On March 23, the House of Representatives overwhelmingly passed a permanent “doc fix.” Now it heads to the Senate, where it is expected to pass easily. This bipartisan effort will end the yearly ritual of bypassing Medicare reforms imposed by the Balanced Budget Act of 1997. Much of professional Washington greeted it with a cheer—a sign that comity in the capital is still possible.
Professional Washington is wrong. While the BBA was a clunky attempt to amend Medicare, the program remains in need of reform—and the permanent doc fix illustrates that neither party is prepared to do what needs to be done.
The BBA imposed a “sustainable growth rate” on doctor payments under Medicare Part B. The SGR mandated that payments be limited by a function of broader economic growth. Because medical costs typically increase faster than the rest of the economy, this put doctors in a squeeze. The American Medical Association leaned heavily on Congress to walk back reforms.
Thus the doc fix was born—and grew bigger every year, as the gap between what the SGR mandated and doctors’ actual prices kept widening. The annual effort to pass the fix generated a lobbying bonanza as provider groups pressured Congress to keep reimbursement rates from falling precipitiously.
A permanent doc fix is probably necessary. The BBA is badly designed law on this front. It is one of those pieces of legislation that enable politicians to declare today that they’ve solved a problem, while pushing hard choices well into the future. The annual fix is also extortionary. Legislators prefer short time horizons for many programs—like agricultural and transportation subsidies, as well as corporate tax preferences—because they ensure industry groups keep coming to Congress and making campaign donations.
The problem with this permanent doc fix is that it does not address the real problem: Medicare providers have too much say in what they shall be paid. This conflict of interest has driven the program’s costs far beyond its architects’ wildest imaginings. The SGR is an ineffective way to deal with this problem, and it needs repealing. But it also needs replacing. Sure, there are some modest reforms in the permanent fix—Medicare means-testing for upper income brackets—but these skirt the real issue.
In this way, the permanent doc fix is entirely unexceptional. For 50 years, politicians looking to expand or reform the welfare state have lived in abject fear of the medical services industry. And for good reason—political success has always depended heavily upon the industry’s approval.
After his surprise election in 1948, Harry Truman proposed a national health insurance system, which the AMA vehemently opposed. Truman’s idea went nowhere. John F. Kennedy backed an early version of Medicare during his brief tenure; the AMA balked, and again the proposal went down to defeat.
It was only after his 1964 landslide election that Lyndon Johnson had the numbers in Congress to pass a Medicare plan, and even this program was highly favorable to providers. Under Medicare’s original 1965 terms, the government was forbidden from discriminating between providers based on performance and could not set limits on prices, instead relying on the usual and customary rates providers set. Providers did not have to deal directly with the government, either, but through third-party processors like Blue Cross Blue Shield. Medicare was basically a blank check handed to the medical services industry.
Little wonder that it ended up costing so much more than anybody imagined. But this was the prerequisite to making the program work. The government was not going to provide care directly to seniors; it lacked the capacity, and anyway the public hotly opposed socialization of medicine. The only solution was to delegate the task to private parties, whose participation is voluntary and predicated upon an expectation of profit. Legislators had to write Medicare to win providers over, and after the previous defeats they wrote the friendliest law imaginable. By allowing providers to set their own prices, the architects of Medicare institutionalized a conflict of interest.
The costs of the program became so obscene that by the 1980s, enough was enough. The government finally found the wherewithal to impose some restraints on providers, in the form of formulas meant to base reimbursement rates on the value of the procedures. These modest cost controls are budgetary measures imposed from the top down, making them a variant of Richard Nixon’s early 1970s price freezes. Accordingly, they create all sorts of perverse effects as providers look to game the law to their advantage. In many cases, seniors receive substandard care as a direct consequence.
More important, providers still have immense authority over reimbursement formulas. The government simply lacks the expertise to develop payment rates for every medical procedure under the sun. So it leans heavily on providers to supply the necessary information. The American Hospital Association has great power in determining reimbursement rates under Part A; the AMA sets upwards of 90 percent of all rates under Part B, in a process closed to public scrutiny.
And the government still lacks the ability to discriminate between providers based on quality or efficiency. It barely even pursues fraudulent claims. The Centers for Medicare and Medicaid Services estimates that about 10 percent of all Medicare payments are “improper”: $36 billion in 2013 alone. But it does precious little to get this money back. Indeed, CMS is not built for such a task. Medicare now costs about $500 billion per year—more than the GDP of all but the wealthiest countries—yet the staff of CMS is less than 5,000. The agency suspended its recovery audit program in 2013, earning a stinging rebuke from the watchdog group Citizens Against Government Waste:
It would not be overly cynical to conclude that our government does not actually want to control Medicare costs. Indeed, Occam’s razor demands such a conclusion: From the original law’s blank check and laissez-faire regulatory structure, to the weak budgetary caps of the ’80s and ’90s, to suspension of audits, and now to the permanent doc fix, government has bent over backwards to woo the medical services industry. The exception is, in fact, the SGR, but even this was a punt, a poorly designed, top-down budgetary mandate. The SGR did not do the hard work of figuring out how to get a handle on Medicare payments; it just required that somebody figure out how to get a handle on them. When nobody did, the government began walking the reform back, through the doc fix.
The permanent doc fix, then, is not an extraordinary event. It certainly is not an instance of the two parties working together to do good. Rather, it is yet another example of how potent the medical services industry is in Washington.
Conservative reformers must understand this political context if they hope to fix our welfare state, which—thanks to the ongoing retirement of the baby boomers—will soon drive the deficit sharply higher. It is not enough for a conservative initiative to receive a good score from the Congressional Budget Office. A host of interest groups effectively have a veto over reform. If the endless array of acronymic “stakeholders”—the AMA, AHA, AHIP, PhRMA, and so on—oppose a plan, it is all but doomed to failure. Thus fixing the nation’s terribly inefficient entitlement system is not simply a matter of designing reforms just so. It requires taking power back from the industry groups that dominate public policy for private interests.
This might also be the greatest challenge to the effort to repeal Obamacare. Conservatives are right to oppose this law, but the sad truth is that, on a political level, it is of a piece with just about every welfare program in the postwar era. The president and congressional leaders secured industry buy-in at every step of the legislative process. The medical services industry supports Obamacare because it believes the law is good for its bottom line. Powerful industry groups are not left wing; they play both sides, and of late they have favored the GOP. The Republican congressional majority depends heavily upon their support—for campaign money, for information, for post-political career prospects. If these groups say no to repeal, will Republicans have the strength to stand up to them?
Jay Cost is a staff writer at The Weekly Standard. His new book is A Republic No More: Big Government and the Rise of American Political Corruption.
