Want To Fix The “Doc Fix”? Experiment!

For health policy wonks, the end of the year isn't just the holiday season. With the falling temperatures will come a renewed “doc fix” debate, as Congress deliberates on ways to avoid a scheduled double-digit (24 percent last year) cut in Medicare's physician payments. And avoid it they will. As health economist Austin Frakt put bluntly: “Good luck getting physicians to keep Medicare patients if the payments are suddenly cut 24 percent.”

The problem, as anyone who follows health policy will tell you, is Medicare's “Sustainable Growth Rate,” or SGR. The SGR is a formula created under the 1997 Balanced Budget Act, with a noble goal: keep Medicare physician spending under control. Under the formula, when spending per beneficiary grows faster than GDP, a payment cut is required. Because policymakers haven't been thrilled about cutting physician payments as the SGR would have required over the past 11 years, the required cuts have accumulated over the years, resulting in the 24 percent cut that Congress worked to avoid last year.

And it's likely that these patches have actually helped slow Medicare spending. Most doc fixes have been offset with other health-related savings that have helped make federal health spending more efficient. Nevertheless, the uncertain policy environment and clear failure of the actual SGR payment system means that long-run reform is necessary.

While each doc fix has been a temporary patch, ideas for permanent fixes still exist. Last year had two competing options, both of which would have moved to a performance-based SGR schedule in the long-run. Suffice to say, neither succeeded, and instead, Congress passed another patch through March 2015.

This underscores the political difficulties of fixing the payment mechanism. On the one hand, the existing system isn't sustainable. Physician payment updates have basically come out of a bureaucratic process, with no connection to value or quality. On the other hand, long-run fixes are expensive. According to the CBO, a permanent fix to the SGR would cost about $140 billion over 10 years. No matter what, someone's ox gets gored, and incentives for gimmick-based savings become very attractive.

All of that begs the question – why even have an SGR to begin with? Regardless of what changes are made to the formula, it will remain bureaucratic and political. And to the extent that determining physician payments remains within Congress's purview, political pressure to avoid flat or negative adjustments will still be a threat.

There is no reason that physician payments under Medicare – about 12 percent of the program's outlays – should necessarily grow slower than GDP. If higher payments can improve the quality of care of beneficiaries, and perhaps reduce spending elsewhere, higher payments to physicians may be warranted. And while the literature on pay-for-performance schemes shows mixed results, evidence on Medicare Advantage, a private plan alternative for Medicare beneficiaries, has found that the program has spillovers for Medicare and private insurance, while higher payments to the program are associated with better quality.

The solution to the SGR mess, then, may be simpler than convoluted formulas and political horse-trading. The Medicare Advantage program can serve as a “baseline” for physician reimbursements. For instance, traditional Medicare can take the second-cheapest MA plan in each county across the country, and base physician payments on that plan's reimbursement schedule, plus any penalties/bonuses required under the program. This would eliminate the bureaucracy of the federal government trying to determine how much physicians should be paid, and for what. Plans in the private sector are clearly already figuring this out, and there's no sense in reinventing the wheel.

But this doesn't have to happen all at once. Indeed, it would make sense to test such an approach before implementing it across the board. Medicare could pick, at random, a set of counties where reimbursements would be based on private plans for a set period of time. Quality and cost data could then be analyzed to determine whether this method is worth it.

Of course, it may turn out that it isn't! But the only way to figure out whether current reimbursements are better or worse than the alternative is to experiment. If it turns out that costs are lower and quality improves, then the next SGR bill should expand the experiment. If not, then policymakers could look elsewhere.

If nothing else, this would get our SGR debates out of a rut.

This piece originally appeared in Forbes.com