A popular definition of insanity – doing the same thing over and over and expecting a different result – could well be applied to the Sustainable Growth Rate. Understanding the origins of this failed policy is highly instructive as to the effects of government price controls in the Medicare system.
Costs within the Medicare system started to rise faster than predicted as soon as the program was instituted. This should have come as no surprise. Millions of seniors were handed an entitlement to medical services, which of course increased the demand for these services. Physicians were allowed to charge their “usual, customary, and reasonable” rates and did so.
Concern over rising costs led to various responses from the Health Care Financing Administration (HCFA, the bureaucratic precursor of the Center for Medicare and Medicaid Services), to rein in spending. These mostly took the form of price controls on physicians’ services. On its face, this is stupid policy, as payments to doctors were between 10 and 15% of total program spending. Cuts in this sector couldn’t reasonably be expected to produce much in the way of savings. And of course, going back to the dawn of civilization, price controls have never worked and have more often than not been disastrous.
In 1983, HCFA began a fee freeze on Medicare payments to doctors. This was extended through 1986. Total Medicare spending increased dramatically during this period. Why? Doctors, to maintain income, increased the volume of services provided. The more patients seen, the more tests, prescriptions, consultations, and hospitalizations occur. Limiting the payment for an office visit invariably leads to less time per patient encounter. This must result in loss of quality.
In 1989, HCFA moved away from paying doctors based on their UCR charges to the Resource Based Relative Value System, a socialistic construct that assigned dollar amounts to the myriad services provided by doctors. Balance billing of wealthier patients (not all seniors are poor) was severely restricted. Non-participating physicians could only charge a bit over the Medicare “maximum allowable charge.” Since they were also penalized with a lower payment rate, this increased the physician Medicare participation rate. The net result was another big pay cut to physicians, which was again followed by a major increase in total Medicare spending. It also brought larger numbers of doctors into the Medicare system, where they became highly sensitized to the dictated pricing.
In 1997, the Medicare Modernization Act introduced the SGR. The idea was to base Medicare physician fees on total program performance the prior year. If total Medicare spending were above a certain target, payments to physicians would be frozen or cut in the current year.
But pay cuts to doctors predictably cause total spending to increase. The Medicare Payment Advisory Commission (MedPac) recently reported that from 2002-2012 Medicare spending on physician services per beneficiary increased by 72%. A 9% increase in rates during this period was dwarfed by the growth in volume of physician services, including lab tests (91% increase), imaging (79% increase), and other procedures (up 68%).
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
If SGR doctor pay cuts had been allowed to take place, doctors would now be getting paid pennies to see Medicare patients! This would have forced many doctors out of Medicare completely, creating a shortage (the legacy of most price controls). The SGR meets the definition of insanity.
As it is, the net effect of pay cuts and freezes has been to force many physicians out of private practice, and into hospital systems, where costs are much greater. From 2002-2012, Medicare fee-for-service rates increased 9%, while the cost of operating a practice increased 27%.
What’s the solution? The bill just passed by the House of Representatives and awaiting Senate action does away with the SGR, but enshrines Medicare price controls and an arbitrary update formula guaranteed to be substandard. It also furthers the push away from fee-for-service payment in favor of newer forms of managed care, such as the Accountable Care Organization. These, despite the bells and whistles, are doomed to fail.
Since much of the current Medicare disaster can be traced directly to the effect of price controls, and direct payment of doctors through mandatory assignment, we should do away with these.
Congress should insist that Medicare physician payments go through patients, and restore to physicians the right to balance bill. This would include being able to provide care for free to a truly indigent beneficiary (a practice that is now illegal).
This would stem the flow of doctors exiting Medicare, and private practice, improve quality of care, and empower patients. Payments to physicians would likely remain flat, as volume of services would immediately decline. And this would moderate total program spending.
[Photo from Wikimedia Commons]
