Worsening economic outlook will bring lower Medicare reimbursement rates

Economic slowdown affecting payment formula changes

If the economy continues weakening as expected, this will activate automatic changes in Medicare’s physician fee schedule that would cut projected pay raises for next year by as much as two to three percent, say reimbursement experts.

Each year, Medicare updates its physician fee schedule to account for changes in the cost of providing health care services. Last March, the Centers for Medicare and Medicaid Services (CMS) issued an initial estimate that predicted the 2002 update would be -0.1%. Now CMS officials are saying the fee schedule update could be several percentage points lower, based on the most recent economic data.

"I am very concerned about what kind of impact that would have on physicians who are already accepting discounted payments for Medicare patients in many parts of the country," notes Alan Nelson, MD, an internist and a member of the Medicare Payment Advisory Commission (MedPAC), which advises Congress on Medicare payment issues.

Others note that over the past two years, Medicare’s physician payments have jumped a total of 10% — a significant amount that will help cushion next year’s shortfall.

Sustainable growth rate targeted for change

These events have spurred physicians to put increased pressure on CMS to revamp the formula used to calculate changes in Medicare’s fee structure, especially when it comes to setting the sustainable growth rate (SGR) used to establish a spending target for physician services.

The SGR takes into account four factors: gross domestic product (GDP) growth, changes in Medicare fee-for-service enrollment, increases in fees for physician services, and changes in physician spending due to law or regulation. Accurately calculated, the SGR should expand per-beneficiary spending at the rate of increase in the gross domestic product.

After the SGR is established, CMS calculates the payment update with a congressionally mandated formula based on the change in costs for physician services as measured by the Medicare Economic Index, as well as expected changes in physician behavior due to payment modifications. If physician spending exceeds the target rate in a given year, Medicare cuts spending for the next year. If the GDP does not grow as much as predicted — or the volume of doctor services grows more rapidly than expected — physician spending by Medicare is likely to exceed the SGR.

It seems both of these possible scenarios are coming true this year, notes Yank Coble, MD, speaking for the American Medical Association (AMA). For instance, the GDP for 2000 is being revised downward by economists, while the 2001 GDP is not expected to meet projections. Meanwhile, initial estimates from CMS show that Medicare spending for physician services is rising faster than in previous years.

Part of the problem is that the CMS does not accurately account for all costs when it calculates the cost of physician services, especially the costs of new Medicare regulations, quality improvement projects, and large one-time costs, such as Y2K conversions, contends the AMA.

Type of beneficiary should be accounted for

To soften this projected shortfall, the AMA and other groups have suggested that if the CMS uses the current formula, it should then adjust the numbers to calculate the SGR and the update. Specifically, physician groups want Medicare to account not only for an increase in enrollment but also for the type of beneficiary it enrolls in its fee-for-service program to provide additional funding for the growing percentage of high-cost patients, such as those with disabilities or end-stage renal disease.

Meanwhile, various medical societies are also lobbying Congress and CMS to make other regulatory and legislative changes to push up payments, such as increasing spending for physical therapy and nonphysician practitioners. However, with the nation’s capital focused on the war on terrorists, Beltway insiders are saying any other "nonessential" legislation will probably be on hold for the foreseeable future.