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Obama just approved a $214 billion plan to fix Medicare. That's a big deal.

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President Obama signed a $214 billion Medicare reform package late Thursday that will overhaul the entitlement program funding — and has strong backing from both political parties.

The Medicare Access and CHIP Reauthorization Act, or MACRA, managed to overcome Congressional gridlock — passing the Senate with a 92 to 8 vote — because it does something nearly everyone in Washington supports: repeals the current Medicare funding formula.

That's a big deal: the two parties have tried to do this for than a decade, but to no avail. They always got hung up on where to find the funds to pay for a decade-long increase to doctor salaries.

The source of this whole problem is an aging law on the books that mandates a double-digit pay cut for Medicare doctors every so often because it doesn't provide enough funding to keep salaries steady. But instead of letting those pay cuts go into effect, Congress always scrounges up extra billions to save doctors' salaries.

This time around, legislators decided, in part, to stop caring about the cost. They passed a permanent doc-fix that, while partially paid-for, is still expected to raise the deficit by $141 billion over the next decade.

While the Medicare overhaul will come into force with strong political backing, health policy experts have already raised concerns about whether MACRA will actually improve the Medicare program — or come with its own, new set of problems.

Medicare's problem dates back to a 1997 law

stethoscope money

(Shutterstock)

Ever since Congress created Medicare back in 1965, it's struggled with a fundamental problem: deciding how much to pay doctors. The government wants to reimburse them enough that they'll stay in the program — but not so much that the insurance plan becomes unaffordable.

Congress has cycled through a handful of wonky-sounding policies that try to set the right prices for doctor visits. There was the Medicare Economic Index of the 1970s, followed by the equally obtuse-sounding Volume Performance Standard of the 1990s.

In 1997, Congress developed its current funding formula: the Sustainable Growth Rate (SGR). As the name implies, the idea was to make Medicare payment growth sustainable. What was different about the SGR was that it set a cap on how quickly doctor payments could grow based on how quickly the rest of the economy was growing.

SGR worked great for five years, during the economic upswing of the late 1990s and early 2000s. But in 2002, as the economy dipped, Medicare spending started to grow faster than the rest of the economy — and sticking to the SGR formula began to force huge cuts to doctor payments.

Since 2002, Congress has religiously enacted laws that give Medicare additional funding and hold doctor payments constant. In early 2014, the Congressional Research Service tallied 16 separate funding patches passed since 2002. Some are as short as a few months; others as long as a year. The number rose to 17 last spring, when Congress passed a one-year funding bill. That bill ran out on April 1 — but the federal government has said it will hold off on processing doctors' claims until April 15, assuming Congress would appropriate more money by then. That sets a deadline of this Wednesday for Congress to act, or doctor payments to drop.

The new bill aims to pay better doctors more money
boehner pelosi

(Jim Watson/AFP via Getty News Images)

Right now, the American health-care system is largely "fee for service": doctors get paid a set amount for each episode of care, whether that's an annual physical or a knee replacement. Arguably, that gives them a strong financial incentive to overtreat their patients.

This new bill tries to move away from that, paying doctors more for the value they provide — giving doctors more money, for example, when their knee replacement goes well and less money if the surgery has mistakes or complications.

The replacement Medicare formula lets doctors pick from two ways to participate in that payment scheme:

  1. They can join the Merit-Based Incentive Payment System (which goes by the delightful acronym MIPS). This programs rolls three other older incentive programs into one larger one that gives doctors a quality score. If their scores are really great, doctors' reimbursement rates will go up.
  2. They can sign up to be part of an Alternative Payment Model. These are typically payment arrangements that require a whole group of doctors to band together and take a lump sum of money to care for a certain group of patients. If they can provide the care for less — and hit certain quality metrics — they get to keep some of the leftover cash. The hope is that these models will force doctors to be vigilant against wasteful care, since doctors have a financial incentive to spend less than their lump sum amount.

You can think of MIPS as "Pay-for-Value Lite": it some layers some bonuses (and some penalties) on top of a system that still pays doctors a set amount for each medical service.

The Alternative Payment Model option is where there's real potential for change because you have doctors taking on much more risk. They're no longer getting paid for each service; they're getting a lump sum of money and figuring out how to spend it best.

This is the option Congress and the White House want doctors to choose: doctors immediately get a 5 percent bonus on top of all their other Medicare payments just for going this route.

"The good thing we can say about this bill is that it's great to provide strong financial incentives for alternative payment models," says Topher Spiro, vice president for health policy at the Center for American Progress. "In an ideal world, there would be negative consequences for not doing this. But politically, that's probably not feasible."

The new plan has its own problem: it's really hard to pay doctors for value

(Media for Medical/Universal Images Group via Getty News Images)

(Media for Medical/Universal Images Group via Getty News Images)

Here's where experts have a gripe with the new bill: it doesn't say anything about what quality metrics will be used to gauge whether doctors are good or bad — or what counts as an alternative payment model.

"It's way easier in Congress to get agreement on general principles than on details," says Mark McClellan, who directs the Health Care Innovation and Value Initiative at the Brookings Institution. He previously ran the Medicare program under George W. Bush. "That means a lot is going to hinge on how this and future administrations implement the law."

A lot of this concern has to do with the MIPS program. The law doesn't say which quality metrics the government ought to use in measuring quality. And for some specialties, this is very tough: how do you measure if a radiologist, for example, is doing a great job? Mostly by if they read image scans right — but Medicare doesn't get that information in patient claims.

"We're inherently limited by what we're able to measure," Bob Berenson, a health economist at the Urban Institute, says.

There's already worry about the metric-setting process: it requires the federal government to use quality indicators that doctor groups suggest to the health and human services secretary. The secretary can add her own metrics to the list — but doctors are then free to pick and choose which metrics they want to be judged on.

"This is like if you let students write a test for themselves, and then the teacher offers a range of tests," says Spiro. "And of course the students choose the test they wrote for themselves."

But most legislators like it anyway because it stops the scramble for funds

angry doctor

Even the stock-art doctor is fuming mad! (Shutterstock)

There are lots of issues that divide Congress in health care, like whether we should repeal Obamacare, block-grant Medicaid, or raise the Medicare eligibility age.

The doc fix, even with all the experts' gripes, doesn't surface any of those divisions. I have covered health policy in Washington for five years now, and I've never heard a single legislator defend the doc fix as the right way to fund Medicare.

That absolute, vehement hatred was the one force strong enough to overcome even congressional dysfunction.

Negotiations around a permanent doc fix simply never got this far in prevision legislative sessions. Never have both the House and Senate agreed to billions in cuts they could make to the Medicare program. If there's one space in which the two parties can work together on an issue, this is it.

Barely anything passes through the House particularly right now — and that did initially give observers reason to believe that the odds were stacked against a giant Medicare reform bill.

But in the end, hatred of the doc-fix ritual prevailed — and Congress managed to ditch the old funding formula. It's a rare bipartisan bill that has moved through both chambers, and now heads to the president's desk.

Watch: The dysfunction of the American health-care system

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