Medicare's Failed Physician Payment Policy

Medicare has been paying your doctor too much, and it wants its money back. To make up for years of high payments, Medicare fees are scheduled to drop 27.4 percent in January. Fortunately, that will not happen. A payment cut that large would drive physicians out of Medicare just when millions of baby boomers are turning 65. Unfortunately, Congress will not fix the real problem that drives up Medicare spending and threatens our fiscal future.

Republicans and Democrats cannot agree on much these days, but they agree that a fee cut as large as this is unreasonable. Most policymakers would like to scrap the "sustainable growth rate" (SGR) formula that determines how much Medicare's payments are supposed to be reduced. Their problem is the budget. You cannot eliminate a cost-reducing policy in the current political climate without finding new policies to offset the cost. That's true even when the policy you are eliminating never actually results in any savings to the government.

Here's how it works. The SGR formula is designed to keep Medicare's spending for physician services from growing faster than the economy, measured on a per capita basis. In 2002, physician spending exceeded the target rate of growth and fees were cut 4.8 percent - but only because Congress could not reach agreement on a fix. Since then, Congress has overridden the SGR cut, usually with a modest increase in rates. The overrides have accumulated, which is why the January cut has grown to nearly 30 percent.

This process of putting off the SGR cut has played out every year. The 4.4 percent reduction scheduled for 2003 was converted to a 1.4 percent increase. The 21.3 percent reduction for 2010 was replaced by no change in physician fees for the first half of the year and a 2.2 percent increase in fees for the second half. As a result, Medicare has spent hundreds of billions more than would have been spent without congressional intervention.

The fact is that we will never be able to cut Medicare spending using the SGR formula. By now the cuts are too big to implement, and they will only grow larger in future years.

Rational policy would stop this charade. Congress has repeatedly granted relief from the SGR for one year or less to minimize the amount of the budget offset needed to keep the policy budget neutral. But enacting a "fix" one year at a time only appears to limit the budget impact. Over a decade, the total amount of extra spending is the same whether the payment rate in increased a year at a time or all at once.

Washington policy, at least in this instance, is stubbornly irrational. According to CBO, a one-year fix is scored as costing $22 billion over the next decade. Permanently fixing Medicare payment rates at current levels costs $298 billion. Congress will act, but only to put off the problem for another year or two.

That will only treat the symptoms, not the underlying cause of Medicare's physician payment problem. The sustainable growth rate is merely the tip of the policy iceberg. If we abolished the SGR today and did nothing else, fee-for-service payment incentives would continue to promote rapid spending growth, high-value primary care services would remain under-compensated, and the barriers to more efficient health care delivery would remain.

The SGR formula is an attempt to apply the brakes on the use of physician services after the fee-for-service incentives have stepped on the gas. It would be more effective to restructure the incentives in the first place rather than trying to take back money that was already spent.

We need a new approach to Medicare physician payment that corrects the perverse incentives of the current system. There are plenty of ideas, but none of them are ready for prime time. Accountable care organizations touted in the President's health reform law, medical homes, and more comprehensive payment models are all very attractive in concept. However, these are not new ideas, and it will take time and effort to see them come to fruition.

The SGR problem cannot wait that long. But we can buy the time needed to develop better policies.

The Medicare Payment Advisory Commission (MedPAC) has recommended replacing the SGR with a series of other policies that could slow the growth of Medicare spending while a new physician payment system is being developed.  Under that proposal, the $300 billion cost of repealing the SGR would be shared by physicians, other providers, and beneficiaries. Not surprisingly, anyone who could lose money is opposed.

The specifics of the proposal could be changed, but the principles behind it are fundamental. MedPAC's recommendation spreads the cost of repealing the SGR among all the actors in the Medicare program. It recognizes that slowing the growth of physician spending alone will not solve Medicare's fiscal problem. It provides needed relief from the pressures of a failed cost control measure and allows us to focus our energies on developing a payment system that works.

Congress will not take on serious Medicare reform until after the 2012 elections. Short of a fiscal miracle, Congress will not be able to avoid serious debate early in the next presidential term about Medicare's failed physician payment policy.