Back to the Future
Medicare's Resurrection of the Labor Theory of Value

Robert Emmet Moffit

Robert Emmet Moffit is deputy director of domestic policy studies at the Heritage Foundation.

Could phrenology, classifying personalities on the basis of physical measurements of bumps on the head, all the rage last century, make a comeback? Probably not. But few Americans could have guessed that the U.S. government would be officially paying a whole class of Americans citizens--American doctors--on the basis of an updated version of the old labor theory of value, a discarded artifact of nineteenth century socialist economic theory. Not satisfied with confining this new payment system to government health programs, some members of Congress want to extend it to the entire private sector. Even more puzzling is that congressional policymakers, at least from the philosophically blank pages of the ample written record, seem oblivious to the theoretical assumptions underlying the policy.

 

The 1989 Medicare Physician Payment Reform

Since January 1, 1992, hundreds of thousands of doctors in the Medicare program, the huge federal insurance program that serves 35 million elderly and disabled Americans, are being reimbursed according to a new Medicare fee schedule. This new fee schedule, called the resource-based relative value scale, was developed in the 1980s by an impressive interdisciplinary team of social scientists under the direction of William C. Hsiao, a professor of economics and health policy at Harvard University. Using methods derived from modern social psychology, the Harvard study focused on discerning the "value" of a physician's "work." The team did that by calculating the amount of time, intensity, mental and physical effort, skill, judgment, and stress that goes into the job of providing a medical service, assigning those variables a numerical score, establishing a relative scale of different services or procedures, totalling the score for each, and then assigning a dollar value for purposes of reimbursement. Congress enacted a variant of that exercise into law in 1989 to cover as many as 7,000 different procedures performed by over 500,000 physicians in 240 localities throughout America.

The ongoing, four-year implementation of the relative value scale, modified by geographical and malpractice cost factors, and its components amounts to the largest single regulatory expansion in the history of the Medicare program. But the relative value scale is not a self-contained fee system. It is the key element of a three-part physician payment reform enacted by Congress in 1989. Two other components of that reform are the establishment of the Medicare volume performance standards and progressive limitations on the practice of "balance billing" by Medicare doctors--or what Medicare physicians can charge over and above the approved Medicare reimbursement level for a medical procedure.

The Medicare volume performance standards constitute a government projection of an appropriate rate of growth of the volume of Medicare physicians' services to the elderly and disabled. With limitations on fees and billings, Congress enacted the provision to prevent physicians from compensating for reduced Medicare fees by cranking up their volume of Medicare services to senior citizens. So the volume performance standards are designed to control volume by limiting future aggregate reimbursement levels. Thus, if physicians exceed the projected amount of volume in any given year, the aggregate Medicare reimbursement for physicians two years later is reduced proportionally, up to 3 percent. So doctors' reimbursement is also to be adjusted on the basis of the volume of Medicare services.

As a task of central planning, the challenge to the Health Care Financing Administration in estimating the volume of Medicare services to 35 million elderly and disabled citizens as well as determining, refining, and adjusting the relative value units for thousands of medical procedures is daunting. As with so many central planning projects, there is also the likelihood that the volume performance standards will result in physicians' behaving in exactly the opposite way the government intended. They will have an incentive to increase the volume of medical services. After all, a future reduction in Medicare fees for physicians in general does absolutely nothing to curtail an individual physician's present increase in his volume of medical services. In fact, he may even intensify his present efforts and increase his volume of services, and thus his immediate income, with a view toward compensating for expected future losses. Given the rapid growth of the aging population to be served by Medicare, retaliating for individual, antisocial increases in the volume of services by the few (or the many) probably will not work anyway. The goal is reduced Medicare volume and fewer medical services. For an individual physician there is no tangible financial incentive.

