Congress needs to get it right on pricing plan for physician services

It's a simple law of economics: You can't get more of anything by paying less for it. Yet that's exactly what the government plans to attempt.

Medicare, the government health program for millions of seniors and the disabled, is the nation's largest single payer for healthcare services. Starting next year, as part of its ongoing effort to control costs, Congress plans to cut payments to physicians by 5.1 percent. By 2015, when the first waves of baby boomers are well into retirement, lawmakers aim to cut payments by one third.

Think about that: Doctors will see more patients, but be paid less. No other class of professionals — certainly not lawyers — faces arbitrary pay cuts of this magnitude.

Of course, cutting doctors' pay won't spark street riots. (After all, doctors are "rich.") But these cuts will decrease seniors' access to quality healthcare, and that will affect the rest of the population.

Clearly, Congress needs to change the current system. So let's take a look at where we are, so we can determine where we should go.

Medicare payment is governed by "price controls," a euphemism for government price-fixing. Ostensibly, Medicare's price controls are designed to protect consumers by regulating costs.

When Medicare was enacted in the 1960s, lawmakers wanted to make sure doctors would participate. So the program paid "customary, prevailing and reasonable" rates for services, meaning that Medicare reimbursed physicians retrospectively for the charges they submitted, without consideration of the quality or costs of the care provided. That, predictably, led to a growth in expensive services, a wide variation in charges across geographic regions and an incentive for physicians to raise their prices.

By the 1970s, rising costs prompted Congress to change the formula. The result: a government-administered fee schedule that backfired. Physicians merely increased the volume and intensity of the services they provided to offset the reduction in fees, and the spending continued to soar.

Despite the evident failure of this approach, Congress merely intensified its central planning. In 1989, Congress passed the "Resource-Based Relative Value Scale," a mind-numbingly complex payment formula developed by a Harvard economist, based on the "relative value" of the work done by the physician and the associated practice and malpractice costs.

In an attempt to keep physicians from simply seeing more patients, Congress also tied the annual update of Medicare doctors' payments to the total spending for physicians' services. If total volume was too high above a government-set target, every doctor's Medicare reimbursement was reduced. Naturally, it didn't work.

So Congress modified the formula in 1997, tying physician payment updates to the performance of the general economy. It's called the "Sustainable Growth Rate" formula — and it will be driving down physician payment next year and beyond.

Under this formula, growth in gross domestic product per capita is the key component used to adjust Medicare physician payments. But changes in the general economy are unrelated to the market conditions surrounding the delivery of medical services to Medicare patients. One might as well tie Medicare physician updates to the phases of the moon. Meanwhile, this latest change in the formula discourages doctors from taking on new Medicare patients and may even drive physicians out of the program altogether.

It can get worse. A recent AMA physician survey reported that if the projected cuts take effect, 45 percent of physicians will either decrease their Medicare practice or stop seeing new Medicare patients. Meanwhile, more than half of physicians say they will forego investments in their practice, such as purchasing new medical equipment and information technology.

The Medicare Payment Advisory Commission, which counsels Congress on this issue, says the current formula is a "flawed, inequitable system for volume control" and expresses concern that "such consecutive annual cuts would threaten access to physician services over time, particularly primary care services."

Congress needs to act now, and think big. The correct remedy is surgery: Cut out the flawed administered pricing, with its useless bureaucracy and crazy incentives, and replace it with a new system.

The government should make defined contributions to the health plans chosen by Medicare patients, and pay more for poorer, older and sicker retirees. This would deregulate the doctor-patient relationship and create incentives for doctors and patients alike to pursue quality, cost-effectiveness and price transparency.

The current system merely punishes doctors. And that inevitably winds up hurting their patients.

John O'Shea is the Harvard graduate fellow in health policy at The Heritage Foundation. He wrote this commentary for The Heritage Foundation.