Doctors will have to take a pay cut under Obamacare

Reuters

Geisinger Health System pediatrician Dr. James Zolla enters and reviews patient medical information in the Geisinger Health System electronic health records system at the Geisinger Clinic in Selinsgrove, Pennsylvania, October 28, 2009.

Article Highlights

  • One of Medicare’s influential advisory boards recommended that payment rates to providers be sanded down

    Tweet This

  • Last week, MedPAC said that reimbursement rates should “immediately” be made “site neutral”

    Tweet This

  • The Obama Administration’s underlying assumption, all along, has been that doctors earn too much

    Tweet This

For Obamacare to succeed, American doctors need to earn less money.

Last week, Washington took a step in that direction. One of Medicare’s influential advisory boards recommended that payment rates to providers be sanded down.

At present issue are the rates paid to doctors working as part of hospital-owned clinics versus physicians working in their own, independent offices.

Right now, when a doctor works as part of hospital owned practice, and bills Medicare, she’s paid more money than what she’d receive for providing the same services in her own independent medical office. That’s because of an arbitrage between Medicare’s inpatient (Part A) and outpatient (Part B) billing schemes.

In part to take advantage of these differentials, hospitals have gone on a buying binge in recent years, purchasing doctor practices. One of their aims was to bring the physicians’ services (and the procedures that doctors perform) under the “Part A” reimbursement scheme, where they can bill at higher rates for the same services. In fact, for hospitals, outpatient services are among their highest profit centers (typically, along with neonatal intensive care units and spine surgery).

For doctors, coming under the “Part A” billing scheme was a way to offset their declining incomes, and lock in long-term employment agreements with hospitals. It was also a way to foist the rising cost of running their outpatient medical practices onto the hospitals (and stem reductions in their real income as they saw their reimbursement levels held flat, or slightly decline, while their practice costs rose.)

But last week, the Medicare Payment Advisory Commission (MedPAC) said that reimbursement rates should “immediately” be made “site neutral”. In other words, the price arbitrage between Medicare’s outpatient and inpatient billing schemes should be ended.

MedPAC said the fees that Medicare pays under its hospital-based, Part A scheme should be cut to match the lower outpatient, Part B fee schedule. “[i]f the same service can be safely provided in different settings, a prudent purchaser should not pay more for that service in one setting than in another,” the MedPAC report stated. “Medicare should base payment rates on the resources needed to treat patients in the most efficient setting, adjusting for differences in patient severity, to the extent that severity differences affect costs.”

The proposal went well beyond past attempts by the Medicare Commission to try and bring outpatient fees more closely in line with the rates paid to hospitals for the same services. Citing an “increased urgency,” the Commission said that the “current payment disparities had created incentives for hospitals to buy physician practices, driving up costs for the Medicare program and for beneficiaries.”

This reckoning was inevitable. Physician reimbursement needs to come down to accommodate Obamacare.

The plans that are going to be sold in the new exchanges that Obamacare creates will largely be lowbrow products. Under the new rules, insurers need to keep the value of their health plans matched to relatively low financial (actuarial) targets. At the same time, the law mandates that health plans cover a broad range of services.

To accommodate these costly mandates, and still keep the health plans cheap, insurers need to control what providers do, and limit what they’re paid.

For the government, to help make this math work, the Medicare billing rates are an obvious target. Much of the private market is priced off these schedules. But physician pay is likely to be in the crosshairs for a long time.

Last year, the Medicare Payment Advisory Commission proposed to cut what Medicare pays specialists and then freezing these lower rates for years. Under that plan, everyone except primary-care docs would see payments for their services cut by 5.9 percent a year for three years (totaling a 16.7 percent cut in income), followed by a seven-year freeze at the reduced levels. Primary-care providers would have their reimbursement rates frozen at today’s pay levels for the whole decade.

While these are just proposals, they have to be taken seriously. The Medicare Commission’s recommendations are typically a harbinger of future policy decisions.

The Obama Administration’s underlying assumption, all along, has been that doctors earn too much. In a little-noticed analysis published  a few years ago in the Journal Health Affairs, one of the administration’s former assistant health secretaries, Sherry A. Glied, made a case that American doctors earn a lot more than their counterparts in Europe.

