Medicare payment -- past, present, future: Prelude to a crisis

In 1992 physicians lost the ability to set their own Medicare prices. The new payment system seemed to work at first, but problems quickly ensued. Part 1 of a 3-part series.

By David Glendinning, AMNews staff. Sept. 25, 2006.

MEDICARE PAYMENT Past - Present - Future  Prelude to a crisis (Sept. 25)  A "rational" system unraveled (Oct. 2)  Promise and challenges (Oct. 9)

Family physician J. Edward Hill, MD, remembers a time when physicians who saw Medicare patients were able to do something that is unheard of today. After the visit, they would tell the federal government what they thought was a fair price for their care, and Medicare would pay.

"The reimbursement system was unbelievable," said Dr. Hill, American Medical Association immediate past president. "You were actually paid what you charged."

When Dr. Hill started practicing in 1968, near the beginning of Medicare's life, he charged $3 for a basic office or home visit. No government-set physician fee schedule based on rigid mathematical formulas determined this figure for him.

For nearly 30 years from Medicare's birth in 1965, the program operated under some form of the "usual, customary and reasonable" physician fee system. As long as a doctor quoted his or her usual charge for a procedure and as long as that figure was within a certain range of fees that physicians in the same area were charging for the same service, Medicare would pay its full share.

The claims process was simple enough that most doctors did not need the support staff that they do today to help figure it out, Dr. Hill said. "My wife was filling out Medicare claims longhand at the kitchen table at night and then mailing them the next day."

Physicians were subject to certain limits in what they charged, but they would hit these caps only if they raised fees past the top end of the range. At that point, Medicare would pay them at the upper limit for that area. If more and more physicians in the region increased their fees at the same time, the maximum charge would rise accordingly.