A Doc Fix That’s Not a Fix

Published February 25, 2014

National Review Online

A rare (during the Obama years) display of bipartisanship has broken out in health-care policy in recent weeks. The chairman and ranking members of the three leading health-care committees in Congress — Ways and Means and Energy and Commerce in the House, and Finance in the Senate — have agreed to a permanent replacement for the dysfunctional Medicare physician-payment system. This supposed good news would make it unnecessary for Congress to act every year, as it has since 2002, to head off the across-the-board cuts in physician fees that today’s irrational system (called the Sustainable Growth Rate, or SGR) compels. In other words, there would be no need for annual “doc fix” legislation if this bipartisan deal were to become law.

There’s certainly something to be said for that. The cuts in physician fees scheduled under current law, including the 25 percent reduction planned for January 2015, aren’t going to happen anyway — Congress isn’t going to allow seniors to experience the serious disruption in access to physician services that these cuts would set in motion. So wouldn’t it be better to face reality and replace the SGR system with something better, more stable, and permanent?

A fix has certainly been long in the making. It is sometimes said, erroneously, that today’s Medicare physician-fee schedule has its origins in the Balanced Budget Act of 1997. That’s not true. It started with legislation passed by a Democratic Congress in 1989 and signed into law by President George H. W. Bush.

The central idea of the original 1989 legislation was to reward physicians for the time, effort, training, and skill they put into the services they rendered to patients. The concern was that the old system, based on a cost-reimbursement structure, was rewarding high-volume specialties at the expense of primary and preventative care (sound familiar?). So Congress authorized the creation of the resource-based relative-value scale (RBRVS) to correct the imbalance. RBRVS was supposed to pay higher fees for services that required more-intensive and direct physician involvement (like seeing patients) and less for the high-volume procedures and tests that made money but required little real skill.

There was also a concern that Medicare couldn’t afford double-digit spending increases that were occurring every year, and so aggregate physician payments were placed under a Volume Performance Standard (VPS) that would impose across-the-board cuts on areas of physician reimbursement that were growing faster than allowable under a formula. The VPS was the precursor to today’s much despised SGR.

At the time this system was enacted in 1989, it was said that it would finally reverse the trend toward specialization in medicine and begin rewarding physicians for helping patients stay well and avoid costly complications. But instead of reversing the previous trends, the 1989 law exacerbated them. The imbalance in reimbursement levels between primary care and specialists has grown far worse in the last two decades because of changes in technology, but also because the only way doctors can increase revenue under the budget-control mechanisms has been through volume increases. By all accounts, therefore, this government-led payment-system experiment has been a complete failure and resulted in precisely the opposite of what was intended.

Naturally, then, the emerging bipartisan solution, embodied in the bipartisan agreement put together by the three major committees, is to replace it with another government-led payment system.

The buzzwords and acronyms are changing, of course. Instead of the RBRVS’s emphasis on physician involvement and primary care, the new focus is on value. The federal government is going to become the arbiter of what constitutes quality physician care and use metrics (supposedly developed in conjunction with physician groups) to rate how well doctors are measuring up. Physicians that perform well will get bonuses, and others will face penalties. This ensures that the federal government will be right in the middle of what constitutes appropriate physician care.

The government is also going to push physicians to enroll in Alternative Payment Models (APMs), which are going to pay for services on bases (yet to be fully specified) that are different from the fee-for-service model. Among other ideas, physicians might get paid based on a fixed fee per patient per month (with modifications based on circumstances requiring expensive care).

There is nothing inherently wrong with searching for better technocratic solutions to replace the last generation of failed technocratic solutions. What is misguided is the belief that the government is on the cusp of finding a great new technocratic solution that justifies pouring $100 billion or more into the effort. What is really driving the push for the bipartisan “fix” is not so much interest in a value-based vision but the infusion of significant new funding into physician payments over the coming years. The plan will eliminate the planned cuts in physician fees under the SGR and replace them with a guaranteed increase of 0.5 percent per year. The nation’s physicians, fed up with repeated fights over the annual cuts, are ready to pocket the increases and worry about fighting the government’s micromanagement of their practices later.

A better approach would abandon efforts to prop up Medicare’s outdated fee-for-service insurance system with significant new money and instead focus any new resources on reversing the deep cuts planned in the coming years for the Medicare Advantage (MA) program — the private insurance component of Medicare. Today, 27 percent of Medicare’s beneficiaries are enrolled in MA plans; about one out of two new program enrollees picks an MA plan for coverage.

These plans have total flexibility to devise alternative models for paying physicians without the need for new legislation from Congress. But instead of building on this model, the Obama administration wants to shrink it because MA plans threaten the government’s total control over the Medicare program.

Abandoning the expensive bipartisan plan from these committees doesn’t mean physicians have to face a large cut in their Medicare fees when the current patch expires at the end of March. As in the past, Congress should extend the temporary fix through all of 2014, paid for with small spending cuts from within Medicare. And when the end of 2014 approaches, the 2015 cut should be canceled too, again paid for with spending cuts.

What shouldn’t be pursued at this point is an expensive, permanent solution to the “doc fix” problem that’s really just more funding for an unreformed Medicare fee-for-service insurance model. Medicare is badly in need of reform, of course, but real reform means moving away from the government’s counterproductive micromanagement of provider payments, not construction of yet another new government payment system that will inevitably distort the marketplace in ways no one can now predict.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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