The analysis was done before she took her government job. But it seems to reflect a more deeply held view inside the Administration.

The study compared fees paid by public and private payers for primary care office visits and hip replacements in Australia, Canada, France, Germany, the United Kingdom, and the U.S. It found that annual pre-tax income (net of practice expenses) for primary-care doctors was $95,000 in France in 2008, compared to $186,000 in the United States.

For specialists, the disparities were wider. U.S. orthopedic surgeons earned the highest average annual incomes at $442,450, followed by $324,138 for surgeons in the United Kingdom. Although UK surgeons still earned 50 percent more than surgeons in the other comparison countries, they earned 30 percent less than US orthopedic surgeons. Orthopedic surgeons averaged $154,000 in France and $208,000 in Canada.

The differences reflect lower rates for individual services. In France, for one, private insurance pays doctors about a third of what US physicians earn for office visits — $34 in France vs. $133 in America for a primary-care doctor. Even public programs like Medicare pay twice what similar French programs offer.

The analysis was stated in 2008 dollars and adjusted for purchasing power parity. But like other doctor pay comparisons, it didn’t adjust for differences in the relative wealth of nations.

Nor did it try to adjust for the compensation offered by competing professional endeavors that might compete for the same talent that often goes into medicine.

For example, in the U.K. the average salary for a lawyer is about $80,000 U.S. dollars, versus around $113,000 here in America, according to the Bureau of Labor Statistics. For corporate (in house) attorneys, the gaps are even wider.

In the U.K, average starting salaries for in-house lawyers are about $68,000 according to one recent survey, and $56,000 for Germany. In the U.S., an in house attorney begins her career at an average salary of $105,000.

The average in-house lawyer with 10 years of experience can earn €113,000 ($139,905) a year in Ireland, but only €102,000 ($130,000) in France. In the U.S., the same lawyer earns an average of $190,000.

If other professionals earn more in the U.S. than they’d earn in comparable companies, wouldn’t it make sense to see the same differences among doctors?

Nonetheless, the analysis reached the conclusion that the bigger American salaries “were the main drivers of higher U.S. spending” on health care. As public programs come under fiscal pressure, this reasoning will gain traction.

All of this is likely to kindle other changes in American medicine.

As doctors see their compensation under government programs fall, it will ignite greater calls for government subsidization of their practice costs. First up will be a more forceful push by physicians to get the government to offset more of the costs of medical education. This is similar to the practice in European nations. (In the U.S., last year 86 percent of graduating medical students had loans averaging $167,000.)

Further government financing of medical school, of course, will give federal agencies a greater say over the choices doctors make, and the specialties they choose. But with reimbursement rates falling, and medical practice costs rising, doctors will be squeezed into these sorts of accommodations.

So do doctors earn much money? It’s hard to say. Medicare largely sets their reimbursement. Not consumers, who can more accurately value the services.

In the absence of these sorts of market principles, the Medicare program will simply continue to sand down its existing price schedules. This is how the program operates. Last week’s recommendation that the Part A billing scheme be cut to match Part B was just the latest salvo.

To bring European style, centralized medical care to the U.S., it always required that doctors be paid European style rates.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Scott
Gottlieb

What's new on AEI

Poverty in America—and What to Do About It
image GDP for second quarter: Strong headline, weak innards
image Paul Ryan and the emerging conservative reform agenda in higher education
image Democrats' impeachment fixation
AEI on Facebook
Events Calendar
  • 28
    MON
  • 29
    TUE
  • 30
    WED
  • 31
    THU
  • 01
    FRI
Tuesday, July 29, 2014 | 10:00 a.m. – 12:00 p.m.
Is Medicare's future secure? The 2014 Trustees Report

Please join AEI as the chief actuary for Medicare summarizes the report’s results, followed by a panel discussion of what those spending trends are likely to mean for seniors, taxpayers, the health industry, and federal policy.

Friday, August 01, 2014 | 10:30 a.m. – 12:00 p.m.
Watergate revisited: The reforms and the reality, 40 years later

Please join us as four of Washington’s most distinguished political observers will revisit the Watergate hearings and discuss reforms that followed.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.