Medicare Payments Still Teetering on the Cliff
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Paul Howard and Yevgeniy Feyman

The recent bill passed by both the House and the Senate effectively kicked the fiscal cliff can two months down the road and was just approved with the President's signature. Among the provisions in the bill is one that also postpones, for the next year, a 26.5 percent cut to physician reimbursements from Medicare. Commonly known as the 'doc-fix', this measure has been used for many years to avert reimbursement cuts required by Medicare's Sustainable Growth Rate. While physicians can rest easy for the next year, part of the cost of averting the payment cut is being funded by cuts to hospital reimbursements.

So what are we left with? The underlying problem with how Medicare's SGR is calculated remains unattended - come 2014, Medicare providers will once again be at the mercy of congressional maneuvering. Moreover, the hospitals facing the cuts are those that primarily treat poor populations. (Disproportionate Share Hospitals).

The broader problem, which isn't addressed, is how Medicare's payments are calculated - the Resource Based Relative Value Scale. Developed decades ago, the RBRVS guides how Medicare reimbursements are structured based on four categories: mental effort, physical effort, skill, and time. Seemingly uncontroversial, the RBRVS has steadily grown to favor specialists over primary care doctors - reimbursements for specialist services have grown tremendously (even as many procedures - like a cataract extraction - have become more routine and automated) while primary care physicians have seen their reimbursements remain static. Certainly, specialists perform often complicated procedures that require years of training to perform properly - and they deserve to be compensated fairly for their work. But primary care is similarly demanding, and patients rely on their physicians to help diagnose one out of possible dozens of ailments and refer them to the appropriate specialist - no small feat with an ever growing number and variety of chronic diseases.  We're also asking primary care physicians to shoulder more of the burdens of chronic care management, in effect asking them to become health care's version of air traffic controllers.

Of course, it's possible to avoid dealing with the RBRVS entirely by simply changing how the SGR fee update is calculated with a method to always insure a positive increase.  But is this the right way to approach the question?

Congress should be agnostic about who performs a service, as long as the service is delivered effectively and efficiently.  Congress should also set up a system that encourages innovators to replace expensive labor (services) with much less expensive diagnostics.  By basing the RBRVS on the "mental skill" required to perform services, the system implicitly biases the increased utilization of labor rather than diagnostics. 

Or, to put it another way, IBM's Watson could eventually deliver routine and complex analysis of a patient's health through a low-cost tablet app offering supercomputing services to a physicians' assistant, nurse, or primary care physician. This reality isn't that far away - The Tricorder X-Prize, offered by manufacturer Qualcomm, seeks to reward the first company to "put healthcare in the palm of your hand" by essentially creating the ubiquitous Star Trek gadget. Mark Mills, senior fellow at the Manhattan Institute, writes:

The ultimate Tricorder idea is to access the wealth of (voluntary) data about what you've been doing, eating, how your own biological machinery has been operating, and marry it with a rich stream of highly precise and real-time physiologically-specific information about what's going in your body right now - wherever you are - and link this wirelessly to the analytic computing power that resides in the Cloud.

The new world of "Big Data" makes this possible - and with the exabytes of health data out there, it will help put healthcare decisions into the hands of patients.

The RBRVS and the SGR lock American health care into labor arrangements that are swiftly being overtaken by technologies that have the potential to radically change the cost and quality of American health care.  But their use will be constrained as long as pricing signals are based on assumptions about the value of labor that are woefully outdated.

A better solution would be to get out of the business of pricing services entirely, through a premium support mechanism that encouraged robust competition among many different networks of competing health care providers. Pricing competition will encourage insurers and providers to seek out the most cost effective and innovative mix of pricing and services.    

Then we won't have to worry about the SGR or the RBRVS ever again.  And that would be a priceless gain for American health care.   

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