When Medicare first created a fee schedule, critics suggested that it was a Marxist invention. Nevertheless, the schedule, which lists what Medicare is willing to pay for some 7,000 procedures, has become the master list for physician reimbursement in our health care system: Most private insurers peg their payments to the Medicare schedule.
The notion of deciding the precise worth of some 7,000 diagnostic and therapeutic procedures is mind-boggling. How exactly does Medicare do it?
The process began in the late 1980s when officials at the Department of Health and Human Services decided that the way Medicare paid doctors should be overhauled. At the time, Medicare was reimbursing physicians based on what was considered “customary, prevailing and reasonable” in a particular market — in other words the “market value” of the service in that region.
Instead, reformers urged Congress to begin paying doctors in a way that reflected the real cost, to the doctor, of providing the service. (This is where Marx comes in: rather than letting the local market decide what a service is worth “the system appears to be based on the Marxist ‘labor theory of value,’” sputtered Susan Mandel in a 1990 piece in the National Review.)
But to many in Congress, the notion that physicians should be reimbursed for what it costs them to do what they do — plus a reasonable profit — seemed on the face of it, a sound proposal. The problem, of course, lies in determining what the true “cost” is to the physician.
For help, Medicare turned to William C. Hsiao, an economist at Harvard’s School of Public Health who had devised a system for calculating the “relative value” of various medical services. Hsiao had decided that, to be fair, the value of a doctor’s labor should be based, not just how much time the procedure cost the doctor but also on the mental effort and judgment involved, the technical skill and physical effort required, and the stress entailed. To calibrate the precise amount of mental effort, stress and technical skill involved in everything from cataract surgery to performing a hysterectomy on a woman with cervical cancer, the Harvard team interviewed thousands of doctors. At the time, they determined that cataract surgery involves just slightly less work than a hysterectomy.
Some specialties require extra training, and the new system also factored in the value of those years in terms of the “opportunity cost”— the income the doctor might have made if he had not still been in school. In addition, fees tried to reflect “practice costs” (overhead including equipment and supplies) as well as malpractice costs.
In 1992, Medicare adopted Hsiao’s fee schedule, and private insurers soon followed suit. But the schedule was not carved in stone. As medical technology changes, some procedures become easier, while others become more elaborate. Thus the master schedules will always remain a work-in-progress, rather like a cathedral that outlives its original architects. (In January, I described how fees are updated by a committee that is dominated by specialists, which, as I noted, goes a long way toward explaining why Medicare pays relatively little for primary care.)
On the face of it, Hsiao’s system sounds equitable, with perhaps, one caveat: While it makes sense to compensate a doctor for the income lost while training for an additional two or three years, at what point, over the course of a 35-year-career, do you stop compensating for those extra years?
It seems fair that starting salaries should be higher for specialists who spent more years training, both because they will have taken on more debt and because they are that much older when they finally begin practicing medicine. But after 20 or 25 years, should a specialist with an extra two years of training still be making significantly more than a colleague who didn’t put in those additional years?
But that is a relatively minor problem, I think, compared to a deeper flaw in Hsiao’s methodology. The schedule is physician-centered, focusing solely on the cost to the physician in terms of labor, stress, overhead etc. What it doesn’t take into account is the value of the service to the patient.
Typically, in other areas of our economy, we pay more for that which we prize most: We are willing to spend more on a painting that we find exquisite than for one that is merely competent. We pay more for a fresh loaf than for day-old bread. Utility also comes into play: We will lay out a larger sum for an extremely comfortable, durable mattress.
This makes me wonder: When it comes to reimbursing doctors, why don’t we reward those who provide care that offers the greatest benefit to the patient? For example, shouldn’t the cardiologist who helps a patient to stop smoking be paid handsomely? Yet, we pay the physician who performs an angioplasty far more.
Granted, counseling patients or introducing them to nicotine patches doesn’t involve as much technical skill as angioplasty, and is probably not as stressful. (The doctor is much less likely to be sued by the patient who stopped smoking — even if he relapses.) And learning how to help patients kick the habit doesn’t take the same type of training. But it does take time and patience (more time than a single procedure) — and a commitment to the patient over a period of months.
Yet, typically, doctors who specialize in smoking cessation are not well-compensated for their time—even though we know they save lives. By contrast, research suggests that the majority of patients who undergo angioplasty do not live longer or suffer fewer heart attacks than those treated only with drugs.
The symptoms of angina, including chest pain and shortness of breath may disappear, so there is some benefit for the majority of patients, but over time, even that advantage disappears.
Meanwhile, the doctor who helps a patient stop smoking has greatly reduced the patient’s chances of dying a premature and painful death. Shouldn’t this be factored into the equation when deciding his fees?
And it could happen. In its March 2007 report, the Medicare Payment Advisory Commission (MedPac ) reveals that:
“Some Commissioners have argued that the relative value units of the physician fee schedule should be at least partly based on a service’s value to Medicare. … For example, if analysis of clinical effectiveness for a given condition were to show that one service were superior to an alternative service for a given condition, then Medicare’s process of setting relative values might reflect that. This process would be a departure from the established method of setting relative values based only on the time, mental effort, technical skill and effort, psychological stress, and risk of performing the service.”
As MedPac describes it, “the value of a service to Medicare” is almost synonymous with the value of the procedure to the patient. Whether or not it costs the doctor more physical or mental effort to deliver the service, it seems logical that we should provide financial incentives to doctors who provide the most effective services.
Today many health care providers have expanded cardiac centers to provide extremely lucrative cardiac services; few have set up smoking cessation clinics. Yet the physician who persuades the patient to stop smoking saves the patient a world of suffering—and saves Medicare the tens of thousands of dollars it might well otherwise have to spend to treat that patient’s tobacco-related disease. Of course, eventually the patient will die of something. But dying of lung cancer or emphysema is an extraordinarily “costly” way to die—in every possible sense of the word.
Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.