President Barack Obama has called growth in medical spending “a ticking time bomb for the federal budget.”
In his press conference Tuesday, Obama pledged that the health insurance overhaul that he is proposing “brings down the crushing cost of health care. We simply can't have a system where we throw good money after bad habits. We need to control the skyrocketing costs that are driving families, businesses and our government into greater and greater debt.”
But as Congress designs the massive insurance overhaul, there’s reason to doubt that it will find the willpower to control this spending.
It has tried — and failed — in the past.
In the 1997 balanced budget law, Congress aimed to cut future spending on the Medicare program, which pays for medical care for Americans age 65 and older.
But it has proven that it won’t fully enforce the cost controls mandated by that law.
Great expectations in 1997
The story starts on July 30, 1997, a day of bipartisan jubilation in Washington.
By huge margins, Congress passed a bill to cut taxes, extend health insurance to five million uninsured children, and in its key cost-control measure, to cut future Medicare spending by nearly $400 billion over ten years.
“We have put America’s fiscal house in order again,” exulted President Bill Clinton who signed the bill into law.
House Budget committee chairman Rep. John Kasich, R-Ohio, said, “This is the dawn of new era,” calling the future Medicare spending cuts “amazing.”
The mechanism Congress designed to curb spending on doctors’ services was called the Sustainable Growth Rate formula, or SGR.
The idea was that Medicare’s payments to doctors would be kept in line with the growth rate of the overall economy, or growth in Gross Domestic Product (GDP).
If Medicare spending on doctors’ services exceeded the SGR target, a pay cut would automatically take effect the following year.
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“It’s an example of an enforcement mechanism that, on the face of it, looks like it ought to be effective — because there’s no mystery about how you do it,” said Joseph Antos, a former official at the Congressional Budget Office (CBO) who is a health care analyst at the American Enterprise Institute, a conservative think tank in Washington.
“There was this feeling that growth in GDP could be used as a guide post for what might be affordable under Medicare,” said Stephen Zuckerman, a health care economist at the Urban Institute in Washington.
Since 2002, Medicare spending on physicians’ services has exceeded the targets set by the SGR formula. In 2002, Medicare cut the payment rates for doctors by 4.8 percent, as the budget balanced law required.
The following year, under the SGR formula, payment rates were scheduled to be cut again by 4.4 percent. But this time Congress blinked.
It decided the cuts were too painful and postponed them, partly out of concern that cutting doctors’ pay would lead some of them to stop treating Medicare patients.
In each of the years since 2003, as each year’s moment of decision approached for the SGR cuts, Congress has called them off, simply adding them — in theory — to the reductions that would need to be made the following year.
Congress defers cost cuts
Last year Congress cancelled the 10.6 percent cut in payments mandated by the SGR. Instead it raised Medicare reimbursement rates by 1.1 percent.
Experts doubt these cuts will be made, at least not in full.
But Congress faces a dilemma: It can't afford to junk the SGR entirely. The CBO estimates if the SGR were eliminated, it would cost the Treasury more than $500 billion in lost revenue over the next ten years.
Were members of Congress deluding themselves in 1997 that they’d cut future Medicare outlays?
“You can’t assume that they actually understood what the Sustainable Growth Rate formula really meant,” said Antos. “The general principle that we ought to have some control over Medicare spending is different from the reality.”
He asked, “Did they ever believe it [the SGR] would work? I don’t know. It’s never clear to me that most members of Congress really think that far ahead on something like that.”
So what went wrong with the SGR?
“Congress designed a system that they believed was going to be on automatic pilot. There would be updated targets each year and that would automatically control spending,” Zuckerman explained. “The problem is that spending was racing ahead so much more rapidly than the targets.” That in turn led to the prospect of very large fee cuts for Medicare doctors.
This is not what Congress had expected back in 1997.
In the 1997 balanced budget law, most of the $400 billion in projected Medicare savings was to have come not from doctors, but from limits on payments to hospitals and skilled nursing facilities, and from higher premiums charged to those enrolled in Medicare.
Congress seemed to expect that payments to physicians would stay roughly in line with GDP growth, or slightly above it. The CBO forecast in 1997 was that only $12 billion over ten years would need to be trimmed from payments to doctors under the SGR formula.
The projected cuts that would be mandated by the SGR seemed like “a tiny amount” in the big Medicare picture in 1997, said Paul Van de Water, a former CBO official who is now an economist at the Center on Budget and Policy Priorities, a liberal think tank.
But “what seemed like a fairly modest, reasonable growth rate formula” has now become much harder for doctors and Congress to cope with, Van de Water said.
Why the SGR did not work
The SGR “didn’t really change the incentives facing individual physicians,” he said.
“In general, physicians are paid on a per-procedure basis — which is not saying they’re not motivated primarily by doing what’s best for the individual patient — but at the margin, if they are paid per procedure, there’s always an incentive to do more procedures,” said Van de Water.
“If you just control prices (the money Medicare pays to doctors per procedure), then you’re not really controlling total spending,” explained Antos. “If you control prices, but you don’t limit in some way the volume of services, then you’re going to have a spending problem.”
Van de Water said if Congress is going to control costs, it is going to have to change the way it pays doctors under Medicare.
One idea being debated in Washington: bundled payments.
“You create incentives to be more efficient and not just have more patient visits and more procedures. That’s exactly what bundled payments are aiming to do,” said Van de Water.
Obama holds out hope for another idea called comparative effectiveness research: making every doctor in America as efficient as the ones at the Mayo Clinic and other pace-setting hospitals.
But this would require more than just spreading the good word about "best pratices" so that other hospitals could emulate them.
It would require enforcement, said CBO director Douglas Elmendorf in testimony to the Senate Finance Committee in February. Congress would need to reward the hospitals that followed the cost-effectiveness standards and penalize the ones that didn’t, Elmendorf said.
“I think he's absolutely right," said Zuckerman. "Unless you’re willing to link payments to the behaviors you want people to engage in, you’re not going to see those behaviors."
“There’s a real risk of that,” Zuckerman said.
If Congress is not willing to impose cost controls on medical services and put pressure on doctors to change the way they treat patients, Zuckerman said, then “you are not going to get results."
Based on the history of congressional attempts at cost control, "there is a legitimate question about whether Congress is willing to follow through,” he said.