Looming cut in physician payments – will be avoided, but expensive

With all the talk about the ‘fiscal cliff,’ there is a separate issue that demands attention. Physicians are slated to see their reimbursement from Medicare get cut by 26.5% on Jan 1, 2013. That’s not a typo . . . there is a looming 26.5% cut!

Fortunately, there is no appetite on the part of either democrats or republicans to enact this draconian squeeze on reimbursement. Unfortunately, avoiding the cut is expensive. Avoiding the cut for one year will cost an estimated $25 billion. Fixing the problem for ten years will probably cost in excess of $300 billion. Fortunately (for both doctors and patients), these pay cuts have been avoided each year. However, with deficits rising and politicians scrambling to find savings in order to avoid the fiscal cliff, the “doc fix” as it is commonly known becomes increasingly difficult to pay for. It will be paid for in the end, but the fix is likely to be for one more year. A permanent fix, while necessary, is almost certain to remain elusive.

The problem (the requirement to cut Medicare payments to doctors) stems back to the Balanced Budget Act of 1997. Interestingly, this issue at the time was a relatively small consideration, and the long-term consequences were completely unexpected. Essentially, the law contained a provision known as the “sustainable growth rate” (or SGR) that mandated the costs per Medicare beneficiary should grow at the rate of GDP. If costs exceed this, Medicare would automatically cut doctor payments for the following year to bring the growth in medical costs per beneficiary back down.

There are several factors that led to the current problem:

  1. The economy began to grow much more slowly after 2000
  2. Life expectancy is increasing by about year with each passing decade
  3. There has been medical innovation which, while often effective, is generally correspondingly costly

All was fine for the first few years. In 1998-2000, medical costs rose slowly, and doctor payments were stable. In 2001, costs grew, and physician payments were cut by 4.8%. Needless to say, doctors were not happy. Since then Congress has intervened every year to prevent the few percent cut in reimbursement mandated by the SGR formula. Unfortunately, as each year passes, these necessary cuts accumulate, hence the 26.5% cut that is required in 2013 to bring doctor payments down to the level required by the law.

It’s worth taking a moment to think about what this impact could mean to doctors if it were implemented. Even though a typical physician generates only about 30% of his or her revenue from Medicare, the practice’s costs (rent, nursing and office staff, supplies, malpractice insurance, etc) are largely fixed. A doctor’s income is the net of bills collected minus these fixed costs. As can be seen in a simple, hypothetical scenario (below), even if other payers do not change their reimbursement practice, a cut of this nature would be difficult if not devastating.

Hypothetical Medical Practice
$ ‘000 (thousands)
Medicare
Now 26.5% cut
Revenues (medical bills)
Commercial Insurance           420           420
Medicare           180           132
Total Revenue           600           552
Total Expenses           450           450
Doctor Income           150           102

While this issue is almost certain to be fixed once again this year (at a cost of $25 billion), the overhang, frustratingly, is likely to remain and reemerge in a few months as lawmakers begin to consider both the deficit and the federal budget for 2014.

source: The Sustainable Growth rate (Alliance for Health Reform); The ‘Doc Fix Dilemma (Kaiser Health News); Life Expectancy (US Census Bureau)

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