Medicare physician payment policy has endured its share of challenges and controversies since 1992 when the U.S. Congress implemented volume control measures in an effort to cap Part B spending. However, never before have such large cuts in physician reimbursement been predicted. Congress has stepped in several times in the last three years to override the system and provide a short-term “fix.” As a result of these temporary fixes which do not address the system’s underlying problems, Medicare physician reimbursement will fall more than 30 percent between 2006 and 2012, while at the same time costs for providing services are expected to rise more than 19 percent.
While the 2005 Medicare Physician Fee Schedule that has been released includes an approximate 1 percent increase in reimbursement for neurosurgeons, legislative action must be taken in early 2005 to prevent a landslide of cuts beginning Jan. 1, 2006. Just as for the medical liability reform campaign, neurosurgeons will need to be active and involved in this effort.
In preparation, neurosurgeons and their practice administrators can benefit by increasing their knowledge of the complicated system of physician payment under Medicare. To that end, this article comprehensively reviews Part B payment complexities and their implications, followed by a discussion of possible solutions, and a look at the related legislative landscape.
Physician Payment Under Medicare: The Overall Formula
Under Medicare, services provided by physicians are paid under Part B, which by law is funded 75 percent by general tax revenues and 25 percent by beneficiary monthly premiums. In contrast, Part A is funded primarily by the Medicare trust fund and payroll deductions and provides hospitalization coverage. Because Part B is funded by general tax revenues, it competes for funding with other federal programs-including defense, education, homeland security, transportation and the like-and is vulnerable in times of reduced federal income caused by recession. In addition, beneficiaries must pay 25 percent of total costs; therefore, an increase in costs translates to an increase in premiums, which is never popular among active senior voters.
Physician reimbursement under Medicare is determined by the resource-based relative value scale. Under the RBRVS system, physician payment is set by the Medicare fee schedule, which assigns a set reimbursement to each physician activity. Each activity is assigned a relative value unit for three components: the work component, the practice expense component and the professional liability insurance component. The process of determining these values is ongoing, and each activity is evaluated at a minimum of every five years to ensure that the RVUs remain accurate.
To determine payment, each of the three RVU components is multiplied by the geographic practice cost index. The products then are added together and multiplied by the monetary conversion factor:
[(work RVU x GPCI) + (practice expense RVU x GPCI) +
(PLI RVU x GPCI)] x CF = reimbursement per code.
While RVUs vary by Current Procedural Terminology code and the geographic practice cost index varies by region, there is only one conversion factor for all physician services. The conversion factor is determined by a complex formula and is updated each year. Unlike recent reductions in practice expense RVUs and some work RVUs specific to neurosurgical procedures, the current problem-that all physician reimbursement will take an across-the-board cut from 2006 to 2012-arises from the conversion factor itself.
The Conversion Factor Explained
The conversion factor is designed to update reimbursement for all physician services annually. If the conversion factor increases, reimbursement for all physician services increases; if the conversion factor decreases, reimbursement for all physician services decreases. The conversion factor is determined by three factors: the Medicare economic index, MEI; an expenditure target set by the sustainable growth rate, SGR; and other adjustments that may be required from time to time for budget neutrality.
| Medicare and Related Acronyms and Abbreviations | |
| CF Conversion factor |
MMA Medicare Prescription Drug, Modernization, and Improvement Act of 2003 |
| CBO Congressional Budget Office |
MVPS Medicare volume performance standard |
| CMS Centers for Medicare and Medicaid Services |
PPRC
Physician Payment Review Commission |
| CPT Current Procedural Terminology |
RBRVS Resource-based relative value scale |
| GAO General Accounting Office |
RVU Relative value unit Three RVU components: |
| GPCI Geographic practice cost index |
SGR Sustainable growth rate |
| MedPac Medicare Payment Advisory Commission |
Additional information can be found at www.cms.hhs.gov/acronyms. |
| MEI Medicare Economic Index |
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The MEI, which was developed in 1976, is a measure of inflation in the cost of operating a medical practice. The MEI takes into consideration the change in hourly earnings in the general economy for determining both physician and nonphysician compensation costs; changes in office expenses, medical materials and supplies; professional liability insurance; medical equipment expenses; and other similar expenses. Each of these categories is weighted and a positive or negative average change for the year is assigned. Before each MEI is finalized, however, a productivity adjustment is subtracted from the total to account for any increased efficiencies the average medical practice gains over time.
