Commentary

Fix Medicare - Not Its Prices

As they have each year since 2003, the nation’s physicians are scrambling to prevent a scheduled cut in government payments under Medicare.

On Jan. 1, the federal health-insurance program for the elderly and disabled is set to reduce physician payments by 5.1 percent.

Of course, the problem isn’t that physicians are paid too much or too little - it’s that prices for physician services are set by Congress rather than supply and demand.

Last week, Rick Kellerman, the president of the American Association of Family Practitioners, a major medical lobby, told a rally of doctors on Capitol Hill, “Our message to Congress is simple: Get your act together and fix” Medicare’s physician payments. Rep. Joe Barton, the Texas Republican and chairman of the House Energy and Commerce Committee, has promised that Congress will do so before the end of this year.

Physicians predict dire consequences if Congress implements the cuts. The American Medical Association warns that “45 percent of physicians will either stop accepting [Medicare patients] or decrease the number of new Medicare patients they accept.”

In fact, past experience tells us that these cuts probably won’t much reduce Medicare spending, physician incomes or physician participation in the program. When Congress has cut payments in the past, doctors have typically responded by focusing on services where the spread between price and cost is greatest, and increasing the quantity of services they provide. And overall Medicare spending on physicians has still tended to grow, with physicians’ participation in the program remaining high.

Indeed, even if some physicians did drop out of Medicare, the cuts’ greatest impact would likely be on the mix and volume of services physicians offer. For example, in 1998, changes in Medicare payments made house calls profitable for many physicians, and house calls predictably surged. Now Congress is considering reducing payments for house calls. Since Medicare forbids physicians and seniors to negotiate prices themselves, those cuts could eliminate many house calls - regardless of their value.

In other words, Medicare’s physician-payment system doesn’t do much to contain spending or to promote quality.

The Medicare bureaucracy is somehow supposed to divine the correct prices for more than 7,000 distinct physician services in each of Medicare’s 89 physician-payment regions (yep, some 623,000 separate prices). And - unlike market prices - these price controls don’t automatically adjust to reflect the value of goods and services. As a result, quality suffers.

In fact, Medicare pays low-quality physicians the same amount it pays high-quality ones - and sometimes pays them more. Several studies by John Wennberg and his colleagues at Dartmouth Medical School suggest that the quality of care in Medicare is well below what it could be - and that quality is lowest in areas where Medicare spends the most.

Should Medicare pay physicians on the basis of quality? Well, there’s no reason to think that Medicare’s bureaucracy will be any better at defining “quality” than it is at setting prices …

It is tempting to think that Medicare’s payment system exists to benefit physicians who know how to play the game. But few physicians enjoy having their practices thrown into turmoil by payment changes uttlerly unrelated to the value they provide.

A more plausible explanation is that Medicare’s pricing system exists to serve Washington’s political class. Politicians can use the perennial threat of payment cuts to shake down wealthy physicians for political contributions. Organizations that lobby on behalf of physicians - like the AMA and the AAFP - rake in membership fees as well. It is little wonder that, according to the watchdog group Political Money Line, the health-care industry spends more on political contributions and lobbying than any other.

This is madness. The government has no business setting prices for physicians’ services. Until Congress lets the market set those prices, Medicare will continue to purchase sub-standard care and encourage shakedowns that benefit no one but politicians and lobbyists.

Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It (2005).