The way Medicare pays doctors for treating elderly and disabled patients is deeply flawed and fixing it is going to cost a bundle.

In response to steadily rising Medicare spending on physician services, in 1998 Congress replaced the old formula that sets the pay rates every year with what's called the sustainable growth rate. Since then, only the "growth" component of that name has been operative. The formula and the fees it calculates are demonstrably unsustainable and the system frankly doesn't rate.

Physician payments make up more than 20 percent of Medicare expenditures, as this handy fact sheet from the wonderful Kaiser Family Foundatiion shows us. In 2006, Medicare spent  $92 billion on physician services, which was second only to the $187 billion it paid for hospital care and more than twice its expenses for prescription drugs.

In a sense, the sustainable growth rate formula, or SGR, as its predictably called in Washington, is working too well. In every year since 2002, the formula has spat out a pay cut for doctors. That simply won't do, and so, Congress steps in to prevent it. The doctors end up with a pay freeze or a small increase and but have to spend the better part of the year in a cold sweat waiting for Congress.

The Wall Street Journal's Jacob Goldstein, in an article in the newspaper and a post on the Journal's excellent Health Blog, takes a look at the latest idea being bandied about in health policy circles: "bundled" payments, which reimburse doctors, hospitals, et al. at a flat rate for all aspects a particular medical treatment, such as a hip replacement, rather than separate fees for each step on the way.

It's an interesting idea and one designed to resolve one of the biggest crticisms of the current formula: that it provides financial incentives for doctors to overtreat because they get paid for all the things they do, not for resolving the underlying problem. As Goldstein noted, Sen. Max Baucus, the Montana Democrat who chairs the all-powerful Finance Committee, wants to make it part of his health reform package.

The federal government has been testing a lot of ideas, including bundling payments and/or giving bonuses for measurable improvements in the quality of care. If recent history is any guide, however, a permanent fix might have to wait unless health reform happens in a big way.

Last July, Congress committed a particularly creative act of prestidigitation to make sure the docs got a little bump in 2009. But like its predecessors, it's just a short-term measure and it created an even bigger problem for 2010, when Medicare's reimbursement rate for physicians is scheduled to go down at least 21 percent.
(This most recent round was particularly dramatic. Because of Republican objections to cuts in health insurance payments in the bill, the Democratic Congress was only able to get the physician fee fix in place by overriding President Bush's veto. One Senate vote only prevailed because of the surprise appearance of Ted Kennedy, who took a break from brain cancer treatment to cast the deciding vote.)

Relief from those annual cuts often comes at the expense of other players in the health care sector, such as insurers, hospitals, nursing homes, home health agencies, etc., whose payments are trimmed or held flat to offset the devastating cuts looming over the doctors' heads. The proposed solutions, by the way, also would reshuffle money, bringing objections from whoever stands to get less of it.

So why doesn't Congress just get its act together, write a new formula, and be done with it? Mostly because of the cost involved. According to a Congressional Budget Office report, merely freezing the fees to block the cuts for 10 years would cost $100 billion. The price tag goes up to $130 billion if the SGR were replaced with a formula based on a measure of medical inflation. Employing that approach while also protecting beneficiaries from premium hikes would cost $160 billion.

Even in the age of $800 billion bank bailouts and $810 billion economic stimulus bills, that's a staggering sum, particularly since its so narrowly targeted. What Baucus and his compatriots might be hoping is that a $100 billion or so for physician payments might not stand out so much inside a $1 trillion health reform bill.

Jeffrey Young is a staff writer at The Hill.