The Federal Government Can Never “Fix” the “Doc Fix”

Key Points:

  • Medicare Part B beneficiaries are facing a crisis of access to physicians, because the federal government sets fees at an inadequate level.
  • The U.S. government has promised physicians that it will “fix” the fees for the long term, but has proven incompetent to do anything more than patch a series of panicky, short-term, “fixes” on the system.
  • The American Medical Association is spending millions of dollars on a campaign promoting a “cost plus” system which would protect its government-granted monopoly over the codes used for billing, and be fiscally irresponsible as well.
  • A better alternative to “fixing” the fee schedule would be to jettison it entirely, convert Medicare Part B to a system of vouchers, and allow private Medigap insurers to offer plans that cover the balance of physicians’ charges above the value of the voucher.

Every Peanuts™ fan remembers Lucy’s offer to hold the football for Charlie Brown to kick. Lucy would promise to hold the ball steady, only to yank it away just a moment before Charlie Brown’s foot connected with the pigskin. Charlie Brown would crash onto his backside and swear never to trust her again. Year after year, he would succumb to Lucy’s promises that this time would be different – but the outcome never changed.

In U.S. health policy, the federal government plays the role of Lucy, and America’s physicians play the role of Charlie Brown. The “football” is the schedule of fees used by the U.S. government to pay doctors who participate in the Medicare Part B program, through which American seniors receive outpatient care.

The federal government attempts to calculate the price and value of each medical service delivered to Medicare beneficiaries by using a formula called the Resource-Based Relative Value Scale (RVBS). Furthermore, it attempts to limit the total growth of Medicare’s spending on physicians by a method called the Sustainable Growth Rate (SGR), which Congress imposed in 1997.

Physicians cannot stand the SGR because it attempts to limit spending on their services according to growth in real Gross Domestic Product (GDP).1 Because medical costs have been increasing faster than GDP, the SGR is pretty much guaranteed to reduce their fees every year it is in place. However, physicians have successfully lobbied for short-term “fixes” since the SGR started to “bite” almost a decade ago. Congress has put in the “fix” nine times in nine years.2 Unfortunately, every time it “fixes” the schedule, the gap between what the SGR calculates fees to be and where Congress actually sets them grows wider.

Physicians, of course, would like a permanent “fix” based on increasing fees based on the Medicare Economic Index (MEI), a measurement of inflation of medical costs. Unfortunately, this will never happen – for two reasons.

First, having the government establish fees for physicians that are based on physicians’ costs is an obvious recipe for fiscal disaster, because a “cost plus” mechanism would create even more incentives to drive up costs. Second, really “fixing” the fees would force Congress to tell the truth about the future costs of Medicare, which it is unwilling to do. Congress proved this during the passage of ObamaCare.

A “cost plus” mechanism would create even more incentives to drive up costs.

Congress promised a long-term “fix” of physicians’ fees in the first iteration of ObamaCare, H.R. 3200. One of the key problems with H.R. 3200 was that the Congressional Budget Office (CBO) concluded that it would increase the federal budget deficit by $239 billion over the first 10 years of ObamaCare.3 The CBO estimated that H.R. 3200’s long-term “doc fix,” which tossed out the SGR and replaced it with an inflation-based update, would account for $245 billion of ObamaCare’s costs.

Because a deficit-increasing bill violated a presidential promise, the “fix” had to disappear. So, Lucy pulled away the football: The final ObamaCare legislation scrubbed the “doc fix” and left it to be intermittently fixed in other legislation. This year alone, Congress has attempted to fix the fees for a few weeks at a time, the latest effort (on April 15) taking the proposed solution to June 1 – after which it broke again because the U.S. Senate declined to pass its “fix” before Memorial Day.

Organized medicine rolled out the big guns. On June 3, the American Medical Association, as part of a multi-million-dollar ad campaign, deployed a full-page color advertisement in the Wall Street Journal attacking the U.S. Senate for taking a “vacation” (actually, a holiday to commemorate veterans’ sacrifices), instead of “fixing a scheduled 21 percent cut to Medicare. . . ”4 Unfortunately, the AMA does not have an effective alternative.

