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Opinion Column

The Medicare ‘Doc Fix’: How to Make Political Lemonade

The mechanism that governs the growth rate of Medicare spending on physician services isn’t working. The Sustainable Growth Rate put in place in 1997 is supposed to keep total Medicare physician costs from growing faster than the overall economy. When costs do grow too quickly–and they always do–the law demands that prices be cut commensurately.

But it doesn’t work. The SGR target is too low. Medical inflation is perennially above the growth rate of the economy. So Congress always overrides those mandated cuts, and the gap between spending dictated by the SGR and actual spending grows. Most recently it stood at 21 percent.

This is no way to run a health care system. The SGR may make 10-year budget projections look good, but that’s only because it’s based on an unrealistic assumption that the mandated low growth rate can be sustained. By now we know that it can’t.

The solution is not to let the 21 percent cut go into effect. That’s too deep a cut and would devastate physician practices and severely restrict beneficiary access to care. Nor is the solution to keep patching the problem with interim over-rides. That’s what Congress did last week. It’s a stop-gap and doesn’t address deeper problems.  Instead, a systemic “doc fix” is required.

The first step toward a solution is a fuller understanding of the problem. Costs are the product of payments and volume. Growth in Medicare physician payments are constrained by the relatively small updates Congress allows in its over-rides of SGR dictated cuts. Last week Congress voted to replace the 21 percent payment cut with a 2.2 percent increase, for example.

With such small increases, payment levels are below those in effect in early in the decade, adjusted for medical inflation. (This is, by the way, a cost-control virtue of the SGR. There’s nothing like the threat of a double-digit percentage payment cut to make a one or two percent increase look large.) But the volume of health care services remains unconstrained. As it grows, so do costs.

Controlling volume is a challenge, one Congress has never met. It’s too easily defeated by charges of government rationing. Of course, markets ration, too, based on prices. In a market, higher prices lead to lower volume. But Medicare is not a market. Congress – not beneficiaries — pays most of the bill. Congress can’t dictate prices and turn a blind eye toward volume and expect costs to fall.

The SGR problem is now so large it offers an opportunity for political leverage on the issue of volume. The American Medical Association and other physician groups may want it fixed badly enough that they’ll accept some payment system changes in return. And, in the current anti-deficit climate the cost of a full fix–estimated at $245 billion over 10 years–must be partially offset with some kind of savings. As an illustration of the political power of a full SGR fix, the AMA supported health reform on the promise of one.

What should Congress seek in exchange for scrapping the SGR methodology? At the top of my list would be to base some of physician payment on quality improvement. Aligning payment incentives with quality and not quantity will strike at the heart of the cost growth problem. Also high on the list should be reducing payments to specialists and increasing those for primary care physicians.

Specialists are responsible for hundreds of billions of dollars of unnecessary care annually and primary care doctors are predicted to be in short supply as more Americans obtain coverage under the new health reform law. Finally, payments should be adjusted to account for geographic variation in costs that are reasonable and related to appropriate care.

The SGR system was flawed from the start and should have been fixed years ago. But now we have an opportunity to make necessary systemic changes. This lemon really can, and must, be turned into lemonade.

Acknowledgment: Aaron Carroll (physician, Indiana University professor, and

provided valuable feedback on an earlier draft.

Austin Frakt is a health economist and an Assistant Professor of Health Policy and Management at Boston University’s School of Public Health. He blogs at The Incidental Economist.

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