This article describes some reforms previously proposed for addressing the problems with Medicare's physician payment system (balance billing, physician diagnosis-related groups, capitation, and global budgets) and demonstrates why they won't work.
Some critics of Medicare price controls have argued that the problems caused by an inaccurate RBRVS can be remedied by allowing unlimited balance billing - that is, letting physicians charge what they want in excess of the allowed fees and requiring patients to make up the difference. Advocates of balance billing argue that it would eliminate access problems because "any physician would be willing to treat any Medicare patient". Also, widespread balance billing would signal that some procedures were underpriced, and if the system responded to those signals, the RBRVS could evolve into a more reasonable set of prices. However, balance billing isn't all it's cracked up to be. To analyze the proposal, I will use a model that makes the following assumptions:
At first glance, it might seem that all physicians will serve more Medicare patients when they can balance-bill. The ability to balancebill, however, makes absolutely no difference in the total quantity of Medicare services supplied by high-capacity physicians. In the absence of balance billing, they will operate where private marginal revenue is equal to the Medicare fee and marginal cost.
They will supply QP services to the private market and QM to the Medicare market. If unrestricted balance billing is allowed, these physicians will equalize on four margins: They will set MR equal to marginal revenue from balance billing Medicare and to the Medicare fee, and all of these will be equal to MC. The total number of Medicare patients seen is still determined by the intersection of the Medicare fee and MC. Balance billing simply lets these physicians collect more revenue from less price-sensitive Medicare patients - for example, those with better supplementary insurance coverage.
Physicians with low capacity will increase their supply of Medicare services if they can balance-bill without restrictions. Prior to balance billing, they will supply Medicare services up to the point where MC is equal to the Medicare fee. With balance billing, they would balance-bill all Medicare patients, but increase their supply of Medicare services. They will expand Medicare supply until MR is equal to marginal revenue from balance billing Medicare, and both are equal to MC.
Whether balance billing simply transfers revenue to physicians or increases the supply of Medicare services depends on the volume of services that physicians accept on assignment versus the volume for which they balance-bill. If most services are accepted on assignment (that is, the doctor accepts the Medicare fee as payment in full), then there would appear to be little efficiency gained from balance billing. Data on Medicare assignment rates cast doubt on the need for balance billing on a large scale. In 2003, 99 percent of allowed Medicare charges were assigned. Moreover, physician participation and assignment rates in Medicare have been rising in recent years. These data, taken in conjunction with the rising rate at which physicians are accepting new Medicare patients and with MedPAC's surveys that show a narrowing gap between Medicare and private physician prices, suggest that the net marginal revenue from Medicare patients is not substantially different from that of privately insured patients.
The idea behind paying physicians according to diagnosis-related groups (DRGs) is that payments for services of so-called "hospitalbased physicians" (radiologists, pathologists, and anesthesiologists) are bundled together with payments for the hospital admissions in which the services are rendered. Physician DRGs were proposed by the Ronald Reagan administration in 1987. Needless to say, the affected physicians opposed the idea because it would have made them dependent on hospitals.
Such political opposition notwithstanding, physician DRGs have the same drawbacks as RBRVS fees: They are based on a standardized payment per case, "which can be thought of as the average cost of a Medicare case in an average, nonteaching, hospital". There is no reason to think that average cost in an "average, nonteaching, hospital" comes closer to the minimum average cost of production in an efficient hospital than the average cost of physicians' services approaches the minimum average cost in an optimally scaled physician practice.
If, however, the hospital payment system did not attempt to mimic the average cost of a Medicare case, there would be a strong argument for "bundling" the payment for all aspects of the patient's care - including physicians, acute-care hospitals, and long-term care - into a single lump sum. Paying separately for physicians, hospitals, and nursing homes maintains the fiction that these treatment sites are separate and unrelated. In fact, patients and their providers may wish to substitute more resources toward one setting and less toward others. A bundled payment would make it easier to select the optimal treatment pattern.
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