price would not be directly observable, but implicit price would fall. Total expenditures likely to fall since volume would fall. Probably would lead to greater diffusion of ophthalmologists which would increase access in m1d-s1zed towns. But might reduce incentives for diffusion to the smallest size towns. Unrikely to fall in very short run because of profe~sional standardS and current high-quality techniques. But pressures to economize, perhaps by using less qualified assistants, would increase risk of complications. Would greatly reduce incentives for new lens development and diffusion. Provides long-run incentive for prevention or drugs to prevent or slow cataract formation. Provider/insurer would bear much of unexpected costs, especially if both inpatient and outpatient capitated togetner. ~eaving Part A under PPS woula snift much of risk to hospital. // :_;y 4-24 

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minimum average cost, yet reflecting a fair rate of return to their educational investment or a return commensurate with peers under fee-forservice. In general, if payment for cataract surgery is excessive now, the fee implicit in the capitated amount will decline. Of course, the total expenditures attributable to cataract extraction would fall relative to what would occur under an extension of the current CPR system, and, if estimates of unnecessary cataract extraction are believed, then.total volume might fall as well. If implicit fees under capitation tend to correct current geographic distortions in fee levels, then access should improve. A decline in the returns to opht~almological practice in urban areas which currently have high fees woula eventually lead to a diffusion of ophthalmologists to mid size towns. Providing services to less populated areas presents a major operational problem for a capitated approach. Financial access would depend on cost-sharing provisions and on assignment--though under capitated schemes these are less of an issue. Once again, the quality of care and outcomes would not fall for the bulk of procedures in the short run. Average outcomes would go up if the amount of unnecessary cataract extraction is reduced. Quality of care would probably suffer as well as outcomes (for necessary procedures) because of the incentive to economize under capitation. The size of effect is unclear. Capitation would reduce the incentive to develop new models of lenses that are more expensive than current models, but would create an incentive for adopting less costly lenses. Capitation in principle provides a greater incentive for the prevention of cataracts and for the oevelopment of orugs that might slow the formation of cataracts. In practice, the basic research 

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ongoing in this particular area may not be sensitive to current reimbursement methods. Under capitation schemes much of the risk of unexpecteo high costs would be shifted to the provider/insurer. If, however, Part A were left under PPS and only Part 8 cap1tated, then much of the risk of high costs would ranain with Medicare and hospitals since the greatest costs are associated with seriously 111 patients requiring hospitalization. In sum, capitation schemes are attractive with regard to efficient production. Whether they can pranote efficient use is the major question. Whether the market can function to assure access and quality remains a matter of debate. 4-26 /,r., :1, -. -; ..... n' :_ .. J~ qr r :-.. :, :Ul..i-. 

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SECTION 5 RESULTS AND POLICY IMPLICATIONS COMPARISON Of ALTERNATIVES The Medicare program has been a tremendous success on many dimensions. For millions of elderly Americans it has increased the availability of and access to high quality medical treatment. It has also substantially reduced the risk of catastrophic expenses for these same Americans. The peace of mind that this provides Medicare beneficiaries is no small achievement. The current interest in physician payment reform addresses the major drawback of the Medicare system: its inability to contain the costs of medical care. This inability can be attributed to many factors, including overutilizat1on of services, inefficient production methods, excess profits by sane providers, excess-he adoption of new technologies, and inflationary biases in the pricing sys~em. Proposed alternative methods of paying physicians must deal directly with this cost-containment issue without sacrificing too much in terms of what has been achieved on these other dimensions. The argument that Medicare is spending too much under CPR for cataract surgery is based on three types of potential excessive costs. First, there is the cost of unnecessary surgery. This represents that share of the total volume of procedures and related expenditures attributable to extractions that should not have occurred, presumably on the grounds that the expe~~ea benefit to the patient is far below the cost of the proceaure to society. Second, there may be excessive costs to Medicare associatea with excess profits by input providers. This could arise from s-1 t/1, 1_, I 

