Connections : Join the Conversation - The blog of Biomet CEO Jeffrey R. Binder

There's an old saying: if you find yourself standing in a hole, quit digging. The U.S. Congress seems unable to grasp this simple concept when it comes to Medicare's physician payment formula.

The formula, known as the Sustainable Growth Rate (SGR), is forcing Congress to face another end-of-year deadline to avert a ruinous 27.4% cut to Medicare physician payment rates.¹

The formula requires that Medicare's aggregate physician payments stay within a budgeted amount each year. Expenditures above that amount must be recouped by reducing the subsequent year's payments. The formula effectively creates a "debt" that the nation's physicians owe Medicare. Congress has forestalled the required reductions every year since 2002 to avoid draconian cuts in physician pay, but that has not changed the statutory requirement to recoup the over-spending-it has merely kicked the obligation down the road, creating an ever-deeper hole.²

The government estimates that it will cost $300 billion³ to repeal the payment formula. Had Congress addressed this issue decisively in 2005, the cost would have been less than $50 billion.³ By 2016 the cost will be $600 billion.³

But is the cost truly $300 billion? According to Bruce Vladeck, Ph.D., former head of Medicare and Medicaid, since the introduction of the current formula in 1998, Medicare has over-spent about $20 billion on physician fees.⁴ He explains how Congress turns $20 billion into $300 billion:

"In a rational world, Congress would write off the $20 billion as a relatively small policy error, and establish a more realistic prospective formula. But under Congressional budget rules, the cost of doing so is not $20 billion, but $20 billion per year, compounded by inflation, times 10 years. The Congressional Budget Office and the Office of Management and Budget are required to assume that someday Medicare's physician fees will be permanently lowered to SGR levels and that anything above that amount is 'extra spending.'"

I would argue that the actual cost of fixing the payment formula is not $300 billion, or even $20 billion, but zero, because Congress has repeatedly shown that it has no intention of collecting the "debt" that the formula creates.

Congress has dug a hole and, because of its own budgeting rules, keeps digging, creating a self-perpetuating problem:

1. A failed physician payment formula creates a "debt" that is some 15 times larger than actual over-expenditures.
2. Because the "debt" is so big, it would be folly to collect it because doing so would be ruinous to doctors who treat Medicare patients, thus threatening patient access to needed care.
3. So Congress doesn't collect the "debt."
4. But budgeting rules require Congress to assume that it will collect the "debt," even though it has no intention of doing so.
5. So the "debt" keeps getting bigger.
6. Return to point B.

The Medicare Payment Advisory Committee (MedPAC) recently offered its "solution": freeze primary care physicians' pay for 10 years; concurrently, reduce specialists' pay 5.9% per year for each of three years, then freeze their pay at the new lower level for the next seven years.⁵ This is the worst of all possible worlds, because it does not change the flaws in the current formula, locks in the inadequate pay levels for primary care physicians, and foists an ill-considered pay cut on specialists who are already in short supply-far shorter supply, in fact, than primary care physicians.⁶ It would be better for patients and doctors to leave the current formula in place, forcing Congress to forestall the pay cuts on an ad hoc basis.

My suggestion to Congress is to quit digging. Break the circular illogic that makes it impossible to fix this failed payment system. Write it off. Forget it. You're not going to collect it, you shouldn't collect it, and pretending you will collect it is the primary obstacle to devising a workable solution.