Doctors, Patients and the New Medicare Provisions

Testimony Health Care Reform

Doctors, Patients and the New Medicare Provisions

September 17, 2010 14 min read
Robert E. Moffit
Senior Research Fellow, Center for Health and Welfare Policy
Moffit specializes in health care and entitlement programs, especially Medicare.

Statement for the Forum to Examine the Implementation of theHealth Care Law
United States Senate

September 23, 2010

My name is Robert E. Moffit. I am the Senior Fellow in Domestic and Economic Policy Studies at The Heritage Foundation. The views I express in this testimony are my own, and should not be construed as representing any official position of The Heritage Foundation.

We are in the early stages of an eight-year implementation of the Patient Protection and Affordable Care Act (PPACA), the most consequential social legislation of our generation. Because this law directly affects literally every American citizen through the unprecedented imposition of individual and employer mandates, and regulates in a highly prescriptive fashion the financing and delivery of health care in the United States, it will fundamentally alter the relationship between individual Americans and the federal government. It will also alter the relationship between the national government and the governments of the several states. It will profoundly impact the character and quality of American life for generations to come. In short, this law is historic, transformational, and troubling. 

This is an enormous topic. I would like to confine my remarks today on the impact of certain provisions of the law on Americans citizens, the delivery of care by physicians, and the need to secure value in the financing and delivery of medical services. This focus is particularly appropriate in light of the President’s recess appointment of Dr. Donald Berwick as the Administrator of the Center for Medicare and Medicaid Services. Dr. Berwick has had a distinguished academic career and is well known and respected as a prominent health policy analyst. Following his nomination,  Dr. Berwick’s favorable remarks on the performance of the British National Health Service, and its restrictions on the supply of medical services - which he has favorably described as “rationing with eyes wide open”- have come to light and have justifiably interested members of the Senate and the public at large on his views on these matters. Hopefully, the Senate will have the opportunity to explore those views in more detail, and Dr. Berwick will be afforded the well deserved opportunity to clarify his position on a number of these issues and dispel any misconceptions or misunderstandings that have arisen as a result of the publicity surrounding his earlier remarks.

In fact, the recent media attention on Dr. Berwick and his views on rationing or the performance of the British National Health Service misses a much larger and far more consequential point.  The personality of the CMS Administrator or the Secretary of HHS is of secondary importance to the legal framework that Congress itself has erected over the years through thousands of pages of statutory text, which has generated tens of thousands of pages of regulatory interventions into the financing and delivery of health care.

Medicare is an entitlement program with a defined set of medical benefits. Congress defines the benefits and specifies the reimbursement for Medicare benefits, and medical treatments and procedures. It does so through various formulas for administrative payment. Under the terms and conditions of such an entitlement, government officials cannot control demand for these benefits; they can only control the supply. Cost containment therefore normally takes the form of downward adjustments to reimbursement. One cannot get more of something by paying less for it. Thus, continued downward adjustments to reimbursement can indeed limit the supply of medical services. At the end of the day, that is a form of rationing.         

Dr. Berwick is to follow the law, and develop and apply, under the authority of the Secretary, the regulatory regime that Congress has authorized. Congress has authorized a system where control of supply, through price regulation, is the conventional means of cost containment. And this has necessarily opened up a larger question for the future of our health care system.  Exactly how much control do we wish to transfer to federal officials, and how much do we wish to retain for doctors and their patients. This is the crux of the matter and this is at the center of our continuing national health care debate.

The problem is that the American people are getting mixed messages. This is what is undermining public trust. For example, in his June 15, 2009 speech to the American Medical Association, President Obama said, “I know that there are millions of Americans who are content with their health care coverage – they like their plan and they value their relationship with their doctor. And that means that no matter how we reform health care, we will keep this promise: If you like your doctor, you will be able to keep your doctor. Period. If you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what.”

