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Medicare keeps costs down somewhat better than private insurers, though not as well as private insurers did in the ’90s, and they do it by paying providers less money. Providers hate them for it, and that’s why doctors and hospitals and drug companies and device manufacturers have been so aggressive in opposing a public plan able to use Medicare rates. It’s also why Medicare’s growth rate is totally unsustainable — Congress keeps delaying the cuts in doctor’s payments that the Medicare law requires.

Ezra has an interesting post in which he posits that the problem in health care economics is that the rate of inflation of health care persistently exceeds the general rate of inflation.  Fine; I do not think anybody is in disagreement on that point any more.  He goes a bit further, wrongly, I think, in implying that the solution is just to pay doctors less.

The background here is that in the late ’90s, Congress decided to impose a cap on how much medicare expenses for physician services could increase in any given year, using a complicated formula called the Sustainable Growth Rate, which was indexed to GDP growth.  I should note that for some reason, Congress decided not to cap the increase in expense on hospital services, but to let the growth of Medicare Part A accelerate unrestrained.  (The hospital industry must’ve had better lobbyists.)

The SGR ran into trouble immediately, and required pay cuts for physicians, and Congress repeatedly caved and canceled the pay cuts.  So, Medicare Part B grows year over year, at a rate ahead of that of inflation, and the logic seems simple: we need to pay physicians less!

But that ignores the fact that much of physician’s revenue does not go to that physician’s income.  Most doctors (ER docs being an exception) have offices to maintain, nurses and assistants to pay, healthcare premiums for this employees, in addition to the malpractice insurance and billing expenses.   Medicine is not a low-overhead game any more!  My gut feeling was that physician income has been stagnant-to-declining over the last decade.

So I went to the Bureau of Labor Statistics and I manually pulled the data on physician income over the 1999-2008 timeframe, and the inflation rate for the same time span and saw that I was more or less right:

Note that for the first six years, physician income was less than inflation, and 2006-7 was only a little bit above the overall inflation rate.  Also note that for two years physician income was actually negative.   2008 was the only year in which physician income increased faster than inflation.

A note as to methodology: the BLS tracks doctor’s income by specialty, not as a single profession.  I pulled the data for General Internal Medicine, Family Practice, and Surgery, and averaged them.  Including surgery, unsurprisingly, greatly improved the income figures.  Internists’ and Family docs’ income lagged inflation every year but 2008.  This was not weighted, either — there are many more Internists and FPs than surgeons, while I weighted them equally.  (Also, the BLS changed data collection methods in 2002, creating a spurious increase of 33% that year, so I threw out that year and interpolated for the above graph.)  This is not a rigorous analysis, but it gets the point across that individual physician income has not been the driver of overall healthcare inflation. If anything, I think these methods tend to understate the degree to which physician income has stagnated during this period.

So why have global physician expenditures gone up so fast during the last ten years when physicians are, by and large, not seeing the increase in their bottom lines?  Several reasons, I think:

• As overhead costs increase, doctors squeeze more work into the day just to keep up with rising expenses.
• As the baby boomers age, and as lifespans continue to increase, patients are older & sicker, and physicians appropriately provide more intense care to this needier population.
• As new technologies, procedures and therapies are developed, physicians employ them more, generally at increased cost.
• For Medicare in particular, the graying of America simply means there are more people enrolled in Medicare.

So while doctors are providing more services, the increases are in low margin services or the increases are consumed by increased practice expenses.   I am sure there are more factors as well.

So, Ezra’s suggestion that simply paying doctors less (i.e. implementing the SGR-mandated cuts) would have some effect on reducing the global expense for physician services, it would do little to change the trendline towards increasing costs.  Put another way, it would lower the setpoint of the curve without changing its slope.  It would also, incidentally, have a dramatic effect on physician compensation, since the other costs of a medical practice are fairly inelastic, and the lost revenue would come directly out of doctor’s salaries.

I don’t have a solution to the costs problem, and I am not sure anybody else does either.  Cutting hospitals’ reimbursement would have terrible effects; hospitals are under tremendous economic stresses as it is, and I know most hospitals have razor-thin profit/surplus margins.  Medical devices are expensive, but they are so critical to the improvements in health care that I do not think anybody has the stomach to cut them.  Pharma probably should be cut, but their lobby has defended them very well.  There’s no good answer.

But it is overly simplistic to think that doctors’ compensation is at the root of the runaway costs problem.