Under existing congressional formulas, Medicare payment rates
for the services that physicians provide to Medicare beneficiaries
will be reduced by 10 percent in July of this year. Instead of
reforming this broken payment system, Congress will doubtless
resort to another short-term fix, repeating the annual
congressional fire drill to make sure that its own Medicare pricing
system, featuring complex fee schedules and price controls, does
not actually go into effect and wreak havoc on doctors and undercut
access to care among Medicare patients.
Medicare doctors and patients will not be spared this absurd
ritual until Congress replaces Medicare's existing physicians'
payment system with a more rational, market-based system in which
key financial decisions are made by Medicare patients. It is
unlikely that Congress will undertake the program's much-needed
restructuring this year, let alone before the scheduled June 2008
fee cuts. In response to the funding warning issued by the Medicare
trustees, Congress has once again done nothing, even though the
taxpayers have been saddled with another $2 trillion of Medicare
debt since last year's trustees report. Congress will have missed yet
another opportunity to begin the kind of patient-centered reform
that would help to bring long-term stability to Medicare.
Ever since Medicare's inception in 1966, Congress has struggled
with the problem of how to pay for the escalating cost of
ever-improving medical services for America's seniors. Congress has
tried a number of fixes over the past four decades, and all have been
unsuccessful. The reason? By relying on a system of administered
pricing and spending targets, congressional policy is based on the
tacit assumption that government officials, rather than patients
and their physicians, should decide the value of health care
services. The current Medicare payment system is financially
unsustainable, threatens Medicare patients' access to care, and
adds to uncertainties about the adequacy of the future physician
Putting Off the Problem
For doctors, Medicare payment updates are governed by a formula
called the Sustainable Growth Rate (SGR). Congress created the
current methodology to adjust the payment schedule for services
provided to beneficiaries by a factor that reflects cumulative
spending relative to changes in the nation's gross domestic
product per capita.
Each year since 2002, the SGR has called for negative
updates to the fee schedule, and Congress has voted to defer the
fee cuts without reforming the system, adding to the problem. Most
recently, in December of 2007, Congress prevented mandated cuts,
this time for only six months, and the issue of how Medicare will
pay for physician services is again before Congress.
Advances in medical technology, not increases in the fees that
doctors charge patients, are the main drivers of the rise in
Medicare spending. Spending on physician services, such as
evaluation and management of common illnesses and even surgical
procedures, has remained relatively flat for several years. By
basing payment updates on a global spending target, the current
system penalizes Medicare providers and their patients for spending
that is beyond their control.
Although Congress has acted each year since 2002 to avert the
scheduled negative updates to the physician fee schedule, the SGR
formula mandates that payment for services provided to Medicare
beneficiaries be cut by as much as 35 percent to 40 percent by
2016. This will force a majority of physicians to
reduce the number of Medicare patients they treat and will inhibit
investment in health information technology and other quality
improvement measures, according to recent surveys. In addition, the
current system does not reward physicians who provide
better-quality, more efficient services.
The Challenge to Change
Congress should take this opportunity to avoid seriously
undermining access to care for seniors in the short term and should
begin to ensure the long-term stability of the Medicare program by
introducing concrete measures that are centered on restoring
financial control to patients. Specifically, Congress should:
- Prevent the scheduled fee cuts. Allowing the
scheduled fee cuts will result in a significant reduction in access
to health care for America's seniors and therefore is not an
option. In addition to the threat of significant cuts in Medicare
payments, physicians face mounting practice costs and steep payment
decreases from private insurers.
Medicare beneficiaries have already begun to report difficulty in
scheduling timely appointments, especially with primary care
providers, and if the current cuts go into effect, this problem
will be greatly exacerbated. Congress should replace the scheduled
cuts with a 1.8 percent increase for the next 18 months, both to
offset the increase in medical practice costs and to allow Congress
time to initiate real reform of the Medicare payment system.