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ophthalmologists earning excess profits in some areas of the country or hospitals earning. excess profits by overstating costs (when the surgery is done on an outpatient basis). A third potential excessive cost, which is related to the second, would be the cost of using an inefficient mode of production, which could arise if ambulatory surgery centers are more efficient than hospital _outpatient surgery. Identifying and measuring this third cost is not a straightfo..--ard matter. For example, it is not clear if the higher costs associated with hospital outpat1~nt surgery under reasonable cost reimbursement are due to cost shifting from other patients or frcm a truly less efficient production process. In any case, the alternatives under consideration must be weighed with regard to their ability to aodress these potential sources of excessive costs. W1th regard to unnecessary surgery, it may be the case th at progress could be made under the current (or a modified) CPR system by requiring the PROs to monitoi appropriateness of outpatient surgery or through the use of second opinion programs. The potential cost savings from the latter were recently estimated to be substantial by the Congressional Budget Office CCSO, 1985). As suggested acove, it is easy to question the basis and methods of such estimates: In particular, cost javings to Medicare are not cost savings to society since even "unnecessary" procedures can be of benefit to the patient. However, this does not address the other potential sources of excessive costs and has the obvious drawbacks associatec with a policing as opposed to an incentives approach. Utilization review under a modified CPR approach might also reduce unnecessary surgery. In aaoition, if such an approach reduces ophtnalmclogists' remuneration for cataract surgery, it addresses the second area of excessive costs. Reducing any excess profits by ophthalmologists would also have sane effect on their .5-2 

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willingness to provide unnecessary surgery. What a modified CPR approach woula not do (without utilization review) 1s to promote efficient production through the selection of the most appropriate production site. A fee scheaule approach would also provide a mechanism for eliminating excessive remuneration. But there would still be a tendency toward the provision of unnecessary surgery that might be controllable through PRO utilization review or through second opinion programs. A packaging approach has the major advantage over these fee-for-service alternatives of providing a stronger incentive for efficient production. Assuming the global fee for the package is set at a reasonable level, the provider would have an incentive to use the most efficient location and set of inputs. Regardless of whether the recipient of the payment is an ophthalmologist or a provider facility, safeguards against use of low quality inputs (if the ophthalmologist receives the payment) or use of low quality ophthalmologists (if the provider receives payment) woula be professional legal liability, market competition, and other regulatory controls. At present, there is little evidence that the types of input substitutions used (e.g., nonphysician assistants instead of assistant surgeons) result in noticeably worse outcomes. Review by PROs or surgical second opinion programs could also be used as a quality control as well as guarding against overutilizat1on and unnecessary surgery. Finally, the capitation approach provides the strongest incentives for efficient production of any of the alternatives. Efficient use is the problem. Will the capitated plan tend to underprescribe cataract surgery in necessary instances? (The incentive to reduce unnecessary care is clearly strong.) Woula the capitatea plan employ less skilled ophthalmologists ;EST COPY AVAILABLE 

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and/or lower quality inputs? Competition among capitate<l plans is the major safeguard against such abuses. A pure capitation model has the advantage from government's point of v1ew of putting a cap on total expenditures on behalf of Medicare recipients. It does not necessarily follow that the model requires a world of competing staff model HMOs, i.e., in the sense of prepai"d group practices with salaried physicians. The competing plans coula be a mix of IPAs, HMOs, or other organizations, such as private insurers, experimenting with gatekeeper models. Indeed, one major advantage of such a system is the flexibility it affords through decentralization. It allows Medicare to get out of the business of trying to design a pricing system that fits all markets 1n all situations. Capitation models relying on ccmpetition are usually run as a voucher system. The Medicare beneficiary would be given a voucher for a fixed amount whieh can be used only to pay the premium in a qualified plan. The ccmpet1t1on among plans 1s regulated; plans must provide at least the minimum set of services normally covered under Medicare. Competition among plans is expected to result in beneficiaries receiving a set of benefits valued at the premium amount. Because of economies of scale in delivery ana insurance provision, such a competitive model may not work well in less populated areas of the ccuntry. For such areas an applicable capitation model may be what is termea "regional capitation" (Burney et al., 1984). Under this concept one insurer/provider wculd receive the capitated amount to provide care for al 1 the beneficiaries in a given geographic area. Presumably, the contract woula be let througn competitive bidding and contract performance monitorea by Medicare. As with a voucher scheme, an advantage of this system is that S-4 

