Ethics & Public Policy Center

An Unappealing ‘Doc Fix’

Published in National Review Online on March 25, 2015

It’s understandable why House Republican leaders are enthusiastic about the “doc fix” legislation that they cobbled together with Minority Leader Nancy Pelosi. The legislation will finally repeal for good the unworkable “sustainable growth rate” (SGR) mechanism that has caused so many legislative headaches for the past 15 years. And in the process of jettisoning the SGR, Republicans will also get Democratic support for some modest reforms in Medicare to partially offset the higher costs of added spending on physician services. So, from the Republican leadership’s perspective, they are saying good riddance to the despised SGR (and pleasing some doctors in the process), and getting Democrats to help them pass long-sought adjustments in Medicare.

So, isn’t that a two-fer?

In theory, yes, but a closer inspection of the details reveals the deal to be far less appealing in reality than in theory.

For starters, despite claims made by supporters of the emerging bill, it is highly unlikely that the legislation will reduce long-term Medicare spending. The Congressional Budget Office has not yet released its official cost estimate for the bill, but the bill’s authors have said that the added cost of the permanent SGR repeal is expected to be about $210 billion over the first decade, and to grow from there. Meanwhile, the offsets will save $65 billion over a decade. The cost-reducing provisions will cover more of the total cost of the bill in the second decade because they won’t be fully in effect during the first years of implementation. But, even so, as the Committee for a Responsible Federal Budget has noted, it is not plausible that the savings will overtake the new spending. This legislation will permanently increase Medicare’s total costs.

Proponents of the law counter that the new spending shouldn’t be counted in this assessment because the SGR-mandated spending cuts were never going to happen anyway, and thus undoing them is just matching law with reality. But that’s not really accurate. Yes, the SGR cuts would continue to be undone, year by year, but, as past practice has indicated, the added costs have mainly been offset with actual spending cuts. So undoing the SGR and not fully paying for it will increase Medicare spending above what would occur under current law and what would likely occur if the SGR were to be pushed back one year at a time.

Some Republicans are also enthusiastic about the “reforms” the bill would make to Medicare’s physician-payment system. They shouldn’t be. Today’s system is the result of three decades of technocratic good intentions gone terribly awry. In 1989, Congress adopted the “resource-based relative value scale” as the fundamental building block for determining physician fees. The new system was supposed to accurately assess how much time, effort, and training physicians put into taking care of a patient, and pay them accordingly. The result has been arbitrary and irrational payments that have heavily favored procedure-driven medicine over prevention and primary care.

Now we are told that the federal government is going to find a way to pay physicians based on quality and value, using all manner of new technocratic methods to do so. Data will be collected, expert panels convened, and regulations issued, and supposedly that will lead to a better system of physician payments.

But there’s no reason to believe the Medicare bureaucracy will be any better in the future than it has been in the past in setting physician fees. The real danger here is that the federal government will use the new authorities provided in the law to become the official arbiter of what constitutes “quality” in physician care. That’s a recipe for getting the exact opposite of what the law’s authors intend.

As to the “reforms” in Medicare, there’s far less there than one might hope. The first provision would only modestly adjust upward the premium payments for a small number of upper-income households. Elderly couples with incomes between $267,000 and $320,000 per year would see their Medicare premiums rise from 50 to 65 percent of the value of their Part B insurance. Couples with incomes above $320,000 but below $428,000 would see their premiums rise from 65 to 75 percent of the implicit total premium for their coverage.

What’s important to remember about these kinds of reforms is that the elderly are generally retired. They aren’t working, and many of them are living off their accumulated savings, which they draw on as needed. They don’t have substantial incomes, even if they have substantial assets. So income-tested premiums of the kind envisioned in the SGR deal affect very few people — only 2 percent of all Medicare beneficiaries. And the provision doesn’t become effective until 2018.

The other reform that Republicans are touting is the prohibition of Medigap coverage of the deductible for physician services and other outpatient care. This is a good reform, as it never made sense for Medigap plans to cover this deductible, which is very low to begin with ($147 in 2015). Prohibiting coverage of this deductible will modestly reduce costs because some seniors will think twice about using services when they have to pay the deductible themselves.

But this reform is also a modest adjustment that must be put in context. Even with this change, Medigap plans can fill in all the other cost-sharing included in Medicare’s benefit plan. Consequently, once the deductible is paid for (which is early in the year for most seniors), there will be very little incentive for Medicare enrollees to be cost-conscious in their use of services because all of their bills (with the exception of drugs) will be fully covered by insurance payments. Medicare needs far more sweeping reform of its benefit design and cost-sharing requirements than is contained in the SGR deal.

Congress has been dealing annually with “doc fix” legislation for more than a decade now, and many physicians are beyond impatient with the legislative process. That’s understandable. But in trying to appease them, it looks as if Congress is going to approve a plan that is more business as usual than its supporters would like to admit.

— 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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