Finally, Congress and the administration put a third control on the doctor's Medicare income by limiting balance billing, the amount a doctor can charge a patient over and above the Medicare approved charge. The 1989 statute calls for a progressive limitation on the ability of physicians to charge beneficiaries for medical services--limiting it to 115 percent of the Medicare fee schedule, regardless of whether a patient may want to pay the extra portion of the bill and still remain in Medicare. The Bush administration argues officially that this sort of price control is necessary to "protect" consumers, forty centuries of experience with price controls--from Hammurabi the Great to the Roman Emperor Diocletian to Richard Nixon--notwithstanding.

 

Achieving Pay Equity

Limitations on doctors' billing practices and the government's estimate and enforcement of the "right" volume of Medicare services to the elderly are truly less interesting, at least from the standpoint of social and economic policy, than the relative value scale itself.

The relative value scale is premised on the unworkability of market forces in the health care delivery system. Instead of being a normal collision of supply and demand, relative value scale advocates argue, medical prices are essentially arbitrary and set unilaterally by the forces of supply: the medical profession. In fact, of course, congressional advocates of the relative value scale are right. Markets in the health care delivery system, dominated by employer-based insurance, are distorted. But instead of trying to inject, even on a limited scale, the market forces to rectify those distortions, proponents of the relative value scale want payments made on the "value" of a physician's work, while also factoring in the impact of malpractice and geography as well as practice and training costs. The emphasis on training costs and the costs of practice, such as the purchase or rental of equipment and office space and the recruitment and hiring of personnel, are not materially significant. The revolutionary character of the relative value scale is, rather, the government's attempt to quantify and rank the "value" of a doctor's labor--the most significant variable in the relative value scale equation--with no reference to market forces.

In its essentials the relative value scale resembles the comparable worth approach to job valuation: an attempt to measure the "value" or "worth" of different jobs on the basis of a social science calculation of the elements of a job, including its level of difficulty. Jobs are ranked accordingly.

Comparable worth doctrine became a centerpiece of "feminist" economics during the 1980s. The object of the comparable worth exercise in the past ten years or so was to "discover," through sophisticated social science methodology rather than market forces, the "true value" of diverse occupations and rank them on a scale of "comparable worth." Congressional advocates of comparable worth sought to upgrade jobs in "female-dominated" occupations relative to "male-dominated" occupations so as to achieve "pay equity" between men and women in the workplace. The key feature was to discern the objective value of the work involved in different occupations. The premise of the comparable worth enterprise was that the market was an unworkable arrangement; for the "true value" of work performed largely by women was obscured by entrenched social and sexual prejudices.

The federal judiciary dismissed the comparable worth doctrine when its proponents tried to apply it at the state level. Liberals in Congress considered it as the basis for federal pay reform for the federal civil service, but never got enough support to enact such an idea--even as the basis for a study of civil service pay scales.

But the parallels between the "feminist" comparable worth doctrine and the Medicare relative value scale are striking. The relative value scale is promoted by its advocates in Congress and the medical profession as an instrument to achieve "pay equity" in America's health care delivery system and to "create a level playing field" between "overvalued" and thus overpriced surgeons and other specialists, for example, and "undervalued" and thus underpriced general and family practitioners. Thus, Medicare not only is a program for providing medical services to the elderly, but also becomes a powerful engine of income redistribution and social justice among American physicians. A socially desirable result would be the positive valuation of "cognitive" medical skills, and an incentive for medicine to attract men and women interested in general and family practice. In short, high-priced surgeons would be cut down to size, and general practitioners would get a raise. The doctors would get "pay equity," and the government would save money.

That last point is especially worth noting. For the historical record, relative value scale advocates originally promoted the new fee schedule as a regulatory weapon to curb unnecessary, expensive, and overpriced procedures. Because it is the doctor who makes the diagnosis and prescribes and administers the treatment--including too many unnecessary or only marginally beneficial treatments--effective regulation must directly hit the target: the doctor. If the doctor is, as advocates of the relative value scale insist, the "key decisionmaker" in the health care delivery system, the control of the price he charges for a medical service is tantamount to the control, not only of the cost, but also of the character of American medical practice. In effect, the unacceptably high costs of Medicare and American medicine in general are traceable to the predominant physician pricing of medical services. Thus, the architects of the relative value scale originally promoted the new fee schedule as a key, if not the key, to controlling spiralling health care costs.