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it decentralizes the decision-making about how to price indiviaual services within the area. The regional insurer or provider could choose from a variety of schemes ranging from fee-for-service with utilization review to physician gatekeeper models. E0YXIY The difference between these two types of capitatea models brings to the forefront the important issue of equity among beneficiaries. Current payment patterns under Medicare's CPR system and under the PPS allow differential payments in different geographic areas of the country and especially between urban and rural areas. The rationale is presumably that input prices are different in different areas and that ranuneration should reflect these differences. The evidence suggests that this adjustment is very imperfect. The result is what sane would interpret as an implicit subsidy to the performance of surgery in urban areas. Furthermore, it is not obvious why these benefit payments should be indexed when the contribution rates (either the Part 8 premiums or the general revenue contributions to Part 8) do not depend directly on geographic location. The cost of living as well as practice costs are surely lower in rural areas, .though not fer all inputs. While it is true that wage rates and the rental cost cf floor space are lower in rural areas, it may well be that supplies and ether inputs are more expensive because of an inability to take account cf volume discounts and increased charges for transportation. Paying physicians less in these areas discourages physicians from locating there, which increases th~ time and travel costs of Meaicare beneficiaries 5-5 J'I. _,,, qEST COPY AVAILABIJ 

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in these areas. This equ1ty issue arises under any of the alternative methods for paying physicians under consideration. At this time it setlffls likely that any transition to a capitated system will be a gradual one. The issues and questions that arise with regard to performance of cataract surgery under capitation are the same issues and questions that arise in general with this form of reimbursement. A gradualist approach to the implementation of a capitation or voucher scnane 1s appropriate. Until questions about the stability and-viability <Price et al., 1984) are resolved, it is premature to move to full scale adoption. SYSTEM-WIPE yeesus SEL;CTIYE REFC8MS Thusfar the four alternatives have been discussed as system-wiae reforms.. It is possible, instead, to have a mixed or selective reform: l) a partial adoption of capitation within a general CPR framework, as we now have; 2) selective controls on partic~lar procedures: cataract sursery could be treated as a unique case; and 3) different areas of the country could experiment with different reimbursement systems. The current sys~em is actually a mixed system with selective controls. For example, reimbursement for facility use and supplies in freestanding certified ambulatory surgery cent&iS 1s handled differently from hospital outpatient reimbursement. And PROs are targeting specific procedures for review. Different states are experimenting with different reimbursement systems. Alt.,ough sane have argued that the complexity of the CPR physician reimbursement system is one of its major drawbacks (Jencks and Dobson, 1985), it may be the case that selective controls woulo actually reauce the complexity rather than increase it. There is a traaeoff: singl~ng out a 5-6 