The President’s attempted reassurance on these points has been unpersuasive. Moreover, the Congressional insistence on expanding the regulatory power of the Medicare bureaucracy appears to contradict what was once thought to be a settled principle formally embodied in the original Medicare law itself.  Under Sections 1801, 1802 and 1803 of Title XVIII, Congress has tried to establish boundaries for federal officials, basically barring them from interfering with or supervising the practice of medicine.

For his part, the President has steadfastly insisted that Americans will be able to keep their relationship with their doctors. Of course, the President is aware that the professional independence and integrity of the medical profession has long been a given in Americans’ understanding of their relationship with their doctors. Likewise, for centuries, physicians have understood their own role to be an application of their knowledge, skills, and abilities in the service of the interests of individual patients, which is nothing less than an ethical imperative overriding other considerations. Under the traditional Hippocratic Oath, physicians are to be servants of their patients, and nothing is or should come between the physician and his patient.

The problem is that the force of the traditional Oath itself, and its practical application, has been steadily weakened; many medical schools don’t even administer it or administer a watered down version of it. As a cultural matter, it has amounted to a quiet revolution in medical ethics, and many Americans, as patients, are not even aware that it has even taken place.  And, as for the original Congressional statutory restrictions on federal interference in medical practice in the Medicare program, that has also been progressively eroded both in law and regulation. For example, under Section 4507 of the Balanced Budget Act of 1997, Congress enacted for the very first time a unique statutory restriction on the ability of doctors and Medicare patients to contract privately with each other for the delivery of medical services outside of the Medicare program. Under that provision, doctors could privately contract if they notified the Secretary of their intent to enter into such a contract, submit the notification within ten days, and agree to forgo all other Medicare reimbursement from all other Medicare patients for a period of two years. No such restriction was applied to any other government program, including Medicaid.

Under the PPACA, there are 123 sections of the law dealing with various aspects of the Medicare program, ranging from changes in fee for service payment for hospitals, skilled nursing homes and home health care agencies, to major reductions in payment for Medicare Advantage plans. In its survey of the law, the Congressional Research Service reports that several provisions of the PPACA will indeed have far ranging impact on the practice of medicine in many ways, “large and small”. 


It is hard to imagine how the health law will improve the prospects of the medical profession. Aside from the authorization of state pilot programs, which states can conduct on their own, the medical liability problems that confront physicians in many states remain. Moreover, the existing system of administrative payment for doctors and other medical professionals under Medicare and Medicaid, a deepening problem for physicians, is re-entrenched with federal program coverage expansions. 

In this connection, it’s ironic that the American Medical Association formally endorsed enactment of the Senate version of the health bill, which was eventually signed into law on March 23, 2010, even though the CBO’s favorable estimate of its deficit impact was based on the assumption of current law governing Medicare payment update formula: the Sustainable Growth Rate (SGR). Tying physician payment updates to the growth in the general economy, under the terms of the formula physicians were faced with an automatic 21 percent reduction in their Medicare payment. It would be hard to imagine any leader of organized labor backing a bill premised on a 21 percent wage cut for employees.

While the Congressional leadership has indicated a strong desire to repeal the current Medicare update formula, it is still unclear how they intend to do it without saddling taxpayers with a major increase in the deficit over the next ten years. With the recently enacted six month fix, the problem for increasingly demoralized physicians commences again in December of this year. Meanwhile, the Association of American Medical Colleges projects a shortage of 150,000 physicians within the next 15 years, while 15 million seniors will enroll in Medicare over the next ten years.

Based on estimates from CBO and CMS and independent analysts, the new law is expected to significantly increase the number of American citizens with health insurance coverage, estimated by CBO, for example, to jump from 84 to 93 percent of the American population. This dramatic reduction in the number of the uninsured, however, is based on the assumption that the individual and employer mandates will be enforced and will work as they are intended to work. In the case of the individual mandate, in particular, this could be a tricky process, fraught with potential for ineffective enforcement, serious adverse selection in the health insurance markets, and related unintended consequences.  

