Fix Medicare Physician Payment, But Fund It With Structural Reforms

Robert Moffit / January 17, 2014

Medicare physicians will soon face a 24 percent pay cut.  The statutory formula that updates Medicare physician payment, the Sustainable Growth Rate (SGR), requires it. The purpose of the formula is “sustainable growth”, meaning that Medicare physician payment is to track growth in the general economy, as measured by the Gross Domestic Product (GDP). But it doesn’t.

In truth, tying physician payment to changes in the general economy is conceptually flawed. There is no real connection between changes in the general economy, which could be affected by other sectors like energy or housing, and the supply and demand for medical services. So, not surprisingly, the SGR formula has yielded results that are as impractical as they are undesirable, and Congress has been thus unwilling to abide by the results of its own statutory creation. But continual Congressional intervention to stop the law from going into effect- a temporary “doc fix”- incurs cumulatively higher costs under current law.   It must be permanently fixed.

Traditional Offsets. Since 2003, Congress stopped  SGR cuts on 15 occasions. For example:

• In 2003,  Medicare physicians were faced with a 4.4 percent payment cut, and Congress responded by increasing physician payment by 1.4 percent.
• In 2009, the scheduled payment cut jumped to 21 percent, and Congress froze payment at existing levels.
• In 2011, the scheduled payment cut jumped again to 27.4 percent, and Congress again froze Medicare physician payment.

In 10 of those 15 occasions, Congress offset the costs of the temporary “doc fix” by enacting health care savings. In virtually all cases, these special savings were secured through the manipulation of administrative payments, tightening up Medicare price controls, or payment reductions for drugs, lab tests, Medicare Advantage, therapy services, radiology and various other items. Price controls, in particular, impose their own costs on both taxpayers and patients; they distort markets, create shortages, multiply inefficiencies in the Medicare program, and result in either overpayment or underpayment for medical services.

Paying for Reform.  Congressional leaders say they want to repeal the SGR entirely and replace it with a more rational Medicare physician payment program.  To accomplish this objective will incur additional Medicare costs, which must be offset.

Paying for a permanent fix is doable in various ways, such as freezing Medicare physician payment levels, while transitioning to a better system.  CBO now estimates that the ten year net cost of a freeze in physician payment (over the period 2014 to 2023) would amount to $116.5 billion, down from an earlier estimate of $139.1 billion. With the House Energy and Commerce SGR repeal bill, though, CBO estimates an additional cost of $175.5 billion over the same period.

The Right Policy. Congress should junk the old approach of paying for changes in provider payments by tightening up Medicare price controls, manipulating administrative payments, or essentially shifting costs from one part of the program to another.  Already, Medicare providers face $716 billion in Obamacare’s 10 year Medicare payment reductions, which the Medicare Actuary says will “jeopardize” seniors’ access to care.

The right approach is to make structural reforms that will offset SGR replacement costs. There are a variety of ways to do this. Some of the best options include combining Medicare Parts A (hospital payment)and B (physicians’ payment) with a uniform deductible, rationalizing  cost-sharing and Medi-gap coverage and giving seniors crucial protection from catastrophic costs that they don’t have today. That change alone, CBO estimates, would secure $114 billion in savings from 2014 to 2023. Other options that have a history of bipartisan support include a further reduction of taxpayer subsidies for wealthy retirees, and gradually raising Medicare’s eligibility age to 68, or at least 67, tracking the normal retirement age of Social Security.

Congress should repeal and replace the SGR as part of a broader strategic vision of reform (The Second Stage of Medicare Reform) based on expanded patient choice and intense provider competition. In the meantime, Medicare payment reform should bring relief to doctors trying to care for Medicare patients in an increasingly unfriendly environment of bureaucratic hassles and a cumbersome regulatory regime.