Medicare Doc Fix: An Interview with Austin Frakt

The Medicare "doc fix" is in the news again. I keep hearing if Congress doesn’t act, doctor’s fees for treating Medicare patients will be cut by 27% starting on January 1.

This is a complete mystery to me. What’s this evil force that’s trying to cut doctor’s fees? Why can’t Congress make it stop since they have all the power?

The best person to answer these questions is my friend and former co-blogger Austin Frakt. Austin is a health economist at Boston University. He blogs at The Incidental Economist. I interviewed Austin via email. He also sent me a bunch of reference articles. I listed them at the end of this post.


TFB: Why must Congress act now to avoid a 27% cut to doctor’s fees under Medicare? Who’s trying to make the cut and why?

Austin Frakt: To make a long very story much shorter, the required cut is due to a payment update mechanism known as the Sustainable Growth Rate (SGR).

Glossing over many details, the SGR basically mandates that Medicare spending on physician services grow no faster than the overall economy. Congress has rarely allowed SGR-mandated cuts to go into effect, thereby kicking the can down the road so many times that the cumulative result is to require that huge cut at the turn of the year. That is, a cut avoided this year is carried over to the next one. Thus, it just keeps growing.

TFB: Does the SGR only affect doctors or does it also affect facilities such as hospitals and labs?

Austin Frakt: It affects physician payments under Medicare Part B (which is coverage for non-hospital and health services, though not outpatient prescription drugs).

TFB: When was the SGR supposed to start taking effect? Did it ever take effect or was it overruled since the first year onward?

Austin Frakt: The SGR was supposed to be in effect since 1997. Through 2001, it did not require any payment cuts because Medicare Part B growth was below the target. The SGR did call for cuts in 2002, which were allowed to occur. But since then Congress has overridden every cut it required.

TFB: What was the gap between the SGR-mandated rate and the actual rate when SGR was overruled the first time? It must be much smaller, right?

Austin Frakt: Right. The cut that went into effect in 2002 was about 4%.

TFB: Why didn’t Congress stick to the SGR in 2003?

Austin Frakt: Physicians claim that they will stop accepting Medicare patients if cuts to payments are made.

Is this a credible threat? It is hard to know. We do know that many fewer physicians see Medicaid patients because Medicaid pays them far below what Medicare does. Medicare’s payments are already below those of private plans. Yet, today, there are not widespread problems with Medicare beneficiary access to doctors, as there are in Medicaid.

Where’s the tipping point? How much can Congress cut payments to doctors without causing difficulty for beneficiaries? I don’t know.

TFB: To a typical doctor who treats Medicare patients, what percentage of income comes Medicare?

Austin Frakt: I don’t know. Many doctors specialize. A pediatrician won’t see a Medicare beneficiary, for example. So, it isn’t clear what "typical" even means. Here’s what Sarah Kliff wrote: "Medicare pays a decent chunk of most doctors’ salaries, accounting for about one-fifth of national health-care spending, making it a pretty difficult program to leave."

TFB: If Medicare cuts a doctor’s fees, can the doctor bill the difference to the patient?

Austin Frakt: Doctors are not permitted to bill the extra to the patient if they accept assignment, meaning they accept Medicare’s payment as payment in full, apart from the standard deductible and copayment. I believe the vast majority of doctors accept assignment, though I cannot recall the precise figure on this.

TFB: Does Medicare’s fee schedule set a benchmark for private insurance as well? How much does private insurance pay more than Medicare? If private insurance pays more and a doctor still takes Medicare patients, I assume that’s because the doctor doesn’t have enough better paying privately insured patients: marginal revenue > marginal cost. Is that a correct assumption?

Austin Frakt: Medicare does not control what private insurers can pay.

Medicare’s payments to physicians are about 80% of the size of payments made by private plans. Obviously if a doctor could make all the money he wanted by seeing only privately insured patients, he’d do that.

That the vast majority also see Medicare patients must mean the Medicare payment covers marginal costs. This assumes that the physician is maximizing profit. I am sure some physicians see some patients even at a loss. They’re not as cold hearted as economics or personal finance bloggers!

TFB: So let’s take that 20% share of income number. If Medicare cut the fees by 5% when SGR was overruled the first time in 2003, would a doctor really risk losing 20% of income instead of 20% * 5% = 1% by leaving Medicare? If Medicare says a doctor will be barred from taking Medicare patients ever again if the doctor drops out, would the doctor really drop out? Once dropped out, and the doctor finds that private insurance rates are also down, the doctor would be really screwed by cutting him/herself out of 20% of the market.

Austin Frakt: I don’t know what the rules are about physicians jumping in and out of Medicare. I don’t know if they are locked out, as suggested. I’ve not heard of such a thing.

TFB: Can Medicare buy or build its own facilities and/or hire doctors on salary like the HMO Kaiser Permanente does? Wouldn’t it be a solution for the utilization problem?

Austin Frakt: That’s nationalized medicine, like the VA has or the UK. It’s politically impossible.

Could it be a solution technically, apart from politics? Sure. But there are many other solutions that don’t involve nationalizing the health system. If you believe Congress could nationalize the health system, then surely it could implement and stick with a physician payment scheme that worked well too.

In health care, there are never easy answers and no solution is perfect. That doesn’t mean we should not keep trying to make things better. But it does mean that you should be skeptical of anyone who thinks they can explain an ideal reform in a few sentences.


Thank you Austin. I learned everything I wanted to know about the "doc fix." If you’d like to dive deeper into this topic, check out the articles listed below.

For more on health care economics and policies, be sure to subscribe to The Incidental Economist where Austin Frakt and several well known experts write extensively.


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  1. White Coat Investor says

    Some docs can’t stop taking medicare, like emergency docs and anyone who provides inpatient care to patients who come in to the emergency department. Since federal law mandates that these patients’ emergencies be stabilized without regard to their ability to pay, these docs take what they can get. Even medicaid is better than nothing.

    For us, medicare pays about half of what private insurance does, medicaid pays 1/4, and self-pay (aka no-pay or uninsured patients) pay about 1/15th-because most of them don’t pay at all and a few pay the full price.

    But if I was in private practice there’s no way I’d take medicare or medicaid, and many other docs don’t either. They might in the beginning while they’re growing their practice, and they might keep their established patients who transition onto medicare, but they don’t accept new medicare patients. My parents went onto medicare and couldn’t get a doc anywhere in town. They ended up in a low-income clinic because they were the only docs in town who would take medicare. A 27% cut (what the AGR planned for this year) would have a dramatic effect on physician availability to medicare patients I assure you. So they’d come see me in the ED I suppose where we have to see them due to the largest unfunded mandate in the history of our country.

  2. Harry Sit says

    @dd – Since Congress is overruling itself, instead of holding the payment rates flat or giving a small increase, it can certainly cut the rates gradually as well.

    @White Coat Investor – Thank you for your comments from the field. If a doctor opts out of Medicare, are there enough privately insured patients going around? If there are, since Medicare pays only half, you’d think doctors wouldn’t bother with Medicare patients already, except for the emergency mandate of course.

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