It wants Congress to legislate a “cost plus” fee-schedule, but also for the federal government to stay in the business of setting physicians’ fees. Although such a “fix” cannot serve physicians’ needs, it does serve the AMA’s business interests. The AMA reported revenues of $268.6 million in 2009, but only $42.2 million was membership dues, a drop of 10 percent from its high-water mark in 2006. The $210 million was revenue from publishing. Most people probably think of the AMA publishing journals, especially JAMA – The Journal of the American Medical Association. The AMA’s core business, however, is selling intellectual property pertaining to the Current Procedural Terminology (CPT©), to which the AMA owns the copyright. CPTs are codes for medical procedures, developed by the AMA but used for Medicare and all state Medicaid billing.

The fundamental problem with Medicare’s fees is not where the government fixes them, but that the government fixes them at all.

So, the AMA is a monopolistic supplier of codes that physicians need to submit claims to government-run health care plans. It’s a declining enterprise: Profits have been slipping from 2003 through 2009.5 Nevertheless, as long as this is its business model, the AMA will never advocate that the government stop fixing physicians’ fees. And the AMA and the government are always moving the cheese: Last year, they agreed on updates to codes for nearly 200 physician services, which the AMA had identified as wrongly valued.6 Even after these panicky, short-term measures, Medicare beneficiaries’ access to care is in crisis.

Last October, the Mayo clinic decided that it could no longer accept Medicare patients at its two primary-care clinics in Phoenix.7 And the media increasingly report other cases. For example, an elderly woman in Virginia Beach, VA, recently called 40 primary-care doctors, none of whom would accept Medicare patients anymore.8 One can reasonably presume that many patients have had similar experiences without reporting them to the media.

In Texas, where a 2008 survey found that half of physicians were no longer accepting Medicare patients, a 2010 survey found that the numbers declining any participation in Medicare were increasing by 100 to 200 annually.9 Last year, Houston’s Kelsey-Seybold Clinic, that city’s largest medical practice, announced that it would no longer accept new patients enrolled in the traditional Medicare Part B program, because reimbursements had fallen too low. Almost all of the clinic’s patients have switched to Medicare Advantage plans, most of which negotiate their own payment rates with providers.10

Unfortunately, many seniors who have access to Medicare Advantage plans will soon lose them, despite the government’s misrepresenting this consequence of ObamaCare. Kathleen Sebelius, U.S. Secretary of Health and Human Services, recently sent a piece of appallingly inaccurate junk-mail to Medicare beneficiaries, which contained the falsehood that “Your Medicare benefits won’t change – whether you get them through Original Medicare or a Medicare Advantage plan.”11 In fact, the Chief Actuary of the Center for Medicare & Medicaid Services estimates that 7.4 million Medicare beneficiaries will lose their Medicare Advantage plans by 2017, one half of those who would have enjoyed that choice under pre-ObamaCare Medicare.12

The fundamental problem with Medicare’s fees is not where the government fixes them, but that the government fixes them at all. The economist who designed the system, first implemented in 1983, determined Medicare’s fees as follows: “He put together a large team that interviewed and surveyed thousands of physicians from almost two dozen specialties. They analyzed what was involved in everything from 45 minutes of psychotherapy for a patient with panic attacks to a hysterectomy for a woman with cervical cancer. They determined that the hysterectomy takes about twice as much time as the session of psychotherapy, 3.8 times as much mental effort, 4.47 times as much technical skill and physical effort, and 4.24 times as much risk. The total calculation: 4.99 times as much work. Eventually, Hsiao and his team arrived at a relative value for every single thing doctors do.”13

This system cannot be fixed: It would be far better for the federal government simply to pull the plug on the entire mechanism and convert Medicare Part B to a system of vouchers, which would limit taxpayers’ liability.

This nonsense continues – and feeds the AMA’s coffers – unto this very day. A physician has three choices with respect to participating in this system – none of which is very appealing. She can simply accept the government’s fees. If she wants to make her life a lot more complicated in return for a little more money, she can opt to become a non-participating provider, which means that she must bill her patient directly and the patient can submit a claim to Medicare. However, in this case, she may only charge a fee effectively 9 percent higher than the government’ fee.