For physicians, the insurance coverage expansion is a mixed blessing. Both the CBO and the CMS project that roughly half of all the newly covered persons over the next ten years are going to be covered under Medicaid. Millions of lower income Americans will be confined to Medicaid and the states are going to be required to enroll them in the program. If millions of ordinary Americans thought for one moment that they were going to get the kind of private insurance that their neighbors have, they are in for a rude awakening.

The Medicaid program is the fastest growing but the most poorly performing component of America’s welfare system. It delivers low quality care. The gap in outcomes between private coverage and Medicaid are big, especially for cardiac, cancer and even pediatric care.  Nationwide, Medicaid pays physicians on average 56 cents on the private sector dollar, which is why so many physicians refuse to take Medicaid patients or see new ones. When I was appointed to the Maryland Health Care Commission in 2003, our very capable career staff did a major survey of Maryland physician reimbursement, and found that on average Medicaid physician reimbursement for medical services often did not even cover the cost of those services. When Medicaid beneficiaries entered the physicians’ waiting rooms, the physicians lost money. There is nothing in the law that will change these dynamics.  

According to CDC data, Medicaid enrollees use the emergency room for non-urgent care at twice the rate of the uninsured and four times the rate of those with private insurance. So, if you think you have problems with hospital room overcrowding now, just wait. According to former CBO Director Douglas Holtz-Eakin, the additional visits to the emergency room will generate tens of millions of visits and add an additional $36 billion to the nation’s health care bill. 

Right now doctors and hospitals have no choice but to shift costs from Medicare and Medicaid practice to the private sector, thus hiking premiums for private family coverage. If private insurers think they have problems with the tens of billions of dollars in Medicare and Medicaid cost shifting now, they have seen nothing yet. 

With regard to the medical profession, there are bigger challenges ahead beyond payment or liability issues. As noted, under the original Medicare law, federal officials were explicitly forbidden to interfere with the practice of medicine. With the new law, it is not at all clear how physicians will be able to retain their traditional autonomy in the delivery of care, particularly under new compliance and reporting requirements related to the provision of quality of care, as determined by federal officials, and the existing restrictions on private contracting and balanced billing. For example:

First, under section 3403, there will be a 15 member Independent Payment Advisory Board. It will make Medicare payment policy. The objective of the board is to make recommendations to reduce the per capita growth rate in Medicare spending. Unless Congress enacts alternatives to effect the same level of savings, the Secretary and, presumably, the CMS Administrator, is to implement the Board’s recommendations. By 2015, Medicare payment is to grow at the rate of health care inflation. By 2019, it is to grow at GDP, plus 1 percentage point. In the past 20 years, CBO estimated that Medicare average annual rate of growth was 8 percent. Consider the inflation levels for the period 1990 through the end of 2009: the average annual rate of inflation was approximately 3 percent, while the average annual rate of medical inflation was 4.6 percent. The average annual GDP growth was 4.8 percent. The Board can indeed cut reimbursements to doctors and other medical professionals to hit these ambitious savings targets, as measured by inflation and GDP. But, to borrow an understatement from the CMS Actuary, this will be a “challenge”.  In other words, this process guarantees significant payment cuts for medical professionals. Curiously, hospitals, which account for the largest portion of Medicare spending, are exempt from the Board’s authority until 2019. It is hard to imagine that this process will not affect medical practice.       

Under section 3002 of Title III, the law strengthens the Physician Quality Reporting Initiative. Its objective is to improve the quality of care delivered to Medicare beneficiaries. If doctors report the specified quality data, meaning that they are complying with federal standards in the delivery of care, they get Medicare bonus payments. If they do not comply and report the required data, their Medicare payments are cut. By 2015, the law makes participation compulsory for doctors in Medicare. This amounts to compliance with federal quality standards; it is hardly a prescription for traditional physician autonomy, professional independence or clinical innovation in the delivery of care. It is certainly a prescription for more time consuming compliance with Medicare rules, which are multiplying with stunning rapidity. The statute is no sure guide as to how all of this will work out on the ground, of course; the details will be set forth in regulations. 

