Re: New York Times Op-Ed – 7/24/2008 – “Paying Doctors to Ignore Patients” – Peter Bach

While it is true that there are problems in Medicare’s way of paying doctors, Bach’s suggestions would make things even worse.

There are two major problems with Medicare’s reimbursement structure. First it overpays for procedures compared to other necessary medical services, such as office visits. Second, it reimburses doctors less for providing non-procedures than their direct cost plus reasonable return on their time and investment. This payment situation reduces the incentive to provide any care to patients other than the high-cost procedures.

Lowering payments across the board is obviously the worse possible cure for this problem --- it reduces cost only by reducing supply or quality, doing absolutely nothing positive to improve the efficiency of providing medical care. To its credit, Congress understands the stupidity of this tactic and reverses the payment cuts whenever they are proposed.

Bach thinks making doctors risk managers (fixed fee per patients’ normal care and disease treatment) is a solution. But risk management is by nature a probabilistic endeavor, and the laws of probability are reasonable approximations of reality only for large populations. Insurance companies are suitable risk managers because they have huge numbers of insured. But very few doctors have sufficient scale of practices to manage their own risks. When their patient demand is below average, doctors would make extra money but when their patient demand is above average, the doctors would run in the red and/or fail to meet the demand. Being rather small entities with very limited capital resources, physicians could easily be bankrupt or fail to meet their responsibilities in providing care when demand is randomly high. Furthermore, doctors are not trained as financial risk managers, so it would be almost impossible for a low overhead small business to afford the type of expertise necessary to determine an appropriate per patient average cost, even though doctors know what to charge for each type of service they provide. Let the government set the rates? That would create a temptation too great to resist to pin reimbursements to government budget constraint rather than to the real costs doctors face and ignore the real cost differential between practices in different regions and different types of patients --- problems we face with the current reimbursement system.

Bach’s arguments seem to ignore the fact that the practice of medicine is a business and is influenced by all the income and expense issues of any other business. Should the government fix the price that Hewlett Packard can charge for every desktop computer based on an average configuration, and if a particular user needs an extra large hard disk, either the user gets the disk upgrade for free (at HP’s cost) or is denied the necessary feature? I should hope not --- no company and particularly not HP could stand such interference with the way they do business. Neither can physicians.

What can be done? I might suggest three positive steps.

First, fix the undesirable incentives built into the Medicare fee schedule that favors procedures over other types of medical care. Perhaps opening each procedure and other types of care to bids, using the average of the lowest 10% of the bids as the base rate for each, and offering those bidders at or below that rate a 10% bonus on their reimbursements. 

Second, rather than trying to force everyone into the average cost model and then ratchet down those model costs to force efficiency, re-price procedural reimbursements to reflect the real costs before profit (perhaps using a procedure like the bids I suggested above), perhaps corrected for regional and other uncontrollable factors, and reimburse doctors that amount, allowing doctors to price compete by billing patients as much as they want above that.

Third, encourage price as an issue in selecting physicians. Make patients aware of and responsible for some of the financial burden of their healthcare.

I am not a believer in a 100% free market (I think some regulation is sometimes a good thing), but I do sincerely believe that Medicare has encroached too far into the free market for medical services, and more intervention, especially price fixing, forced risk management, and hiding the cost of patient care from the patient, is not appropriate.