Urbanizing counties sue to win physicians better Medicare pay

California family physician Jack R. Watson, MD, said his practice is the last primary care office to keep its doors open to new Medicare patients in Santa Cruz County.

In the eight years he has worked there, Dr. Watson has watched the cost of practicing medicine in the urbanizing area rise to that of neighboring giant Silicon Valley. But his reimbursements reflect that of rural California.

"It's becoming economically unsustainable," Dr. Watson said. "We are besieged with new patients, but it does represent the lack of access to primary care physicians."

Dr. Watson has lost staff to practices just across the county line in nearby Santa Clara, where reimbursements are 25% higher and doctors can afford to pay employees better wages. The physician shortage in Santa Cruz, mostly a retirement community, is forcing patients to travel more than an hour for care.

The reason for the disparity, doctors say, is that Medicare has failed to adjust properly physician payments for the geographic differences in the cost of practicing medicine. Costs include doctors' work; expenses, such as rent, supplies and staff; and medical liability insurance.

The problem, compounded by predicted overall Medicare physician payment cuts, is costing growth areas good doctors, said Dr. Watson, president of the Santa Cruz County Medical Society.

That's why Santa Cruz and six other California counties, on behalf of doctors, are leading a nationwide class-action lawsuit against the Dept. of Health and Human Services, said Dario de Ghetaldi, lead attorney in the case. The counties are asking Medicare to move areas where doctors' costs exceed those of their locality by 5% into a new locality that reflects actual expenses. The lawsuit, filed in June, seeks $2.4 billion in physician back pay since 2001.

Growing areas such as Santa Cruz are grouped into Medicare-assigned localities with more rural areas, where the cost of practicing medicine is much lower. Their costs are averaged using what Medicare calls geographic practice cost indexes, or GPCIs. On the other hand, bigger urban centers such as San Francisco and New York are classified as their own localities. Doctors' reimbursements there more accurately reflect their outlays, physicians say.

Communities that are becoming urban or suburban aren't the only ones with difficulties. Entire states are affected, because Medicare applies the same geographic adjustments to all physicians in some mainly rural states. Many say the GPCIs produce reimbursements that are too low.

Iowa is a case in point, said Michael J. Kitchell, MD. He is the only neurologist within 150 miles of his practice in Ames. Dr. Kitchell drives anywhere from 90 to 140 miles round-trip to visit Medicare patients a few times a week. Yet Iowa doctors, even those in Des Moines, see Medicare reimbursements 11% less than even the most rural parts of California, he said. This makes recruiting difficult.

"We have a critical shortage in many rural areas of the country, and yet [Medicare] penalizes rural areas," Dr. Kitchell said.

The system, says California Medical Assn. research, has caused physicians in 32 states and 175 counties to be underpaid by as much as 14%. That includes states with multiple localities, as well as states that comprise a single geographic locality.

"It's a real, national problem," de Ghetaldi said.

Texas Medical Assn. President William W. Hinchey, MD, said the state's largest locality encompasses about 250 of the state's 254 counties, including San Antonio, where he practices pathology.

"We are the 10th largest city in the country, and we are considered rural," Dr. Hinchey said. The TMA has no position on the lawsuit.

The differential is compounded when many private health plans base their rates on some percentage of Medicare's fee schedule, he added.

The root of the problem

Boundaries used to define Medicare's localities, first developed in 1966. They have not been redrawn since 1996, de Ghetaldi said, despite major demographic changes and many requests from state medical associations. This means that when Medicare adjusted the geographic indexes every three years as required, it used outdated information, de Ghetaldi added.

"The political process has failed, and these doctors tried for years to get this fixed, and nothing happened. So courts are the last resort," he said.

Officials from the Centers for Medicare & Medicaid Services did not return calls for comment.

Former CMS Administrator Thomas A. Scully said there's no easy answer, especially when any change has to be budget neutral.

"You have a finite pot of money, and if you raise one county, you hurt another," said Scully, a partner at the New York City-based investment firm, Welsh, Carson, Anderson & Stowe. He acknowledged that some data were old and said CMS has pushed for more current practice cost surveys.

"A lot of doctors' concerns are legitimate. But it's a formula fight," Scully said. "Sometimes you have to make arbitrary calls based on the best data you have."

Doctors say that's not enough, and a solution is 10 years overdue. But physicians have different ideas of what the answer should look like.

"Medicare has made a commitment in law to doctors to pay them according to their practice costs, and Medicare is not keeping that commitment," said Elizabeth McNeil, the CMA's vice president of federal government relations.

The CMA met with CMS officials several times since 1999, she said, but to no avail. The medical association supports the lawsuit's goal to reimburse doctors for six years of underpaid work, she said. But doctors want to ensure that the outcome of the case does not cut reimbursements to doctors in other counties where the geographic formula is not causing underpayments.

A CMA-supported federal bill introduced in the House in May proposes that CMS update the geographic boundaries every three years using the 5% rule, while preserving the rates of doctors left in the original locality. The measure would apply only to multilocality states and Virginia, which includes the Washington, D.C., area, McNeil said.

The proposal suggests that CMS withhold payments to unlicensed independent diagnostic testing facilities engaged in abusive billing. The resulting funds would help maintain the status quo for doctors unaffected by the geographic payment gaps and prevent funding competition with the effort to stop overall Medicare payment cuts, McNeil said.

But some doctors in rural states say a county-by-county evaluation is only half the solution, and gross disparities from state to state shouldn't exist. "Unequal pay for equal work is a bad policy," said Dr. Kitchell, an Iowa Medical Society board member. "CMS can't justify those differences."

Dr. Kitchell acknowledged that the system must account for the inevitably higher cost of medical practice in places such as California and New York. At the same time, Medicare's "cookie cutter" formula ignores other expenses and challenges, such as the hours spent driving to see patients, that come with practicing medicine in a largely rural state with a high Medicare population, he said.

To narrow the gap, the IMS and 25 other state and specialty medical associations want to establish a permanent floor for the work component of the GPCIs. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 set a temporary floor, due to expire in December. The doctors also are pushing to establish a similar floor for the practice expense and medical liability portion of the formula over the next 10 years.