Government

Medicare ripple effect linked to dip in spending growth on doctor services

Private insurers have been able to ride on the back of flat Medicare payments, but physicians soon may reach their limit, CMS actuaries said.

By David Glendinning — Posted March 12, 2007

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A federal report on health spending reinforces what many experts have repeatedly warned policymakers about: Health care is going to consume an increasingly larger portion of total spending in this country as time goes on. But this past year, government actuaries found evidence that spending on physician services did not contribute to this trend as much as it has in the past.

The 2006 rate of growth in physician expenditures -- the percentage by which the total annual spending on doctor services increased over the previous year -- fell to its lowest point in seven years, according to the report.

The annual national health expenditures study, released Feb. 21 by the Centers for Medicare & Medicaid Services Office of the Actuary, factors in all spending on physician services regardless of payer.

This rate of growth, still a projection until CMS collects all of the data from last year, means the nation spent about $447 billion on physician care and other clinical services in 2006 out of the roughly $2.1 trillion spent on all health care. That amount is just over 6%, or nearly $26 billion, more than the country spent on doctors in 2005.

Last year represents the third straight year of slower growth in this category. The primary cause for the most recent annual drop is an unusual slowdown in the actual prices physicians are charging for care. That development makes the latest projection a bit of an aberration, said John A. Poisal, a CMS actuary and the report's lead author.

On investigating why price growth took a dive, CMS found that many private health plans have been able to negotiate very low rates with practices based on relatively stagnant Medicare payments. Because insurers often use Medicare as a benchmark or even a ceiling in contract negotiations, the freezes or slight increases in Medicare physician reimbursements in recent years have allowed health plans to keep their payment rates low as well, Poisal said. "The story we kept coming back to is that the private insurers have basically jumped on the coattails of Medicare."

This Medicare ripple effect is well known to physicians, especially those in primary care, so the news that it is affecting total spending growth is not too surprising, said Lynne M. Kirk, MD, a Dallas internist and president of the American College of Physicians.

"The insurers have a large part of the market and then use that to hold physicians to a certain percentage of what Medicare pays," she said. "There's not a lot of options for physicians there."

The end of the trend?

While CMS said the downward trend sparked in part by Medicare's effect on total spending growth is significant, it may not be long-lived.

The actuaries project one more year in which physician spending growth is held to just over 6%, after which the rate is expected to start moving back up.

Such a turnaround would be driven by a rebound in growth of the prices that doctors are able to charge various payers for physician services. This rate hit an estimated low of 1.8% in 2006 but is projected to rise to 3.1% in 2007 and to 4.5% by 2016.

What makes this outlook all the more significant is that it assumes physicians will receive significant annual cuts under Medicare's pay formula for most of the next decade -- something the actuaries deem politically unlikely. Doctors argue that Medicare reimbursement is not keeping pace with increases in their practice costs.

Any legislative changes that boost physician rates over that time could further increase spending growth on doctor services.

Poisal explained that even if Medicare rates are cut, insurers would be limited in how far they could push down reimbursements in tandem with the federal reductions. Eventually, this process would reach its natural breaking point.

"Potentially physicians could say, 'Well, we've been pushed as far as we can be pushed,' " he said. "It remains to be seen if it plays out, but that's the assumption."

Exactly how many physicians would respond to the pressure by dropping out of certain networks or making other practice changes that minimize Medicare and private insurance losses is unclear, said Dr. Kirk.

But observers are certain that continuing rate squeezes are already prompting some palpable results. The situation is convincing many new doctors, for instance, to avoid primary care altogether, she said.

A mixed bag

The CMS actuary report has some good news in it but also outlines a number of worrisome trends, said Mark B. McClellan, MD, PhD. He is the former CMS chief and a visiting senior fellow at the American Enterprise Institute, a conservative think tank in Washington, D.C.

The growth in the utilization of physician services under Medicare is declining, indicating that doctors are doing a better job providing quality care, rather than simply more services, he said. Numerous times during his tenure as CMS administrator, Dr. McClellan raised alarms about what he characterized as runaway growth in the volume and intensity of certain physician services. The more recent trend helps reduce some of the concerns about rising costs, he said.

But annual increases in physician expenditures are still outpacing the overall escalation in the costs associated with providing the care.

"Spending growth rates are still about twice the [medical] inflation rate, so the pressures to make sure that we're spending the money well in health care are by no means going away," Dr. McClellan said.

In addition, Medicare Part B is also seeing rapid spending growth in areas outside of the physician office. Hospital outpatient procedures are on the rise, for instance, prompting questions about whether doctors could provide some of this care for a lower cost in a different treatment setting, he said.

These factors contribute to CMS' projection that total national health spending will nearly double over a decade. Even assuming massive Medicare reductions to physicians over that time period, the actuaries expect payers in 2016 to spend more than $4 trillion on health care, or nearly 20% of the gross domestic product. More than $800 billion of that could be attributed to physician care. Another $1.3 trillion would be spent on hospital care, and $497.5 billion on prescription drugs.

The American Medical Association and other physician organizations have argued that the increased spending on physician services expected in the future is worth it due to the better health outcomes and longer patient lifespans that result.

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ADDITIONAL INFORMATION

Upswing projected

[download pdf]

National health care expenditures are expected to nearly double over the next decade, as is spending on physician services.

Expenditures (in billions)
Physician Total
2006 $447.0 $2,122.5
2007 $474.2 $2,262.3
2008 $506.2 $2,420.0
2009 $541.4 $2,596.0
2010 $577.1 $2,776.4
2011 $612.9 $2,966.4
2012 $650.4 $3,173.4
2013 $690.0 $3,395.8
2014 $731.7 $3,628.6
2015 $774.9 $3,874.6
2016 $819.9 $4,136.9

Source: CMS Office of the Actuary

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Low point in physician spending rate?

The 2006 rate of spending growth for physician services hit the lowest point since 1999. The tide is expected to turn in 2008.

Spending
increase
1999 5.2%
2000 7.0%
2001 8.5%
2002 7.9%
2003 8.5%
2004 7.4%
2005 7.0%
2006 6.1%
2007 6.1%
2008 6.7%
2009 7.0%

Note: Figures for 2006-09 are projected.

Source: CMS Office of the Actuary

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Diverting the drug bill

With the launch of Part D, Medicare started absorbing a significant portion of drug expenditures previously paid by beneficiaries, states and private payers.

Payer Percentage of drug expenditures
2005 2006
Private insurance 47% 42%
Medicare 2% 22%
Beneficiary out-of-pocket 25% 19%
Medicaid 19% 11%
Other public programs 7% 7%

Source: CMS Office of the Actuary

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External links

"Health Spending Projections Through 2016: Modest Changes Obscure Part D's Impact," abstract, Health Affairs, Web exclusive, Feb. 21 (link)

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