Medicare fee schedule basics

To those who don’t yet understand how Medicare pays physicians, I recommend Robert Berenson’s brief paper on pricing distortions in the Medicare physician fee schedule. It’s an easy read. Though nothing in it was new to me, the following passage motivated me to write this post:

The [Medicare physician fee schedule]  is based on a long list of codes that describe thousands of discrete activities that physicians provide. The Centers for Medicare and Medicaid Services (CMS) assigns relative value units (RVUs) to each service by determining the amount of physician work, practice expenses, and malpractice liability costs associated with each service. The values given to these resource components are adjusted for geographic variations in input prices, and the total relative value is multiplied by a standard dollar amount, called the conversion factor, to arrive at the final fee. Fees may be further adjusted for other factors, such as pro vider location in an underserved area.

What could possibly go wrong? (Don’t answer that.)

What is absolutely astounding about this price-setting mechanism is that it’s all about the doctors’ resources and leaves out the very things patients might care about. The whole arrangement conflates costs with price. For instance, where is the consideration for the value of procedures to patients, to their quality or length of life? Where is the input that corresponds to how much patients want certain kinds of care? How much would patients pay for the services rendered? That’s a question of price which relates to value not to cost.

This is not a novel observation, nor am I suggesting changing the Medicare fee schedule would be simple or politically feasible. I write this only to make it crystal clear to the uninitiated that there are deep problems in how Medicare compensates physicians. The first step toward recognizing it is to understand what’s left out of the formula. In a word, the patient is left out. It’s rather astonishing.

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