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Commentary: How Medicare’s Flawed Physician Fee Schedule Harms Patients

November 7, 2017, 7:24 PM UTC
Manuela Ocampo meets with Dr. Pam Garcia at the Esperanza Health Center in Philadelphia, PA, on March 13, 2017. The center is located in North Philadelphia, the city with the highest rate of deep poverty people with incomes below half of the poverty line of any of the USAs 10 most populous cities, were a high rate of people do not have medical insurance coverage. / AFP PHOTO / DOMINICK REUTER (Photo credit should read DOMINICK REUTER/AFP/Getty Images)

The most important federal health care agency you never heard of is about to get a makeover. Business should pay attention.

In addition to expanding insurance coverage, the Affordable Care Act took less-noticed steps to address the problems with the U.S. health care delivery and payment system by at long last recognizing that “you get what you pay for.” To that end, the ACA devoted $10 billion to establish the Center for Medicare and Medicaid Innovation (CMMI) to explore new ways to pay health care providers and change the way health care providers deliver care. CMMI focuses largely on Medicare, but the experiments it spawned starting in 2010 created momentum for payment reform across the entire health care sector. CMMI also carried out evaluations of these programs, showing mixed results.

There is still much to learn. As the Senate was killing the latest effort to “repeal and replace” the ACA, the administrator of the Centers for Medicare and Medicaid Services, Seema Verma, launched the Innovation Center on a search for new ideas.

She got my attention. As executive director of the nonprofit Catalyst for Payment Reform, I work closely with large private employers, state Medicaid, and employee and retiree agencies seeking to get better value for their health care spending and provide a better patient experience for their populations. These purchasers buy health care on behalf of millions of Americans and have a big stake in CMMI’s future.

Why? Where Medicare goes, the rest of health care tends to follow. As Medicare pays about 20% of health care expenditures in this country, its decisions about how and how much to pay providers influences the options other purchasers have, too.

Where do I think CMMI should focus? To be sure, we need to continue testing new ways of paying physicians and hospitals, but we also need to address fundamentals. Experimentation with provider payment should include the Medicare physician “fee schedule,” which sets the amount Medicare pays physicians for the services they deliver to patients. Commercial payers often use it as a starting point for negotiating with physicians, offering 140% of the Medicare rate, for example. While final agreements reflect the relative negotiating prowess and market power of the respective parties, they often tie back to Medicare’s physician fee schedule.

The fee schedule is flawed. It establishes payment amounts that are too high (e.g. interpreting the results of an electrocardiogram) or too low (e.g. visits with patients to diagnose and treat depression) for some services and entirely absent for others (e.g. coordinating a patient’s care). This impacts the mix of services physicians offer. Does it make sense that Medicare pays a primary care doctor seeing a complicated patient with cancer and diabetes about the same it pays a dermatologist for removing a mole? The relative amounts Medicare pays today lead, in specific troubling cases, to the oversupply of some services patients don’t need and an undersupply of other services that would benefit patients. It is a significant reason we overemphasize specialty care in this country and underemphasize the role of primary care.


A successful executive leads a company by understanding root causes of problems and addressing them. Health care is no different. While it’s popular to say we are moving away from fee-for-service or “paying for volume” to “paying for value,” the vast majority of payment reforms in both the public and private sectors are being built on top of this flawed fee schedule. For example, in some cases providers are paid on a fee-for-service basis but receive bonuses for meeting quality standards or share savings if they beat a target budget. Can the “right” incentives on top of perverse ones make a difference? Fixing the fee schedule is an intrinsic part of the search for value, and it might be that layering various payment incentives leads to what the doctor should have ordered.

How can we make progress? We need input from a broad array of stakeholders to improve the foundation, to continue trying new payment models, and to learn what works and in what context before we invest too heavily in any one approach. I welcome the chance to provide this input to CMMI.

Suzanne F. Delbanco is executive director of Catalyst for Payment Reform.