What if you had to plan for a pay cut that grew bigger each year? Welcome to the “doctor cliff”

Doctors face a constantly troubling diagnosis. AP Photo/Jeff Barnard

One of the deferred decisions in the fiscal-cliff deal the US Congress reached last night concerns another “cliff”. A plan called the Medicare Sustainable Growth Rate (SGR) attempts to control the spiraling costs of the government’s healthcare program for the elderly by capping payments to doctors, so that Medicare doesn’t grow faster than GDP. Every year since the SGR first slashed doctor pay in 2001, Congress, fearing the impact on elderly patients and on doctors, has waived the cuts. Every year, therefore, the cuts needed to keep the cost of Medicare costs on track grow bigger. Had this year’s temporary “doc fix” not been passed last night, Medicare payments to doctors would have fallen 27%.

In theory, the SGR makes some sense. Healthcare costs are growing overall: according to Deloitte (pdf), “per capita health care spending in the U.S. averages $8,402 and accounts for 17.9 percent of total GDP.” The idea behind the SGR is that over time doctors should increase the efficiency of each test or procedure they perform on elderly patients, decreasing the marginal cost of a new one.

In real life, however, it’s unworkable. Doctors pay a high overhead—around 60%—not only because of investments in equipment that costs about as much as a small house, but in staffing costs to handle the ever-more complex insurance paperwork. Doctors make money incrementally, often on small medical procedures repeated multiple times per day, and there’s simply a limit to the number they can do. Moreover, the country’s aging population of “baby boomers”—a huge swath of the adult population born in the 1940s and 1950s—are more expensive to treat now that they have begun to reach old age. They require more procedures, and more intricate and complex procedures have been developed to treat problems that were untreatable even a decade ago, all of which contributes to raising the costs.

Ultimately, cuts assessed through SGR could cause already overwhelmed doctors to drop Medicare patients altogether, or discourage new talent from entering the field. In a study on the subject, Deloitte concludes (pdf):

If Congress continues to override SGR-mandated physician fee reductions through 2018, the SGR formula suggests that physicians will face a 49 percent reduction in reimbursement rates at that time. Such a drastic cut to physician reimbursements, without implementing mechanisms to decrease health care costs, will result in physicians discontinuing medical services to Medicare beneficiaries.

Both Republicans and Democrats have expressed interest in replacing the SGR with a formula that rewards doctors for cutting costs and providing preventative care for patients. They’ve now stopped the formula from going into effect 15 times. However continuing gridlock in Washington means that the issue often gets papered over by other concerns, like the viability of the Affordable Care Act—better known as “Obamacare”—and left on the sidelines. And although doctor advocacy organizations like the American Medical Association believe that a permanent “doc fix” must be part of any entitlement reform, politicians’ track record isn’t promising. The latest deal puts off the problem for one more year, leaving federal budget planners, doctors, and patients in uncertainty again.