Taming Medicare Costs

Legislation to reform physician compensation under Medicare is moving ahead in Congress, a welcome step toward taming health-care costs that have been virtually out of control.

At the same time, a congressional subcommittee has approved an increase in the ceiling on income that Social Security beneficiaries can earn without having their benefits penalized. It is a useful move towards abolition of the inequitable and counter-productive income ceilings.

With the support of the Bush Administration, a coalition of Democrats and Republicans in the health subcommittee of the Committee on Ways and Means has adopted legislation to cap Medicare expenditures for physicians. The legislation also would phase in a new fee structure based on a relative value scale. The revised scale would result in decreased compensation for surgeons and increased compensation for diagnosticians and other primary care providers.

The most controversial element of the Medicare reforms is the establishment of expenditure targets for Medicare payments to doctors. The expenditure caps were developed after earlier ceilings on fees failed to limit costs in the face of a 40% increase in the utilization of physician services.

Under the new legislation, increases in utilization of medical services that threaten to breach the expenditure caps would be counterbalanced by reductions in payments to physicians. Initially, there would be a single national physician compensation target. In future years, however, there would be the possibility of establishing separate targets by medical specialties and by geographic regions. For example, there could be an expenditure target for heart surgeons in Orange County or for ophthalmologists performing cataract surgery in Los Angeles.

Development of the reforms for Medicare was mandated by Congress in 1986 with creation of the independent Physician Payment Review Commission, headed by Dr. Philip R. Lee, director of the Institute for Health Policy Studies at UC San Francisco. The relative value scale for physician compensation is based on federally funded research by a team led by William Hsiao at Harvard.

The Medicare reforms are expected to have a profound impact on all medical insurance. Medicare is the nation’s largest payer of health care, providing basic health services for 29 million persons 65 and older, a rapidly increasing segment of the population, and 3 million disabled persons. Medicare reforms inevitably influence all of the health-care system. The diagnosis-related fixed fees for hospitalizations imposed by Medicare have resulted in reduced hospital use and increased out-patient surgery. Despite controls, however, the cost of Medicare has been increasing at a rate of more than 13% a year since 1980, with physician outlays increasing at about 17% a year between 1980 and 1988, far beyond the national rate of inflation. As there is no evidence that the spiraling costs have been buying better quality of health care, the pressure for reform is growing.