If controlling costs means saving money, that goal has been lost in the process of congressional enactment and bureaucratic implementation of the new fee system. The statute says that the relative value scale system must be "budget neutral": no more or less federal spending for the new system of paying doctors than for the old system. No one, either in the administration or in Congress, seriously argues today that the relative value scale is designed to save money. In fact, both congressional advocates of the relative value scale and administration spokesmen insist the opposite is the case.

Since the relative value scale is no longer expected to save money, its main value is apparently income redistribution among a highly paid class of professionals. That has supremely interesting implications for social policy. Consumers normally do not pay workers for the time, effort, or difficulty they experience in providing a service; they pay them for the service itself. Needless to say, perceived inequities in income are universal in a relatively free society, where consumers freely satisfy their own wants and needs, rather than measure up to someone else's standard of approved consumer behavior. Opera stars are relatively "undervalued," for example, compared with rock stars; nurses do not make so much money as long-distance truck drivers; struggling criminal attorneys are often not so well paid as high-priced corporate lawyers.

For ordinary taxpayers, this gargantuan effort must appear a mysterious enterprise. A family of four making only $16,000 per year typically pays about $2,000 in federal taxes. A family with an income of $20,000 per year pays approximately $3,700 in taxes. Among struggling lower- and middle-income taxpayers who subsidize the Medicare program, income discrepancies among physicians, whose average earnings amount to $164,000 per year, must be a profound social problem that is difficult to fathom. But the official position of the American Medical Association is that the redistribution of income and resources among physicians, from high-priced specialists to low-paid general practitioners, is a "fundamental goal" of the relative value scale. This entire regulatory enterprise, with its direct and indirect costs to taxpayers and physicians alike, now appears to be a herculean effort to arrive at a postmedieval version of the "just price."

But the relative value scale is indeed accomplishing a number of its key goals. Under the terms of the Health Care Financing Administration's final rule, there is a sharp redistribution of Medicare reimbursement from specialists to general practitioners. General and family practitioners are getting increases of 27 and 28 percent, respectively, which relative value scale advocates deem socially desirable, and surgeons and other specialists are getting decreases, a result also deemed socially desirable. For specialists the cuts in payments per service over the next four years are less than those proposed in June 1992 but still significant: thoracic surgery and anesthesiology each get a 27 percent cut; ophthalmology, a 21 percent cut; gastroenterology and neurosurgery, an 18 percent cut; pathology, a 20 percent cut; and cardiology, a 17 percent cut. Overall, physicians in Alaska, Nevada, and Florida will receive the largest aggregate reductions in Medicare reimbursement. The biggest winners under the new fee schedule appear to be optometrists, who are looking toward a 41 percent increase in Medicare reimbursement.

Implementation thus far has been messy. Beyond bitter disputes about how to convert "values" to dollars, estimate physician behavior, and gauge budgetary impact, the Health Care Financing Administration has not been getting a lot of the "work values" right. Even beyond the difficult task of estimating thousands of "work values," the agency is struggling with the rudimentary problems of old-fashioned central planning. Take, for instance, accounting for geographical variations and their impact on practice costs, such as the rental of office space. Observers have noted that a reliable index of commercial real estate costs, the best point of comparison for estimating the costs of a doctor's office, is often not available. As a result, the agency relies on residential rental costs, which are often quite different. So one meaningless number is piled on top of another meaningless number.

 

Back to the Future

The ongoing implementation of the relative value scale brings some very old issues into sharp relief. Some are purely technical, but the most important are rooted in the very concept of the relative value scale itself--problems inherent in any labor theory of value.

The labor theory of value was a feature in the thought of the leading classical economists, including Adam Smith and David Ricardo, but received its most politically significant formulation in the political and economic theory of nineteenth century German socialists like Karl Rodbertus and Karl Marx.

