AMNews
November 19, 2001
by Markian Hawryluk
The Centers for Medicare & Medicaid Services announced Nov. 1 that the conversion factor used to calculate payments to physicians would decline by 5.4%.
Unlike payments for hospitals or other providers for which Medicare’s annual updates allow some government discretion, physician payment is updated based on a set formula. In essence, CMS must simply input the numbers and arrive at an answer.
Unlike payments for hospitals or other providers for which Medicare’s annual updates allow some government discretion, physician payment is updated based on a set formula. In essence, CMS must simply input the numbers and arrive at an answer.
The self-correcting nature of the formula is primarily responsible for the impending reduction. The formula updates payments on the basis of estimated changes in physician costs. But the update only equals the estimated change if actual spending is equal to a target — the sustainable growth rate.
The target is based on four things: gross domestic product, enrollment in the traditional Medicare program, input prices, and spending due to new laws or regulations. If actual spending misses the target, the next year’s update must be raised or lowered to bring spending in line. This year, revisions to previous year estimates of GDP, increases in physician spending and the economic slowdown have all added up to a large negative update.
Comment: Medicare has led the way in slowing the rate of inflation in health care, using fee controls designed to reflect the real costs of delivering care. Private managed care health plans followed with measures that excessively squeezed profits and drove many physician groups into bankruptcy. Medicare’s formula was designed to assure adequate compensation for physicians while still providing value for the taxpayer. Private health plans were strictly bottom line oriented, ignoring the threat to the fiscal stability of the medical profession.
Although Medicare’s efforts were more noble, they didn’t quite get it right. Although a 5.4 % decrease doesn’t look like much, it can be disastrous. Keep in mind that overhead expenses are relatively fixed for solo and small group medical practices. The percentage change affects primarily the net income of the physicians. Thus a 5.4 % decrease in fees may translate into a 10 % or 15 % decrease in take-home pay. If similar adjustments were to occur in consecutive years (unlikely but not impossible), the implications are obvious. Using physicians’ net income as the ultimate adjustment for the “sustainable growth rate” places on physicians too much of the burden of health care inflation control.
Private health plans have wreaked financial havoc without containing costs. They have to go. Universal insurance holds the promise of containing costs through global budgets and negotiation of provider rates. Although the formulas used by Medicare are rational, they create excessive instability of physician income. Negotiation must be added to the process. But allowing physician negotiation in our fragmented system could threaten further disruption of delivery of health care services (beyond that of contract terminations and bankruptcies). On the other hand, a universal program of public insurance should strive for equity in rate setting by adding negotiation to the process. Physicians would be protected from excessive decreases during unfavorable years, and the taxpayers would be protected from excessive physician compensation in more favorable years.
Does anyone in America oppose equity, or fairness, in the funding and delivery of health care? Then why aren’t we moving ahead with reform that would establish equity?