Medicare Rates Continue to Fall Behind Practice Expenses

August 29, 2013

Physicians have escaped massive cuts in their Medicare reimbursement in recent years, but here is one thing they have not escaped: the gap between sporadic Medicare pay raises, called updates, and practice expenses that are climbing even faster.

From 2002 to 2012, Medicare fee-for-service (FFS) rates increased 9%, while the cost of operating a practice — as measured by the Medicare Economic Index (MEI) — increased 27%, according to a recent report by the Medicare Payment Advisory Commission (MedPac). The MEI includes everything from physician and staff compensation to rent, exam room tables, postage, and computers. During that same period, the overall inflation rate was 33%.

The MedPac findings appear in its 2013 "data book" on Medicare spending, released in July. The independent Congressional agency has described the disconnect between practice expenses and Medicare rates in previous editions of the annual publication, so the 2013 edition merely freshens up the bad news.

Glen Stream, MD, who chairs the board of directors of the American Academy of Family Physicians (AAFP), said the MedPac numbers illustrate the financial challenges facing his members.

"We've had concern that the Medicare [fee schedule] updates have been relatively flat and have not kept up with the cost of delivering services," Dr. Stream told Medscape Medical News. "Practices are torn in their altruistic professional desire to take care of patients and the economic reality that is more and more difficult."

The gap between Medicare costs and practice expenses is particularly hard on small independent practices, which explains why so many physicians have gone to work for hospitals and integrated delivery systems, said Dr. Stream. These large institutions can better weather the Medicare physician fee schedule because "Medicare payment on the hospital side isn't as bad."

Some Physician Services Have Skyrocketed

There is more bad news in the latest MedPac data book, at least from a societal point of view. From 2002 to 2012, Medicare spending for physician services per beneficiary increased at a break-the-bank pace of 72.4%.

The 9% increase in Medicare payment rates contributed somewhat to this spending growth, but the lion's share, according to MedPac, came from the growth of physician services.

Table. Volume growth per beneficiary for 5 categories of physician fee schedule services from 2000 to 2011.

Physician fee schedule service category Growth in volume from 2000 to 2011
Tests 90.9%
Imaging 78.9%
Other procedures 68.2%
Evaluation and management services 36.8%
Major procedures 34%

Source: MedPac.

Regina Herzlinger, PhD, a professor of business administration at the Harvard Business School, Boston, Massachusetts, told Medscape Medical News that all these data, if accurate, illustrate 2 problems in healthcare: One, when prices are cut, physicians and other providers pump up the volume of services, and two, third-party price-setting does not work.

"The suppliers always find a way to circumvent its many rules," said Dr. Herzlinger, author of the 2007 book Who Killed Health Care? America's $2 Trillion Medical Problem—and the Consumer-Driven Cure.

Healthcare economist Judith Lave, PhD, agrees that the surge in Medicare spending per beneficiary and some physician services partly reflects an attempt by physicians "to maintain some degree of income." But "pumping up the volume" is not the entire explanation for the trend lines, said Dr. Lave, a professor of health economics at the University of Pittsburgh in Pennsylvania, who served on MedPac and its predecessor, the Prospective Payment Assessment Commission, in the 1990s. Patient demand also factors in, especially when there are new healthcare technologies and services coming on line and they are affordable.

"The majority of Medicare beneficiaries have some form of supplemental insurance, so they're shielded from the cost of care," Dr. Lave told Medscape Medical News. "There's very little reason for beneficiaries to economize."

The AAFP's Dr. Stream offers an additional explanation for increased Medicare spending per beneficiary that's purely clinical: an epidemic of chronic illnesses in the aging Medicare population. Accordingly, "some of these services are appropriate and necessary," he said.

Dr. Stream acknowledges that in FFS medicine, the number of inappropriate services can rise when fees go down, but healthcare reform has a cure for that, he noted.

"If we can do better at wellness and prevention and care coordination, we can squeeze out services that aren't necessary," he said.

SGR Repeal Bill Calls for More Meager Raises

Minimal fee updates since 2002 have been stopgap measures taken by lawmakers as they have wrestled with Medicare's sustainable growth rate (SGR) formula for setting physician reimbursement.

Detested by organized medicine, the SGR formula sets an annual target for Medicare FFS spending on physician services based partly on changes in the gross domestic product. If spending comes under that target in a given year, physicians are entitled to a commensurate raise the next year. However, if Medicare spending blows past the target, physicians are supposed to take a pay cut.

Every year since 2002, the formula has called for a "negative update," in CMS jargon, but with the exception of 2002, Congress has postponed each reduction, making next year's even larger. Instead, lawmakers usually have given physicians a raise of 1% to 2%, although they froze Medicare rates in 2007, 2012, and 2013. This year also has seen a separate 2% reduction imposed by across-the-board budget cuts called sequestration. The SGR formula will trigger a 24.4% decrease in 2014 unless Congress once again comes to the rescue.

In a rare show of bipartisanship, House Republicans and Democrats have crafted an SGR repeal bill that has won the unanimous approval of the House Energy and Commerce Committee. If it goes on to pass the full House and Senate, the bill would preserve the pay–expense gap for many physicians. It calls for annual fee schedule updates of 0.5% from 2014 through 2018 before introducing pay-for-performance models of reimbursement. Organized medicine already is grumbling that this proposed raise would trail inflation.

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