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Bloomberg: There’s a Better Way to Pay Doctors

November 06, 2013

Congress may soon vote on a bill changing how, and how much, Medicare pays doctors. That’s a good idea — so long as taxpayers benefit, too.

The impetus for the change is a problem that Congress itself created. In 1997, lawmakers tried to keep down Medicare spending by limiting the growth of doctors’ payments. That was the idea, anyway; every year since 2003, physicians have successfully lobbied Congress to override the pay cuts imposed by the 1997 formula, a move that came to be known as the “doc fix.”

The result is a status quo that serves nobody’s interests. Doctors worry each year about a sudden drop in rates. Congress is forced to look for new money each year to offset the cost of preventing that drop. The federal government must make budget projections that reflect Medicare cuts that are never going to happen. Meanwhile, the purpose of the 1997 law — reining in Medicare spending — remains unmet.

The proposal before Congress would deal most effectively with the first of these problems. It would repeal the 1997 formula, permanently removing the threat of payment reductions. In their place, the measure would help Medicare catch up with a shift that private health insurers have already started: changing the way doctors are paid, by emphasizing the quality and cost of care over quantity of services.

This makes sense. Under the traditional payment model, doctors and other health-care providers get a fee for each service they provide. That creates a financial incentive to perform tests or procedures that might not be medically necessary, but no comparable inducement for healing patients quickly and efficiently.

Many large private insurers are already starting to abandon the fee-for-service system. By the end of last year, more than half the primary-care providers in WellPoint Inc. (WLP)’s network worked under some sort of value-based purchasing program; for Humana Inc. (HUM), that figure was 84 percent.

One drawback to the proposal in Congress is that it moves too gradually. Starting in 2016, doctors who shift to a new payment arrangement would get a 5 percent bonus. There’s no penalty for not taking part: The law would simply freeze the current payment rates. Nor are there any targets for doctor participation, and those who want to keep using fee-for-service can do so indefinitely.

The slow pace of change isn’t the only area where the proposal could be improved. It offers the bonus even to physicians whose costs remain unchanged, which is hard to justify if part of the purpose of the new program is to reduce medical costs. The new system would cost approximately $150 billion over 10 years, initial estimates suggest — but there’s no indication how it should be paid for. Most important, there’s no guarantee that new payment method would make Medicare more cost-efficient.

Still, all these caveats amount to issues to be addressed, not reasons to stick with the status quo. The financial stakes are too great not to embrace reform: Medicare spent $131 billion on physician and clinical services last year alone, a figure that’s projected to almost double by 2022. Changing the way doctors are paid is more necessary than ever.