The 2004 MEI was 2.9 percent (with an average inflation rate of 3.8 percent and a productivity adjustment deduction of 0.9 percent), while the 2003 MEI was 3 percent. In essence, using the MEI the Centers for Medicare and Medicaid Services, CMS, has determined that it costs 2.9 percent more to run a physician practice in 2004 than in 2003.
The conversion factor, however, does not rely just on the MEI. The CMS also estimates an expenditure target for physician services in a given year. The expenditure target is determined by the SGR formula. The SGR formula uses the following factors to determine the expenditure target: fees for physician services (utilizing the MEI, the CMS determines how much fees should increase in a given year); the gross domestic product, GDP; increases in the number of beneficiaries for fee-for-service Medicare; and changes in law and regulation. Using these factors, the CMS determines how much should be spent on physician services during a given year.
If actual spending on physician services is greater than the expenditure target, physicians receive a negative update (that is, the conversion factor is decreased, therefore decreasing payment for physician services). If actual spending is less than the expenditure target, physicians receive a positive update. In essence, the CMS determines each year how much it will spend on physician Part B services and any overages must be taken out of the next year’s payments by reducing reimbursements.
| “CMS determines each year how much it will spend on physician Part B services and any overages must be taken out of the next year’s payments by reducing reimbursements.” |
While the surgical specialties for many years enjoyed the benefits of meeting or beating their expenditure targets, the primary care and nonsurgical specialties did not. This caused animosity among the specialties, as some enjoyed increases in Medicare payment and others saw cuts. Because of changes made in the calculation of the expenditure target in the mid-1990s, the Physician Payment Review Commission, known as the PPRC, projected that physicians would receive cuts of at least 2 percent indefinitely under the MVPS. The goal of replacing the MVPS with the SGR formula was to prevent long-term cuts in reimbursement, bring stability to the system and prevent the volatility that plagued the MVPS system.
Updates Under the Sustainable Growth Rate Formula
Updates under the SGR formula have been so inconsistent and unreliable that congressional or administrative intervention has been necessary multiple times. In addition, developing an accurate expenditure target based on the SGR formula has proven virtually impossible. In 1998 and 1999, the first two years the formula was used, the CMS underestimated the strength of the U.S. economy, and therefore the GDP, as well as the number of enrollees in fee-for-service Medicare. As a result, the expenditure target was 7 percent less than it should have been. In 2001, the CMS had to make adjustments to its fiscal 2000 projections after again underestimating the expenditure target.
By 2002 the faltering economy caused the CMS to lower the expenditure target. To no one’s surprise, medical spending did not decrease with the faltering economy and physician spending exceeded the expenditure target. In addition, the CMS revealed that it had forgotten to include some recently approved procedures in its actual spending determinations since 1998. This mistake cost $4.5 billion and added a 1.6 percent decrease to a previous cut of 3.8 percent (for a total cut of 5.4 percent).
In 2003 the CMS predicted another 4.4 percent cut. However, after intense pressure and delays in the implementation of the 2003 Medicare Physician Fee Schedule, Congress acted that March to allow the CMS to fix the accounting errors it made back in 1998 and 1999 related to the expenditure target and the number of fee-for-service enrollees. The accounting mistakes cost $54 billion to fix and resulted in a 1.6 percent fee increase for physicians.
In 2004, yet another 4.4 percent cut was predicted. However, a provision in the Medicare Prescription Drug, Modernization, and Improvement Act of 2003, MMA, included a 1.5 percent increase in physician payment for 2004 and 2005 (averting a predicted 3.6 percent cut in 2005). These temporary increases were designed to give Congress and the administration time to review and evaluate the current SGR system. In fact, as currently written, the increases must be paid back to the Medicare program with substantial interest. The General Accounting Office has noted, “Because the MMA did not make corresponding revisions to SGR’s spending targets, SGR will reduce fees beginning in 2006 to offset the additional spending caused by MMA’s fee increases.” Because of this, over a 10-year period physicians would have been better off taking the cut in 2004 and 2005 than taking the temporary increases. Without the increases cuts were estimated until 2006, while with the increases cuts are now estimated until 2012.
