Time to Clean Up the Medicare Doctor Payment Mess

Robert Moffit /

Congressional Quarterly is reporting that the United States Senate is going to enact a one-month reprieve for Medicare physicians, saving them once again from a draconian reduction in Medicare payment.

This entire system is a mess. Under the existing Medicare payment formula (the Sustainable Growth Rate, or SGR) for doctors that the Senate and their House colleagues enacted in 1997, physician reimbursement is tied to the performance of the general economy. If in any given year Medicare physician payment outpaces the growth in the general economy, there is an automatic proportional reduction.

Routinely, Congress has blocked the annual payment reductions, but then, under the congressional formula, the payment reductions accumulate. Yet another flaw of the Patient Protection and Affordable Care Act is that it did not fix the physician payment problem. The result: This December, Medicare doctors will face a 23 percent cut in pay. A one-month extension of the reprieve would guarantee that the cuts next month would be even greater, requiring another congressional intervention.

No one on Capitol Hill, Republican or Democrat, wants the congressional formula to be operational. If Congress allowed a 23 percent cut to go into effect now, or a bigger payment cut to take effect later, it would certainly trigger a big—and bad—shakeup in the Medicare program, as more physicians would refuse to take Medicare patients, cut back on Medicare practice, or decide to take no more Medicare patients than they already have. It is not hard to imagine even more overcrowded hospital emergency rooms where senior and disabled citizens are desperately jostling with the uninsured and Medicaid patients to get medical treatments, even for non-urgent care. What a mess!

Congress should fix the Medicare payment system—but not add one dime to the deficit in doing it. It could do this by sequestering a portion of the projected $575 billion in Medicare savings they just enacted in the Patient Protection and Affordable Care Act to offset the additional costs—well over $200 billion in 10 years. Congress should also extend the fix for longer than one month and require that Congress enact a permanent fix to this problem during this temporary fix.

To permanently fix the problem, Congress should provide for a predictable and stable payment increase (perhaps based on inflation as measured by the consumer price index) but allow doctors to charge extra over and above the Medicare reimbursement levels. This would return physician payment practice to the standard that existed in Medicare prior to 1989.

Congress should also allow doctors and patients to go outside of the Medicare program and contract privately for Medicare services without statutory or regulatory obstacles. There was no statutory restriction on this practice until 1997, when the Balanced Budget Act provided for a bizarre statutory restriction on Medicare private contracting (Section 4507 of the Balanced Budget Act), plus the flawed Medicare physician payment update, which no Member of Congress wants to enforce.

Congress should admit that its Medicare administrative payment process is outdated. Through the Medicare bureaucracy, Congress sets the prices of over 7,000 medical procedures, slaps on a price control regime, and then threatens the imposition of a formula that has little to do with the real market conditions of supply and demand. Routinely, they overpay or underpay doctors and hospitals because of their system of central planning and price regulation. Liberal and conservative analysts alike agree that they can’t get the medical prices exactly right.

The right answer is to reform the Medicare program itself. A good place to start is the model suggested recently by the Bipartisan Task Force. Or, better yet, the more refined Medicare proposal recently presented by former Congressional Budget Office Director Alice Rivlin and Representative Paul Ryan: Replace the existing Medicare financing system with a premium support system broadly similar to that which exists in the Federal Employees Health Benefits Program (FEHBP). In the FEHBP, Congress doesn’t have to worry about anything like the Medicare RBRVS, DRGs, or the dreadful SGR. Physician payment is handled very nicely in the market. Better still, Congress doesn’t have to perpetually embarrass itself with its periodic Chinese fire drill to stave off Medicare payment crises.