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subset of procedures for a treatment under a more uniform fee scheaule or packaging scheme would be more complex in that it sets up a two-part system. On the other hand, it might substantially reduce complexity by removing. unjustified regional or intra-physician differentials. Considered as system-wide reforms, the general drawbacks of each of the proposed alternatives are fairly obvious. A modified CPR may reduce excessive physician ccmpensation, but the total savings from this are limited since physician payment ccmprises only about 20 percent of total costs. Thus, it does not deal well with the problem of overall system cost containment, and it seems unlikely to pranote the most effective and efficient treatment patterns. A fee scheaule has similar benefits and problems but with the additional limitation of requiring a bureaucracy to administer the price system. This is unlikely to improve efficiency in the 1 ong run. Implementing a broader packaging scheme system-wiae appears to have limited applicability for several reasons. For most types of illnesses it appears impossible to define the case or episode on a meaningful clinical basis that leaves cost variability manageable. It might be possible for a limited set of surgical prqcedures or DRGs that exhibit much less variability. However, this then raises the important issue of whom to pay. Bundling the physician and hospital payments under an MDDRG system would tend to align the interest of the physician and hospital in terms of limiting care, which might not be in the patient's best interest. The current system at least provide.s a safeguard by giving the physician and hospital aifferent incentives with respect to care for a given patient. With packaging, the incentive to over-proviae or provide unnecessary surgery would persist for both doctors and hospitals. 5-7 7) 

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In the case of outpatient surgery, such packaging might work better since there is less of an issue of limiting care through, for example, discharging or releasing the patient before they have recovered. A packaged payment for outpatient surgery would give the provider/physician a strong incentive to minimize costs. Packaging remains a form of fee-for-service reimbursement and thus may have incentives for nnecessary surgery or for an inappropriate assignment to 1np~tient versus outpatient. If it were medically appropriate for sane patients (the most seriously 111) to receive inpatient surgery, then the relative rewards for inpatient versus outpatient performance would have tc be considered. But if the. percentage of such cases 1s small, then 1t may not be too costly to guard against under-hospitalization through profess1onal liability mechanisms or over hospitalization through peer review or second opinions. IECHNQLCGICAL CHANGE, ANO COMPLEXITY The importance of good vision in everyday life makes the results of cataract surgery, especially with IOL implantation, seem almost miraculous. For the prospect of going from near blindness in sane cases to near 20/20 vision 1s sanething for which most individuals and their .families woulo be willing to sacrifice a great deal. Certainly, many would be willing and able to pay much more than the few thousand dollars that the procedure currently costs. The history of cataract surgery 1s replete with examples of fortuitous events and unexpected developments that have changea the nature of the technology. At one time, the AAO even took a stana against ICL insertion. In recent years there has been a dramatic tecnn~1ogica1 change with a movement. to pos'terior cnamber insertion from anterior insertion. I / 5-8 '.,/ 

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Although this shift has been aramatic--from only 20 percent posterior in 1982 to 78 percent in 1984, the fact that 22 percent of insertions remain anterior raises scme important questions. Although there is apparently a small percentage of patients for whom an anterior insertion is clinically preferred over a posterior insertion, the proportion may be far below 22 percent. The persistence of this rate of anterior insertion raises important questions about policies toward the adoption of new technologies. How is the reimbursement system to deal with apparently outmoded procedures? Should the rates have been adjusted to reflect the replacement of anterior by posterior insertion? It is clear that the complexity of medical technology can present serious problems for an administered, fee-for-service system. In the case of cataract surgery, this is refl~cted in the nonuniform procedural terminology used around the country. Substantial uncertainty surrounds so simple an is.sue as whether ophthalmologists charge for IOL insertion separately from cataract extraction. Charging practices evidently vary around the country. As another example, establisni1.,g fees for new techniques such as the various types of refractive keratoplasty can be a complex problem. Other types of technological change present similar problems. It is difficult to imagine significant improvements in effectiveness, given the current excellent results of IOL insertion and the low rates of complication., Nonetheless, 1 f new surgical techriiques or more costly, but effective, lenses are developed, most of the alternative payment methoas discussed in this paper will pose dilemmas. For example, suppose a new, mor& costly lens makes a dramatic improvement even over current lens results. Given the high volume of cataraC't procedures projectec to the ~1tST COPY AVAILABLE 

