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The real challenge is to insure availability of quality oriented care to all, no matter which reimbursement system is applied. Decreased cost, effected through pooling, coordination and optimum use of facilities, equipment and manpower, could just as readily be applied to the fee for service plan as it could to prepaid plans. This would have the added incentive of circumventing abuse by both consumers and providers, as well as insuring that consumers will for the most part, pay only for services rendered to them. Prepayment could then be applied only to long-term and catastrophic illness. This would adequately protect families from such events, and could be secured at a more reasonable rate. Such a system would very likely be more acceptable to all involved than is the present multifaceted and complicated health insurance and other prepaid plan systems, which too often succeed only in subsidizing the medical industry, the insurance companies and the prepaid groups, causing further inflation of health care costs.



OCTOBER 4, 1968. To: California Council for Health Plan Alternatives : members of the Council

and Advisory Committee Members; California Labor Federation : Thomas Pitts, Mike Peevey ; Central Labor Councils, Metropolitan Areas; Other union

officials and health care specialists concerned about the Medical Program, From : Bruce Poyer, member, Health Review and Program Council. Re: September 25th meeting of the Council.

(Note: Copies of this report are being sent to California Health Welfare Department officials, other HRPC members, CMA officials, and administrators of major negotiated health programs in California. Comments or suggestions (or criticisms) on any matter raised herein will be appreciated.)

The key agenda item for September 25, which was on the advance agenda, was: “Presentation of California Blue Shield method of determining reasonable charges for physicians' services on the basis of profiles."

Spokesmen for CBS, the fiscal intermediary, gave a thorough and detailed explanation of the entire, complex, profile business, and described their procedures in processing Medical claims, in keeping track of physicians' fees, and in reviewing questionable costs and practices.

The agenda item which was not described in advance, and which related only indirectly to the CBS appearance, was the California Medical Association's request, appearance, and argument for higher fees to be paid to doctors for services performed under Medical. In contrast to the detailed procedural description presented by CBS, the CMA spokesmen gave no data and developed no economic rationale to support their argument for higher fees. They relied primarily on the simple threat that continuation of present limits on fees would soon cause California physicians to be unwilling to participate in the MediCal program.

The present formula sets maximum physician fees at the 60th percentile of the level of physicians' charges in effect January 1, 1967. Physicians' charges are determined by procedures, as defined in the CMA Relative Value Studies, and by different areas of the state. Price control “at the 60th percentile" means that at a particular price for a particular procedure in a particular area, over 60% of all claims for that procedure in that area are at or below that price. The present maximum fees under Medical are presumably set at the 60th percentile of prices charged January 1, 1967.

*See Statement, p. 697.

1 There is some question about where the maximum fees are actually set. The following is from the legislative analysts report on Governor Reagan's budget request of last November, with particular reference to the appropriation requested for physicians' fees under the Medical program:

"It is difficult to understand the meaning of all of these assumed program limitations. We have never been able to obtain a clear explanation of the reported rollback of physicians fees to January 1, 1967, and the related application of the sixtieth percentile maximum fee. This is because the actual administration of the fee system has been by contract with California Physicians' Service. We do not believe that in fact physicians fees are being approved at the level of those fees which were charged by individual physicians at January 1, 1967, and if this is the case, then all assumptions as to increases in physicians charges should be reexamined to see how far physicians have in fact been able to increase fees since January 1, 1967, and what this means as to increases for the next few years."

The CMA proposal was to move this “percentile control” to the 90th percentile of current charges, rather than charges in effect January 1, 1967, and to redefine the interpretation of the percentile control point. Under the redefinition, for a procedure like an office visit or a tonsillectomy, the maximum fee Medical would pay for a particular area would be (a) that fee which is at the 90th percentile of all claims under California Blue Shield plans in that area for that procedure (this is the "area profile," as used previously); or (b) that fee which is at the 90th percentile of all fees charged by all the doctors in that area for that procedure (this is the “individual physicians' fee profile,” now to be introduced). Whichever fee is higher, (a) or (b), would prevail as the maximum fee that could be charged to a Medical patient. In no case would the maximum fee ever be below the 90th percentile on both profiles. In some cases, if the (a) profile established a price higher than the (b) profile, or vice versa, the actual control point could fall as high as the 98th percentile on both profiles.”