In addition to paying back the money used to fund the 1.5 percent increases in 2004 and 2005, the problems that caused the 5.4 percent cut in 2001 and the predicted cuts in 2002, 2003 and 2004 still plague the system. While Congress has acted to prevent negative cuts in the past three fee schedules, the underlying problem with the SGR formula has not been fixed. In essence, they have placed a Band-Aid on an aneurysm and the system is about to burst.
Predicted Physician Fee Cuts
Based on having to pay back the 1.5 percent increases for 2004 and 2005, slow growth in the GDP and, most important, repeatedly spending more than the expenditure target, the General Accounting Office has predicted there will be negative physician updates of 5 percent from 2006 to 2012. The Congressional Budget Office, however, estimates there will be negative updates of 5 percent, the most likely allowable by law, from 2006 until 2014 (the farthest “out year”).
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The CBO’s estimates also are based on a reduction in spending per beneficiary from 2006 to 2009. If this does not happen, reductions in payment will be greater than estimated. The 2004 Medicare Trustees Report projected the physician update would be approximately negative 5 percent until 2012. The result would be a cumulative reduction in physician fees of more than 31 percent from 2005 to 2012, while physicians’ costs of providing services, as determined by the MEI, are projected to rise by 19 percent. Further cuts could come as a result of changes made to the practice expense RVUs, work RVUs or PLI RVUs.
By law, the most that physician reimbursement can be cut in one year is 7 percent, minus the MEI. This usually works out to around 5 percent. If it were not for this law, physician cuts in 2006 would be in the 25 percent range. The reason the cuts are for such an extended period of time is because the amount owed is rolling over to the next year.
Why Cuts Are Predicted: Problems With the SGR
Problems with the SGR formula have been well-documented by independent agencies and groups since before the formula became effective. The reason for the past and future decreases is threefold:
- the expenditure target is lower because growth in the GDP has slowed;
- actual expenditures have outpaced the expenditure target significantly for a number of years in a row; and
- real per-beneficiary spending on physician services is projected to grow faster than allowed by the SGR.
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It is important to understand, however, that the root cause of all the concerns and problems is an explosion in volume.
The amount and intensity of services has increased significantly since 2000, with diagnostic imaging and cardiac services leading the way with an almost 35 percent increase in volume. If the overall expenditures are capped and the number of services provided has increased, the only option is to reduce the cost paid per service.
That is exactly what a reduction in the conversion factor does-by reducing the conversion factor by 5 percent, physician reimbursement receives a 5 percent across-the-board reduction and more services can be provided for the same overall price. It is this unexpected increase in volume that the system was not designed to handle. While the following discusses specific problems with the SGR formula that are leading to the predicted cuts from 2006 to 2012, keep in mind that the volume increase has exacerbated all of these issues. The problem is not that the Medicare program is actually being cut; in fact, the expenditure target will rise from $62 billion in 2004 to more than $120 billion in 2014. The problem is that volume increases have-and will-continue to drive actual costs beyond those numbers.
Specific problems with the SGR include use of the GDP to set the expenditure target; the cumulative nature of the formula; the inclusion of outpatient drugs and other “incident-to” services in the actual costs; and inability to recognize and account for changes in beneficiary demographics.
How the SGR Uses the GDP
The SGR formula uses the GDP to set the expenditure target. When the GDP increases, the expenditure target increases; when the GDP decreases, the expenditure target decreases. There has never been any evidence, however, that the healthcare needs of Medicare beneficiaries proportionally increase in a strong economy or decrease in a weak economy. As the MEI has indicated, the costs of providing services to beneficiaries also are not related to the GDP. In times when the economy is strong, physicians may receive an update that is greater than costs and the Medicare system will therefore spend more than is necessary. In contrast, when the economy is in recession, reimbursement will be cut unfairly.
The MVPS system did not use the GDP as an indicator for how much physician services should grow during a given year. Instead, the system relied on historical trends in volume and intensity growth to set new targets. While use of the GDP has been a strong point of contention in recent years, the MMA changed the SGR so that, instead of using a single year’s GDP to set the expenditure target, a 10-year rolling average is now used. This should stabilize the system somewhat and make the formula less susceptible to sudden changes in the economy.
Cumulative Nature of the Expenditure Target
Under the SGR formula, the expenditure target for one year is not compared with actual spending for that year to determine the level of spending. Instead, the cumulative expenditure target is compared with cumulative spending. Exceeding the expenditure target one year affects not only next year’s update, but also all future updates. For example, when setting the 2006 update to the conversion factor, the CMS will review the expenditure target from April 1, 1996, through Dec. 31, 2005, and compare it with the actual expenditure target for that time period. Once the expenditure target has been exceeded, it will affect all future updates. To get back under the expenditure target and receive a positive update, physician spending not only would have to come in under the expenditure target in future years, but also make up for any overages in past years.
