Medicare doctor payment fix remains elusive for Congress

A congressional hearing sets the stage for the long process of fixing the formula or creating a new one.

By Markian Hawryluk — Posted May 24, 2004

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Washington -- Congress has started shopping for a replacement for the Medicare physician payment formula but is finding that alternatives might be too expensive for its taste.

At a recent hearing of the House Energy and Commerce health subcommittee, lawmakers heard widespread agreement that the current physician payment formula is ineffective at setting appropriate rates or controlling utilization -- the two things it was designed to do. But solutions come with multibillion-dollar price tags.

"I know doctors in Florida who are really being squeezed right now as they contend with declining reimbursement from Medicare at the same time they're facing skyrocketing medical malpractice insurance premiums," subcommittee Chair Michael Bilirakis (R, Fla.) said. "Access problems will become a real issue, and I'm afraid we will face a physician supply problem for years if we allow prolonged cuts in payments."

Congress stepped in last year with a temporary fix to set updates for 2004 and 2005 at no less than 1.5%. But that move, combined with previous action to avoid a cut in 2002, has set the stage for major pay reductions from 2006 through 2012. Under the sustainable growth rate formula, a target is set for physician spending each year. If spending exceeds the cap, those funds must be recouped in future years.

According to Congressional Budget Office Director Douglas Holtz-Eakin, the 2004 and 2005 floor on updates is likely to boost spending by about $4 billion each year. That $8 billion, on top of $5 billion in additional spending from previous years, means future updates will have to recoup $13 billion in spending. As a result, physicians will face the maximum reduction possible, about 5%, in at least 2006 and 2007. Medicare trustees recently estimated that physicians will see the largest allowable cuts through 2012.

The American Medical Association said the unpredictability leaves physicians and patients in a vulnerable position. "Even the threat of repeated cuts puts Medicare patient access to physicians' services at risk and threatens to destabilize the program," the AMA said in a written statement submitted for the hearing. "The vast majority of physician practices are small businesses, and, as such, do not have the economic and other necessary resources to absorb sustained losses or the steep payment fluctuations that have occurred."

While there is support for scrapping the sustainable growth rate formula, that option could be too expensive for Congress if some tinkering to the formula isn't done beforehand to minimize the size of the impending cuts and thus the cost of any repairs. The Medicare Payment Advisory Commission has recommended dumping the formula because it disconnects payment from the cost of providing services, is a flawed volume control mechanism, and is inequitable to doctors.

"Because it is a national target, there is no incentive for individual physicians to control volume," said MedPAC Chair Glenn Hackbarth. "It is inequitable because it treats all physicians and regions of the country alike, regardless of their individual volume-influencing behavior."

The formula is designed to allow growth in the volume and intensity of services to track growth in the gross domestic product. But fee reductions have not consistently slowed growth in the volume of services physicians provide to Medicare patients, he said.

"A better system from our perspective would be one that has not a rigid formula to determine update factors for physicians but is based on a year-to-year evaluation of payment adequacy and is coupled with more targeted efforts to reduce inappropriate volume of service and improve quality of care," Hackbarth said.

The Senate passed a nonbinding resolution expressing support for that approach. The CBO, however, has estimated that change would increase spending by about $95 billion over 10 years. But Hackbarth and lawmakers said that is because the present formula produces unrealistically deep cuts in payment over the next decade.

Changes for the here and now

Ways and Means Committee Chair Bill Thomas (R, Calif.) said he was anxious for a new formula but would try to improve the current approach until one is available.

"What I'm trying to do is examine, point by point, the most seriously flawed provisions in the physician payment formula," he said. "There are some opportunities, but time is running out. What we're really trying to do is lay the groundwork for dealing with it in the next Congress."

Thomas has met with Mark McClellan, MD, PhD, administrator of the Centers for Medicare & Medicaid Services, urging the administration to make changes in the way it calculates various parts of the formula.

The AMA has complained that CMS does not adequately account for the diffusion of new technology or legislative and regulatory mandates that increase spending for physician services. Although last year's Medicare reform law is likely to increase spending for doctor services by introducing coverage for initial preventive physical exams, cardiovascular screening blood tests and diabetes screening tests, CMS included no adjustment to the sustainable growth rate target to account for the legislation in its most recent update estimate.

Physician groups also have argued for removing drug spending from the calculation of physician services. Since the new Medicare law reformed the payment system for these drugs, concerns of overutilization should be eliminated, the AMA said.

The CBO has estimated that removing drugs from the target would cost $15 billion over 10 years but would not lead to positive updates until 2008.

Holtz-Eakin said another option would be to allow the physician spending target to grow at a rate of the gross domestic product plus one percentage point. That would result in positive updates beginning in 2008 and cost $35 billion over 10 years.

The nearest-term solution could be to treat the 1.5% updates in 2004 and 2005 not as spending that exceeds the target and must be recouped, but as a change in law that is just one factor in the formula. That would result in positive updates throughout the next decade and cost $45 billion over 10 years.

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A disconnect

The Medicare reimbursement formula is neither setting adequate physician payment rates nor controlling utilization of services, experts say. Payment updates met or outpaced medical inflation for several years but since 2002 have lagged behind. Meanwhile, Medicare spending per beneficiary, an indication of utilization, has remained unchecked.

Medical inflation Update Spending per beneficiary
1998 2.2% 2.3% 4.9%
1999 2.3% 2.3% 4.0%
2000 2.4% 5.5% 9.9%
2001 2.0% 4.8% 10.1%
2002 2.6% -4.8% 1.9%
2003 3.0% 1.7% 6.3%
2004 2.9% 1.5% 7.1%
2005 2.7% 1.5% 4.7%

Note: Data for 2004, 2005 projected.

Source: General Accounting Office

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External links

House Energy and Commerce Committee, May 5 health subcommittee hearing, "Physician Fee Schedule: A Review of the Current Medicare Payment System" (link)

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