Dire Medicare outlook assumes deep physician pay cuts

The program's trustees say long-term projections will be even worse in the likely event Congress stops a 31% SGR cut from taking effect in 2013.

By — Posted April 30, 2012

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Medicare’s fiscal caretakers warn that the already dismal view they have of the entitlement program’s long-term financing is probably overly optimistic given that it relies in large part on reduced payments and increased efficiency-of-care assumptions for health professionals that might never become a reality.

In their annual report on the state of the program’s finances, Medicare’s trustees project that outpatient care spending under Part B will increase by an average of 4.9% annually during the next five years, a full percentage point lower than the 5.9% average seen during the past five years. But the estimate assumes that Medicare pay to physicians will be cut by 30.9% in January 2013 under the sustainable growth rate formula. If Congress overrides the SGR cut, the trustees say average annual Part B spending growth going forward will jump to 7.6%.

“It is a virtual certainty that lawmakers, cognizant of the disruptive consequences of such a sudden, sharp reduction in payments, will override this reduction just as they have every year since 2003,” the trustees state in the 2012 report.

The Part B projections also are influenced by the Budget Control Act of 2011, a sweeping deficit reduction measure that will reduce total Medicare spending by as much as 2% starting in January 2013, a mandate that could squeeze physician pay even more on top of the SGR cut. So far, lawmakers have failed to agree on more targeted reductions to replace the across-the-board spending cuts to Medicare, defense and other nondefense programs. If they cannot do so by the end of 2012, the automatic reduction process known as sequestration will begin.

The effect of the Patient Protection and Affordable Care Act, the landmark 2010 health system reform law, is another wild card in the trustees’ overview. The law requires reductions in pay rates to most health professionals based on expected growth in “economywide multifactor productivity,” and the trustees assume that Congress will allow these reductions to go into effect as mandated by law. But the report warns that this scenario would require health professionals to achieve “unprecedented improvements” in the efficiency of care that they provide to patients — improvements that will be difficult to achieve.

Medicare trustees predict that the Medicare Independent Payment Advisory Board, which was authorized by the health reform law to restrict pay to physicians and others when total spending exceeds predetermined targets, won’t be required to act until 2019 — and even then IPAB would reduce total spending growth by only 0.1%. But the effect of the board in the long run is still significant enough that a congressional repeal of IPAB, a move strongly supported by organized medicine, would change the financial outlook over time.

“In view of these issues, it is important to note that the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report, possibly by substantial amounts,” the trustees state. Under current law, for instance, total Medicare spending is projected to make up less than 7% of the nation’s gross domestic product by 2080, up from about 3.7% now. If Congress stops the SGR cuts, that figure jumps to nearly 8% of GDP, and if lawmakers also approve alternatives to the reform law’s productivity adjustments and the IPAB, Medicare spending alone will represent about 10% of the economy in 2080.

Dissatisfaction all around

The American Medical Association reiterated its call for a permanent SGR solution in light of the program projections.

“Today’s Medicare trustees report is clear: Without congressional action, physicians who care for Medicare patients will face a devastating cut of 30.9% on Jan. 1, [2013],” said AMA Chair-elect Steven J. Stack, MD. “Nothing is more critical to the Medicare program than patients’ ability to access the physicians they want and need to see.”

Many observers focus on the trustees’ projections of spending on inpatient services under Part A as a marker of the program’s long-term financial health. The Part B trust fund technically cannot become insolvent, because it is replenished with a combination of premium and taxpayer dollars. But when the Part A trust fund is exhausted, Medicare will not have enough revenue to cover all of its promised benefits to seniors.

The newest report sets the Part A trust fund insolvency date at 2024, the same as last year. But this stability also relies on some of the same projected cost savings under current law that might never materialize. In addition, focusing simply on the insolvency date ignores the growing strain of the program on federal budgets that will require significant reforms well before then, the trustees said.

Before the trustees’ report release, the Obama administration issued a report that estimates $200 billion in short-term savings to Medicare from provisions in the health reform law through 2016. These savings will come from reducing additional pay given to Medicare private plans, cracking down on fraud and adjusting pay based on health professionals’ productivity.

“One of the most important things we can do right now to preserve Medicare is to implement the Affordable Care Act fully and effectively,” Treasury Secretary Timothy F. Geithner said at a news conference for the trustees report’s release. He said the White House has proposed additional program reforms that will strengthen the program’s finances even more by paying doctors and hospitals based on quality, reducing federal drug company subsidies and raising premiums for wealthier seniors.

But GOP lawmakers blasted the administration’s contention that the reform law bolstered Medicare and that the additional proposed reforms are a practical approach.

“The idea that Obamacare will save Medicare would be laughable if the health care of millions of seniors was not at stake,” said Rep. John Fleming, MD (R, La.). “The president used Medicare savings to foot some of the bill for Obamacare. The administration may spin today’s report to justify its do-nothing approach to Medicare reform, but the fact is Medicare remains on an unsustainable path, and Democrats need to stop the political games and join House Republicans in working to save Medicare.”

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Part B’s widening slice of the pie

Even under current law, Medicare trustees say, the outpatient side of the program is projected to take up a larger portion of the nation’s economy over time. If Congress pulls back on pay reductions to physicians and others under the Medicare sustainable growth rate formula and the health reform law, as many expect, these percentages are expected to be significantly higher.

Year Part B spending
as % of GDP
2012 1.58%
2013 1.45%
2014 1.47%
2015 1.49%
2016 1.49%
2017 1.52%
2018 1.56%
2019 1.60%
2020 1.65%
2021 1.71%
2025 1.99%
2030 2.25%
2035 2.39%
2040 2.42%
2045 2.42%
2050 2.41%
2055 2.42%
2060 2.45%
2065 2.48%
2070 2.50%
2075 2.51%
2080 2.52%
2085 2.52%

Source: 2012 Medicare Trustees Report, April (link)

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