Panel predicts Medicare pay cuts as crunch looms for 2006

Medicare insolvency warnings could hinder a physician payment formula fix.

By Markian Hawryluk — Posted April 12, 2004

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While the news about the pending bankruptcy of Medicare's Part A hospital trust fund was bad, the outlook for physicians is even worse.

The Medicare trustees report issued in mid-March predicted that the Part A trust fund would go broke in 2019, seven years earlier than expected. But estimates in the report signaled an impending crisis in Part B physician payments less than two years away.

The Medicare Modernization Act of 2003 eliminated cuts in physician payment for 2004 and 2005 but only pushed the problem out to future years, said Richard Foster, the Centers for Medicare & Medicaid Services' chief actuary.

"It did not do anything to reset the target for allowable spending under the sustainable growth rate system," Foster said. "The fact that the actual expenditures were already over the target and will now be even that much more over the target means that we have to reduce payment updates in future years to get them back to the target on a cumulative basis."

As a result, Foster and the other Medicare trustees are forecasting cuts of about 5% for 2006 through 2012.

"That's seven years' worth of minus 5% updates," he said. "It can't possibly happen, but that's current law. As a result, our Part B expenditure projections in the report are probably unrealistically low because current law can't continue this way."

The trustees report said multiple years of physician pay cuts are unlikely to occur before Congress intervenes and raises rates, and thus Medicare spending. But even without those potential increases, the growth rate for both Medicare Part A and Part B spending is alarming.

The Part B fund is unlikely to go bankrupt because beneficiary premiums and general revenue contributions are adjusted by CMS actuaries each year to cover estimated costs. "Unless they totally foul it up, that trust fund is not going to go broke," Foster said.

But the growth rate is a concern. Beneficiary premiums and cost sharing will go up to help cover the costs, but spending is projected to outpace inflation and beneficiary incomes.

Political challenges

That could make the prospects for physician payment increases politically difficult. Beneficiaries already face an estimated 17% increase in Part B premiums in 2005 alone due to physician payment fixes for 2003 and 2004. The premium hike was delayed because Congress passed the law to eliminate cuts to doctors after CMS had already set the premium level.

"We're going to run another deficit this year," Foster said. "The Part B account assets are down about as low as they ought to get."

With little action on Medicare expected before the November election, that means beneficiaries will face a large premium increase just as Congress will be trying to address problems with the physician payment formula.

Deficits in the Part A trust fund could make a formula fix under Part B difficult as well. Congress has held itself to budgetary rules in recent years that require spending increases in a budget area to be offset by cuts. So financial constraints for Part A could limit expansion of Part B spending.

The Part A trust fund has moved closer to insolvency primarily due to higher spending and lower tax revenues in 2003, as well as higher payments to managed care and rural health facilities in the Medicare Modernization Act. The prescription drug benefit, which will start in 2006, is financed under a separate account in the Part B trust fund and does not impact the Part A insolvency date.

Health and Human Services Secretary Tommy Thompson said that although the MMA did help bring the trust fund closer to insolvency, the trustees were unable to calculate savings that could accrue through the law's addition of disease management, chronic care programs, new screening benefits and other changes.

"The reforms built into the new Medicare law often get overshadowed by the new prescription drug benefits, but these reforms provide more tools to use to improve the solvency of the program," Thompson said.

But many of those reforms are likely to produce longer-term savings. The fear among health experts is that Congress will institute draconian cuts in Medicare spending in the near term, as it did the last time insolvency was looming close.

Gail Wilensky, PhD, a former CMS administrator, said Congress passed "rather traumatic changes" to Medicare in the Balanced Budget Act of 1997, when insolvency was a mere four years away. "Congress is not likely to do something dramatic until we are much closer to the due date."

Looking for alternatives

Incoming CMS Administrator Mark McClellan, MD, pledged to avoid such cuts. "In the past, when Medicare spending was deemed too high, the tried-and-true main approach instead of reducing costs has been reducing provider payments. I don't want to see that happen again."

Dr. McClellan said the MMA would provide new opportunities to help reduce Medicare costs that could improve the long-term outlook for both the Part A trust fund and physician payment updates.

But speaking to a gathering of physicians from the AMA, Dr. McClellan did not offer his views on the future of the physician payment update formula. Instead, he mentioned other ways to reduce the burden on physicians, such as cutting paperwork or reducing medical liability premiums.

"When Medicare costs keep going up, an essential part of the solution is to do more to address the avoidable costs that pile on to the cost of physician services themselves," he said.

Both Thompson and Dr. McClellan said the new Medicare projections highlight the need for medical liability reform to reduce overall costs in the health care system. But if accomplished, that would unlikely be enough to offset the sharp downturn in physician payments beginning in 2006, the so-called Medicare cliff.

"We've got some time between now and 2006 to find some better solutions," Dr. McClellan said. "I want to focus on doing everything possible under the law to reduce the projections about that cliff. I think there are a lot of opportunities to do that."

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Facing a cliff

A Medicare funding crisis for physicians is less than two years away. Doctors will face multiple years of negative updates, estimates in the 2004 Medicare Trustees Report show.

2004 1.5%
2005 1.5%
2006 -5.2%
2007 -5.0%
2008 -5.3%
2009 -4.8%
2010 -4.8%
2011 -4.8%
2012 -4.8%
2013 -2.1%

Source: 2004 Medicare Trustees Report

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External links

The 2004 Medicare Trustees Report (link)

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