There are several versions of the doctrine. In its most notable formulation by Marx, the "value of any article is the amount of labor socially necessary, or the labor time necessary for its production.... The value of one commodity is to the value of any other, as the labor time necessary for the production of the one is to that necessary for the production of the other."

Socially necessary labor, says Marx, is measurable in units of time: "The labor time necessary is that required to produce an article under normal conditions of production, and with the average degree of skill and intensity prevalent at that time." Thus, the concept of social necessity is best understood in terms of the average skill and ability found in a given labor force, or the labor force of any given industry. In the old socialist theory, in contrast to the theory of the classical economists, it is the exploitation of that labor by the bourgeois ruling class, the ruthless extraction of surplus value, the fruits of labor over and above the specific amount of labor required to maintain the worker at his subsistence level, that progressively oppresses the working masses. That, of course, paves the way for the inevitable historical transition to a higher social order through a proletarian revolution.

Today that sort of thing sounds quaint. But well over a century ago, the labor theory of value, the key ingredient of socialist political economy, came under relentless intellectual attack from several quarters, most notably from British and Austrian economists.

Critics argued that the value of a commodity, or a service for that matter, could not simply be determined by the socially required labor time necessary to produce it; that the notion of objective value was an economic fiction; and that the economic value of anything was ultimately a matter of its utility, a utility subjectively determined by consumer demand.

Some of the most prescient critics of nineteenth century socialism argued that even if one wanted to retain a credible labor theory of value, it would have to be at least more superficially rational than the crude measurement of labor time--requiring something approaching Medicare's far more sophisticated relative value scale.

The relative value scale will most assuredly create discontent and discord in Washington's health care policy process each and every year. Moreover, in measuring and ranking physicians' work "values," the federal government seems to be giving up all semblance of following a rigorous, broad, and sophisticated social science survey of physicians intimately familiar with the medical procedures to be evaluated and ranked. Instead, the Health Care Financing Administration is moving toward establishing small, select panels of physicians for the future setting of relative values and hence physicians' fees.

To gain some perspective on this process, one should try to imagine plumbers, electricians, artists, or attorneys surrendering their economic future to a select panel of appointees charged with measuring the worth of their specific contributions to society. In any case, representatives of different specialties are certain to fight bitterly with one another over the limited resources of the Medicare budget and to employ hundreds and possibly thousands of consultants and lawyers to develop or argue the case that the Health Care Financing Administration's relative value scale work or practice values in any given instance are unfair or inequitable or erroneous and ought to be increased. Indeed, a lead article in the American Medical News advised physicians that, given the enormous complexity and uncertainties surrounding the new relative value scale fee schedule, it might be worthwhile for a doctor to spend as much as $4,500 in 1992 for a consultant to help him calculate the impact of the relative value scale on his practice. That is yet another layer of costly transactional paperwork on the American health care system.

 

The Future Is Now

There is little or no evidence that the relative value scale, backed by a Republican administration and a Democratic Congress, is an ideological instrument; indeed, to the contrary, the bland language surrounding its adoption and promotion has not even a slightest tone of philosophical conviction. Nevertheless, the major theoretical and practical difficulties attending the implementation of the Medicare relative value scale are inherent in the application of any labor theory of value, no matter how sophisticated the statistical measurement.

 

Ignoring Demand.

In relative value scale price setting, consumer demand has no role. Advocates of the relative value scale argue that because the physician is in a position to diagnose and prescribe treatment for disease, and because neither the diagnosis nor the treatment is capable of being intelligently evaluated by the patient, the consumer of medical services must of necessity play a passive role. The dominant objective factor here, then, is the agent of supply: the doctor. Because this supply-driven market does not and cannot deliver a "true price" nor uncover the "true cost" of a medical service, it is the job of the federal policymaker to discover the "true price" of a medical service by discerning the "resource costs" required to provide it, including the work of the doctor.

The architects of the Medicare relative value scale are candid about the limitations of their own methodology. If the patient has no role whatsoever, nor can have a role, how can the relative value scale system remunerate physicians on the basis of the "quality" or "benefit" of medical services provided to the patient? Currently, it does not.