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future, such a development would represent a major increase in Maaicare expenditures. Indeed, this might even be large enough to make a ncticeable difference in the average cost of all beneficiaries. How are coverage decisions about such developments to be maae? It would se,em that the cho~ces lie sanewhere bet-.veen an option which req1Jires a coverage decision that gives sane weight to cost effectiveness and not just efficacy (Ruby et al., 1985) or a system wnich proviues a voucher tha1~ tne beneficiary can apply to whatever plan Cand coverage provisions) that he or she chooses. But even 1 n the 1 attar case, there would .see-n to be sane, necessity for Medicare to define the set of minimum benefits that must. be provided by capitated schemes. The problem of coverage determination for new technologies may defy a market solution. AGING Of IHE PQPULATION There seems little doubt that the demand for cataract surgery will canti nue to be strong for years to come. The el aerl y population ; s expecte.o to grow by 40 percent betiVeen 1980 and 2000 and another 45 percent by 2020 (S0eial Security Administration, 1981). The number o'f elaerly 1,erscns in each age category will increase over these years; but pernaps more 1mportantly 1n the near term, t.,e pf'oportion age 75 and over will grow even more dramatically. The increase in the incidence of cataracts witn age will accentuate the demand for the procedure. As yet, there is no rea!ion to expect medical breakthroughs th!t will either prevent the formati1Jn of cataracts or provide a nonsurgi,:al remedy. However, with rapio growth in our understanding of basic biological pnencmenon and organ transplantation, it is foolhardy to project too far into the future. s-10 

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GENERALIZABILITY TO OTHER PBQCEDURES Although this discussion has addressee some of the ge~eral incentives under different alternative methods of paying physicians, it is useful ~o consider the separate issue of how representative the likely impacts on cataract surgery are for either surgery in general or for broader definitions of medical -care. Catar"ct surger)' is one of the most common surgical procedures, but generalizability to other surgery is obviously 11mited. Defining surgery is not a simple matter. Past definitions have made distinctions with regard to general versus local anesthesia and the need for incision. At one time the use of an operating room would have sufficed as a definition, but the movement of surgery to outpatient facilities and physician offices limits this. From an:economic point of view, an important facet of surgery is the economic interest that the surgeon has in carrying out the procedure. One could imagine a system under which the pl"lysician who diagnosed and recommendeo treatment might not be allowed to proviae treatment because of the potential conflict of interest. But, of course, this potential conflict is not unique to surgery. Medical specialties such as nephrology face this issue in prescribing dialysis versus kianey transplantation for end-stage renal disease. Another important economic aspect of surgery has been the reliance upon the hospital as an input. Although both the medical and sur-gical special 1 sts use the hospital as a treatment setting for the1 r pat.i ents, the use of high-cost surgical facilities makes the hospital a more important input in the surgeon's proouction process. Analysts (such as Pauly, 1980) have noted the problems that separating the control of hospital inputs from the meaical staff creates. Physicians, especially under cost reimbursement., 

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have every incentive to use hospital facilities and personnel in place of their own time and office inputs. This would be one explanation for why many procedures that could technically be performed on an outpatient basis have long been performed on an inpatient basis. Payment incentives with regard to cataract surgery may be more generalizable to other types of outpatient surgery, rather than procedures that must definitely be performed on an inpatient basis. As suggested above, it may be possible and even desirable to package these outpatient surgical procedures as a type of outpatient DRG system. Including the physic1an payment is less of a problem than for inpatient DRGs where early discharge can be an issue. If Medicare were to develop an MOORG system for outpatier1t surgical procedures, there would still be issues of he~ to set the payment level and whan to pay. The fee for the package could be set under a fee scheaule for the nation, or it mignt even be possible to engage in more innovative pricing schemes based on competitive bidding or even patient rebates (as suggested by Hay, l983). It might be possible, for example,. to set a fixed fee level and allow patients to share 1n any savings from using physicians who charge less than that packaged fee level or pay more for more expensive surgeons. The general problem with such schemes is tliat they might give patients an incentive to over-utilize low quality care or to even fraudulently report usage of care 1n order to gain income. However, for surgery the potential for such abuses may be limitea. The extent of unnecessary surgery mi snt not differ much in practice from that under the current syst.em. In sum, even if grea~er packaging mignt be cesiraole for reimbursing cataract surgery, it is not necessarily so for other major surgical s-12 