The SGR’s cumulative nature is the primary reason for the currently predicted multiple years of negative updates-once the program gets off track, it is nearly impossible to make up that money. Unlike 2003, when Congress added $54 billion to the expenditure target to fix accounting errors, when legislation prevented cuts in 2004 and 2005, no money was added to the expenditure target. Instead, the positive updates just added to the actual costs for those years. Because the SGR is cumulative, in 2006 those expenditures now need to be made up.
Immediate Recoupment of Excess Spending
The SGR formula also requires that all excess spending be immediately recouped, up to the amount allowable by law. The formula requires that actual expenditures be brought back into line with targets each year and does not allow cuts to be spread out over several years. The PPRC also predicted this would make the SGR system more volatile than the previous MVPS system. This volatility is fueled by both the SGR’s immediate recoupment of any excesses as well as the cumulative nature. The PPRC concluded:
Another limitation of the proposed approach is that it adjusts the conversion factor annually to recoup all excess or surplus spending that occurred in the prior year. This approach makes the system’s conversion factor update more volatile because it not only reflects year-to-year fluctuations in volume and intensity of growth, but also recovers the entire excess or surplus in a single year.
In essence, if actual expenditures are greater than the expenditure target, physicians are punished twice: once in the following year when the excesses are immediately recouped, and then each year thereafter when the cumulative target is compared to the cumulative actual expenditures.
Outpatient Drugs and Other “Incident-To” Services
The SGR expenditure target encompasses both spending for services on the physician fee schedule and services incident to a physician visit. These “incident-to” services include some prescription drugs, the prices of which physicians cannot control, that are covered under Medicare Part B. Including incident-to services within the expenditure target and actual expenditures can artificially inflate costs. The CBO has concluded:
Although the SGR expenditure targets are adjusted for changes in the prices of a market basket of prescription drugs, shifts in the quantity and in the mix of drugs administered-toward the use of more recently introduced and more expensive drugs-tend to result in spending that grows faster than the inflation adjustment…. CBO projects, however, that spending for incident-to services will grow faster, on a per-beneficiary basis, than the adjustments for inflation and the GDP-based allowance for volume and technology. Therefore, spending for incident-to services will grow more rapidly than the SGR expenditure targets, and payments for those services will consume an increasing share of the target, rising from $12 billion in 2004 (20 percent of the $62 billion expenditure target) to $28 billion in 2014 (23 percent of the $121 billion target). In turn, the effective expenditure target for services on the physician fee schedule will decline from 80 percent of the SGR target in 2004 to 77 percent in 2014, CBO estimates. That decline in the share of the SGR expenditure target for physicians’ services will be almost half a percentage point lower, on average, than the growth in the SGR target as a whole.
| “Individual physicians are punished by reimbursement cuts if the actual charges for the year exceed the expenditure target.” |
Unevenly Applied Changes in Law and Regulation
Under the SGR formula, changes in law and regulation, including coverage decisions, should be reflected in changes to the expenditure target. However, there is little detail and explanation on how these changes are first estimated and then tracked and adjusted in the future by the CMS. Each year Congress adds benefits to the Medicare program, including the expansion of services to include new procedures and technologies, screening benefits and diagnostic tests. It is unclear, however, how the CMS accounts for these new benefits when developing the expenditure target.
For example, the MMA added a “welcome to Medicare” screening benefit for all new enrollees. However, no additional funds were added to the expenditure target to cover the costs of the physical itself or the procedures, including laboratory work, colonoscopies, mammograms and so forth, that are likely to be ordered. Changes in law and regulation, including coverage decisions and the addition of preventative tests, can add to volume that is not necessarily reflected in the expenditure target.
Impossibility of Setting the Expenditure Target
Another problem with the SGR formula is the nearly impossible task of setting the expenditure target and calculating actual expenditures. As explained earlier, each year since the inception of the SGR formula the CMS has had to retrospectively make adjustments to either the expenditure target or the actual expenditures because of miscalculations, accounting errors or other problems. While this is understandable given the complexity of Medicare physician payment, physicians are being held accountable for a standard that cannot accurately be set until after the fact. In addition, as the Medicare Payment Advisory Commission has noted, individual physicians are punished by reimbursement cuts if the actual charges for the year exceed the expenditure target, but they have no way of controlling overall spending.
