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Drastic Medicare Physician Pay Cuts Looming

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According to the Congressional Budget Office, Medicare physician payment rates will drop significantly in the foreseeable future, starting with an alarming 10 percent cut in 2008 if Congress does not intervene. The cuts are expected to total 40 percent by the year 2015 due to a flawed statutory formula, states the 2006 Medicare Trustees report.

Since 2002, the American Academy of Ophthalmology, the American Medical Association (AMA) and all physician specialties have fought to achieve a permanent, long-term solution to the inequitable and untenable formula called the sustainable growth rate (SGR) that determines Medicare physician payment updates. As a result of groundwork laid by these organizations, efforts to fix the flawed payment formula resulted in the introduction of numerous bills in the House and Senate in the last Congress.

Congressional action in 2006 reversed the 5 percent cut scheduled for 2007, and provided physicians the opportunity for a 1.5 percent bonus for reporting on quality measures. The end result for physicians, however, is 2007 payment rates that are about the same as they were in 2001, despite increases in physician practice costs over the same period.

The Academy and the AMA support the previous recommendation by the Medicare Payment Advisory Commission (MedPAC) that Congress scrap the SGR, and instead adopt the same approach for physician payment updates that is used for hospitals, nursing homes and other Medicare providers. Under this approach, payments would reflect practice cost increases. Most recently, in March 2007, MedPAC recommended that 2008 Medicare physician payments be updated by 1.7 percent.

An AMA-sponsored survey indicates that if the expected cuts are not averted, 38 percent of physicians plan to decrease the number of new Medicare patients they accept, more than half of physicians plan to defer the purchase of information technology, and a majority of physicians will be less likely to participate in Medicare Advantage.

How Medicare Cuts Happen
It is important to realize that Medicare pays for services provided by physicians and numerous other health care professionals on the basis of a payment formula that is updated annually by the SGR formula. Under the SGR, enacted by the Balanced Budget Act of 1997, the Centers for Medicare and Medicaid Services (CMS) establishes "allowed expenditures" (i.e.; target) for physicians’ services based on certain factors set forth in the law:

  • Inflation
  • Fee-for-service enrollment
  • Real per capita gross domestic product (GDP), and
  • Laws and regulations

CMS then compares allowed expenditures to actual expenditures. If actual expenditures exceed allowed expenditures in a particular year, then physician payments are reduced in the subsequent year. Conversely, if allowed expenditures are less than actual expenditures, physician payments increase.

Where This Stands in Congress
As Congressional leaders had promised, SGR fixes are being tied to reform of the physician payment system under Medicare — specifically movement toward "value-based purchasing" or another form of pay for performance. There is concern on both sides of the aisle about the sustainability of a program that only rewards physicians for doing more. There is also growing concern about the quality of care in the U.S., as well as geographic variation in care intensity.

As a first step, when Congress acted to stop the 2007 cut, it created financial incentives (1.5 percent bonus) for physicians to begin reporting on some basic quality measures similar to Medicare incentives for hospitals and other providers. CMS has created the Physician Quality Reporting Program (PQRI) that will run July 1 through Dec. 31, 2007. This program is based on the voluntary (with no incentive) Physician Voluntary Reporting Program (PVRP), which was launched in 2006 with 16 primary care measures. The PQRI now covers many physician specialists with 74 quality measures, including eight ophthalmology measures. The Academy is working with the AMA to ensure that this program remains voluntary, allows ophthalmologists to participate and includes only positive incentives. Specifically, the Academy calls for this program to be fully examined before expanding it into future years.

While Congress continues to work to resolve this issue, and the AMA and the Academy are preparing to help devise a workable solution, physicians face an uphill battle. In the short term, the administration continues to refuse to remove drug costs from the SGR, which would significantly reduce the cost of the transition into a new payment system. However, the Academy is encouraged by recent signals that indicate interest from this new Congress in addressing the immediate crisis of a 10 percent cut scheduled for 2008.

Where to Go From Here
One of the most challenging obstacles physicians face is educating new members of Congress and Congressional leaders on possible solutions that are acceptable to medicine. Another challenge is the growing cost of a permanent ($300 billion) or even a temporary fix. Congress recently instituted "pay go" budgetary rules, which require that all new spending be "offset" or funded either through cuts in other federal spending or through tax increases.

Without a clear pathway recommendation and some complex, untested options on the table, the Academy, AMA and others have responded with joint recommendations that provide concrete and more immediate solutions to the crisis.

The recommendations include a repeal of the SGR, which would be replaced with an update system that reflects increases in physicians' and other health professionals' practice costs. If an immediate repeal is not possible, Congress must stabilize payments for a minimum of two years by providing positive baseline updates to all physicians and health care professionals.

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About the author: Cherie McNett is the Academy's health policy director. She can be reached at cmcnett@aaodc.org.