Government price controls are a miserable failure that has cost doctors income and patients access to physicians.

Those about to go on Medicare, and many already on it, may be surprised that doctors are increasingly unwilling to accept them as patients. The problem does not lie with doctors but our political elite. Instead of true health-care reform they have offered a faulty price-fixing system.

On January 1, a 5.4-percent reduction in physician fees took effect, the culmination of a ten-year price-fixing experiment. Further cuts will persist through 2005, causing a $262.82 reduction in income for every one percent of a doctor’s practice devoted to patients on Medicare, according to the American College of Physicians.

A doctor whose practice consists of 40 percent Medicare patients will see a $10,512.80 reduction in income. But many doctors have seen their income diminish yearly, while other sectors of the economy enjoyed boom times. Many doctors stopped working 10-hour days and some opted for retirement.

In March the New York Times quoted several physicians who are no longer accepting new Medicare patients. The American Academy of Family Physicians puts the share of family doctors who refuse to take new Medicare patients at 17 percent.

If this situation is left unattended, physicians will stop seeing new Medicare patients, even though there are more of them. And it would be wrong to attack these doctors as selfish. They’ve been losing money on Medicare patients for years and will continue to lose money on the Medicare patients they already have. Many doctors now view public programs like Medicare as charity work, which has crowded out much of the real charity care that they used to provide. The blame for this lamentable situation falls not on doctors but on our legislators.

Congress has plenty of evidence that price controls lead to shortages. Yet Congress slapped a fee schedule on Medicare physicians in 1992 in an effort to stop runaway spending. Since then, the price controls have tightened their grip.

The formula to set physician fees is ridiculously complex and fees have not kept pace with increasing expenses, regulations, and paperwork. Fees have also been subject to budget neutrality adjustments and, since 1998, to a sustainable growth rate (SGR) that links changes in physician fees to the change in the gross domestic product (GDP).

If increases in spending on physician services exceed the SGR target, the following year’s fees are adjusted downward. Last year, these elements came together, resulting in the 5.4 percent cut. But even with the cuts, federal spending on Medicare will likely grow 5.2 percent this year to $257 billion and continue to grow to $294 billion in 2005.

On Capitol Hill there have been predictable calls to adjust the price-control formula. The Bush Administration, however, insists that any increases be offset by other cuts in Medicare spending. Neither side holds the high ground because tinkering with the price controls is, at best, a band-aid solution.

Instead, Federal lawmakers should admit that price controls have been a failure and that fundamental reform of Medicare is necessary. Lawmakers have an excellent place to start, their own system for obtaining health insurance.

The Federal Employees Health Benefits Program (FEHBP) – offers federal employees a choice of competing private health insurance plans. Medicare should be converted into a defined contribution program that takes the best elements of the FEHBP and improves upon it. An important benefit of this reform would be instant drug coverage without federal price controls.

Of course, most private plans also set reimbursement rates for physicians, but there is an important difference – choice. Under the FEHBP, both consumers and doctors have the ability to “opt out” of any given plan. If a competing plan does not sufficiently pay doctors or does not offer consumers a quality product, they can choose not to do business with that plan.

Before new Medicare beneficiaries find themselves on waiting lists, Congress should turn Medicare into a defined contribution program. Health-care providers and consumers alike need the power to walk away from government price controls.

Examiner columnist Sally Pipes is the President and CEO of the Pacific Research Institute, a California-based think tank. She can be reached via email at spipes@pacificresearch.org.