Another problem with the SGR formula is that in order to accurately estimate an expenditure target, the number of Medicare beneficiaries enrolled in fee-for-service Medicare must be accurately determined. Obviously, if more beneficiaries are being treated than estimated, volume will increase and vice versa.
Both the CBO and the CMS also assume in their recent estimates that a significant portion of the Medicare population will enroll in HMOs over the next 10 years, further reducing the expenditure target. If this does not happen, actual expenditures will obviously be more than the expenditure target because there are more enrollees in fee-for- service. Medicare than original estimated. This happened in the late 1990s and led to Congress needing to allocate $54 billion to fix these “accounting errors”.
Changes in the Medical Marketplace
Lastly, the SGR formula does not take into account changes in the medical marketplace, especially changes in the age, health and demographics of Medicare beneficiaries. According to information recently released by the CMS, for example:
- More than 25 percent of Medicare beneficiaries are either over the age of 85 or are under the age of 65 (and are, therefore, likely disabled).
- The proportion of women increases as the Medicare population grows older, and women tend to use more healthcare services.
- Nearly 65 percent of Medicare beneficiaries have annual incomes below $25,000 and more than 56 percent have incomes below $15,000; more than 70 percent of Medicare expenditures are on behalf of these individuals.
- More than half of Medicare beneficiaries suffer from hypertension and/or arthritis; almost 20 percent have diabetes; and 15 percent have pulmonary disease-all conditions that require significant medical management.
- More than one-third of Medicare beneficiaries need assistance with activities of daily living.
- Medicare beneficiaries in poor health or with functional limitations are more likely to receive Medicaid assistance, have no supplemental insurance and be enrolled in fee-for-service Medicare.
While the demographics of Medicare beneficiaries continue to change, the SGR formula simply looks at the number of beneficiaries without considering the characteristics of those beneficiaries.
| “Two enormous obstacles stand between physicians and a stable future reimbursement environment: time and money.” |
If Not the SGR, Then What?
There is a growing consensus among Washington policymakers that the SGR formula is ineffective, volatile and beyond repair. However, for physicians looking to prevent cuts under the SGR or enact a new update system, the timing could not be worse. Two enormous obstacles stand between physicians and a stable future reimbursement environment: time and money.
While cuts are not scheduled to begin until 2006, the 2006 Medicare Physician Fee Schedule will need to be ready and published by August 2005, cutting the lead time roughly in half. Asking Congress to draft, debate and pass a major overhaul to the physician payment system in only six months is a tall order, especially in an election year, when inaugurations and the related orientations delay the start of the new session. Furthermore, the president in 2005 must turn in a budget by Feb. 1. In addition, Congress, the CMS and the related agencies have before them the task of implementing the new prescription drug benefit in 2005, a mammoth undertaking in itself that will no doubt devour large amounts of resources in 2005. Time may prove to be a formidable obstacle for those looking to prevent physician reimbursement cuts for 2006.
Perhaps even more of a challenge than time is the money to finance a potential solution. In August, the White House Office of Management and Budget released its budget projections for 2005, which include a federal budget deficit of $445 billion. By 2012, the federal deficit is expected to grow to $2.2 trillion. The report also stated that Medicare would spend an additional $67 billion over its already dismal forecast for 2005 through 2009. The prescription drug benefit, originally given a price tag of $400 billion, has already exceeded its original estimate, even though the major tinkering that is likely to come with implementation has yet to be determined, and is currently running at about $540 billion. The report concluded with the statement that “Medicare and Medicaid spending must be brought under control to help rein in overall federal spending.” Washington experts already are predicting that regardless of who wins the presidency, when the president’s budget is submitted on Feb. 1, it probably will include cuts to the Medicare and Medicaid programs. Any cuts likely will affect all providers, including hospitals, skilled nursing facilities and so forth, leading to a furry of lobbying activity as they all head to Capitol Hill to make the case as to why their funding should not be cut.
Finally, early drafts of a much-anticipated report by the General Accounting Office state that Congress will need to come up with between $150 and $200 billion to prevent the cuts. Because the problem has been delayed for four years and the debt has been allowed to stack up, any “fixes”-from taking drugs out of the formu