Suffice it to say here that the quality and benefit are bottom line attractions in the selection of any service, including a medical service--precisely the elements to which a market responds. No matter how unsophisticated the consumers of medical services are required to be to justify the federal government's adoption and enforcement of something like the Medicare relative value scale, even the most undemocratic system of centralized economic planning often at least tries to incorporate quality and benefit in the allocation of goods and services to consumers.

Few consumer decisions are made under the pressures of a medical emergency. As a matter of fact, even unsophisticated consumers, so necessary to this model of central planning, do indeed inquire into the reputation and skills and experience of physicians, especially if the procedure they are to undergo is a delicate or difficult procedure with profound implications for their health or quality of life. That is not unlike the basic consumer inquiry into the professional reputation of lawyers, stockbrokers, auto mechanics, or many other professionals who offer technical or complex services to consumers in an open market.

So it is with medical specialists. It is one thing to argue, as do congressional advocates of the relative value scale, that as a general rule there are too many specialists and too many specialized procedures. It is quite another to translate that abstract principle into the treatment of real patients.

Advocates of the relative value scale are forthright about that problem. With more time, more research, and a progressive refinement of the methodological tools of their trade, advocates of the Medicare relative value scale suggest that they can incorporate indexes for quality and benefit. How the concept of "quality" is to be quantified in future social science research or how the "social benefits" of medical procedures could be calculated is yet mysterious. Given the current interest of some members of Congress in expanding the relative value scale beyond the confines of Medicare, the public should ask for an accounting of how such vital elements as "quality" and "benefit" are going to be incorporated in the future payment for medical services.

 

Ignoring Skill.

The relative value scale, of course, makes no distinction among physicians on the basis of skill in performing any given procedure. The result is that we end up with the "value" of a delicate and difficult surgery performed by a highly experienced and highly regarded surgeon being equated with the "value" of one performed by a physician with much less experience and perhaps a much less stellar reputation. Instead of trying to allow for greater flexibility in physician payment, federal policy operationalizes that absurdity by erecting a reimbursement system that pays each the same--as if they were the same--and compounds it by designating this a "fair and rational" price.

 

Ignoring Inefficiencies and Differences.

The use of average time as a principle of measurement in the relative value scale cannot measure the efficiency of a physician's performance or deal with the differences in the severity of the cases. In some cases the application of the average-time concept in the Medicare relative value scale has had some absurd consequences in measuring work across specialties. For example, following the publication of the June 5, 1991, interim relative value scale regulations, according to congressional testimony of the American Psychiatric Association, the use of average time in measuring physicians' work resulted in the equation of fifty minutes of psychotherapy with the draining of a finger abscess. More absurdities continue to surface.

 

Guaranteed Repeat Performance

Even strong supporters of the new system are concerned that its implementation will progressively undermine its credibility, among both doctors and the public. Likewise, the Physician Payment Review Commission, the independent review panel that reports to Congress on the reimbursement of doctors in the Medicare program, has expressed deep concern about both the readiness and the technical aspects of the relative value scale's application. But instead of replacing the relative value scale with market-oriented changes that would bring about more rational pricing in the Medicare program and strengthen the independence of private medical practice, the commission's recommendations only add another layer of bureaucratic tinkering and further complicate an already complex and administratively burdensome price control apparatus. To improve evaluation of work variables to make them more credible, the commission favors adding a broader representation to its panels of experts--including "clinicians, payers, beneficiaries, and health service researchers"--thereby applying the principle of "participatory democracy" to government price-fixing. In addition, the commission advocates refining the work of those panels with a secondary review by medical specialists and adding a "Medicare adjuster" to the relative value scale formula to better attune it to the work involved in providing medical services to the elderly. If the relative value scale formula were to be applied to the private sector, as proposed by Rep. Dan Rostenkowski of the House Ways and Means Committee, then the commission recommends that Congress make provision for the treatment of different kinds of patients than are normally served by Medicare, which suggests a "pediatric adjuster" to the Medicare fee schedule.