- Repeal the SGR. MedPAC, the American Medical
Association, medical specialty organizations, and most prominent
health policy analysts have been calling for repeal of the SGR for
a number of years. At the very least, given the legislative
reluctance to abandon administrative pricing and spending targets
completely, and given the need to restrain the unsustainable future
cost of Medicare, Congress should replace the SGR with a more
stable measure and allow physicians to balance-bill for their
The measure that replaces the SGR as the standard for payment
updates should be stable and predictable. The best approach is to
update the physician payment schedule based on a more conscious
long-term budget for Medicare together with an annual market survey
by MedPAC of the market costs of providing medical services. Such a
survey would offer a measurement of relevant costs in the medical
market. Medicare payment rates could then more accurately reflect
the pre-established rate of return to physicians necessary to
achieve an acceptable level of availability and quality of services
within the desired Medicare budget. Because it is an annual survey,
it would also be flexible, allowing for shifts in relative costs
and prices, technologies, and specialties and practices, some of
which would be influenced over time by the payment rates
Such a regularly updated payment schedule is far preferable to a
rigid SGR or other schedule based on past practices and updated
either on an ad hoc basis or on some index such as the
Consumer Price Index that fails to reflect current changes in the
- Promote self-sufficiency and accountability among
doctors in traditional Medicare. Congress should remove
restrictions on balance-billing. Doctors should be able to
determine their own success based on their performance, not on
government pricing decisions. In traditional Medicare,
quality-improvement efforts tend to be disaggregated and often
measure processes during an episode of care. Although these
measures may provide feedback to help physicians improve care,
patients are more concerned about the outcome following an
interaction with the health care system.
For traditional Medicare, Congress should increase support for
projects that help the medical profession develop a coordinated,
outcomes-based quality measurement and improvement system that will
collect and report data on health outcomes, coordination of care,
use of Health Information Technology (HIT), patient satisfaction,
and spending, allowing a more transparent, provider-specific
analysis of the value of services.
- Start moving to a new patient-centered, consumer-driven
system based on a defined contribution in Medicare. New
Medicare beneficiaries should have the option of receiving a
defined contribution that can be used to purchase the coverage plan
that they feel is most appropriate to their situation, similar to
the option Members of Congress and other federal employees enjoy in
the Federal Employees Health Benefits Program (FEHBP). This would
eliminate the need for the centralized price administration that
governs Medicare today and give beneficiaries control of their
health care resources, shifting the decision over which plans and
benefits will be covered from government to the individual.
It also would promote competition among plans as well as
providers. Informed patients, along with their physicians, are
better situated to decide the value of coverage and services
according to their own individual and clinical situations. If
patients are willing to pay for discretionary services or for a
doctor or medical specialist who has been shown to have better
outcomes, they should be able to do so.
Unless Congress intervenes, Medicare payments for physician
services will be cut by 10 percent in July of this year. Congress
needs to prevent these cuts in order to avoid jeopardizing access
to care for America's seniors.
Major reform of the Medicare payment system that is centered on
the patient can no longer be postponed. This reform should begin by
replacing the SGR with a more rational methodology. At the same
time, Medicare needs to start moving to a system that gives
beneficiaries a defined contribution, with the option of ownership
and control of their health care resources. Such a reform would
give providers self-sufficiency while insisting on greater
The sooner Congress starts this process, the easier it will be
for Medicare beneficiaries, taxpayers, and Congress itself.
John S. O'Shea, M.D., is a practicing physician and a former
Health Policy Fellow at The Heritage Foundation.
Greg D'Angelo and Robert E. Moffit, Ph.D., "Congress Must Not
Ignore the Medicare Trustees' Warning," Heritage Foundation
WebMemo No. 1869, March 27, 2008, at http://www.heritage.org/research/healthcare/wm1869.cfm.
a detailed discussion of the evolution of the Medicare Physician
Payment System, see John S. O'Shea, "The Urgent Need to Reform
Medicare's Physician Payment System," Heritage Foundation
Backgrounder No. 1986, December 5, 2006, at http://www.heritage.org/Research/HealthCare/bg1986.cfm.
B. Marron, Congressional Budget Office, "Medicare's Physician
Payment Rates and the Sustainable Growth Rate," testimony before
the Subcommittee on Health, Committee on Energy and Commerce, U.S.
House of Representatives, July 25, 2006.
M. Hackbarth, Medicare Advisory Commission, "Report to the
Congress: Medicare Payment Policy," testimony before the
Subcommittee on Health, Committee on Ways and Means, U.S. House of
Representatives, March 11, 2008.