In discussion of the CMA proposal, the following points were raised :

(1) The State Department of Health and Welfare estimates the cost of the revision requested by CMA to be “in the neighborhood” of 5 to 7 million a year: This would be over and above the 5% increase in physicians' fees which was already budgeted in appropriations for this fiscal year. Questions raised at the September 25 meeting establi ned that the 5–7 million estimate is obviously


2 In a paper describing the mechanics of its full service program, California Blue Shield has itself given the most concise explanation of the development of its "profiles :"

"From an 'area profile of charges, with the 'top of the range' established by means of a conversion factor applicable to broad bands of service reflected in the Relative Value Studies, the evolution has been to 'procedure profiles by area. The latter establishes a range of charges for each procedure (service). Thus, a charge is screened against a procedure profile to establish that it is customary for that specific service in the geographic

"Now in its final state of development is the 'Individual Physician Charge History.' This is a refinement from an 'area profile by type of service to an individual physician's usual charge history for a specific procedure (service). Thus, a charge is screened, first, against the physician's charge history to determine that it is his usual charge, then it is screened against the area range of charges to verify that it is within the customary range of charges for a similar service, and, therefore, considered 'reasonable.'

In the same paper, CBS also gave a better illustration than it gave to the HRPC of how the two profiles would be put together in the determination of "Top of the Range :"

Example 1: Procedure 1234

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*Top of the Range. In Example 1, at $45—90.2 percent of the claims were included. However, only 85.3 per cent of the physicians were included. Therefore, to establish the range to include at least 90 per cent of physicians, the next charge of $50 was selected as the top of the range. This represented the charges of 93.4 per cent of the physicians and 94.3 per cent of the claims.

In Example 2, at $110-92.4 per cent of the physicians were included. However, only 86.5 per cent of the claims were included. Therefore, to establish the range of at least 90 per cent of the claims, the next charge of $120 was selected as the top of the range. This represented the charges of 98.2 per cent of the physicians and 98.0 per cent of the claims.

very loose. No data was submitted to support the estimate, nor did it appear that any reliable data was available.

The control point on physicians' fees was moved back from the 90th to the 60th percentile, in September, 1967. The Office of Health Care Services later (May, 1968, reestimates) determined that this reduced expenditures for physicians' services by 10 million in fiscal 1967-1968, and by a projected 12 million for fiscal 1968–1969. The financial impact of the proposed upward revision would be greater than the impact of the last downward revision, for two reasons: (a) there would no longer be a freeze on fees at their January 1, 1967 level, and fees are obviously much higher now; (b) the use of the individual profile system permits maximum fees beyond the old 90th percentile maximum level.

(2) California Blue Shield the fiscal intermediary, indicates that complete “top of the range” fee data, by areas, using both the individual physicians' profiles and the area profiles, is available only from January 1, 1968.

This means, in effect, that CBS either does not have, or will not disclose, any "base data” that can be used to determine what usual and customary fee charges were in the various areas, except data as of January 1, 1968. Nearly two years of inflationary impact of the MediCal and Medicare programs is therefore now to be built into the January 1, 1968 determination of “top of the range” (or 90th percentile plus). Probably, that will be the only data available as a bench mark for future determinations of how fast fee levels are rising.

The intent of the Medical law was and is that physicians' fee levels prevailing in various community areas were to determine what Medical paid for similar services to recipients. However, the "bench marks” on what is happening to fees in the various areas are continually pushed forward in time by the physicians who are the fiscal intermediaries. Thus, what is being measured is usual and customary community practice, plus all of the inflationary impact of the Medical and Medicare programs.

In other words, in my opinion, the program is being used to advance the fee levels that are considered to be "usual and customary,” which in turn results in advancing the program's fee levels. It is a very nice situation for any provider of service to be in, especially if the provider is also the fiscal intermediary, and is therefore in charge of all the data.

(3) The representatives of the medical profession quoted data to indicate an over-all increase in the "California Physican Fee Index” of about 4% a year for the past five years or so. They did not bother to produce any of the data they quoted. Their figures are probably from the Socio Economic Report of the Bureau of Research and Planning of the CMA. The March 1968 issue of this report shows the CMA physician fee index at 123.9, using June 1962 as base of 100.0. This would be a 4.34% increase per year over the 512 year period. However, the 542 year period used in this computation includes only 1 year and 9 months under Medical, and 3 years and 9 months when we did not have MediCal or Medicare. Use of this period spreads most of the inflationary impact of the government programs over a longer period of time prior to the advent of the programs.

