Manhattan Moment: Medicare's Doctor Payments Mess (and How to Fix It)
Even with a proposal for a permanent fix set to be unveiled next week, lawmakers will likely vote — as they have 17 times before — to prevent a 21 percent "automatic" cut in Medicare's payments to physicians, at the end of this month. The so-called "sustainable growth rate," which dictates how fast physician payments are allowed to grow, is the culprit. After all, cutting rates so drastically is a political nonstarter that physicians, patients, and trade groups would vocally oppose.
The usual course of action has been to override the scheduled cuts and replace them with slight increases, often funded from other parts of the federal budget. This isn't just unpredictable for patients, physicians, and taxpayers; it's downright bad government.
Reform ideas do exist. Last year, three committees from the House and Senate developed a proposal for small initial payment bumps, tying future increases to quality metrics. The most recent proposal, which has a better (though not great) shot at passing, takes a similar tack, offsetting small, fixed increases in payment rates with increases in Medicare premiums and changes to Medigap plans. Yet despite the best intentions, such an approach wouldn't address the problem underlying the SGR: bureaucratic price-setting.
But there is another way.
In a new report for the Manhattan Institute, we argue that instead of doubling down on a failed system, Washington policymakers should instead look to use markets to determine Medicare's payments to physicians. Though this may appear to be a novel idea, it in fact builds on elements of Medicare already in place.
Private plans participating in Medicare Advantage use payment arrangements that do not have to conform to traditional Medicare's fee schedule. These plans bid in a semi-competitive environment — while plans do compete for patients, payments to plans are still tied to administrative benchmarks, weakening the incentive to compete on cost. Nevertheless, plans still have an incentive to ensure that payments to physicians maximize value to beneficiaries.
This approach could be transformed to work for Medicare as a whole. Our proposal would begin by shifting Medicare Advantage to a true "competitive bidding" model in which benchmarks would not be set administratively, but would be based on plans' bids (as they are in Medicare Part D). In doing so, competing on cost becomes a necessity.
Competitive bidding is a pre-requisite for obtaining market prices and would also address one of the reasons for the failure of SGR reform — the cost. One estimate of competitive bidding forecasts savings of $339 billion over 10 years, which would likely offset the cost of this proposal.
The bids – which would now represent a patient-based, rather than an administratively determined, value of how much physicians would be paid – would then be compared to projected spending on physicians in traditional Medicare. If market prices were higher (indicating underpayment), rates in traditional Medicare would increase; if they were lower (indicating overpayment), rates in traditional Medicare would fall.
Why such an approach?
First, market-based pricing more closely approximates the actual cost of providing service provisions. Justifying an override of scheduled payment reductions is easy when an administrative formula is to blame – it becomes much more difficult when it's simply the market working itself out.
Perhaps more importantly, Medicare Advantage plans are free of many of traditional Medicare's restrictions. Private plans can, for instance, structure payment and delivery of services in a more holistic manner that accounts for how physician spending may increase or reduce costs elsewhere.
Under a Medicare Advantage plan, for example, patients at risk for cardiovascular disease may receive more frequent cholesterol screenings because of the plan's particular payment structure. This may well reduce heart attacks and other related problems, resulting in savings to the healthcare system. And, by virtue of their use of provider networks, Medicare Advantage reimbursements better account for provider quality and performance.
While the numerous proposals to date seeking to replace the SGR may represent improvement over the status quo, such proposals fail to address the problem of the SGR's centralized pricing system. A truly market-based alternative such as the one outlined here, would offer a permanent reform- preserving access for seniors, while ensuring that physicians are reimbursed closer to their "true" value.
This piece originally appeared in Washington Examiner
This piece originally appeared in Washington Examiner