Medicare Reform: Scrap the SGR and Use Markets to Control Costs

Competition for the biggest waste of time in Washington is fierce, but certainly the annual "doc fix" exercise deserves to be in the running.

Medicare's Sustainable Growth Rate was created in an attempt to control Medicare's costs by tying the program's reimbursement rates to economic growth as measured by GDP. Such cuts were always a stretch–after all, doctors and hospitals need to receive competitive payments if they are going to continue to serve the Medicare population–but if implemented today, SGR cuts would be devastating to the medical community and the Medicare population.

That's why each year Congress has a "doc fix" vote to suspend the upcoming rate cuts.

Yet just because these cuts are always put off doesn't mean they don't do plenty of harm: The whole "doc fix" process creates uncertainty for doctors, patients, and taxpayers, and it's become a political football ripe for abuse. The doc fix vote enables doctors' groups and other medical associations to shake down their members for political cash, and it wastes time and resources in our political system that would be better spent elsewhere.

The SGR also masks the true cost of government health programs like Medicare. With SGR technically on the books, budgetary score outfits like the Congressional Budget Office have to report on Medicare's future costs as if SGR were going to be implemented. These scores make Medicare look less costly and more financially stable than it actually is.

Instead of passing an annual "doc fix," we should finally fix Medicare's reimbursement system for good.

Of course, the Medicare program desperately needs cost control. More than 50 million seniors already depend on Medicare, and a coming wave of Baby Boomers will add to enrollment significantly. The average senior takes out $3 in benefits for each dollar he paid in. Unsurprisingly, this means Medicare today faces a 75-year unfunded liability of more than $30 trillion.

So how should we reform Medicare's payment structure?

In the short term, Congress should vote to repeal the Sustainable Growth Rate formula. If we aren't going to follow it, what's the point of having it on the books? Suspending the SGR permanently would be better than the current practice of suspending it annually.

Repealing the SGR would have several immediate benefits: For one, it would allow budget scoring agencies to more clearly depict Medicare's rising costs, and should inspire lawmakers to reform the program entirely. Repealing the SGR would also remove the annual invitation to waste time and money on the "doc fix" vote.

A long-term solution to the problem of physician reimbursement entails broader reforms to the Medicare program. Ultimately, rather than relying on government projections and formulas, Congress should give Medicare patients more control over their health insurance and allow doctors to work with private insurers to treat these patients. Medicare should be reformed into a "premium support" program, in which seniors receive funds from the government and are free to find and buy a private health insurance plan of their choice.

This would put these patients on equal footing with other (younger) patients who have private insurance, and would leave reimbursement rates between physicians and those insurers, getting government out of the business of setting rates. Lawmakers could even use permanent SGR repeal as a bargaining chip to advance these reforms.

Medicare patients would ultimately be more satisfied with private insurance plans. Private insurers would have to compete for Medicare beneficiaries who would have a choice about where to spend their dollars. Not only would they compete on price, but on the quality of insurance (what's covered, size of provider network, etc.)

And premium-support reforms would benefit taxpayers too. Premium support funding would encourage individual Medicare patients to efficiently use their health care dollars, and encourage insurers to deliver real value to this important group of consumers. Taxpayers would better be able to anticipate the programs' costs and be assured that funds were being targeted wisely, since those with greater financial needs would be given a greater share of government support.

That's the kind of "fix" that would benefit us all–doctors, patients, and taxpayers–and would mercifully eliminate one of Washington's most pointless and counterproductive annual political traditions.