Medicare's Messed Up Payment System

The new issue of Health Affairs includes a study of how the Center for Medicare and Medicaid Services (CMS) goes about setting physician reimbursement rates within Medicare. It’s dressed up in layers of (interesting!) technocratic fluffery, but mostly it’s worthwhile as a revealing look at the absurdity of wholly government-run health care payment systems.

Medicare’s resource based relative value scale (RBRVS) is basically a socialist payment system. It pays physicians based on the predetermined “work values” of various activities and procedures. The idea is to equalize payments in such a way that physicians never have a financial incentive to perform some procedures more than others: One procedure that takes about an hour of a physician’s time should pay roughly as much as any other procedure that takes an hour out of their day. A procedure that takes two hours should pay roughly twice as much, and so forth. Stress and skill level calculations also factor in, but the overriding idea is to avoid giving physicians an incentive to focus on certain higher-paying procedures at the expense of others.

But of course someone has to figure out exactly what the work values are and how much to pay for them. And that someone turns out to be a combination of a special payment committee run by the American Medical Association and the payment system overseers at CMS. The AMA’s payment committee submits yearly recommendations to CMS, which then uses those recommendations to create its fee scale. Basically, doctors and regulators talk to a couple of doctors, read some studies, then sit around and scratch their chins for a while until they all agree on a set of payment rates.

Most of the work seems to be done by the AMA committee, which at least has the virtue of direct professional experience. According to the study, which was performed by health researchers at Columbia University, the University of Illinois, and UCLA, CMS accepts the AMA proposal 87.4 percent of the time.

Why does CMS reject the AMA recommendations 12.4 percent of the time? Your guess is as good as mine; the authors of the study couldn’t figure it out either. “Based on the available data,” the study’s authors report, “we were unable to determine why CMS agreed or disagreed with the recommendations made by the committee.”

It’s all pretty mysterious, and it has no real connection to any sort of genuine market-based price signals. There’s no interaction between supply and demand. It’s just providers and regulators teaming up to do some joint guesswork. And even the providers aren’t really all that well equipped to make these sorts of determinations, because they still lack the usual customer-side input.

For my October 2011 print feature tracing Medicare’s payment history, I spoke with Joseph Antos, an economist now with the American Enterprise Institute who helped design Medicare’s physician payment system in the early 1980s, and later helped implement it. Despite his involvement, he described being skeptical from the very beginning. 

The system they were planning would become known as the resource-based relative value scale, or RBRVS. It attempted to divide physician’s services into roughly equal work units and make payments accordingly. The assorted high-level officials had a naive confidence in their ability to accurately align the amount of work that went into a procedure with the amount of payment a physician received.

“They knew that there was a problem paying physicians,” Antos says. “They thought they knew what the problem was. This was going to be a new system that was going to rationalize the old system.”Antos, the only economist in the group, wasn’t so sure. And so he began to ask questions: “How does the government know what the relative values should be? How is this related to any market-clearing process that anybody’s ever known?” One idea was to set prices by committee. Antos pointed out that “asking committees of doctors to guess how much work is involved in something is the same thing as just setting prices.”

Add in an additional layer of non-transparent guesswork by officials at Medicare, and you end up with a centrally designed payment system that’s just a mess.

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  • anon||

    1th.

  • Hugh Akston||

    Sometimes I wonder what the world would be like if doctors just charged what they wanted for a procedure and patients paid for it out of pocket, like every other transaction people do every single day.

    Then I remember. Every doctor would charge a million billion dollars for an office visit, and the bottom 99% of earners would die from lack of proper medical care.

    Thank Galt the government is here to turn the screws on those greedy bastards.

  • Mr Whipple||

    There's a lot of money to be made by providing low cost alternatives for low income people. Just ask Paul Polak.

    http://www.youtube.com/watch?f.....zVxt7TkyeM

  • NoVAHockey||

    I think looking at the dental system might address what you're getting at. That does have access issues, but payment is only part of the problem there. Scope of practice laws and a restricted supply of dentists are contributing factors.

  • Paul.||

    Sometimes I wonder what the world would be like if doctors just charged what they wanted for a procedure and patients paid for it out of pocket, like every other transaction people do every single day.

    Healthcare isn't a normal market!

    Somalia!

    Roadz!

