The Wrong Policy: Physicians, Medicare Payment, and What Congress Could Learn from Private Sector Experience

May 10, 2010

Bruce Vladeck has a terrific piece in this week’s New England Journal of Medicine describing the problems with how physician fees are currently adjusted under Medicare.

The Sustainable Growth Rate (SGR) formula, put in place in by Congress in 1997 – was designed to use physician fees as a tool to control health care spending. That is, total physician payments per beneficiary were to grow no faster than growth in the gross domestic product (GDP), and if they did, physician fees would have to be reduced.

This policy has not worked to slow health care spending, and every year, when Congress gets to the point of having to cut physician payments (since health care costs have grown more than GDP), they suspend the policy without fundamentally altering it.

Today, this has become a $20 billion problem (and, Congress is again suspending the 21 percent fee reduction that was to have gone into effect on April 1). This issue was “supposed” to have been fixed in health care reform, but a desire to limit projected cost increases in the bill kept this issue out of the Patient Protection and Affordable Care Act.

Oh, if only Congress had talked to Michigan back in 1997: we could have told them what a bad idea the SGR was because we tried it – two decades earlier – with the same effect.

In the late 1970s, Blue Cross and Blue Shield of Michigan noticed that health care spending in one part of the state (the I-75 corridor, Detroit to Flint) was much higher than in the rest of the state. So, the Blues decided not to increase physician fees in that region until spending was on par with spending in the rest of the state.

What a disaster! Not only did spending not go down in that region, it actually went up!

On reflection, it makes sense that spending increased as a result of the I-75 corridor policy, right? Start with the fact that physicians are rational economic actors. Even if they aren’t consciously thinking about their incomes when determining appropriate referrals and the like, they are (as are we all) influenced by incentives. The I-75 corridor policy, like the SGR, relied on the collective actions of individual actors – physicians – to make any difference in future payments. And, physicians did not believe that the collective would change. Therefore, the rational economic incentive of this policy for any one physician was to spend, prescribe, and provide as many services as possible in the short run, because in the long run, payments would likely decline. That is exactly what happened in Michigan, and it’s exactly what happened nationally in the Medicare program. The only difference is those trends became clear at BCBSM by the early 1980s, and BCBSM decided to abandon the policy in favor of different approaches to addressing health care spending – something Congress has not yet been able to do, even after more than 10 years of clarity that the SGR is a failed strategy.

So it’s all well and good for us here in Michigan to look at Washington and say, “I told you so.” But, that doesn’t really help the country get on a different path.

This is a policy that clearly requires the political courage to say, as we did in Michigan years ago, OK, we made a mistake, and then move on. Bruce Vladeck provides an elegant analysis of why this is so hard to do politically – the projected impact of this change does have a considerable effect on the projected national deficit. Nevertheless, it must be done – and every year’s delay makes the problem worse since “costs” accumulate and compound over time.

Beyond fixing this particular problem, it is essential for us to take steps to avoid falling into this same trap again. As we say to our children, the issue isn’t to fix blame for the mess we’re in, but to learn from it so it doesn’t happen again.

So, what is the learning here? The learning is that there are lots of us out in the field – beyond the beltway – trying a lot of different approaches to addressing health care spending. And, it would be good if policy makers in D.C. were interested in and open to learning about our experiences, because we can teach them about things that didn’t work as well as those that did.

There is a world beyond Washington D.C., and while Congress sometimes recognizes that and looks for models (like the Mayo Clinic, Geisinger, and a few others), it should be casting a wider net. Health reform provides a great opportunity for experimentation. How about taking full advantage of what the private sector has already learned at the state and local level, and building on that?