In the sweltering heat of 19th-century colonial Delhi, legend has it that cobras were taking over the streets. To eliminate the dangerous snakes, British officials offered a bounty for every dead cobra brought to government offices. Soon, locals began breeding and killing cobras for profit. When British officers caught wind of the scheme, they ended the program immediately. In response, the breeders released their now-worthless snakes back into the streets, turning a problem into a crisis.
This tale of unintended consequences, known as the “cobra effect,” serves as a stark reminder that well-meaning policies usually backfire disastrously when they fail to consider human nature and economic incentives.
Medicare’s method of reimbursing doctors bears a striking resemblance to this parable.
Established with the intent to control healthcare costs through calculated payments and budget caps, Medicare’s payment model has instead contributed to healthcare inflation and now threatens to compromise patient health.
Here’s how we got into this venomous situation—and what Congress must do to help.
How We Got Into This Mess
The problem began with the Budget Reconciliation Act of 1989, a law designed to keep total payments to physicians relatively flat year after year, allowing total Medicare spending to increase by no more than $20 million annually.
To calculate its payments to doctors, Medicare assigns an intensity factor to everything from a doctor’s office visit to an X-ray to surgery. This is called a relative value unit or RVU, to which Medicare proposes a fixed dollar amount. That value is then multiplied by the total number of RVUs to generate the actual physician payment.
When Medicare’s projected payments for the year exceed the budget neutrality limit, the Centers for Medicare and Medicaid Services (CMS) reduces RVU payments. But as physicians face higher office expenses (staff, salaries, rent and utilities), they have no option but to perform more procedures and see patients more often. This, in turn, forces CMS to propose even lower RVU values the following year, perpetuating a never-ending cycle of volume escalation and payment cuts.
The folly of this approach becomes even more apparent with the ensuing political response.
Once CMS announce the reduced RVU values, individual physicians and the American Medical Association lobby Congress vigorously. Lawmakers almost always bend to this political pressure, increasing reimbursements for doctors. This combination of restored payments plus a higher volume of services drives total Medicare costs even higher.
Four Short-Term Failures In Medicare’s Payment Approach
Here are four reasons why Medicare’s approach is doomed.
- Misplaced Focus On Physician Income: Although the goal of the budget reconciliation Act was to control overall Medicare costs, the legislation illogically targets physician income, which represents only 7% of total healthcare spending. A more rational strategy would address the larger costs directly, such as hospital operations (30% of total costs) and the rapidly increasing prices of medications.
- Ineffective Budget Neutrality: The requirement for budget neutrality is applied nationally, not at an individual level. So, it remains financially beneficial for individual clinicians to increase the volume of services they provide in response to reductions in unit payments.
- Increased Costs From Hospital Facility Fees: Hospitals, which employ nearly 80% of America’s physicians, charge a facility fee for outpatient services that often exceeds the payments made to the physician. As lower RVU values lead to more outpatient visits, diagnostic tests and procedures, Medicare costs rise even faster as the government must reimburse both doctors and the hospitals that run the facilities.
- Financial Strain And Physician Exodus: The pandemic has exacerbated labor and supply costs across healthcare. Within the confines of budget neutrality, the financial numbers don’t work, especially for primary care practices. As a result, many doctors are retiring early, creating a critical shortage. Others have started charging concierge fees, which unintentionally pushes low-income patients toward more expensive emergency room care—thereby increasing overall healthcare costs and delaying essential treatments.
The cumulative effect of these policies: doctors must see more patients each day with less time for each. This rushed environment not only erodes patient satisfaction but also heightens physician burnout and increases the risk of misdiagnoses. These time-constrained conditions contribute to an estimated 400,000 U.S. deaths annually from misdiagnoses.
Long-Term Consequences: Deepening The Healthcare Crisis
The implications of Medicare’s current payment strategy extend far beyond immediate inefficiencies. They will spiral into a deeper healthcare crisis if Congress does nothing to stop the bleeding. Here’s why:
- Damage To Communities: When government payments decline the businesses that fund private healthcare (covering 155 million Americans) pay higher prices to make up the difference. It’s the only way to keep the providers of medical care viable in the face of higher labor and supply costs. Recent research concludes that higher healthcare costs paid by employers result in lower wages and significant job losses across communities.
- Delaying Innovative Change: There exists a plethora of innovative AI approaches that can enhance the quality, accessibility and efficiency of American healthcare. However, the current pay-for-volume model used by Medicare fails to reward their adoption. Instead, it incentivizes in-person visits and additional procedures rather than encouraging clinicians to focus on preventing chronic diseases, avoiding their complications and eliminating redundant or ineffective medical treatments.
Strategic Reforms: Implementing A Smart Solution
To safeguard the health of our nation and manage Medicare costs effectively, Congress must take decisive action. It’s time to move beyond the current fee-for-service model. Here’s how:
- Pay-For-Value, Not For Volume: Pay-for-volume reimbursements fail to adequately incentivize effective chronic disease control, leading to a 30-50% increase in preventable heart attacks, strokes and kidney failures, according to the CDC. A shift to a capitation model—a fixed annual payment to a group of doctors for managing the health of a population—would incentivize doctors to leverage modern technology and empower patients for better health outcomes. This proactive approach could significantly reduce Medicare costs by preventing severe health issues before they arise.
- Eliminate The Middleman: Today, Medicare’s capitated payments go to insurance companies, not directly to physicians. Insurance companies with no other means of limiting expenses implement restrictive prior authorization processes that delay and prevent necessary treatments, undermining patient outcomes. Direct payments to physician groups would align incentives and drive meaningful healthcare transformation.
- Fund The Transition To Smarter Payments: The shift to capitation involves considerable risk for individual doctors if undertaken alone. The most significant improvements in healthcare come from collaboration within groups of doctors. Yet, establishing high-performing medical groups demands substantial time, resources and leadership—all of which are scarce in our overwhelmed system. Today, instead of medical societies competing to increase RVUs for their specialty at the expense of other specialties, CMS should encourage medical organizations to collaborate. It could, for example, announce a five-year plan to phase out fee-for-service payments, transitioning instead to contracts with multi-specialty medical groups ready to embrace capitation. This strategic move would not only streamline healthcare delivery but also enhance the quality of care by fostering teamwork and integration among specialists.
Transforming Medicare’s payment model to a pay-for-value system, although complex, is entirely feasible. Organizations like ChenMed have already demonstrated success. This large primary care group specializes in caring for complex, older patients in socioeconomically challenged communities and has consistently achieved superior clinical outcomes at lower costs. The organization underscores the viability and benefits of capitated payment models.
Currently, the debate among CMS and healthcare groups focuses narrowly on whether next year’s reduction in payments will be closer to 2.9% or 1%, and which specialties will face the harshest impacts. This myopic view overlooks the larger issue: 98% of the reimbursement methodology remains unaddressed.
If Congress makes these changes now, we can significantly enhance the physical and financial health of our nation and ensure a sustainable healthcare system for future generations.
