Senate leaders reached an agreement Monday to delay cuts to physician reimbursement rates under Medicare for one year. The details of the negotiations have yet to be ironed out, but if the deal makes it through Congress, doctors will avert a 23 percent pay cut scheduled for January 1.

Heritage health policy expert Bob Moffit explains in a recent post that the Sustainable Growth Rate (SGR) formula, enacted in 1997, arbitrarily ties Medicare physician reimbursement to the overall performance of the economy, meaning that when payments grow faster than the economy, automatic reductions go into effect.

In theory, that is. Congress has continually delayed the reductions to avoid reducing seniors’ access to health care. (This delay is known as the “doc fix.”) As reimbursement rates drop, more physicians become inclined to limit the number of Medicare patients they see. Some are even forced to stop accepting Medicare altogether. As Congress continues to stop the cuts from going into effect, they accumulate, so failure to act now would serve doctors a crippling 23 percent pay cut in 2011.

A Red Flag

It is good news that there is agreement to delay the physician payment cuts for another year. The bad news is that the Senate leaders say that they will pay for the one-year doc fix now with hopes for savings in the future. Where will the Senators get these savings? From future improper payments of taxpayer subsidies to individuals and families for health insurance under Obamacare—that begin in 2014.

For fiscal conservatives, this raises a red flag. Obamacare creates a new system of taxpayer subsidies for low- and middle-income Americans to purchase health insurance in state health insurance exchanges beginning in 2014. If some future person, under this future system, gets an improper payment because, for one reason or another, he is no longer eligible for the subsidy, he must return a portion of it. So Senate leaders are betting on enough mistakes—improper payments—to secure the $19 billion. This is a fragile scenario.

A better idea is to pay for the doc fix with current offsets in other areas of spending. Raising the necessary amount of improper payments individuals must return tomorrow to pay for the spending today is, well, another congressional exercise in creative financing.

Fix It for Good

A temporary extension is far from the permanent fix that is needed. Congress should have tied the current fix to a requirement to get rid of the SGR formula for good and pay for it, too. A stable payment schedule for physicians would ensure access to care for seniors and could be paid for by cutting other spending now and using Obamacare’s Medicare cuts later. In principle, any and all savings found in Medicare should be funneled back into the program itself to strengthen it and increase its solvency, not used to fund a new entitlement program.

But Congress should not stop here. The flawed physician payment system is just one of the many symptoms of the flawed approach under which the Medicare bureaucracy micromanages seniors’ care. True transformation would resolve these flaws. Lawmakers need look no further than their own health program—the Federal Employers Health Benefit Program (FEHBP)—for the best way forward in Medicare reform. Proposals that borrow from the FEHBP’s premium support system are already out there, starting with Representative Paul Ryan’s (R–WI) Roadmap for America’s Future and echoed in both the Bipartisan Task Force’s plan for deficit reduction and a separate proposal from Ryan and Alice Rivlin.

Through the right reform, Congress could eliminate the need for a constant doc fix and several other long-term problems inherent in the current Medicare system.