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.