02/11/2011 02:37 pm ET Updated May 25, 2011

Will Budget Hawks Have the Guts to Reject Doctors' Demands? Probably Not.

Sometime in the next few months we'll get a clear signal about whether the austerity bunch in Congress is serious about constraining Medicare costs. My guess is that they'll flinch and increase payments by tens of billions of dollars to delay scheduled reimbursement reductions. Congress has already done this repeatedly.

Doctors have convinced legislators there's a major problem here. If Congress fails to act, payments for individual services will be slashed by more than 20% -- a big figure that results from a failure to accept smaller decreases in past years that have now been aggregated. They say this physician fix is needed because Congress made a big mistake when it created this policy in 1997 as part of the successful quest to balance the budget.

But did it? Perhaps the sustainable growth rate contained in the Balanced Budget Act of 1997 makes sense. It certainly seemed logical at the time.

Ever since the creation of Medicare, the government has faced a cost problem because its ability to set prices was overwhelmed by its inability to control volume, which rises steadily. To provide an extreme and highly improbable hypothetical example, if Congress tried to cap costs by freezing payment levels and providers scheduled twice as many visits, tests and procedures, costs would explode.

The 1997 act was an attempt to constrain the size of the entire Medicare balloon and stop allowing discipline imposed in some areas to be offset by indulgence elsewhere. Basically it targets total Medicare spending. That means if the total number of visits, tests and procedures pushes the total above this target, the payment for each is reduced until the target level is reached. Of course, things are a bit more complex. For one thing, costs in one year reflect payments the following year.

This is a policy that nearly guarantees that the government can keep spending within budgeted amounts. It also puts providers at risk, perhaps cutting per procedure payments to cardiologists in New York who are doing a stable number of procedures because dermatology costs in California have exploded. (This example is unrealistic and improbable, but does illustrate the basics). It makes primary care doctors, who have little to bill but their time, particularly vulnerable as an increasing number of expensive surgical procedures come on line.

One could tweak this mechanism to make it work better, perhaps by setting caps for particular specialties, geographic areas -- or both. But that would require a more bureaucratic system than we have now, something politicians are unlikely to embrace in today's environment.

It is a good bet that today's Congress will ape its predecessors and kick the can down the road for another year. That's because a permanent fix is very expensive, probably more than $300 billion and simply allowing the balanced budget act to do its job would cause intolerable pain to physicians who'd find a way to make patients and their elected representatives equally uncomfortable.

It may seem incredibly harsh to embrace a cut in reimbursement that exceeds 20%, but it would a mistake to think this change would cut physician income by that amount. As Uwe Reinhardt explains in a cogent discussion of the issue, Medicare physician spending per beneficiary has been rising by better than 5% annually, regularly outpacing inflation. A chart of the trend shows that while 2009 reimbursement rates were barely higher than they were in 2001, spending per beneficiary rose by more than 50%.

In 1997 Congress came up with a formula to constrain that trend. Subsequent congresses have lacked the stomach to live with that result. It's unlikely this one will be any different, austere rhetoric notwithstanding.

(More extensive analysis of the progress and perils of health reform awaits you at