July 16 (Bloomberg) -- Medicare will cut payments to insurers instead of doctors under legislation Congress enacted over President George W. Bush's veto.

In overriding Bush's veto yesterday, the Senate and House averted a 10.6 percent reduction in fees paid to doctors by Medicare, the U.S. health program for the elderly and disabled.

Bush said he backed restoring the fees for doctors, although he opposed paying for it by cutting $12.5 billion over five years from insurance companies. The insurers, led by UnitedHealth Group Inc. and Humana Inc., provide care to about one in five Medicare beneficiaries. Now, the companies face the prospect of more cuts from Democrats who say the government pays too much, according to health policy analyst Bob Laszewski.

Insurers ``should have used their political capital to get the best five-year transition they could'' to reduced rates, said Laszewski, who is based in Washington, in a telephone interview today. ``Now they have zero political capital, and they're just going to have it done to them next year. It was incredibly foolish.''

The Senate voted 70-26 yesterday, more than the two-thirds needed, to override Bush's veto of the Medicare legislation. The House voted 383-41 earlier in the day.

The six-member Standard & Poor's 500 Managed Health Care Index, dominated by the biggest Medicare Advantage providers, rose less than 1 percent at 4:06 p.m. New York time. The index has fallen 4.6 percent since July 9, when the House first approved the legislation by a veto-proof majority.

Doctors' Fees

The cut in doctors' fees was required under a formula Congress approved a decade ago to hold down Medicare spending. It has been set aside repeatedly in recent years, leaving physicians facing a 10.6 percent reduction on July 1. Health groups such as the American Medical Association, the largest organization for physicians, said the elderly would have a harder time finding doctors unless the cut was reversed.

Bush and Republican supporters said they wanted to find a way to pay doctors without taking money from insurers that run plans called Medicare Advantage. Reducing the funding will hurt people who have the coverage, Bush said when he vetoed the measure yesterday.

``I support the primary objective of this legislation, to forestall reductions in physician payments,'' Bush said in his veto message. ``Yet taking choices away from seniors to pay physicians is wrong.''

Twenty-one Republicans in the Senate joined Democrats to override Bush's veto, including four Republicans who opposed the measure when it passed the Senate on July 9.

Fee-for-Service

The Medicare Advantage plans run by private insurers cost, on average, 13 percent more than Medicare spends to provide care directly. The insurers offer extra benefits such as vision care and lower co-payments. The federal health program is expected to pay $86 billion this year for the coverage.

Bush's opposition to the legislation focused on changes in insurers' private fee-for-service plans, which a congressional advisory board has estimated are paid 17 percent more than traditional Medicare would pay for the same patients.

The legislation will require this type of Medicare Advantage plan in 2011 to form provider networks, instead of assuming that all doctors and hospitals that take Medicare are part of the plan. The change may cause some plans to close and beneficiaries to choose other Medicare options, according to a report by the Congressional Budget Office.

Teaching Hospitals

Medicare also will stop paying the private plans extra for patients treated at teaching hospitals. These facilities already receive extra payments to cover their higher cost.

Democrats said insurers in Medicare Advantage are overpaid.

``There is no reason to overpay the charlatans who provide second-rate care,'' said Representative Pete Stark, a California Democrat, during House debate.

The law also constrains some of the marketing techniques that helped lure more than 10 million beneficiaries into Medicare Advantage programs. The law bans Advantage marketers from providing free meals at sales presentations and making unsolicited telephone calls and home visits.

Equipment Bidding Delay

A provision of the law suspends Medicare's new bidding process for medical equipment such as wheelchairs and walkers. The procedure, intended to save money, requires suppliers to compete on price instead of being paid according to a fee schedule. Some suppliers who lost in the initial bidding, covering 10 metropolitan areas, said they were treated unfairly and Medicare beneficiaries might not get supplies they needed.

The delay of bidding will ``perpetuate wasteful overpayments to medical equipment suppliers,'' Bush said in his veto statement.

The measure also will add $4 billion over five years to Medicare for more preventive care, expand assistance for low- income seniors, and reduce the co-payment for mental health services to 20 percent from 50 percent, in line with other services.

Physicians will get an extra 2 percent if they submit prescriptions electronically, in an effort to help reduce errors. Those who don't use the so-called e-prescriptions by 2011 would have their fees cut by 1 percent the following year, rising to 2 percent in 2014.

Kidney dialysis centers, which now receive a lump sum for laboratory work, will be paid a single `bundled'' rate by 2011. That rate will be regularly adjusted for inflation, as is done with hospitals and other providers.

To contact the reporters on this story: Aliza Marcus in Washington at amarcus8@bloomberg.net; Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: July 16, 2008 16:16 EDT