Medicare’s doc fix insanity

John R. Graham Independent Institute, National Center for Policy Analysis
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Seniors are likely unaware that, until a few days before Christmas, they were on the verge of losing access to physicians on New Year’s Eve. If Congress had not acted, Medicare’s fees paid to physicians would have dropped by one quarter overnight, making it uneconomical for physicians to keep seeing Medicare patients.

It is not surprising that nobody was panicking: Congress has pulled this stunt every few months for over a decade. Nobody really expects the politicians to allow physicians’ fees to drop by such a huge amount. Nevertheless, it begs the question: Why can’t they figure out a real fix to this perpetual crisis?

The answer is that neither party wants to grapple with the real problem: Medicare pays physicians by using a method that puts Gosplan to shame.

The fee schedule is determined by a government-authorized committee that estimates how much time it takes a doctor to do a procedure. For example, a session of psychotherapy for a patient with panic attacks takes 45 minutes. A hysterectomy takes about twice as much time as the session of psychotherapy, plus 3.8 times as much mental effort, and 4.47 times as much technical skill and physical effort, as well as 4.24 times as much risk. Needless to say, negotiation over these estimates consumes a lot of energy in a zero-sum game between specialist medical associations.

The outcome is a “relative value” for every single thing doctors get paid for by Medicare. A highly complex and time consuming procedure earns a high relative value. Each relative value is adjusted for geography (e.g., Manhattan is more expensive than Dallas) and multiplied by a conversion factor to determine how much Medicare will pay a doctor.

For 2013, the conversion factor is $34.023. This figure is the target of the so-called “doc fix” which Congress implements every year. The figure was supposed to shrink because of a calculation called the Sustainable Growth Rate (SGR). The SGR never kicks in, because organized medicine lobbies against it very effectively.

However, organized medicine also has a conflict of interest, because the American Medical Association’s primary line of business is licensing the codes that physicians need to use when billing Medicare. These are the same codes used to describe the “relative values” estimated by the central planners. So, organized medicine never tells Congress that the federal government should get out of the business of determining the value of every single Medicare procedure that physicians do.

Instead, Congress keeps delaying implementation of the SGR’s fee cut in a series of short-term fixes. Instead of dropping by one quarter at the end of March, the conversion factor will increase by 0.5 percent. However, it is supposed to revert to the SGR level three months later. That is, if the “fix” is not fixed again next spring, the conversion factor will drop by about 25.5 percent.

One consequence of this ridiculous procedure is that it makes a mockery of all Congressional Medicare budget scoring. Obamacare and all other legislation that addresses Medicare assumes that the SGR will kick in, when everyone know the politicians in Congress will panic every year and give the doctors more money.

The Congressional Budget Office’s score of the latest doc fix is exemplary. The three-month fix will increase Medicare spending by $7.3 billion versus previous scores of Medicare spending. But, politicians assert that this will not increase government spending, because all increases in spending have to be “paid for” under Congress’ rules.

And this $7.3 billion will be paid for by reducing certain payments to hospitals – in 2023, the last year of the Congressional Budget Offices’s scoring window. Almost zero savings take place in earlier years.

Nobody can take this game seriously. Both doctors and taxpayers will continue to suffer as long as they accept the notion that politicians should decide how much to pay for our medical care. A better solution would be to transform Medicare to a premium-support system, as proposed by Rep. Paul Ryan. This would allow seniors a broad choice of private health plans, while accurately defining taxpayers’ liability.

John R. Graham is Senior Fellow at The Independent Institute (www.independent.org), Oakland, CA.