Battle begins in Congress over Medicare pay cut

Lawmakers debate the necessity and expense of overhauling Medicare's physician payment formula.

By David Glendinning — Posted Feb. 28, 2005

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Washington -- The race to fix the Medicare physician pay system this year is on. But while some lawmakers already have started getting into the details of how they can accomplish such a move, others are questioning whether they need to act at all.

The House Ways and Means health subcommittee recently held its first hearing on the subject this congressional session, and the voices calling for payment reform were out in force. Physicians representing the American Medical Association and various specialty groups warned that the projected 5.2% cut in Medicare reimbursements next year -- as well as similar estimated cuts in subsequent years -- would have a devastating effect on patient access to care.

"The Medicare payment formula as it relates to physicians is flawed and permanently broken," said Nancy H. Nielsen, MD, PhD, speaker of the AMA House of Delegates.

The AMA says payment is disconnected from the actual costs of physician services because the formula establishes a spending target for each year that is based largely on how well the national economy is doing, rather than on medical inflation. When doctors as a whole exceed the sustainable growth rate target, base reimbursements for subsequent years are cut.

The Association wants Congress to replace the SGR formula with a system that reflects increases in doctors' practice costs.

That position received a sympathetic reception from Rep. Nancy Johnson (R, Conn.), the subcommittee's chair.

"We need to fundamentally rethink the way we pay our doctors," Johnson said. "Let's face it, the so-called sustainable growth rate formula is not sustainable."

But Johnson's assertion that Medicare needs to track physician costs more accurately drew a skeptical response from the panel's ranking Democrat, Rep. Pete Stark (Calif.). Doctors are increasing the volume of their services, which indicates that they are getting more efficient, he said. The SGR target is in place to make sure that payments take this into account, he added.

"As physicians ... become more efficient, they become more productive and should, in fact, share some of the savings with the taxpayers who funded this," Stark said.

Questions about physician access

Stark and other lawmakers who are wary of spending the roughly $90 billion over 10 years that the Congressional Budget Office estimates it will take to fully repair the payment system could have new ammunition in the fight on Capitol Hill.

Even after doctors swallowed a 5.4% reduction in 2002, Medicare patient access throughout the country continued to rise, the Government Accountability Office said in a report released in advance of the House hearing. Comparing figures from April 2000 and April 2002, GAO found that the portion of beneficiaries who received physician services rose 4%, and doctors offered significantly more procedures per senior.

Senate Finance Committee Chair Charles Grassley (R, Iowa), who commissioned the report, said the finding was welcome news.

"I'm relieved to know that access to physicians improved even with the -5.4% payment update in 2002," Grassley said. "The GAO information will be especially useful to Congress this year as it reviews ways to promote efficiency and quality, while considering the potential impact of upcoming reductions in physician payments in 2006."

Grassley's Democratic counterpart on the Finance Committee warned that access might plummet for some beneficiaries if physician pay is cut too much.

"The GAO says that, in the aggregate, seniors' access to physician care is strong," said Sen. Max Baucus (D, Mont.). "But in areas where patients and providers are few and far between, it doesn't take much to throw aggregates and averages off."

Aggregate access statistics conceal the fact that some Medicare beneficiaries are indeed complaining that they can't find a doctor who can treat them, the AMA's Dr. Nielsen said.

"The new GAO report on Medicare patients' access to care offers false comfort to America's seniors," she said. "The Centers for Medicare & Medicaid Services has more recent evidence that shows patient access-to-care problems were more common among those new to Medicare and those who had recently moved to a new area."

Legislation or regulation?

Even if relatively few doctors so far have decided to cut Medicare services because of the size of their reimbursements, many experts contend that the situation will worsen if Congress does nothing over many consecutive years of rate reductions.

Lawmakers could decide, however, that CMS must take the first step.

One of the options on the table would remove physician-administered drugs from the pay formula. The AMA argues that the added costs of the medications should not count as a physician service and that these costs cause spending limit overruns that unfairly drive down reimbursements for some practitioners.

"It is simply bad policy to penalize physician payments when certain physicians prescribe needed life-saving drugs," Dr. Nielsen said.

The Association says CMS can simply remove the drug element via regulation whenever it wants. An AMA-commissioned legal analysis of the Medicare statute by the law firm Ropes & Gray in Washington, D.C., supports the group's stance. The agency also could provide additional reimbursement relief to doctors by making the removal retroactive to 1996, Dr. Nielsen said.

Although the Medicare Payment Advisory Commission and the GAO generally agree with this assessment of CMS' statutory authority, the agency has not yet determined whether it can act, a spokesman said. Because tens of billions of Medicare dollars would be required either to eliminate the entire formula or to revise its elements, the issue might turn into a fiscal battle between the administration and Congress.

"That is one of the worst aspects of the sustainable growth rate," said Glenn Hackbarth, chair of MedPAC. "It has become a barrier to sound, prudent policy."

The longer Congress and CMS face off over who pays for the changes, the worse the situation could become for both doctors and beneficiaries, according to Bruce Steinwald, director of health care economic and payment issues for the GAO.

In the past, Congress could pass temporary fixes to stave off physician cuts and offset the cost of the revisions by simply projecting deeper cuts for future years. Because physicians are now set to receive the maximum yearly reduction for the bulk of the next decade, lawmakers are running out of room to pass such budget-neutral fixes, Steinwald said.

"We are at the threshold of an important change here," he said.

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Options on the table

Here's how Congress' options for addressing problems with Medicare's physician payment formula would affect fees and spending from 2006 through 2014:

Option Years with
pay cut
Spending above
current law
Do nothing 8 0%
Eliminate spending targets 0 22%
Set growth rate to GDP+1% 6 4%
Reset spending targets' base 6 13%
Remove Part B drugs from formula 5 5%

Source: Centers for Medicare & Medicaid Services Office of the Actuary

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Divergent paths

If Congress does not change the Medicare physician payment formula, reimbursement will decline yearly while doctors' costs continue to rise.

2006 -5.2% 1.9%
2007 -5.0% 2.2%
2008 -5.3% 1.8%
2009 -4.8% 2.4%
2010 -4.8% 2.4%
2011 -4.8% 2.4%
2012 -4.8% 2.4%
2013 -2.1% 2.3%

Source: 2004 Medicare Trustees Report

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The Medicare drug benefit factor

The campaign to fix Medicare's physician payment system will compete with a massive federal undertaking that gets more expensive as time goes on -- the outpatient prescription drug benefit.

Both a series of Medicare physician reimbursement cuts and the new prescription benefit are set to begin in 2006.

The Bush administration now estimates the Medicare drug program's 10-year cost to be roughly $720 billion. For the first time, the projection takes into account a full decade of payments for beneficiaries' medications. Congress initially agreed to spend $400 billion on the program over 10 years, but that figure included the two transition years that started in 2004.

In trying to promote a physician payment formula fix that will run tens of billions of dollars over a decade, the American Medical Association and others will need to convince lawmakers that the added cost is necessary.

"With more and more cash flowing to the drug benefit, it's going to become harder to sell anything that will pile up more costs in other areas of the program," one Senate aide said.

Battle lines over the new Medicare benefit have already been drawn. President Bush said he will veto any bill that restricts beneficiaries' drug choices, and conservatives and liberals alike have vowed to press forward with measures that aim to rein in the program's costs.

The AMA argues that sustained physician cuts under the current payment formula will result in serious patient access problems.

That message could resonate on Capitol Hill. "There's no benefit to having a really expensive Medicare drug plan and then no doctors who are able to write the prescriptions," the Senate aide said.

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