The Pending 21.2 Percent Reduction in Medicare Physician Fee Schedule Payments
By Christopher J. Kutner, Esq. and Jennifer C. Koehler, Esq., Farrell Fritz, P.C., Uniondale, New York
In its Medicare Physician Fee Schedule (MPFS) for calendar year 2010, the Centers for Medicare and Medicaid Services (CMS) implemented a 21.2 percent reduction in the Medicare physician fee conversion factor, resulting in a blanket reduction in physician fee schedule payments under Medicare Part B. The impact of this reduction cannot be understated, as Medicare is the largest payer for health services in the United States. On December 21, 2009, President Obama signed the Department of Defense Appropriations Act for 2010, which included a short-term delay for the looming reduction until March 1, 2010. Subsequently, when the reduction took effect, Congress passed a thirty day extension on this delay. How future events unfold may significantly impact the Medicare physician reimbursement system.
MPFS payment rates are a combination of three components: 1) Relative Value Units (a combination of work, practice expense and malpractice costs); 2) Conversion Factor; and 3) Geographic Practice Cost Indices.
The Conversion Factor is updated on an annual basis based on the Medicare Economic Index (a measure of inflation) that is adjusted depending on how actual expenditures compare to a target rate called the Sustainable Growth Rate (SGR). The SGR is based on estimates of medical inflation, the projected growth in the domestic economy, the projected growth in the number of Medicare fee-for-service beneficiaries, and law and regulatory changes. The purpose of the target rate is to control aggregate growth in Medicare physician service expenditures. Thus, if expenditures exceed the SGR’s target rate, then updates for future years are reduced (and vice versa).
This balancing of actual expenditures with targeted expenditures is the root of the Medicare physician reimbursement problem. The rate of healthcare spending has continued to exceed the rate of healthcare growth by more than 2 percent. Moreover, many current transformations in healthcare, such as new and improved technologies, increased beneficiary awareness of treatment options and a general shift from inpatient to outpatient treatment, are not controlled by physician behavior. As a result, the SGR has not properly accounted for medical inflation, rendering its notorious reputation as a flawed formula well deserved. In fact, since 2002, the SGR formula has resulted in negative updates, though Congress has enacted legislation almost every year to avoid the reduction. Unfortunately, however, the massive 2010 Conversion Factor reduction was necessitated by the cumulative effects of these delays.
The conversion factor will drop from $36.0666 to $28.4061 on March 31, 2010. Currently, however, Congress is working to permanently repeal the SGR. On November 19, 2009, the House of Representatives passed the Medicare Physician Payment Reform Act of 2009, H.R. 3961. The bill seeks to replace the Conversion Factor and, more importantly, aims to permanently restructure the SGR.
First, the legislation sets a transitional update that replaces the Conversation Factor cut with an increase equal to the Medicare Economic Index for 2010, which is 1.2 percent. Second, it rebases the update adjustment factor for 2011 and subsequent years by: (1) making the allowed expenditures for 2009 equal to the actual expenditures for physicians’ services during 2009; and (2) changing from April 1, 1996 to January 1, 2009 (or, if later, the fifth year before the year involved) the reference point for calculating the cumulative adjustment component to expenditure targets in the formula. Thus, the legislation would “reset” expenditure targets every five years, reducing the effects of cumulative deficits (such as the “band-aids” Congress has used since 2003).
The Congressional Budget Office estimates that permanently fixing the SGR under the Medicare Physician Payment Reform Act of 2009 would cost $210 billion from 2010-2019. Further, changes to the SGR formula would yield $195 billion in increased fees paid to physicians over the 10-year projected window.
The bill is currently on the Senate’s legislative calendar, though its fate is unclear given that the Senate refused to consider a similar proposal under S.1776, the Medicare Physician Fairness Act. In what appears to be a promising first move, however, the President signed the “Statutory Pay-As-You-Go Act of 2010,” into law on February 12, 2010. The law exempts $82 billion that may be used to avoid reductions over five years, but does not reform the SGR. If the Senate authorizes the funding, it would be the longest payment fix implemented since the deficits began to be offset in 2002. While this can be viewed as a step in the right direction, $82 billion falls far short of the cost required to permanently fix the SGR, which will continue to accumulate debt.
A separate proposal currently under consideration by Congress is the creation of a fifteen-member Independent Payment Advisory Board (IPAB) under the Senate-passed version of the Patient Protection and Affordable Care Act. The IPAB would have significant authority over Medicare payment rates and, starting in 2014, would be required to submit recommendations to reduce the Medicare per capita growth rate in any year it exceeded a target growth rate. The legislation has drawn wide criticism because it will further reduce reimbursement rates and inappropriately usurp Congress’s oversight responsibilities over Medicare. Neither the House nor Senate version of the bill includes a permanent fix for the SGR.
The future of the Medicare physician reimbursement system is uncertain. The 21.2 reduction went into effect on March 1, 2010, but Congress postponed the effective date of the fee reduction for an additional thirty days on March 2, 2010. Prior to this action, the Centers for Medicare and Medicaid Services (CMS) had ordered its carriers not to process Medicare claims for the first 10 business days of March in the hopes that a solution could be achieved. If Congress does not act further and the proposed 21.2 percent reduction occurs, the effect on the United States healthcare system could be massive. Physician lobbyist groups have raised issues such as practice viability, limitations on Medicare patient volume and patient access to physicians. Moreover, changes would likely affect private commercial payors as many benchmark their contracts on the Medicare system.
Additionally, there is the concern of what to expect in subsequent years. During the period 2009-2019, average annual health spending growth is anticipated to outpace average annual growth in the overall economy. By 2019, national health spending is expected to reach $4.5 trillion, comprising 19.3 percent of the GDP. Undoubtedly, continued reliance on the SGR would be disastrous considering these projections.
Changes to the Medicare physician payment system are imminent. The current SGR formula does not properly account for medical inflation, yielding target expenditure rates that are unrealistic and unattainable. Moreover, the “band-aids” that Congress has used have only exacerbated the problem; the repeated legislation since 2003 to avoid the formula’s reductions has led to the massive 21.2 percent fee cut now facing physicians in 2010. The environment appears poised to devise a permanent replacement or reform of the SGR, but Congress must act appropriately. Continued procrastination will only exacerbate the problem, jeopardizing Medicare coverage for millions and the economy as a whole.
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