MedPAC’s SGR Solution: Bad Medicine For A Chronic Problem

The Medicare Payment Advisory Commission (MedPAC) is the closest thing Congress has to adult supervision on important health policy questions. The Commission commands bipartisan respect both for its record of sound policy advice and for its leadership.

With its October recommendations, MedPac attempted to solve the sustainable growth rate (SGR) physician payment formula budget crisis by spreading its more than $300 billion cost beyond the physician community.  More than two-thirds of the burden would fall on hospitals, pharmaceutical and device manufacturers and, significantly, on Medicare beneficiaries themselves. Clearly MedPac’s intent was to widen the circle of pain.

However, a significant portion of the burden, over $100 billion, would still be borne by the physician community through 17 percent reductions in specialists’ fees and a ten-year freeze on primary care fees.    If implemented, MedPac’s policies will give rise to a festival of unintended consequences: weakening multi-specialty group practices (which rely upon specialist comp to cross-subsidize their primary care services); winding down private practice-based primary care medicine; accelerating the hospital roll-up of medical practices while widening hospitals’ losses on the practices they already own; and triggering a further wave of ill-timed cost shifting to private insurers.

The Flaws In MedPAC’s Proposal And Where They Would Lead

MedPac committed two regrettable policy errors in its SGR recommendations.  Of the two, the more grievous is assuming that the frozen primary care fee schedule will be even close to adequate to replace the current cadre of baby boom primary physicians.  Even with the proposed specialty fee cuts, primary care compensation will still be relatively unattractive.  Only trust funders or those married to investment bankers will be able to afford to practice primary care (unless they choose to work for hospitals who can afford to subsidize them).  The rest could take their entire careers to pay off their loans.  Primary care compensation needs to double (as Britain’s NHS did),  or the tens of millions of baby boomers entering the Medicare program in the coming fifteen years will have markedly inferior access to primary medicine compared to their parents.

The recommended across-the-board 17 percent cut in Medicare’s specialty fees will accelerate the exodus of practitioners from the 24/7 specialties like general surgery and cardiology already under way. It will also accelerate the present hospital feeding frenzy of specialty practice acquisitions, leaving hospitals the unhappy owners of most of the physician practices in their communities.  Though most Washington policymakers are blissfully unaware, the current wave of hospital practice acquisitions carries an unmistakable odor of economic exploitation and rent-seeking behavior.

In a shockingly short period of time, cardiology has returned to being a hospital-based specialty. With their formerly independent cardiologists, hospital managements all over the country were confronted with the following ugly choice:  “Would you like all our catheterization/stents and open heart referrals or none of them?”   To avoid losing their referrals, hospitals made cardiologists cushy salary guarantees extending out five to seven years at compensation levels far exceeding common sense, and, in some cases, violating Medicare’s fraud and abuse guidelines.

Under MedPac’s specialty fee scenario, the cardiology shakedown will spread to orthopedics, oncology, neurosurgery, etc, leaving hospitals saddled with a full complement of very expensive, 35 hour a week specialists.  The specialty payment cuts MedPac has recommended will also widen hospital losses for physicians whose practices they already own, further diminishing hospital cash flow just as reduced patient volumes and rising bad debts have compromised hospitals’ finances.

To offset their losses on acquired physician practices, hospitals will immediately mark up the specialists’ fees to Medicare’s hospital-based rates and put them on “eat what you kill” (e.g. RVU based production-driven) compensation plans, eliminating any potential Medicare program savings and perpetuating the “do more/make more” incentives of fee-for-service Medicare.  Hospitals with strong market positions will also pivot to aggressive rate demands upon their local private insurers to offset their physician practice losses.

The sad fact is:  the vast majority of hospitals do not know how to manage physician practices.  Managements seem to have learned or remembered little from the 1990’s physician practice acquisition fiasco. Most hospitals and systems lack the governance, political savvy, information technology infrastructure or capital to manage large collections of separate physician practices, which is what they presently own.  At the current pace of development, hospitals and systems could take a decade or more to create real, functioning, self-governing medical group practices capable of managing population health risk or meaningfully restraining health cost growth.

We continue not to have had the policy conversation about whether it makes sense for the health system to be controlled by regional hospital monopolies. That would be the long-term structural consequence of the MedPac recommendations.  In a well-balanced health system, there is a dynamic tension between hospitals, physicians and health plans.  Medical practice is already the weakest of these three actors.  Building up multi-specialty group practice and encouraging more physician-sponsored managed care enterprises (health plans or Independent Practice Associations (IPAs)) would help right this imbalance, but those do not appear to be part of the policy agenda in Washington right now.  They were certainly not part of the Affordable Care Act.

A Way Forward

As previously argued, the SGR was a catastrophic policy mistake because there were no feedback loops or mechanisms to correct for overspending the caps.  To continue behaving as if the nation’s physicians somehow owe the Medicare program more than $100 billion only continues that mistake.  The money is spent, and insisting that a new generation of physicians burdened with $200 thousand medical school debts be required to pay it back out of their future earnings is both punitive and shortsighted.  The practical effect is to burden a new generation of physicians with the sins of their fathers, and to hasten the end of private medical practice.

There needs to be a political resolution of the SGR problem, in exchange for writing off the more than $300 billion in illusory Part B “savings” as a dead loss.  The reforms accompanying the writeoff should not be required to be “scorable” but rather should sensibly address the key inflation drivers in the present Medicare program. Cleaning up the conflicts of interests in high technology diagnosis and therapy; ending, not merely disclosing, payments to physicians by drug companies and device manufacturers; substantive malpractice reform; enabling organized medical practice to play a more substantial role in managing health costs (through IPAs or physician-sponsored health plans rather than the relatively flimsy mechanism of an accountable care organization); and markedly improving care organization for the sickest 5 percent of Medicare’s patients are all potential ingredients in this solution.

Originally published on The Health Care Blog.