Changing the Doctor Payment Scheme

The Obama health reform plan, embodied most clearly in a bill now before the Senate, rests on a fiscal deception when it comes to the way Medicare pays America's doctors.

Right now, Medicare pays fixed fees based on a formula that assigns a certain number of work "units" to each of Medicare's 7,500 billable doctor services. These values derive largely from the "intensity" of the work doctors perform, so seemingly more demanding procedures like surgeries are paid much better than routine, primary care counseling.

Under this formula, annual increases in Medicare's aggregate spending on doctors must stay within defined targets that are pegged to overall inflation rates. Otherwise, mandatory across-the-board cuts kick in. The actual costs always rise much faster. So Congress simply papers over the shortfall by appropriating additional money and forestalling the cuts, but causing future shortfalls to grow much larger.

Medicare is so enmeshed in the practice of medicine that it seems the only way to get a handle on costs is for the agency to ensconce itself still further.

The political future of the Obama health care bill rests on the idea that it won't increase the deficit, already at a whopping $1.4 trillion this year. It's a fiscal promise that turns on two unlikely assumptions when it comes to this flawed doctor payment scheme:

First, that Congress will stop papering over these mandatory cuts in doctor fees by finally implementing deep and across-the-board reductions in what Medicare pays its participating doctors. Yet dinging doctors by a proposed 20% cut in their pay is politically impossible.

Second, Obamacare assumes that Medicare will also be able to re-engineer the way that physicians practice medicine to make their medical practices less costly in the first place. Yet the unpopular ways Medicare plans to manage medical practice to less costly outcomes may be as unlikely as the sweeping pay cuts.

The Senate Finance Committee proposal starts by redistributing money toward primary care doctors, but turns on another dubious political premise--that our ample supply of specialists is creating its own excessive demand for their costlier services. More medical care is driven by medical specialists because the treatments themselves have become more intricate. But starting in 2012, under the health care reform plan drafted by the Senate Finance Committee and endorsed by President Obama, doctors will be penalized with a 5% pay cut if their "aggregated" use of resources in caring for patients is higher than peer physicians. This discourages specialist "referrals" for consults on tough medical issues.

Doctors will also be encouraged to consolidate into larger groups or join staff models or sell their practices to hospitals. The political assumption here is that medical care, and its costs, will be easier to regulate by a remote Medicare agency once doctors become part of larger organizations. Under the Obama plan, if these larger groups are able to save Medicare money--presumably by economizing on care and practicing more efficiently--then these large medical groups will be able to share in some of the savings.

Medicare is so enmeshed in the practice of medicine that it seems the only way to get a handle on costs is for the agency to ensconce itself still further. But if legislators were designing Medicare today, there's a lot we would do differently, and still can.

We'd probably want to start by first providing the protection of catastrophic coverage with caps on out-of-pocket spending exposure that rose with income. Right now however, Medicare--unbelievably--still doesn't have a catastrophic cap on out-of-pocket expenses. In other words, seniors' costs rise along with their medical expenses, even for major illnesses. This is no way to design a modern medical insurance system.

If we had this essential security for all elderly Americans, this foundation of necessary coverage could be coupled to a truly competitive market for separately contracted, supplemental insurance policies of various types. Seniors could use this coverage to pay for more routine outpatient expenses. Nine out of 10 seniors currently buy some kind of coverage that's supplemental to Medicare to pay for co-pays and uncovered benefits. It's a reminder that the program already falls short as a comprehensive benefit.

As we transition to supplemental policies, there would need to be some continuation of coverage for routine physician services through the traditional Medicare program. But a broader selection of more extensive supplemental policies could cover a wider swath of routine medical services, as well as a growing list of newly launched treatments that should become part of a quality benefits package. In other words, these supplemental policies could cover the innovative part of health care. This would start taking the federal Medicare agency out of the business of evaluating the individual merit of emerging technologies.

Meanwhile, the competition between separately run plans would establish prices for medical services through market principles rather than a formulaic scheme hatched in Washington. A bipartisan Medicare reform commission proposed some similar ideas in 1999.

Under the supplemental policies, though, patients wouldn't be left on their own. They would get a defined contribution of money, based on income levels, to buy policies that in turn would be required to cover a range of basic benefits and operate within the same basic ground rules to compete for a similar amount of taxpayer subsidies. Seniors would get access to information about the costs, quality, and outcomes of competing services so they can exercise real choice and control over medical care and its prices.

Medicare's fiscal future holds two grim alternatives. More micromanaging of medical care from top-down controls set in Washington to cut costs. Or outright insolvency, with some combination of crushing tax burdens and arbitrary spending cuts to try and stave it off.

We can alter this trajectory. It starts with changing the doctor payment scheme by restoring a competitive market to how we pay for routine medical services. Patients must call more of the shots on their medical treatments, and the financial value they place on these services.

Scott Gottlieb, M.D., is a resident fellow at AEI.

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