Finally, she can bail out of Medicare entirely and charge her patients whatever they are willing to pay. However, in this case, Medicare will not reimburse patients.14 So, it is unlikely that many Medicare beneficiaries can patronize such a physician. (Medicare Part B premiums, which the government deducts from beneficiaries’ Social Security, only pay one quarter of the cost of Medicare Part B. So, although Medicare Part B is voluntary, seniors who do not participate abandon a huge subsidy.)

This system cannot be fixed: It would be far better for the federal government simply to pull the plug on the entire mechanism and convert Medicare Part B to a system of vouchers, which would limit taxpayers’ liability. In return for this hard budget, the government would allow physicians to charge whatever fees they and their patients agreed upon. So that seniors could protect themselves from the costs of outpatient care beyond the value of the vouchers, the government could liberalize the popular, private, Medigap plans, to allow them to cover extra physicians’ fees.15 This would be similar to France, where the government recognizes that its fee-schedule is inadequate and allows many physicians to charge extra, the balance usually being covered by private insurance.16

The AMA has every right to protect its business interests, but the Medicare crisis is too far gone to allow those interests to block real reform.


1. The method, in all its glory, is described in Centers for Medicare & Medicaid Services, Estimated Sustainable Growth Rate and Conversion Factor, for Medicare Payments to Physicians in 2010 (Baltimore, MD: Centers for Medicare & Medicaid Services, November, 2009).

2. American Medical Association, Medicare Participation Options for Physicians (Chicago, IL: American Medical Association, February 10, 2010).

3. Congressional Budget Office, Preliminary Analysis of H.R. 3200, the America’s Affordable Health Choices Act of 2009, letter to the Hon. Charles B. Rangel (Washington, DC: Congressional Budget Office, July 17, 2009).

4. American Medical Association, Fix Medicare Now (Chicago, IL: American Medical Association, June 3, 2010). Available at

5. American Medical Association, Annual Report 2009 (Chicago, IL: American Medical Association, 2010, pp. 11-18; American Medical Association, Annual Report 2007 (Chicago, IL: American Medical Association, 2008, pp. 18.

6. American Medical Association, The 2010 Medicare Physician Payment Final Rule (Chicago, IL: American Medical Association, 2009). Available at

7. Ginger Rough, “Mayo unit no longer to accept Medicare,” Arizona Republic, October 9, 2009, p. 1.

8. Julie Rovner, What Health Law Didn’t Fix: Medicare Doctor Pay,”National Public Radio, May 6, 2010. Available at

9. Todd Ackerman, “Texas Doctors Opting Out of Medicare at Alarming Rate,” Houston Chronicle, May 17, 2010. Available at

10. Cindy George, “Kelsey-Seybold opts out of Medicare,” Houston Chronicle, February 17, 2009, p. B1.

11. Kathleen Sebelius, Medicare and the New Health Law: What It Means to You (Washington, DC: U.S. Department of Health & Human Services, May 1, 2010). Available at

12. Richard S. Foster, Estimated Financial Effects of the “Patient Protection and Affordable Care Ac,” As Amended (Baltimore, MD: Centers for Medicare & Medicaid Services, April 22, 2010), p. 11.

13. Rick Mayes and Robert A. Berenson, Medicare Prospective Payment and the Shaping of U.S. Health Care (Baltimore, MD: Johns Hopkins University Press, 2006), p. 86.

14. American Medical Association, Medicare Participation Options for Physicians (Chicago, IL: American Medical Association, February 10, 2010).

15. John R. Graham, Medicare Advantage or Medicare Monopoly? Protecting Seniors’ Choices and Taxpayers’ Wallets In the Federal Government’s Largest Entitlement Program (San Francisco, CA: Pacific Research Institute, December 2009), pp. 12-14.

16. Thomas C. Buchmueller and Agnes Couffinhal, Private Health Insurance in France, OECD Health Working Papers No. 12 (Paris, France: Organization for Economic Co-operation and Development, March 11, 2004), pp. 10-11.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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