Medicare finances: sanity takes a holiday.

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A popular definition of insanity--doing the same thing over and over and expecting a different result--well could be applied to the Medicare Sustainable Growth Rate (SGR), maintains Richard Amerling, associate professor of clinical medicine and an academic nephrologist at Mount Sinai Beth Israel, New York.

"Understanding the origins of this failed policy is highly instructive as to the effects of government price controls in the Medicare system. Costs started to rise faster than predicted as soon as the program was instituted. This should have come as no surprise. Millions of seniors were handed an entitlement to medical services, which, of course, increased the demand for these services. Physicians were allowed to charge their 'usual, customary, and reasonable' rates and did so."

Concern over rising costs led to various responses from the Health Care Financing Administration--HCFA, the bureaucratic precursor of the Center for Medicare and Medicaid Services--to rein in spending, Amerling explains. These mostly took the form of price controls on physicians' services.

"On its face, this is stupid policy, as payments to doctors were between 10% and 15% of total program spending. Cuts in this sector couldn't reasonably be expected to produce much in the way of savings--and, of course, going back to the dawn of civilization, price controls have never worked and have more often than not been disastrous."

In 1983, HCFA began a fee freeze on Medicare payments to doctors. This was extended through 1986. Total Medicare spending increased dramatically during this period, Amerling points out. "Why? Doctors, to maintain income, increased the volume of services provided. The more patients seen, the more tests, prescriptions, consultations, and hospitalizations occur. Limiting the payment for an office visit invariably leads to less time per patient encounter. This must result in loss of quality."

In 1989, Amerling continues, HCFA moved away from paying doctors based on their UCR charges to the Resource Based Relative Value System, a socialistic construct that assigned dollar amounts to the myriad services provided by doctors. Balance billing of wealthier patients--not all seniors are poor--severely was restricted. "Nonparticipating physicians could only charge a bit over the Medicare 'maximum allowable charge.'"

Since they also were penalized with a lower payment rate, this increased the physician Medicare participation rate. The net result was another...

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