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procedures. The aata presentea here on the cataract surgery and the aiscussion suggest that Congress and HCFA should look to the possibility of mixed, rather than system-wide reforms in the short run. The benefits of handling cataract surgery as a special case may outweigh the costs. Although one of the major problems with the current reimbursement system is its complexity, it 1s not obvious that special treatment or selective controls would always represent a net increase in complexity. For example, a system that packages physician payment with reimbursement under the certified ASC program would not represent a major increase in system complexity. It might even reduce complexity by eliminating the variation in physician payment levels across the country. If it turns out that a shift of hospital costs to outpatient care is undermining the cost savings of PPS, then the adoption of selective controls might result in considerable savings in the short run. However, greater packaging is probablynot a workable solution for dealing with other nonsurgical outpatient use. Given its importance in terms of costs to Medicare, cataract surgery wou4Q be a good candidate for a demonstration project on packaging. In any case, experiments on and attempts to implement voucher and capitation moaels should continue: They offer important lessons in market-generated price systems, and they can certainly coexist with centralized schemes. 5-13 r; I t...,,"' ;' 

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American Academy of Ophthalmology, Ophthalmology <Eye Physician ang Surgeon) Manpower Studies foe the United States. Roberto. Reinecke Ced.), October 1978. American Academy of Ophthalmology, "Medicare Peer Review Organizations," Testimony presented to the Senate Finance Committee, Subcommittee on Health, April 19, 1985. American Academy of Ophthalmology, Committee on Manpower and Planning, Amecjcan Academy of OphthaJmoJogy Manpower Studies, no date. American Medical Association, Physician Characteristics and Distribution in the u,s,-1ga2 egj.:t.1.Q.n, 1983. American Medical Assoc:at1on, Soc;joecongmic; Charactecjstjc:s of Medical Pcactjc:e 1984, Roger A. Reynolds and Robert L. Ohsfeldt (eds.>, 1984. Applied Management Sciences, W]ysjs of Distcjbytion and Cutgyt of Vision care Provictecs; B,w~ct on the Geographic Distribution of Vision care Pcoyjgers. Report to Bureau of Health Professions, Department of Health and Human Services C,ontract No. HRA-232-81-0017, Task No. l, May 20, 1983. Barraquer, J.I., "Keratomileusis and Keratcphakia in the Surgical. Correction of Aphakia," ~cact suc~ery and Its CompJ1catjgns, St. Louis, MO, pp. 199-220, 1981. Bigmedj ca] eusj ness In-tecnat1 onal, "Intraoc:u 1 ar Lenses," v III< 9/ lO >: 81, 90-92, May 28, 1985. Boon W., and Seymore, C .. Jr., "Outpatient Cataract and Intraocular Lens Surgery," JoucnaJ qf the National Medical Association 76<12):1201-1204, 1984. Bureau of Health Professions, Projections of Fbysi,1an Supply 10 toe u,s, Macsb 19as. 1985. Burney, I., Hickman, P., Paradise, J., et al., "Medicare Physician Payment, Part1 c1 pati on, and Reform," Heal th Affaj cs 3 < 4) : S-24, Winter l 984. Burstein P., and Cromwell, J., "Hela.tive Incomes and !~ates of Return for u.s. Physicians," JournaJ of Health Econcmics 4:63-78, 198S. Cavai,agh, H., Bodner 8., and Wilson, L., "Extended Wear Hydrogel Lenses," American Acaqemy of Qgbtbalmology 87:871-876, 1980. Congressional Budget Office, Letter from Rudolph Penner to Honorable John Heinz, July l, 1985. Oepartmen't of Health and Human Services, "Meaicare Program; Chan~es to tne Inpatient Prospective Payment System and Fiscal Year 1986 Rates; Proposeo Rule," June lO, 1985. 

