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The RBRVS system included a mechanism, known as the volume performance standard, aimed at preventing doctors from gaming the standardized payments by increasing the number of cases they processed. If total physician spending increased, fees went down. If total physician spending decreased, the fees went up. The problem was that the formula was based on historical trends in volume, which had been rising for years. But in the mid 1990s, that trend unexpectedly slowed, leading to substantial increases in Medicare’s physician fees.
Under President Bill Clinton, a Republican Congress tried out a new payment mechanism intended to control volume as part of the 1997 Balanced Budget Act. It tied payments to the size of the economy in the hope of controlling inflationary spending by keeping costs per patient from rising faster than GDP. If total spending on physician reimbursements stayed under the spending target, fees would go up. If reimbursements exceeded the target, fees would go down.
For a few years, payments to providers rose as planned, and spending stayed within budgetary targets. But like previous payment reforms, the Clinton-era “sustainable growth rate” (SGR) formula put pressure on one part of the system, shifting costs elsewhere. Douglas Holtz-Eakin, a former director of the Congressional Budget Office, argues that the formula has two major flaws: First, it targets only one component of Medicare—physician spending—rather than the program as a whole. Second, despite its goal, it does not really control volume. “Congress failed to understand that physicians respond to incentives,” he says. Lower reimbursements inevitably result in more services being performed. “Cut rates, they will respond.” Rather quickly, the system started to break down. As the journal Health Affairs dryly noted in a recent primer on the issue, “The expectation that this payment system would control spending was not realized.”
That was not entirely the fault of SGR. Legislators in Congress did not let their own system work. The reform allowed for payment reductions in order to keep spending in line with the economy. But in the booming 1990s, when the law was passed, most policymakers never expected that payments would ever fall. As long as GDP grew and payments rose in response, the system worked mostly as planned. But in 2002 the formula called for a 5 percent reimbursement cut to keep payments in line with the flagging, post–tech bubble economy.
Congress allowed the cut to take effect, but doctors weren’t happy. The grumbling was loud enough that when the formula called for another cut in 2003, Congress overrode it and voted to institute a small reimbursement hike. Since then that pattern has held: Each year the SGR has called for a reimbursement cut, and each year—sometimes multiple times a year—Congress, ever susceptible to outside influence, has instead voted to delay the cut though a temporary patch, now known widely as “the doc fix.”
The lack of congressional fortitude has created additional headaches for doctors and patients. Although doctors took a pay cut only once, the temporary nature of the extensions still means that Medicare payments are riddled with uncertainty. Almost everyone—doctors and policy makers alike—assumes the cuts will never go through. But they don’t know for sure. That makes doctors wary of relying too much on Medicare payments, which already lag behind the rates paid by private insurers. As a result, some are reducing the number of new Medicare patients they see, while others are dropping out of the program entirely. A 2010 survey by the Texas Medical Association found that 100 to 200 doctors in the state were giving up on Medicare each year. The SGR’s unlikely but persistent threat of dramatic fee cuts has made it harder for seniors to obtain health care.
Doctors, led by the American Medical Association, have escaped those big cuts so far. But lobbying pressure to override the programmatic cuts has exacerbated the long-term problem. When Congress replaced a scheduled reduction in 2004 and 2005 with a 1.5 percent increase, it did not bother to change the long-term spending target. Consequently, the SGR called for even bigger cuts down the road to make up for the short-term hikes. As the overrides have mounted over the years, so have the cuts called for by the formula. There is now an enormous chasm between what physicians who accept Medicare are supposed to be paid under the SGR and what they are actually paid.
In December 2010, congressional leaders announced a tentative deal to pay for a one-year extension of the doc fix by trimming funding for the first year of ObamaCare’s insurance subsidies. But time is running out. By the formula’s reckoning, doctors face as much as a 29.5 percent cut at the beginning of 2012. Depending on how long Congress continues to delay the cuts, an even steeper reduction looms in the future—an estimated 40 percent if the charade continues until 2014.
Abolishing the SGR entirely, as many doctors would like, could cost up to $370 billion over a decade, according to the Congressional Budget Office (CBO). But the Obama administration, despite cutting more than $500 billion in Medicare payments to pay for the president’s health care overhaul, and despite calling for another $248 billion in Medicare reductions as part of his debt reduction plan, has paid little attention to the problem. In February 2011, Health and Human Services Secretary Kathleen Sebelius told members of Congress that the administration thinks the doc fix is “very important to do.” Early drafts of the health care overhaul included a doc fix. But in the end, Democrats chose to use the law’s Medicare cuts to pay for expanded coverage rather than to stabilize physician payments. An administration budget proposal this year also called for the doc fix to be fully paid for. How? The administration won’t say. Instead, it has offered up enough money to extend the doc fix for just two years—and then only by reducing the rate of Medicare spending growth over a full decade. This is rather like a lifelong two-pack-a-day smoker promising to quit next year, then spending the money he’ll “save” on cigarettes over the course of the year at a bar that evening.
But the SGR puts Republicans in a tough spot too. CBO projections, based on current law, assume that the SGR’s scheduled cuts will take effect. Few Republicans want to be seen as advocating what the CBO will count as hundreds of billions in additional Medicare spending. But neither do GOP legislators want to be seen as advocating a nearly 30 percent reduction in physician reimbursements, which will further reduce seniors’ access to doctors.
Medicare’s resident technocrats have been somewhat more forthcoming with proposals. In October, the Medicare Payment Advisory Commission, a 17-member panel of experts that advises Congress about how to structure the program’s reimbursements, voted to recommend a decade-long doc fix. Its proposal, which can’t go into effect without congressional approval, would cut specialist rates by 5.9 percent annually for three years while freezing primary care reimbursements. But this plan pays for only $100 billion or so of the 10-year cost; the remaining $200 to $300 billion would come from cuts in payments to hospitals, drug makers, acute care facilities, and other providers. Provider groups immediately launched an aggressive opposition campaign; given Congress’s historical reluctance to let doctors take a hit, it seems unlikely that this proposal will succeed where others have failed.
Holtz-Eakin, the former CBO director, argues that members of Congress need to recognize that the cost of recurrent SGR overrides is already built into the system. “We’ve already really committed to spending this money,” he says. After accepting that reality, he says, Congress should move to a new system that puts the entire Medicare program on a budget and turns control of that budget over to individual seniors. “It’s the first step that’s killing every-one, though,” he says. “No politician wants to be seen as adding $300 or $400 billion to the deficit.”
The second step won’t be easy either. In April, House Republicans voted for a budget plan authored by House Budget Committee Chairman Paul Ryan (R-Wis.) that would have transformed Medicare from an essentially unlimited program, committed to endless spending, into a premium support system that would allow seniors to buy regulated plans from private insurers. Democrats spent the following months accusing House Republicans of having voted to “end Medicare as we know it,” a line that many promised to repeat all the way up to the 2012 election. But according to Antos, the American Enterprise Institute health policy expert, transforming the system is the only way to escape the flaws of SGR and other price controls. “If you leave the structure of Medicare alone,” he says, “you cannot solve the problem.”
ObamaCare and Medicare
Obama didn’t transform the system so much as double down on its faults. Much like the introduction of Medicare, ObamaCare extends subsidized insurance coverage to millions of people, a move that is likely to spur additional demand.