Source: Gibson, Dunn & Crutcher LLP.

Fix Doctors’ Pay and Improve Health, Too

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July 3 (Bloomberg) -- On Medicare, Republicans and Democrats don’t agree about much, except this: The current fee-for-service system is unsustainable, and the broken formula used to pay doctors who treat Medicare patients is a big reason why. Fortunately, there’s a consensus forming around fixing that formula -- and it’s an opportunity for the kind of bipartisan cooperation we rarely see in health-care policy.

In 1997, Congress passed the sustainable growth rate formula, designed to restrict the growth of Medicare physician reimbursements. Since 2002, the SGR has dictated cuts in physician fees -- but almost every year, Congress has passed the “doc fix,” temporarily postponing those cuts.

Aside from the instability created by the SGR overrides, the formula also cuts pay indiscriminately, failing to distinguish between specialties or physicians. Worse, the regular reprieves set up even steeper future cuts in physician reimbursements -- and potentially in access to health care -- under the Medicare program. The SGR is set to impose a 24.4 percent cut in physician payments in 2014.

The formula also fails to tie payment to quality. Outside of Medicare, private insurers have started using physician compensation to encourage providers to employ resources more effectively and efficiently. Fixing the SGR is an opportunity to embrace some of those changes in Medicare.

Reform Principles

Congress should move quickly to get rid of this flawed formula. Over the past several months, the House Energy and Commerce Committee and Ways and Means Committee have sought input from physician groups, health policy experts and other stakeholders in an effort to replace the SGR with an improved physician payment system. Recent draft legislation is a step in the right direction, and reflects many of the principles that should guide an SGR replacement.

First, at a macro level, SGR reform should be the initial step toward ending Medicare’s fee-for-service program. This is the underlying cause for the SGR -- and both Democrats and Republicans agree that a transition away from fee-for-service is necessary to ensure the sustainability of Medicare over the long run.

Second, an improved Medicare physician compensation system should begin to reward the quality of care provided, rather than the quantity or volume of services rendered. While physicians are understandably nervous about putting all their compensation in the hands of potentially subjective or novel metrics, at least some of what they are paid should be based on the quality of care provided to beneficiaries.

That means payments should vary based primarily on the quality of care that doctors provide. That way, doctors who deliver high-quality care will be rewarded accordingly, while those who do not will receive smaller payments and have incentive to improve.

Third, the quality measures should be risk-adjusted so that providers aren’t penalized for treating sicker patients or those with more complicated diagnoses or conditions. Moreover, the new payment system should be phased in over time. The House proposal would lock in stable, predictable fee schedule updates for a few years so that physicians can prepare for fundamental payment changes.

Fourth, the way quality is measured should be primarily determined not by bureaucrats and politicians, but by stakeholders (particularly physicians) who can create clinically meaningful metrics and achievable goals. Too often in recent history, Washington has tried to micromanage the provision of health care to the American people. Doctors, other care providers and patients should be the ones primarily responsible for building a quality measurement and reward system in a post-SGR world.

Data Opportunity

Finally, moving away from the SGR is a golden opportunity for better data collection on quality of care and patient outcomes. This data isn’t widely or readily available now. But under a system of quality-driven payments, doctors will demand to know the precise metrics on which they are being compensated. That will speed the development of information databases that will help both providers and consumers.

Moving away from the current payment model won’t be easy. Nor will it be cheap: Ending the SGR will cost an estimated $138 billion -- considerably less than previous estimates, but an amount that will nonetheless require Republicans to identify significant offsets if they are to keep the SGR repeal from growing the deficit.

Acknowledging the need to replace the flawed payment system for doctors is a significant opportunity for bipartisan action. It’s also a great first step toward lasting changes that are needed to strengthen Medicare for generations to come.

(Lanhee Chen is a Bloomberg View columnist and a research fellow at the Hoover Institution at Stanford University. He was the policy director of Mitt Romney’s 2012 presidential campaign. Follow him on Twitter at @lanheechen.)

To contact the writer of this article: Lanhee Chen at

To contact the editor responsible for this article: Christopher Flavelle at