The same CMA data, using December 1964 as base, shows a 14% increase in physicians' fees to December 1967, or 4.7% a year. This 3 year period is short to establish a trend, but it sets a base period 1 year and 3 months before the government programs started, and it covers 1 year and 9 months of their operation. It thus provides more realistic barometer of what is happening now.

U.S. Department of Labor data on physicians fees in San Francisco and Los Angeles (from the BLS Cost of Living determinations) was also quoted at the September 25th meeting. This data is regularly discredited by the CMA, as being statistically unreliable. However, in the 3 year period December 1964 December 1967, BLS shows virtually the same change in physicians' fees in Los Angeles and San Francisco, as that which is recorded in the CMA data. BLS shows a 4.9% increase per year over the 3 years. CMA shows a 4.7% change each year over the 3 year period.

The basic similarity of BLS data describing the 3 year period is important not only because CMA discredits their data, but even more because BLS shows an index of physicians' fees (for Los Angeles and San Francisco) for June, 1968. CMA is silent on that subject, at least in its public disclosures.

BLS shows a remarkable jump of 11% in physicians' fees in Los Angeles and San Francisco in the six month period December 1967 to June 1968. That single jump is big enough to bring the annual rate of change in the BLS series up to 7.8% over the total 31/2 year period, December 1964 (base) to June, 1968. CMA data, or that which is released publically, does not yet cover this period December 1967 to June, 1968. CMA representatives at the September 25 meeting refused to comment on the data reported by BLS, except to say they consider it statistically unreliable, and prefer to use their own data. Clearly, whether statistical reliability is involved or not, their own data is much better for their public relations. 3

(4) Of course, there is a great deal more data to indicate that physicians in California are not suffering too much from inadequate fees, and some of it was also quoted at the September 25 meeting. However, the data on fees and the fine points about its interpretation obscures a more important question : why should a "control point” on maximum fees be set at the top of the usual and customary range (or at the 90th percentile or higher), rather than at some mid point in the range (such as the 60th percentile or lower)? The chief CMA spokesman was asked to comment on the following quote which summarizes this whole issue (from the report of the Governor's Survey on Efficiency and Cost Control) :

“Many of the physicians who charge the higher fees practice in geographical areas where there are few Medi-Cal patients. Therefore, if some of the physicians, by reason of fees charged, find the program unacceptable and discontinue their services, it would not result in any major loss to the program. Further, the processing costs being incurred in handling elaims with fees above the normal range do not appear to be justifiable."

The CMA spokesman commented only that all doctors should participate, and that fee limits should not be set so that some doctors are "cut out of the program."

There was no information from the Department of Health Care Services as to whether all of Medical's needs for physicians could be met with maximum fees set at any particular percentile level. Presumably, the program has been getting all the physicians services required with the control point at the 60th percentile. According to CMA, the physicians with higher prices are performing the necessary services, billing at the higher levels, and then complaining when their claims are reduced by MediCal to the maximum levels which existed under the 60th percentile control. The doctors, of course, have complete freedom to refer the Medi-Cal patient (or have the administration refer him) to any physician who would accept the existing maximum. Therefore the relevant question really is: are there enough physicians charging the lower fees to meet al Medical needs?

I have no data to suggest an answer. CBS and CMA may have such data, but if so, they probably prefer not to discuss it. It does not appear to me that the Administration is even interested in raising the basic questions, let alone demanding the data to answer them. They appear to respond only to the threat that the doctors "may not choose to participate” in the program if fees are not adjusted upward, and they appear unwilling to ask: how many would not participate? at what control points? where do they practice? how many MediCal patients do they have? what are they charging? would their nonparticipation be a major loss to the program? or a net gain to the program?

3 The statistical reliability question is not actually an argument. CMA prices more physicians' procedures than BLS, although the BLS sample of procedures is a good one. All of CMA's pricing is done in California. while BLS prices in San Francisco and Los Angeles and in 54 other cities in the U.S. BLS does not publish separate physicians' fee indexes by separate cities, since its pricing procedure is designed to produce a national index. However, the data for San Francisco and Los Angeles is available on request.

The BLS pricing procedure relies primarily on trained field representatives who gather data in personal interviews (giving more statistical reliability). It is my understanding that the CMA procedure relies primarily on mail questionnaires (which have considerably less statistical reliability).

The medical care component in the BLS's Consumer Price Index (of which physician's fees are a part) was previously criticized for failing to measure quality improvements adequately. To correct this, a linking procedure was developed and is now used to factor out price increases based on a new or different quality. The linking procedure is now criticized as a factor tending to understate the actual amount of medical care price increases measured by the BLS.

