Prices for doctor services lag behind inflation

Economists cite downward pressure on pay rates from Medicare and commercial payers.

By — Posted April 30, 2012

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Physicians have long felt that the cost of running a practice is growing more quickly than payment received per service. New government data indicate that this is more than a feeling.

The Consumer Price Index for all items went up 0.3% in March and 2.7% in the previous 12 months, according to Bureau of Labor Statistics data released April 13. Prices paid for physician care, which includes the amount from an insurer as well as the patient portion for a single service, went up 0.2% for the month and 1.3% during the past year.

The annual physician services inflation rate has been below the overall number for the past 12 months, and the month-to-month physician numbers have been lower than general inflation for eight of the past 12 months.

The BLS determines the inflation rate through monthly interviews of a statistically representative sample of providers of goods and services. They include nearly 1,500 who speak for physician practices about the prices paid for the most common procedures and office visits.

For physicians faced with a low inflation rate, compared with the overall rise, payments have not kept up with practice costs in recent years.

The Medical Group Management Assn. said practice revenues increased 45% between 2001 and 2010, but costs went up 53% even though practices cut costs by 2.2% in 2010, mostly through less spending on drugs and furniture.

The American Medical Association said there is a 20% gap between what Medicare pays — a major factor in keeping down physician prices — and what it costs physicians to treat patients.

“The cost of providing care is going up,” said Glen Stream, MD, president of the American Academy of Family Physicians. “There’s a downward pressure on physician payment. At some point, something is going to break.”

Analysts often cite the lag between practice revenues and costs as the reason why many physicians are seeking what they view as the financial stability of hospital employment over the pressures of owning an independent practice.

In 2001, 3% of residents surveyed by physician recruiting firm Merritt Hawkins & Associates wanted to work as hospital employees. In 2011, that number was 32%.

A total of 91,282 physicians and dentists had full-time employment at community hospitals in 2010, a 47% increase from 61,972 in 2001, and a 7% jump just from 2010, according to the American Hospital Assn.

What’s affecting physician prices

In the 1980s and 1990s, the physician services rate was well above inflation, but that gap began narrowing significantly in 2001. In fact, the physician services inflation rate also fell below the overall inflation total from August 2005 to September 2006 and from November 2007 to October 2008.

Economists and other experts said the trend is a result of tightening payments from government and private insurers.

Since 2002, the sustainable growth rate formula used by the Centers for Medicare & Medicaid Services to set Medicare pay rates has called for cuts in physician payments, including a more than 30% reduction set to begin Jan. 1, 2013. While Congress has reversed SGR-mandated cuts a dozen times, the results have been short-term freezes or small increases in Medicare pay.

To fix what it has labeled an “unsustainable” SGR, the AMA has called for its elimination, with five years of positive pay updates as Medicare tests pay models that would enhance care coordination, quality and appropriateness of care while addressing cost concerns.

Also, many states have cut Medicaid pay to address their budget problems during the past few years. In the private sector, economists said, physician practices have lost negotiating power to private insurers as they have become larger.

More than 400 health plan mergers were approved by federal and state regulators from 1996 to 2008, with only two deals required to sell operations in some markets because of questions about market domination. As a result, nearly every metropolitan area in the United States has one plan controlling at least 30% of the commercial insurance market, and in more than half, one plan controls at least 50%, according to numbers gathered by HealthLeaders-InterStudy and analyzed by the AMA. This is true even as a majority of physicians work in practices of five doctors or fewer.

“What we’re seeing is that, in general, over the past 10 years, physicians have had less and less power over their prices,” said Douglas Hough, PhD, associate professor at Johns Hopkins Carey Business School in Baltimore, who works on health economics issues. “It’s not that physicians could dictate the price before, but they certainly had more influence on what the price would be.”

Economists say physicians’ lack of negotiating clout is reflected in the fact that other parts of the health system have not consistently felt similar pressure on prices.

Growth in the prices paid for hospital care has continued to surpass overall inflation, according to the BLS. The cost of inpatient hospital services went up 0.1% in March but 5.3% for the past year. Outpatient services grew by 0.2% in March but 4.9% for the previous 12 months. The cost of health insurance went up as well. Health insurance premiums for a family of four increased 9% to $15,073 in 2011, according to data released Sept. 27, 2011, by the Kaiser Family Foundation and the Health Research & Educational Trust. Premium prices have increased by double-digit percentages in many years during the past decade.

With government and private efforts to control health costs, economists expect those sectors to feel more of the pricing pressure that physicians have felt for much of the past decade — and for doctors to keep feeling it.

“I just don’t see any factors that are going to allow physician prices to go above the overall Consumer Price Index again,” Hough said.

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A monthly view of physician price changes

View in PDF

Click to see data in PDF.

Throughout the 1980s and 1990s, the average total price paid to physicians per service by insurers and out-of-pocket by consumers grew more quickly than general inflation. But that began changing in the 2000s, and for the past 12 months, inflation in physician prices has fallen behind the overall rate.

Month Annual inflation rate Annual inflation rate
for physician services
January 2011 1.6% 2.6%
February 2011 2.1% 3.0%
March 2011 2.6% 3.2%
April 2011 3.1% 3.0%
May 2011 3.4% 3.0%
June 2011 3.5% 2.7%
July 2011 3.6% 2.4%
August 2011 3.8% 2.5%
September 2011 3.9% 2.2%
October 2011 3.6% 2.7%
November 2011 3.5% 2.6%
December 2011 3.0% 2.7%
January 2012 2.9% 2.4%
February 2012 2.9% 1.3%
March 2012 2.6% 1.3%

Source: Consumer Price Index, Bureau of Labor Statistics (link)

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External links

Bureau of Labor Statistics, Consumer Price Index (link)

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