Price controls — Do they ever work?

June 28, 2010 at 2:26 PM Leave a comment

A proposed rule from CMS would reduce physicians’ Medicare payments by 6.1% starting Jan. 1, 2011. That is in addition to a projected 23.5% cut scheduled to take effect Dec. 1, 2010 unless Congress changes it.

The sustainable growth-rate formula (SGR) formula has called for payment cuts to doctors for years, with Congress stepping in intermittently to stop the reductions.  The latest intervention came on June 24, 2010 when the House replaced a 21.2% Medicare physician pay cut with a 2.2% raise through November.  Unless, Congress acts by the end of November, the 2.2% raise will be eliminated and the 21.2% cut will be implemented, resulting in a 23.5% reduction in current reimbursement rates.

Add in the potential 6.1% reduction scheduled for January 2011 and physicians face the potential of a nearly 30% SGR cut.

Do we need academic studies and journalistic investigations to tell us how doctors will respond?  Of course not.  We all can guess what will happen.  However, the studies and investigations are available.  As reported in the New York Times and elsewhere, physicians will reduce the number of Medicare patients they see.  As reported in a new study in Health Affairs, doctors will respond by simply treating more patients or ordering more tests and procedures for existing patients to make up for the lost income.  Cost cuts for Medicare will not yield a commensurate decrease in Medicare spending.  Also, there will be a growth in spending for commercial and Medicaid patients.  An onward and upward goes the healthcare cost spiral.

The solution is for cost cutting to be part of a broader strategy for healthcare cost management.  Only a partial list of strategies include:

  • Incentives that encourage patients to better manage their own health (eg, reductions in healthcare premiums for weight loss; value-based insurance design)
  • Financial incentives for physicians based on patient outcomes
  • Better management of the healthcare services and resources available to patients (eg, patient centered medical homes)
  • Evidence-based increases or reductions in reimbursement for select healthcare services based on the value they deliver in terms of outcomes
  • Reductions in administrative requirements
  • Better sharing of healthcare information between providers
  • Development of cost-effective treatment algorithms and incentives for physicians to comply with them

Taking cost out of the healthcare system will affect provider income.  However, the reduction in income does not need to translate dollar-for-dollar in a reduction in profitability.  More efficiently using our healthcare system will yield a reduction in the infrastructure required to deliver healthcare.  For example, a reduction in the administrative burden for a doctor or a hospital can be accompanied by a reduction in staff.   Therefore, reductions in services are more palatable than simple cuts in reimbursement.

A thoughtful and coordinated strategy for reducing the use of our healthcare system that improves outcomes is the critical next step.  Hodge-podge cost cuts by government and private payers only leads to more ill effects.  As illustrated above, such attempts actually lead to increases in reimbursement.  This is where the Federal administration needs to focus its efforts and provide leadership. 

Many of us look today at China and wonder about the wisdom of state capitalismUnder this system, authoritarian governments use markets “to create wealth that can be directed as political officials see fit.” The ultimate motive, he continues, “is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival).” Under state capitalism, market enterprises exist to earn money to finance the ruling class. (Credits to  “The End of the Free Market” by Ian Bremmer.)  In the United States’ healthcare industry, democratic capitalism has led to chaos. 

In 2009 and 2010, we saw how the country reacts to a state takeover of the healthcare industry.  I am not arguing for a complete takeover.  However, a step in that direction where the administration works with healthcare industry to develop a coordinated strategy seems wise and appropriate.  Once the plan is developed, we can leave it to the free markets to implement it.  Without leadership, chaos and cost rises that significantly hinder the health of business, large and small, will continue.


Entry filed under: Healthcare Economics, Healthcare Reform, Hospital Care, Patient Centered Medical Home. Tags: , , , , , .

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