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Dowling J., Jr., and Bahr, R., "A Survey of Current Cataract Surgical Techniques," American Journal of Qphtha] mo] ogy 99:35-39, January 1985. Dresch, S., "Original Wage Rates, Hours of Work, and Returns to Physician Training and Specialization," Health Care Financing Aaministration Contract No. 500-78-0054, no date. Eggers, P., "Trends in Medicare Reimbursement for End-Stage Renal Disease: 1974-1979," Health care financing Review 6<1>:31-37, Fall 1984. Enthoven, A., HeaJtb PJan -The OnJy PcactjcaJ SgJytion to the saacjng Cost gf Medical Care (Reading, MA, Addison-Wesley Publishing Company, Inc., 1980). "Epidemiology of Cataract, (editorial)" The Lancet, p. 1392, June 19, 1982. Glandon, G.L. and Shapiro, R.J., "Trends in Physicians' ~ncomes, Expenses and Fees. 1970-1979," Profile of Medical Practice. ~erican Meaical Association, pp. 39-50, 1980. Hay, J_. "An Incentive Reimbursement Plan for Meoicaid Home Health Care Services," Robert Wood Johnson Foundation Grant #9028, Project Proposal, Princeton, NJ, 1983. Health Care Financing Administration, Medicare Dicectory of Pceyai]ing Charges 1ga4, 1984. Hsiao, W., and Stason, W., "Toward Developing a Relative Value Scale for Medical and Surgical Services," Health Cace financing Review 1(2):283 8, Fa 11 l 97 9 Institute of Medicine of the National Academy of Sciences, Meaicace-Megicaid Reimbursement PoJicies. Committee Print 94-125 (Washington, DC), March l, 1976. Jencks, S., and Dobson, A., "Strategies for Reforming_Meaicare's Physician Payments. Physician Diagnosis-Related Groups and Other Approaches," Ibe New Englang Journal of Medicine, p. 1492, June 6, 1985. Kusserow, R.P., "Statement of Richard P. Kusserow, Inspector General, Department of Health and Human Services, Before Subcommittee on Health and Long-Term Care Select Committee on Aging," July 19, 1985 Liesegang, T., "Cataracts and Cataract Operations," Mayo CJinic Procee~ 59:556-567, 1984. LoGerfo, J., Efird, R., Diehr, P., et al., "Rates of Surgical Care in Prepaid Group Practices and the Inaepenoent Setting," Meaica) Care 17(1):1-7, January 1979. Mitchell, J., Calore, K., Cromwell, J., Freiman, M., and Hewes, H., "Creating DRG-Based Physician Reimbursement Schemes: A Conceptual anc.1 Empirical Analysis," Report to the Center for Health Economics qEST COPY AVAILABLE 