Under the new law, CMS officials will also be charged with designing new payment systems for doctors. The statute specifically calls for the redirection of Medicare payment away from traditional fee for service, which serves about 77 percent of seniors today, in favor of salaried, or capitated payments for physicians and other medical professionals. Of course, there is nothing inherently wrong with radical new payment systems, such as bundling payment for medical services, as conservative and liberal health policy analysts have both suggested. But we should recognize that under the current Medicare structure, doctors and their patients ordinarily have little control over the kinds of payment arrangements that will exist between them. Patients don’t control the dollars, and the doctors don’t control the conditions of care delivery under the new regulatory dispensation. If seniors thought that Medicare fee for service was here to stay, they are also mistaken.   

An Alternative Vision

The President and the authors of the Patient Protection and Affordable Care Act have focused heavily on the persistent problem of how to get value in the health care system. Pay for performance for physicians and value based purchasing of medical goods and services is for hospitals and their remedy is superior planning and administration, and the manipulation of economic incentives through new forms of administrative payment. This is a classic top-down approach to health care financing and delivery.

There is a better way: Bottom up. Under this approach, the key element of health care reform would be to restore the traditional doctor patient relationship and re-arrange the way in which health care is financed. 

For their part, the doctors and other medical professionals must do whatever is in their power to make the right diagnosis of the condition to be treated, and prescribe the right remedy at the right time to cure disease.  Doctors should be the key decision-makers in the delivery of health care. And if they are not the key decision-makers, policymakers need to make sure that they become the key decision-makers in the system.

And that is where the patients come into the equation. If doctors control the delivery of health care, the patients should control the financing. So, the key ingredient in creating a value-based health care system would be to transfer direct control of the flow of health care dollars to individuals.  This would create a patient-centered, consumer driven system. It would be the kind of system, based on real choice and robust competition that would deliver what is of value, not as value is defined by either government officials or third party administrators in the private sector, but as desired by the patient in consultation with his physician.

Systemically, in both the public and the private sector, we are far from that kind of an arrangement. America’s households, not government officials or employers, already pay 100 percent of health care costs. But America’s households control only a tiny portion of total health care spending, mostly in out of pocket spending for health insurance which is purchased on their behalf and designed by third parties: employers, managed care executives or government officials.

Those who control the dollars are those who call the shots.   Ideally, individuals and families should control every red cent spent on health care, as they do in virtually every other sector of the economy, where consumers make an exchange of dollars for goods and services of value to them. 
What would such a new approach mean for doctors and patients?  

First, it would mean much greater personal choice over health options in both the public and the private sector. In the public sector, it would mean that retirees would, for example, be able to carry their private health plans with them into retirement and secure a generous government contribution to offset their cost. In the private sector, individuals and families would have the opportunity, if they wished to do so, to own and control their health insurance policies, just like they own and control their own auto, life and homeowners insurance, and be able to take their policies with them from job to job without a tax or regulatory penalty. 

Second, it would mean much greater control over the financing of health options. Individuals would be able to buy the plans they want, the benefits they want, and contract with doctors and other medical professionals for the services they want at a price they wish to pay. This means that individuals would be able to pick health plans that provide them value for their dollars; they would know the price of medical services, and they would be able to compare performance and quality in an information-driven market

Third, health plans and doctors and other medical professionals would compete on a level playing field. Government would not be in the business of picking winners and losers, setting different rules for different plans and groups.

Finally, individuals and families would be able to pick health plans and medical professionals that support or at least accommodate their ethical, moral and religious convictions. That is especially important in all matters dealing with the beginning and the end of life. 

That concludes my formal testimony. I would be very happy to answer any questions you might have. Thank you


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Robert E. Moffit
Robert Moffit

Senior Research Fellow, Center for Health and Welfare Policy