Why Congress should change how Medicare pays doctors

Legend has it that cobras took over the streets in the sweltering heat of 19th-century colonial Delhi. To eliminate the dangerous snakes, British officials offered a bounty for every dead cobra brought into government buildings. Soon, locals began breeding and killing cobras for profit. When British officers learned of the plan, they immediately ended the program. In response, breeders released their now worthless snakes back into the streets, turning a problem into a crisis.

This story of unintended consequences, known as the “cobra effect‘ serves as a stark reminder that well-intentioned policies usually backfire disastrously when human nature and economic incentives are not taken into account.

Medicare’s method of reimbursing physicians bears a striking resemblance to this parable.

Medicare’s payment model, created with the intention of controlling healthcare costs through calculated payments and budget caps, has instead contributed to healthcare inflation and now threatens to endanger patients’ health.

Here’s how we got into this toxic situation — and what Congress should do to help.

How we got into this mess

The problem started with the Budget Reconciliation Act of 1989, a law intended to keep total payments to physicians relatively flat year after year, limiting total Medicare spending to increase by no more than $20 million per year.

To calculate payments to doctors, Medicare assigns an intensity factor to everything from a doctor’s visit to an X-ray to surgery. This is called a relative value unit, or RVU, to which Medicare proposes a fixed dollar amount. That value is then multiplied by the total number of RVUs to generate the actual physician payment.

When expected Medicare payments for the year exceed the budget neutrality limit, the Centers for Medicare and Medicaid Services (CMS) reduces RVU payments. But as doctors face higher office costs (staff, salaries, rent and utilities), they have no choice but to perform more procedures and see patients more often. This in turn forces CMS to propose even lower RVU values ​​the following year, perpetuating an endless cycle of volume escalation and payment reductions.

The counterproductive nature of this approach becomes even more apparent with the subsequent political response.

Once CMS announces reduced RVU levels, individual physicians and the American Medical Association vigorously lobby Congress. Lawmakers almost always bow to political pressure, causing physician compensation to rise. The combination of restored payments plus increased volume of services pushes total Medicare costs even higher.

Four short-term mistakes in Medicare’s payment approach

Here are four reasons why the Medicare approach is doomed.

1. Misplaced focus on doctors’ incomesAlthough the goal of the Budget Reconciliation Act was to control overall Medicare costs, the legislation focuses primarily on physician income, which represents less than 10% of the country’s total healthcare expenditure. A more targeted strategy would address the much larger costs, such as hospital operations (30% of total expenditures) and the rapidly rising price of drugs.
2. Ineffective budget neutrality: The budget neutrality requirement is applied nationally, not at the individual level. Thus, it remains financially beneficial for individual physicians to increase the volume of services they provide in response to the reduction in unit payments.
3. Higher costs due to reimbursements for hospital facilities: Hospitals, which ones almost 80% employed of U.S. physicians charge a fee for outpatient services that often exceeds payments to the physician. Because lower RVU values ​​lead to more outpatient services, Medicare costs rise even faster because the government must reimburse both physicians and the hospitals that run the facilities.
4. Financial pressure and physician exodus: The pandemic has increased labor and supply costs in healthcare. Within the boundaries of budget neutrality, the financial numbers don’t work, especially for primary care practices. The Association of American Medical Colleges (AAMC) now projects one shortage of up to 139,000 doctors in 2033 of early retirements are increasing. Other doctors have begun charging concierge fees to offset payment delays, pushing low-income patients toward more expensive emergency care, raising overall health care costs and delaying essential treatments.

The cumulative effect of these policies: doctors have to see more patients every day, with less time for each patient. This rushed environment not only affects patient satisfaction, but also increases physician burnout and increases the risk of misdiagnosis. These time-sensitive conditions contribute to an estimated 400,000 deaths in the US annually due to misdiagnoses. according to research from Johns Hopkins.

Long-term consequences: Deepening the healthcare crisis

The implications of Medicare’s current payment strategy extend far beyond immediate inefficiencies. They will find themselves in a deeper health care crisis if Congress doesn’t act to stop the bleeding. This is why:

• Damage to communities: When government payments decrease, the companies that finance private health care (which covers 155 million Americans) pay higher prices to make up the difference. It is the only way to keep medical care providers viable despite higher labor and supply costs. Recent research led by Yale Economist Zach Cooper concludes that higher healthcare costs paid by employers result in lower wages and significant job losses in all communities.
• Postponing innovative change: There is an abundance of it innovative AI approaches that can improve the quality, accessibility and efficiency of American health care. However, the current pay-for-volume model that Medicare uses is failing to reward adoption. Instead, it encourages in-person visits and additional procedures rather than encouraging physicians to focus on preventing chronic disease, avoiding its complications, and eliminating unnecessary or ineffective medical treatments.

Strategic reforms: implementing a smart solution

To protect our nation’s health and effectively manage Medicare costs, Congress must take decisive action. It’s time to move beyond the current fee-for-service model. Here’s how:

• Pay for value, not volume: Pay-for-volume reimbursements fail to adequately incentivize effective chronic disease control, leading to a 30-50% increase in preventable heart attacks, strokes and kidney failure, according to the CDC. A shift to a capitation model – a fixed annual payment to a group of physicians for managing the health of a population – would encourage physicians to leverage modern technology and empower patients to achieve better health outcomes. This proactive approach could significantly reduce Medicare costs by preventing serious health problems before they occur.
• Eliminate the middleman: Today, Medicare’s capitalized payments go to insurance companies, not directly to physicians. Insurance companies with no other way to contain costs are implementing restrictive prior authorization procedures that delay and prevent necessary treatments, undermining patient outcomes. Direct payments to physician groups would align incentives and drive meaningful healthcare transformation.
• Finance the transition to smarter payments: The shift to capitation poses significant risks to individual physicians if undertaken alone. The most important improvements in healthcare come from collaboration within groups of physicians. Yet building high-performing medical groups requires significant time, resources and leadership – all of which are in short supply in our overwhelmed system. Today, CMS should encourage medical organizations to collaborate, rather than compete, to increase the number of RVUs for their specialty at the expense of other specialties. For example, it could announce a five-year plan to phase out fee-for-service payments, moving instead to contracts with multi-specialty medical groups that are ready to embrace capitation. This strategic move would not only streamline healthcare delivery, but also improve the quality of care by promoting teamwork and integration among specialists.

Transforming Medicare’s payment model to a pay-for-value system, while complex, is entirely feasible. Organizations like ChenMed have already demonstrated success. This large primary care group specializes in the care of complex, elderly patients in socioeconomically disadvantaged communities and has consistently achieved superior clinical outcomes at a lower cost. The organization highlights the viability and benefits of capitalized payment models.

Currently, the debate between CMS and health care groups focuses solely on whether next year’s payment reduction will be closer to 2.9% or 1%, and which specialties will be most severely impacted. This short-sighted view ignores the bigger problem: 98% of the reimbursement methodology remains untouched.

If Congress makes these changes now, we can significantly improve our nation’s physical and financial health and ensure a sustainable health care system for generations to come.

The Centers for Medicare and Medicaid Services was contacted for comment on July 28, 2024.