No April Fooling: 2% Medicare Pay Cut Hits Monday

March 28, 2013

Medicare payments to physicians for services performed beginning Monday, April 1, will shrink by 2% under the automatic, across-the-board budget cuts called sequestration.

And unlike other impending Medicare pay cuts in the past, this one will not be called off by last-minute Congressional action. Lawmakers are on spring break.

The current federal sequester was authorized by the Budget Control Act (BCA) of 2011, which tasked a bipartisan "supercommittee" with proposing at least $1.2 trillion in deficit reduction over 10 years for lawmakers to approve. Failure to achieve this goal would trigger an equal level of sequestration beginning January 1, 2013, that would apply to defense as well as domestic spending. Medicare benefits, Social Security, and Medicaid were off-limits.

The threat of arbitrary, indiscriminate cuts was intended to motivate lawmakers to devise a more nuanced approach. However, the bipartisan committee succumbed to partisan gridlock, unleashing sequestration. Congress did manage, however, to delay the first round of cuts — $85 billion worth — until March 1, 2013, as part of its recent fiscal-cliff legislation.

The Centers for Medicare & Medicaid Services (CMS) announced that it would need until April 1 to implement the 2% reduction in Medicare reimbursement stipulated by the BCA.

Congress could have rolled back sequestration and the physician pay cut when it passed a stopgap spending bill earlier this month to fund government operations through September 30, the last day of fiscal 2013, and avert a shutdown this Friday, when current appropriations would have run out. However, the legislation preserved sequestration.

Lawmakers have another shot at undoing sequestration as they weigh budget proposals for fiscal 2014, but that assumes a Capitol Hill miracle called compromise.

On March 21, the Republican-controlled House passed a budget resolution that, like the stopgap spending measure, preserves sequestration as part of its blueprint for reducing the federal deficit by $4.6 trillion over 10 years. Two days later, the Democrat-controlled Senate approved a budget plan for 2014 that would fully replace sequestration with an equal combination of new revenue and spending cuts; overall, the plan would decrease the deficit by $1.85 trillion over 10 years. Each party considers its opponent's proposal dead in the water.

Cut Applies to Medicare Check, Not Allowable

The 2% Medicare pay cut occurring this Monday is not cut and dry.

Technically, the reduction does not apply to the so-called Medicare allowed charge, or allowable, in the program's fee schedule for a given service. Instead, it applies only to the 80% share of the allowable that the government pays to a physician.

The American College of Physicians (ACP) explains the consequences of this policy on its Web site. If the Medicare allowable for a medical service is $100, then a physician who "participates" in the program — that is, accepts the allowable as payment in full on every claim — would normally receive a check for $80. Under sequestration, the physician would receive 98% of the $80, or $78.40.

The remaining 20% of the $100 allowable — what CMS calls coinsurance — that the patient must pay the physician is not subject to sequestration (neither is the deductible). So in the ACP example, the patient owes the physician $20.

This math has special implications for physicians who elect nonparticipation status in Medicare. Contrary to what the term implies, nonparticipation does not mean that a physician shuns the program. Rather, nonparticipating physicians can choose to accept the Medicare allowable as payment in full — taking assignment on a claim, in CMS parlance — on a patient-by-patient or claim-by-claim basis. If they choose not to take assignment on a particular claim, they're eligible to receive only 95% of the allowable. As always, the patient is responsible for 20% of that amount.

And the remaining 80% of the allowable? Instead of sending a check for that amount to the physician, CMS sends it directly to the patient, who is supposed to pass it on.

However, the sequester will reduce that check by 2%, a minor unpleasantry, given that physicians in this scenario can balance-bill patients for up to 15% of the shrunken Medicare allowable (again, 95% of the normal rate). A smaller check from Uncle Sam means the patient must pay more out of pocket. Nonparticipating physicians should discuss these sequesterized checks with patients beforehand, according to CMS.

Will a 24.4% Cut Follow the 2% Cut?

Leaders of organized medicine have decried the coming Medicare pay cut of 2%, saying that even such a small reduction will hurt financially fragile medical practices, especially in light of their rising expenses. They warn that many physicians may decide to see fewer Medicare patients to keep their practices afloat.

The pain of sequestration hints at the utter agony that practices would experience if Medicare rates decrease 24.4% on January 1, 2014, as mandated by the program's sustainable growth rate (SGR) formula for setting physician reimbursement. The reduction had been set at 26.5%, but CMS recently recalculated it. The SGR formula has called for rate reductions every year since 2002, but Congress has postponed every one of them beginning in 2003. Each postponement only makes the next year's cut even larger.

Democratic and Republican lawmakers alike say they want to replace the SGR formula with something more equitable for physicians. One bipartisan bill that has much of organized medicine applauding would repeal the formula and gradually phase out fee-for-service Medicare reimbursement.

The budget proposal for fiscal 2014 that the Senate passed on March 23 reflects the $138 billion cost of repealing the SGR formula and freezing Medicare rates at their current level for 10 years.