 

The Dance of the Administration.

If the basic theoretical assumptions underlying the relative value scale--that the cost of a service is equal to the resources required for its production or that a centralized government system is the best means of setting the price and allocating the supply of medical services--are incorrect, then focusing attention on all of the statistical aberrations, faulty measurements, and the need for more data, updated computer software, or further refinements in the formula is irrelevant. Fixing those shortcomings makes no difference. Arbitrary bureaucratic determinations will beget arbitrary "values" for medical procedures, and those in turn will beget arbitrary Medicare fees.

 

A Fair and Rational Future?

A central claim of the congressional advocates of the relative value scale is that it will ensure fair and rational pricing of medical procedures. Even if one were to assume that every theoretical objection to a resource-based system or a labor theory of value was groundless, there is yet the problem of the federal budget.

Whatever the merits of the debate on the relative value scale itself, medical professionals are astonishingly naive if they expect that, once firmly entrenched, such a complicated national fee system will serve as a scientifically disinterested mechanism for allocating "fair" levels of compensation. Federal policymakers have been obsessed with controlling costs, and justifiably so. But the new controls on doctors' reimbursement are likely to follow the pattern set by the Prospective Payment System for hospital reimbursement. Says Dr. David Sundwall, formerly administrator of the Health Resources and Services Administration at the Department of Health and Human Services: "Since 1983, the PPS system has provided a budgetary tool that allows the administration and Congress to ratchet down on annual rates of increase in spending for hospital services--and hospital spending has slowed dramatically compared with earlier periods. This point has not been lost on many policymakers, some of whom believe that a similar approach to paying doctors could also have a significant impact on spending for physicians' services and, perhaps, on overall Medicare spending as well."

Great expectations for those chartered to perform services on behalf of the government are invariably dashed. As Milton Friedman, a Nobel laureate in economics, observes: "When the government is taking over any activity, there is more money available. Typically, what happens is once the government has taken it over, the situation changes. There are no more votes to be gotten by taking it over some more. Politicians have to move on to a new field and take over new areas in order to get votes. The result is that those areas already taken over get starved. Instead of there being more funds available, there are less."

 

Is the Doctor in?

While much of the debate about the new fee system has focused on its impact on doctors, far more important is its impact on patients, especially in terms of the availability of medical care to the 35 million elderly and disabled Americans serviced by the Medicare system.

A key measure of access is the willingness of doctors to treat Medicare patients. In that respect Medicare has been a dramatic success. The number of physicians willing to take Medicare "assignment" or to accept the Medicare allowance as full payment for a medical treatment has been steadily climbing. But with the onset of the relative value scale plus volume controls and new and tougher limitations on balance billing as well as growing and time-consuming paperwork requirements in the Medicare program, that patient access could be compromised.

Unlike the system for Medicare hospital reimbursement, the three-part physician payment reform program has never been subjected to a field demonstration to measure its impact on cost, quality, or access to care. As a matter of public policy, it is remarkable that Congress passed a massive change in a multibillion dollar program without a demonstration project.

For specialists facing significant reductions, without any right to charge patients over and above the specified amount, the new regulatory regime is tough. With the rapid aging of the American population and an ever-growing demand for Medicare services, it is unlikely that doctors, increasingly dependent on Medicare for a significant portion of their practice, will simply drop large numbers of Medicare patients. Instead, the access problem may manifest itself in their refusal to take new ones. With the growth of the aged population, any reduction in the number of physicians willing to take Medicare patients is, by definition, excessive.

 

A Shift in Time Saves Mine.

Price control regimes follow predictable patterns. When the government controls one aspect of the commodity or service, the prices are artificially depressed, and labor, resources, and capital are shifted over to commodities or services that are uncontrolled so that the controlled areas starve for investment. There is a consequent reduction in the quantity or quality of the controlled services or commodities, and the consumers of those services are short-changed. In the meantime, the losses incurred by the provider of the controlled services are made up by charging higher prices in the market for the uncontrolled services. In other words, the costs are shifted from the controlled to the uncontrolled market, thereby aggravating the inflation in the uncontrolled market. The government, reacting with the practiced outrage of Claude Raines at the discovery of casino gambling at Rick's Cafe in Casablanca, is "shocked, just shocked" at this development and proposes to extend the controls further--compounding its original distortion of the market. Not much imagination is required to anticipate the next stage in the career of the Medicare payment system.