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Research, Health Care Financing Aaministration Grant No. 18-P-98387/lOl, October 1984. Nadler, 0., and Schwartz 8., "Cataract Surgery in the Uniteo States, 1968 -l976--A Descriptive Epioemiologic Study," Ophthalmology 87(1):10-18. Nat1onal Center for Health Statistics, DetajJeg Diagnoses and Surgical Pcoceduces toe Patients Discharged teem Short-stay Hospitals-Uniteg States, 1983, March 1985. Newhouse, J.; W 1111 ams, A., Bennett, 8., et a 1., "Where Have A 11 the Doctors Gone?" JgucnaJ of the American Medical A'\SQcjatjon 247(17> :2392, May 1 I 1982. Office of Inspector General, U.S. Department of Health and Human Services, Reyjew of Medicare Payments foe Assistant surgeon services Quc1og Cataract Sucgeey., Audit Control No. Ol-5200.l (Washington, D.C.), June 7, 1985. The Orkand Corporation, Cataract ang Aohakia Rela:t.e.LJeryices Unaer Medicare; Toga)' ang Tomoccow, American Acaa~,my of Ophthalmology, Washington, DC, November 20, 1981. Owens, A., "Ophtl'lalmologists: The Earnings Edge Gttts Smaller," ~legica] Es;gngnjc;s, February 21, 19!3. ?auly, M., ''What is Unnecessary Surgery," M1Jbank Mn.Q.daJ fund Qua,:tecJytHeaJtn and Society 57Cl).:95-ll7, Winter 1979. Pauly M.V., "Doctors and Their Workshops: Economic Mooels and Physician Behavior,'" University of Chicago Press, 1980. Price, J., Mays, J., and Gordon, R., "Staoility in the Federal Employees Heal th Benefits Program," JoycnaJ of HeaJ th ;concn~ 2(3) :207-223., Oecembe r l 983 Prospective Payment Assessment Commission, "Report and ~lecommenaati ons to the Secretary, U.S. Department of Hea 1th and Human Servi cas", Apr i 1 l, 1985. Reinharat, U., "A Framework for Deliberations on the Ccmpensation of Physicians," Testimony presented to the United States Senate Special Ccmmittee 0n Aging, Hearing on Physician Reimbursement, March 16, 1984. Ruby, G., Banta, H., Burns, A, "Medicare Coverage, Medicare Costs, and Medical Tecnnology," Journal of Health Politics, Policy ana Law lO<ll, Spring 1985. Sloan, F., "Lifetime Earnings and Physicians' Choice of Specialty," Inqyst,ciaJ anq Laboe BeJations Review 24:49, 1970. Social Security Administration, Office of the Actuary, "Actuary Stucy No~ as J u 1 y 1 sai. ,, / ,' .,,__-x t.~ ,1 ;"I,."''' ..... .,\ f l '. ; '~ f ,~ ... : 1, l..~ 1 ,,., l .\ Vi' .a.'' f 

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APPENDIX A ACKNCWLEDGMENTS A number of people deserve thanks for contributions to this analysis. We are grateful to the following individuals for providing us with information: James Aquavella, M.O. Ambulatory Surgery Center/Ophthalmologist Rochester, New York Th011as Keenan, M.O. Ophthal rnologi st Winchester, Virginia Stephanie Mensch .American Academy of Ophthalmology Walter Stark, M.O. Johns Hopkins Un1vers1ty Barry Stealy Office of the Inspector General ~EST GOPY AVAIUWI.E 

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APPENDIX B -ACRONYMS AND GLOSSARY OF TERMS AAO --American Academy of Ophthalmology AMA --American Medical Association AMS --Applied Management Sciences ASC --Ambulatory Surgical Center BHP --Bureau of Health Professions CBC --Congressional Budget Office CPR -Custanary, Prevailing, and Reasonable DRG --Diagnosis-Related Group ECCE E.xt.racapsular Cataract Extraction FDA --Food and Drug Administration FR --Federal Register FTE --Full Time Equivalent GMENAC --Graduate Medical Education National Advisory Committee HCFA -Health Care Financing Adminisration HOS --Hospital Discharge Survey HRS --Hospital Record Survey ICCE --Intracapsular Cataract Extraction IOL --Intraocular Lens LOS --Length-of-Stay NCHS --National Center for Health Statistics OR --Operating Roan OTA --Office of Technology Assessment PPS --Prospective Payment System PRO --Peer Review Organization ProPAC --Prospective Payment Assessment Commission YAG --Yytrium-Aluminum-Garnet Aphakia --The absence of the lens of the eye Cataract --Opacification of the lens or its (apsule sufficient to interfere with vision Extracapsular cataract extraction -Romoval of cataractous lens of eye from the capsule hold it -part or all of capsule is left intact in the eye Intracapsular cataract extraction --Simultaneous removai of cataractous lens of eye and the capsule that holds it in place Intraocular lens --A lens implanted in the eye to replace the natural lens renoved during cataract surgery