The Hazards of Health-Care Reform

With the recent wrangling in Congress to stave off a scheduled 10.6% cut in Medicare reimbursements to doctors, we have seen a good example of exactly why health-care reform--which politicians and practitioners all agree is desperately needed--will be so very difficult to formulate and implement.

Due to the sustainable growth rate formula that Medicare uses to determine adjustments to the physician reimbursement rate, the reimbursement schedule is set to automatically adjust depending on whether actual spending came in above or below targeted spending. This approach is very similar to what any consumer does when working with a budget--if actual spending is higher than what was budgeted, the individual can curtail future spending in that area until the total spending matches what was budgeted.

In 2002, this SGR mechanism was allowed to work, and physician reimbursement rates were cut by 4.8% when actual spending exceeded targets. But in 2003--despite Medicare spending once again surpassing targets--Congress stepped in to fiddle with the spending target, which led to a 1.6% increase in reimbursement rates. Further, from 2004 through 2007 Congress has intervened to override and nullify the SGR reimbursement reductions which would have otherwise taken place. Now we are in the midst of what has turned into an annual ritual--Medicare spending in excess of budget targets and Congress legislating a band-aid that keeps the reductions from taking place.

As we watch the political machinations play out this year, we have taken away a few lessons that may help us think about health-care reform going forward.

First, it is very difficult to rob Peter to pay Paul. In our current system, in order to keep health-care costs flat, much less reduce them, spending must be redistributed among various parties with differing interests. In the case of this year's Medicare bill, elimination of the scheduled reimbursement reductions to physicians would be paid for by shifting funds that are currently being paid to managed-care companies such as  UnitedHealth (UNH) and  Humana (HUM) to administer Medicare Advantage plans. It's not very easy to pull a dollar out of managed care's pocket and give it to the doctor, and a few pivotal Republicans in the Senate were apparently unwilling to do so until faced with physician outrage.

This illustrates a larger underlying issue with any health-care reform--redistributing the spoils will inevitably lead to some entities that could lose their portion of the gravy train, and we fully expect those groups will fight tooth-and-nail to maintain what they currently enjoy. We are already seeing this type of schism take shape as the health-care policymakers debate the best way to shift more financial incentives toward primary care, probably at the expense of the more-lucrative specialties. Professional associations for various specialists are already preparing to lobby politicians to maintain their piece of the health-care pie.

Second, never underestimate the power of the wheelchair lobby. Although we weren't at all surprised that Congress favored elimination of the reimbursement cut, there were a few ancillary details in the bill that raised our eyebrows. Specifically, the bill also delays the implementation of competitive bidding for low-tech medical equipment (namely wheelchairs, walkers, oxygen tanks, and diabetes testing strips). Keep in mind that a 10-city pilot test of this competitive bidding program demonstrated that Medicare can bag 26% savings over its current system, and you don't have to look very hard before finding many instances of gratuitous overpayment. For example, Medicare currently pays $1,825 for a hospital bed that can be bought online for $754. You would think it is only common sense to roll out competitive bidding across the country. However, our system doesn't work that way.

It is always helpful to ask: Whose pocket is the politician in? Invacare, the leading manufacturer of wheelchairs and hospital beds, is the second-largest contributor to Rep. John Boehner (R-Ohio), one of the cosponsors of this bill who inserted the bit about delaying competitive bidding. We don't believe this is just a coincidence.

This situation underscores exactly why health-care reform moves so slowly. Even wheelchair manufacturers are using their dollars to make sure their interests are represented in Congress. However, there is no organized countergroup of individual Americans in favor competitive bidding dangling campaign contributions in front of elected officials.

With total health-care spending in this country topping $2.7 trillion in 2007 (accounting for 16% of the gross domestic product), we believe our current system of financing and delivering health care is unsustainable in the longer run. The upcoming presidential election and Democratic majorities in Congress may offer us an opportunity to make real changes to improve health-care access, quality, and cost containment. However, we do not expect any quick solutions. If anything, we think health-care reform could be a more complex and more painful process than any quadruple bypass procedure.