Medicare, the government's health plan for seniors, has observed a ritual that's as regular and anticipated as the presidential pardon of a Thanksgiving turkey. It's called the "Doc Fix" and it's been enacted and reenacted 11 times in the last eight years.
The ritual consists of waiting to the very last minute and then delaying automatic cuts in Medicare payments to health-care providers. The supposedly automatic cuts that never happen were scheduled by legislation in the 1990s as a means of stanching the hemorrhage of Medicare expenditures. The cuts are based on a formula known as the Sustainable Growth Rate (SGR), which tied payments to doctors and other health-care providers to growth rates in the larger economy.
Each time the day of reckoning approaches, the American Medical Assocation (AMA) and others implore Congress to prevent the cuts. They argue, correctly, that cuts to physicians' reimbursements will decrease the number of doctors participating in Medicare (participating doctors are not allowed to charge more for a procedure than Medicare pays). The lowered payments make it economically unsustainable for doctors—especially those in primary care—to continue caring for patients within the Medicare system. As more doctors leave, the argument goes, seniors will get less access to health care.
Inevitably, in the eleventh hour, Congress "fixes" the problem, hence the term "doc fix," by passing temporary legislation upping the reimbursement rates. It kicks the day of reckoning down the road a few months. Every time the problem resurfaces, the calculated pay cut grows larger to make up for the fixes. When the ritual first began, doctors were facing pay cuts in the range of 5 percent per procedure. By June 2010, it had grown to 21 percent. By December 1, 2010 (the day of reckoning just averted) it had grown to 23 percent. When January 1, 2011 comes around, the scheduled cut will be yet higher.
This "doc fix" ritual cannot be practiced in perpetuity. No amount of temporary patches can obscure the fact that Medicare's liability continues to mushroom as the population ages and medical technology advances. The latest estimate of that unfunded liability is $37 trillion, or more than twice the current size of the U.S. economy.
Because the money doesn't exist to fund Medicare's promises, Medicare has no recourse but to reduce payments to health care providers. Yet the AMA and its allies routinely call for a permanent fix to the legislation calling for cuts in the reimbursement rates. They figure that by improving the formula by which the cuts and their timing are derived, the exodus of physicians from the Medicare system—and the resulting loss of access to health care for seniors—can be avoided.
The AMA and its friends in Washington are in denial. No matter how many pieces of gum they hope to stick in the cracks developing in the dam, they cannot prevent the dam from bursting.
Yet there is a simple short-term solution to the dilemma faced by Medicare, its beneficiaries, and its providers. It's no substitute for the sort of comprehensive entitlement reform that is badly needed, but it's a good first step.
Let Medicare providers set their own fees, and end the ban on what's known as "balance billing." Prior to the institution of government price controls in the 1980s, Medicare would pay a provider based upon a predetermined fee schedule. Providers were free to bill the patients for the unpaid balance of their fees. Assume, for example, that Medicare would pay $80 for an office visit. A doctor could accept that in full or charge $100 or $120 or whatever to his patients.
Most doctors individualized their balance billing policy. Elderly patients of modest means on fixed incomes would commonly see their balance waived or significantly reduced. Those more financially secure would not. Medicare more closely resembled traditional health insurance. Doctors had more incentive to stay in the Medicare system. Seniors took on a greater degree of responsibility for the cost of their health care. As a result, they also demanded more accountability and were more cost-effective in their utilization of health care dollars. As it stands now, doctors must accept Medicare reimbursements as full payment. To the extent that Medicare is offering below-market rates, doctors leave the system.
If doctors were set free from Medicare price controls by ending the ban on balance billing, then the Medicare administrators would be better able to reduce Medicare's contribution to provider reimbursement without fear of a physician exodus from the system. The entire SGR debate would become moot. The "doc fix" ritual would end, because the scheduled cuts could take effect rather than being perpetually postponed.
As Medicare beneficiaries pay a greater proportion of the providers' bills, market forces will ensue. More doctors will go into primary care if they can charge a fair price. And price competition will lead to better choices for senior patients.
Let the scheduled cuts begin. And unshackle the nation's health care providers. Let them set their own fees and, at their own discretion, bill for the balance after Medicare pays its part.
Medicare price controls are one policy turkey that should not be pardoned.