What used to be an annual exercise — waiting to see whether and by how much Congress would increase payments to physicians under Medicare — has now become a more frequent and even more frustrating activity for physicians. At the end of November the latest financial “fix” for these payments expires and, if nothing is done, physicians who see Medicare patients will face an across-the-board 23 percent reduction in their fees. If nothing happens by January, physicians would face an additional 7 percent reduction.

The consequences for physicians and, therefore, their patients, is hard to imagine. And, while no one I know thinks these disastrous reductions will occur, it is not at all clear what will happen or where the funding will come from to put yet one more patch in place.

How did we get in this mess?

As is frequently the case, the current system reflects a combination of trying to fix some previous known problems and also trying to squeeze a little more money out of Medicare than most reasonable people thought made sense.

In the 1980s, Medicare paid physicians using a fee schedule that followed the “Usual Customary Reasonable” approach then used in the private sector. That schedule resulted in fees that many believed paid too much for procedures and too little for primary care services and paid urban physicians too much relative to their rural counterparts. It also had been observed that using a detailed fee schedule without an external constraint resulted in rates of increase for Medicare Part B that exceeded those of Part A, which by the middle of the decade had adopted a prospective pricing system.

To fix these problems, Congress passed legislation in late 1989 creating the Resource Based Relative Value System. This system was designed to pay physicians using a combined set of measures reflecting work effort, practice expense and a geographic adjuster. In addition, an external constraint called the Volume Performance Standard was put in place to allow fees to be increased (or decreased) by more than the law stipulated if spending for Part B grew at a slower (or faster) pace than had been anticipated.

The VPS had some technical glitches that needed to be fixed and in 1997 was replaced by the Sustainable Growth Rate, which tied the allowable increase in Part B spending to the growth rate in the economy — even though there was no historical basis for believing that this rate of increase was likely to be sustainable over any prolonged period. Some of us in the policy community tried to raise this issue with members of Congress and their staffs but the Congress was in dire need of additional savings — not only to get to a balanced budget, but also to pay for the State Children’s Health Insurance Program.

For the first few years, while the economy was continuing to grow at a robust rate, physicians and the AMA (which did not fight this provision when it became law) enjoyed the benefits of an allowable growth rate tied to the economy.

But in 2002, the first major problem occurred: the volume of services increased substantially and the growth in the economy slowed dramatically. As a result, and as proscribed by law, fees for physicians that year were reduced by 4½ percent.

In every year since, Medicare fees should have been reduced as a result of the SGR but haven’t been because of congressional concerns that the continued reductions would threaten access to care. Rather than face the scheduled reduction, lawmakers instead have annually provided enough funding to keep fees approximately flat but not to fix the problem — thereby digging deeper the hole that ultimately will need to be filled.

What’s the answer?

We need to redesign how we pay physicians. The current fee-for-service system rewards volume rather than value and makes it difficult to encourage or reward physicians who provide low cost, high quality care. In fact, the current link between overall fees and overall spending growth has meant that physicians who practice conservatively have seen their fees and income stay relatively flat since 2002, while those who practice in a more aggressive style have seen their fees stay flat but their income grow substantially. Meanwhile, spending on Part B has been growing at rates of 10 to 12 percent per year through much of the decade — clearly an unsustainable growth rate.

Physician payments need to move away from the current practice of billing for more than 8,000 CPT — Current Procedural Terminology — codes to a more bundled system in which payments are made for taking care of chronic diseases and for high cost, high volume interventions; or to a system that is closer to salary-based reimbursement. Hopefully the bundling pilots that are part of the health overhaul, along with the fledgling interest in accountable care organizations, will provide information on some of the alternatives we so desperately need.

The Center for Medicare & Medicaid Services urgently needs to jump-start these pilots. In the meantime, physicians should expect no more than short term fixes to this perennial (and frustrating) problem. It’s in everyone’s interest to get workable alternatives tried and in practice as soon as possible.