Junk the Medicare Physician Payment Formula

Robert Moffit / December 01, 2011

In January 2012, Medicare physicians face a 27.4 percent cut in their payment for treating senior and disabled citizens.

Congress, as it has routinely since 2003, is feverishly preparing legislation to stop its own goofy Medicare payment formula from going into effect. If they don’t succeed this year, seniors can be assured of severe problems accessing physician care.

The reason Congress goes through this silly routine almost every year is that it is unable or unwilling to make serious changes in the Medicare program. Today, Medicare payment for doctors is determined by a complex fee system, the Resource-Based Relative Value Scale (RBRVS), in which payment is tied to a social-science measurement of doctors’ estimated time, energy, and resources in providing a medical service.

While the Reagan Administration (naturally) opposed RBRVS, its advocates sold it (incredibly) to the Bush Administration and Congress in 1989 as a “scientific” way to pay doctors. So the government sets the fees for over 7,000 medical services, and that payment is further restricted by price controls. Since 1989, doctors cannot legally charge Medicare patients more than government officials say.

On top of this bureaucratic monstrosity, Congress enacted in its 1997 Balanced Budget Act a special formula for updating the Medicare physician payment: the Sustainable Growth Rate (SGR) formula. The idea was to ensure that Medicare physician spending does not exceed the growth in the economy. It’s complex, but basically if physician payments are less than economic growth in any given year, then physician payments would automatically increase the following year. If physician payments exceed the growth in any given year, they are automatically reduced the following year.

Since 2003, Congress has routinely stopped the doctors’ payment cuts from going into effect. But delays have a cumulative effect and result in even deeper cuts and higher costs the following year. CBO has recently estimated that an update, based on the standard Medicare Economic Index, would amount to a 10-year cost of $352.7 billion. For that reason alone, Congress should permanently fix or repeal the SGR.

Urgent Action

In the short term, as Congress prepares to yet again stop the imminent cuts from going into effect, it should pursue the following policy changes:

• Offset any costs associated with this “fix” with dollar-for-dollar spending cuts, including delaying upcoming Obamacare spending provisions;
• Eliminate restrictions on physician balanced billing, enabling doctors to charge more than the capped Medicare amount;
• Require physicians to disclose their fees for their medical services beforehand, making price transparency the legal precondition for the balanced billing of Medicare patients; and
• Authorize the Medicare Payment Advisory Commission, the panel advising Congress on payment issues, to make additional recommendations in paying for medical services in special cases, based on market surveys, so Congress could enact them on an expedited basis.

The Right Policy

The right policy is to transition Medicare into a premium-support system within the next five years and junk the SGR altogether. Traditional Medicare would compete with other health plans, and the newly created Centers for Medicare and Medicaid Innovation could devise a new physician fee schedule for doctors who contract with the traditional Medicare plan. That fee schedule would reflect its premiums in a competitive market.

The routine alternative is more of the same insanity. Putting off real change incurs bigger risks and bigger costs. Doctors are trying to serve Medicare patients while coping with Medicare’s lower pay and the hassles of a cumbersome and oppressive regulatory regime. And the future for doctors looks even worse under Obamacare.