    Externalities!

  • sarcasmic||

    Sometimes I wonder what an oil change would cost if it was covered by car insurance.

    I'm thinking a few hundred bucks. Maybe as much as a thousand.

    I mean, if you don't do it right then you can completely destroy the engine. That's a lot of responsibility.

    You can't trust that to just anyone.

    There should be license requirements that include special training for each make/model/year, type of oil, brand of filter, oil plug, dip stick...

  • Bill||

    You are on the right track. But really, we need a committee to decide the payment scales for each and every repair a mechanic can do and pay them for the amount of time they should take to do it.

    Because all cars and all cases are exactly the same, just like with doctor's.

  • Ken Shultz||

    But of course someone has to figure out exactly what the work values are and how much to pay for them. And that someone turns out to be a combination of a special payment committee run by the American Medical Association and the payment system overseers at CMS. The AMA's payment committee submits yearly recommendations to CMS, which then uses those recommendations to create its fee scale.

    I know! Let's put the fox in charge of guarding the hen house.

  • R C Dean||

    [strokes Persian cat, polishes cleans monocle]

  • Ken Shultz||

    Are there any other government contractors who are allowed to set their own reimbursement rates, or are physicians by way of the American Medical Association the only one?

  • Adam330||

    Under a cost reimbursement contract, the contractor gets paid all its "reasonable costs" (not based on fees per action, but actual documented costs), with some exclusions. Under time and materials contracts, the government and contractor agree to fixed hourly labor rates.

    Medicare doesn't actually "reimburse" doctors in any normal sense of the word (i.e. you present your employer with documentation that you've incurred a travel cost, and it reimburses you the actual cost). It pays them fixed fees per procedure/action.

  • Ken Shultz||

    This is like letting the Teamster's Union decide who does and doesn't get a license to drive a tractor-trailer.

    And then giving them the lead role in deciding how much truck drivers get paid for their service, too.

    This ain't the way I do business.

    I guess it's kinda hard to solicit competitive bids--when the AMA has a monopoly on physicians like the Teamsters union could only dream of!

    There needs to be--at least--two more competitors to the AMA.

    This isn't socialism. This is the government being run by a labor union.

  • sarcasmic||

    I am so in lust with Candace Baily (reference first pic).

    http://www.g4tv.com/attackofth.....1-hot-100/

  • Bill||

    Kind of skinny.

  • sarcasmic||

    I find the skinny ones to be more fun in bed.

  • Enough About Palin||

    Angus beef wiener? WTF???

  • Adam330||

    Another problem with price-setting-by-committee set-up is that specialists are overrepresented on the committees. That helps drive up their rates compared to primary doctors. And that's part of the reason we have a primary doctor shortage. Who knew price setting might have such consequences?

  • Ted S.||

    This is the sort of payment system we need for lawyers and their "billable hours" nonsense.

    Of course, there's nothing any lawyer does that's worth more than minimum wage.

  • ||

    the overriding idea is to avoid giving physicians an incentive to focus on certain higher-paying procedures at the expense of others.

    Golly, we wouldn't want any price signals fucking up our supply and demand!

  • Bill||

    Exactly. We don't want to know when there are too few of a particular type of doctor or surgeon so that more will go into the field.

    We just need another panel of top men from the AMA and Medicare to tell us that too.

  • Paul.||

    And that someone turns out to be a combination of a special payment committee run by the American Medical Association and the payment system overseers at CMS.

    Ding ding ding!

    And here is where you have thousands of medical ethicists and physicians who are chafing at the bit to become part of this panel. There are plenty of busy-bodies who want the power to put their mark on the entire industry.

    Imagine putting out a memo which declares how much an hours time for every member of your profession is worth.

    Think about that kind of power.

  • American Medicare||

    I'll probably visit your site. I think it has what I need. Thanks. American Medicare

  • Barbara Levy, M.D.||

    The RUC is a group of physicians that make recommendations to the decision-makers in Medicare on what goes in to providing care to patients.
    The RUC does not make any recommendations on the amount of money paid to physicians or spent by the government on the Medicare program.
    That decision is made by Congress.

  • Hal_10000||

    The history of RBVRS is interesting. When it was first foisted on us, the AMA swore up and down it would never used for cost control. Ahem.

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