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A Brief History of Medicare

Doctors once loved the program. Here's why we now hate it.

JERRY HAYES, O.D.

When the federal government set out to create the Medicare system in 1965, their single biggest concern was that doctors wouldn't participate.

In a current-day interview with National Public Radio (NPR), Joseph Califano, senior domestic policy aide for the Lyndon Johnson administration, explains the grand plan for enticing M.D.'s to take Medicare patients. The program let doctors set their own fees!

Great idea, just too expensive

As it turns out, the "set your own fee" Medicare system became very popular with medical doctors. I think any practicing O.D. today would enthusiastically embrace such a concept.

But it was immediately apparent that a "name your price" system was going to be entirely too expensive for the U.S. healthcare budget. Mr. Califano freely admits that he and his colleagues blundered because they simply didn't understand the economic structure of the healthcare system.

From managed care to "managed pay"

Desperate to get healthcare costs under control in the mid 1970s, the Ford administration sought to stem rising costs by capping the fees paid to doctors. At that point, Medicare moved from managed care to "managed pay." And that, of course, is why doctors of all persuasion now hate Medicare.

So what do you do if you can't raise your price for a given procedure? Doctors simply ordered — and billed — for more procedures.

Let me introduce the RVS

So, in the late 1980s, in an effort to contain costs, policymakers asked, "how much is each medical procedure really worth?" To answer, they hired Professor William Hsiao, a Harvard economist, to determine competitive prices.

Prof. Hsiao brought in groups of doctors and asked them to rate every single thing they did based on technical difficulty, stress, supply costs, etc.

With lots of data fresh in hand, Hsiao retreated to his Ivory Tower and developed the Relative Value Scale (RVS). Medicare adopted the RVS to determine payments and 17 years later, the program still uses RVS. And of course, healthcare insurance and other third-party payer programs follow a similar model.

Why RVS Didn't Work

However, the RVS has done little to slow rising healthcare costs — something Hsiao, and virtually everyone in health care, blames on special interest groups.

It's sad, but true. How much a doctor gets paid under today's system to perform an eye examination, a cataract surgery or a skin biopsy is determined not only by time and complexity, but also by the effectiveness of that particular discipline's lobbyists.

Where do we go from here?

As we near 2010, healthcare providers are virtual prisoners to a third-party payment system controlled by big corporations and even bigger government.

Sure, you can opt out and take only private pay patients. But if you want to serve the vast majority of consumers, those covered by government and private plans, you have to play by their rules.

My question is: How does a minority profession like optometry best position itself to prosper over the next decade and beyond? OM

The source for this article is the November 4, 2009 issue of the NPR Planet Money Podcast.