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Executive Summary #1882 on Health Care

October 5, 2005

Executive Summary: Pay for Performance or Compliance? A Second Opinion on Medicare Reimbursement

By and

Nothing in this title shall be construed to authorize any Federal officer or employee to exercise any super­vision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services; or to exercise any supervision or control over the administration or operation of any such insti­tution, agency, or person.

-Social Security Act, Sec. 1801, Title XVIII

There is good news and bad news on Medicare reimbursement. The good news is that Members of Congress are unhappy with the Medicare physician payment program that they created. It is a complex system of administered pricing and price controls, governed by elaborate statutory formulas and char­acterized by mind-numbing regulatory microman­agement. In sharp contrast to reimbursement for professional services in other economic sectors, Medicare providers are not paid according to their skill levels, their innovative treatments, the quality of the care delivered to individual Medicare patients, or the specific benefits provided to patients. Moreover, under current government formulas, they can look forward to future reductions in Medicare reimburse­ment even though they are expected to treat a dra­matically larger Medicare population.

The bad news is that, instead of enacting real reform, Congress is preparing not only to keep Medicare's rigid system of price controls and central planning, but also to add another layer of regulatory control over physician behavior. Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Max Baucus (D-MT) are sponsor­ing the Medicare Value Purchasing Act of 2005 (S. 1356), which would implement "pay for perfor­mance" in the Medicare program by tying physician payment to compliance with government-defined medical guidelines. Representative Nancy Johnson (R-CT) has introduced a similar bill in the House. The approach is well intentioned, but more central planning will only intensify the Medicare reim­bursement problem, not ameliorate it.

A Misguided Approach. The proposed approach is a compliance-based system, which would:

  • Dump patients into a system of top-down, "cookbook" medicine that is incompatible with high professional standards of patient care;
  • Spawn an increasing number of Medicare rules, regulations, and guidelines, further under­cutting the physician's professional autonomy and integrity, as well as patient choice and access to care;
  • Undermine the more desirable goal of high quality, which requires personalized care;
  • Retard medical innovation and introduce unproductive gaming by doctors to secure higher Medicare reimbursement; and
  • Further weaken the traditional doctor-patient relationship.

What Congress Should Do. Congress should revisit Medicare reimbursement within the context of comprehensive Medicare reform, transforming Medicare into a system of "premium support" that resembles the Federal Employees Health Benefits Program (FEHBP), as originally recommended in 1999 by the majority of the National Bipartisan Commission on the Future of Medicare. With such a comprehensive reform, the current irrational national system of administrative pricing, price controls, perverse incentives, and regulatory over­kill would simply disappear.

Short of comprehensive Medicare reform, Con­gress should fix what is broken, not make it worse. Instead of responding to the inefficiencies of central planning by instituting even more intrusive forms of central planning, Congress should move Medi­care reimbursement in the opposite direction by removing barriers to a freely functioning, con­sumer-driven health care market for medical ser­vices. The key driver of value in a free market is competition to meet consumer demand. Consum­ers must have access to full information about ser­vices and must be free to choose those services from doctors of their choice. Doctors must be free to adjust the prices of the services that they offer.

To create a market that improves quality and value within the Medicare system, Congress should take the following actions:

  • Reject pay-for-performance reimbursement proposals.
  • Jettison the Sustainable Growth Rate (SGR) and the Medicare fee schedule and substitute annual physician payment updates and Med­PAC adjustments.
  • Remove Medicare restrictions on balance bill­ing and private contracting.
  • Require price transparency of Medicare-reim­bursed services.
  • Encourage private-sector development of qual­ity information.

Conclusion. The current effort to change the payment system is well intentioned. Moreover, the rhetoric of "quality-based purchasing" advocates, including a reliance on evidence-based medicine, best practices, and pay for performance as methods to improve health care quality, is appealing. In real­ity, however, they would constitute a reversal of the letter and spirit of the original Medicare law, which prohibited government interference in the practice of medicine, by further bureaucratizing health care.

Rather than follow this course of top-down micromanagement and artificial competition, Con­gress should base Medicare reimbursement reform on the free-market principles of price transparency, private contracting, and consumer choice, thus removing barriers to real competition and promot­ing high-quality and high-value patient-centered health care.

Richard Dolinar, M.D., is a Senior Fellow in Health Care Policy at the Heartland Institute, and S. Luke Lein­inger is a former Health Policy Fellow in the Center for Health Policy Studies at The Heritage Foundation.

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