Of course, no matter how the government calculates fees for doctors or anybody else, using the relative value scale or any other concoction, distortions in the market are alleviated by allowing the suppliers of services to charge a price on the open market, whether that price is higher or lower than the government's set fee. Medicare, of course, allows no such flexibility. With tough balance billing restrictions on doctors, the result is simply a price control regime, with all the attendant consequences of price controls throughout the four-thousand-year-old history of their experience.

 

The Case for Perestroika at the Health Care Financing Administration

Even if the imposition of the relative value scale, along with limitations on balance billing and controls on the volume of Medicare services, were an excellent idea, it is still not clear that the Health Care Financing Administration is an efficient instrument for that level of central planning. For projecting the volume of Medicare services, the agency's officials admit that they do not have sound and effective methods for measuring the impact of technological change on physician expenditures, and they concede that patients' utilization of services is difficult to estimate. Beyond the Health Care Financing Administration's self-professed limitations, the testimony of professional medical organizations and even the Physician Payment Review Commission was characterized by complaints to the effect that the methodology for developing "values" across medical specialties is flawed, that too many of the "work" values are incorrect, and that too many codes that identify medical procedures are inadequate. The agency is wrestling with an impossible task.

Would it be out of place to suggest a time out? Is there a better way? Instead of insisting on the massive administrative and bureaucratic price-fixing that now characterizes the Medicare program, perhaps federal policymakers could simply set forth new rules for physicians in the Medicare program.

First, they should establish limits on doctors' fees in a clear and predictable fashion. Physicians cannot expect a blank check drawn on the Treasury to pay their Medicare fees. But it is not necessary for the Health Care Financing Administration to go through the enormous, bureaucratic effort to set up and update such a complex fee system to limit Medicare payments. Specifically, the government should refrain from any further cuts and give doctors an annual increase equal to the Consumer Price Index for Medicare-funded procedures. If specialties find that the simple CPI update creates a hardship, they can take their case to the Physician Payment Review Commission. If the commission is convinced that the specialty should be allotted an increase to account for changes in the market, then the commission can simply recommend a change to Congress.

Second, policymakers should eliminate balance billing restrictions in return for full price disclosure. Doctors should not be restrained by limitations on their balance billing, but in return for that freedom to charge over and above the official reimbursement level, they must disclose their fees to patients before, not after, they are treated.

We know that among health care providers in the "private market" there are often huge variations in price for the same procedures, especially in hospitals. By allowing doctors to charge patients above or below the Medicare reimbursement level in an open market, the system would free patients to make comparisons with the published fees of other doctors. They would have an incentive to perform a simple consumer exercise they do not do now: question fees. This not only would make patients better shoppers, but would also engage them more directly as patients in the treatments that doctors prescribe for them. In other words, it would make them better patients. Overall, that would contribute to a healthier doctor-patient relationship.

Finally, policymakers should reduce Medicare paperwork in return for guaranteed acceptance of Medicare assignment for low-income patients. The federal government should do everything in its power to reduce the excessive paperwork and the regulatory hassle factor that make it increasingly difficult for doctors to treat the elderly. Meanwhile, in all cases, doctors should be required to take Medicare assignment for low-income elderly persons. In light of the massive regulatory expansion otherwise confronting doctors, such a requirement, in return for reduced regulation, seems a reasonable trade-off.

Such changes in Medicare reimbursement would make the system less cumbersome and more user-friendly, for both doctors and patients. By pursuing this set of policy initiatives, Congress can do something truly revolutionary, even more revolutionary than central planning--inject the forces of the market into a public health care program that is drowning in a sea of its own regulation.


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