Research on BLS pricing of medical care components (primarily by Anne Scitovsky) has also established that pricing individual items and services results in a lower index than pricing the total illness. The “total illness” approach takes account of a number of factors not considered by either CMA or BLS, including the introdnction of more complicated and costly types of treatment. (See Social Security Bulletin, July 1967, p. 15, for appropriate citations.)

The fine points about statistical procedure should not obscure the fact that CMA and BLS data show virtually the same price changes for the period December 1964 through December 1967, which is the only period that can be used for comparison. On the basis of this similarity, there is every reason to believe that the CMA index for June 1968, when it becomes publically available, will show an increase of much the same magnitude as that already shown by the BLS in its physician fee indexes for San Francisco and Los Angeles—an incredible 11% increase in fees in the six month period.


1. The HRPC recommended to the Health and Welfare Department that the January 1, 1967 freeze should be lifted, that the percentile control point should be moved from the 60th to the 90th, and that the individual physicians' fee history should be added as a criterion in the definition of the 90th percentile. The HRPC recommended moving right now to this new definition, but also recommended placing a 5% limit on the amount of fee increases that would occur under the new definition in each of the two years following its adoption. In this recommendation, the 5% is not a limit on the amount of fee increase that will occur immediately if the new definition is adopted. (I was the only non-governmental consumer or public representative present, and mine was the only dissenting vote. It should be noted that the Council did not have an adequate explanation of what its vote meant. It should also be noted that HRPC recommends only, and the Administration is not obliged to follow its recommendations.)

2. It is still impossible to tell how big an increase in physicians' fees would result if this recommendation is carried out. There was no indication of how many claims have been denied because they were higher than the 60th percentile of charges in effect January 1, 1967. The CMA argued that “a majority of all claims" now comes in higher than the control point allows, but they don't back up this assertion with any data whatever. If it is true, there obviously would be a big jump in fees immediately. And it will obviously be bigger than the 10–12 million a year previously estimated on the basis of last year's reduction in maximum fees permitted.

On the other hand, there is no way of knowing whether the January 1, 1967 "freeze” in fee levels was ever actually enforced (see footnote 1, which casts some doubt). If it was not enforced, then a good bit of what the doctors asked for is already being paid to them, and the recommendation of the HRPC would simply legitimize present practice. In that case, there would not be such a big jump immediately.

The Department of Health Care Services itself had no meaningful analysis of the impact of the increase, either in gross cost terms or on the question of the availablity of program services at different levels of controlled prices. Further, there was no analysis of what services might not be available to recipients as a result of a considerable increase in the amount of resources now to be allocated to physiicans for their particular services. (This is not surprising any more-the recipients and their health care problems always seem to be left out of HRPC deliberations.)

My guess is that the increase will be sizable, but the only thing I have to base this on is the hard push the CMA is apparently making to get the increase established. Their attitude at the September 25 meeting seemed to be that their program was going through regardless of the fact that relevant data was not supplied to support it, and regardless of what arguments might be made in the HRPC. In short, it has all the earmarks of the old steam roller. The best guess is that it will cost plenty, and that MediCal has only begun to pay the increase.

3. Whatever amounts are involved in additional Medical expenditures for physicians' fees, it is obvious that there will be an immediate impact on all other physicians fees under all other programs. Administrators of major negotiated plans should advise collective bargaining representatives accordingly. The law is written so that Medical should pay on the basis of usual and customary fee experience outside the Medical program. But if the HRPC recommendation is carried, collective bargaining representatives can expect to negotiate increased fees for the doctors on the basis of immediae repercussions from the Medical program-or face the unpalatable alternative of cutting back the benefit levels of their negotiated programs.

It would be extremely useful if organized labor, as the largest consumer representative in the state, could supply organized, consistent, and comprehensive data on the coverage, costs, and utilization of their programs, to throw light on the many obscurities of the Medical program. I believe that if anyone but the doctors' own oranization now handled the responsibility of fiscal intermediary for the Medical program (including the state of California), there would be much more data availahle on sensitive questions like doctors' fees. and there would be much less possibility of conflict of interest in the gathering, handling, reporting, and analyzing of all health care data involved in the MediCal program.

Is it possible. even at this late date, to introduce some coordination in the kinds of data handling procedures used in the administration of organized

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