The Medicare Fix

Take a deep breath, Congress.

Photographer: David Paul Morris/Bloomberg

Congress is within reach of trashing the old and unworkable formula that Medicare uses to pay doctors. By itself, this is what it sounds like -- a bureaucratic maneuver that matters little to anyone but the doctors who treat Medicare patients. The system that Congress replaces it with, however, could represent a big step forward in improving the quality, and lowering the cost, of everyone's health care.

The old formula, created in 1997, began as an attempt to limit the growth of Medicare's payments to doctors by tying them to broader economic growth. That formula, the sustainable growth rate, worked pretty well while the economy was expanding briskly. When the expansion stalled, however, the formula called for a pay cut -- and doctors revolted.  

Congress responded by passing what has come to be called the "doc fix" -- a temporary reprieve from the mandated pay cuts. The first of these was for 2003, and there's been one every year since.

If this were merely a waste of congressional time, it might not matter: So what else is new? But it's also a lost opportunity. Because Medicare accounts for such a big share of health-care spending, its payment policies influence practices in the rest of the system.

Traditionally, Medicare has worked on a fee-for-service model, which encourages doctors to provide the greatest possible number of services. If its payments could be designed instead to push doctors toward a focus on outcomes and efficiency -- to make the quality of treatment matter more than quantity -- that could reduce costs and improve care.

So it is a hopeful development that, with the latest fix due to expire April 1, Republicans and Democrats in the House seem close to agreeing on a new quality-oriented payment system for Medicare. So doctors who participate in groups that coordinate care, for example, would get extra money. The deal reportedly includes a two-year extension of the Children's Health Insurance Program, which is a good idea in its own right.

The remaining hurdle is cost -- an expected $200 billion over 10 years. About $70 billion of that will be covered by making other cuts to Medicare payments, and by increasing contributions from high-income beneficiaries. If Congress wanted to save more money, there are ways: Congress could end overpayments to hospitals for training doctors, for example, or make it harder for doctors to refer patients to their own businesses. There are dozens of ideas out there.

At any rate, changing the way Medicare pays doctors is worth some deficit spending -- especially if not changing the formula, and relying on more short-term fixes, is also likely to result in deficit spending. If a new payment formula can change the way doctors practice, the long-term savings and the improvement in public health may make it worthwhile.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.