Medicare Pay: 2004 Forecast Looks Gloomy

Physicians escaping the proverbial frying pan of a 4.4% cut in Medicare payments in 2003 have found themselves right back in the fire for 2004.

Preliminary estimates of the 2004 update by the Centers for Medicare & Medicaid Services have pegged physicians for a 4.2% cut in rates. The agency stressed the number could still change substantially by November when the final update is announced.

While the Bush administration pushed for Congress to address the cuts in 2002 and 2003, early indications from CMS Administrator Tom Scully do not bode well for physicians. “I’m not sure I would be an advocate of fixing it,” he said.

The update is calculated by a complex formula intended, after adjusting for various factors, to allow physician spending to grow at the rate of the gross domestic product. However, the formula requires CMS to estimate certain factors to develop a spending target, called the sustainable growth rate. If that spending target is exceeded, future physician payments must be lowered to make up the difference.

For 2002, CMS said the real per capita GDP grew less than expected, while the volume of physician services grew about two percentage points higher than expected. The combination of those two factors accounted for the vast majority of the negative update revision for 2004.

The growth in spending on physician services caught CMS officials by surprise in light of the 5.4% cut in 2002 payments and the myriad reports of physicians limiting their Medicare case load.

The volume of Medicare services in 2002 grew faster than expected. “The program is growing faster than anyone expected,” Scully said.

According to CMS Chief Actuary Richard Foster, the higher than expected growth in volume could be due to two factors. One is that there could be an increase in the number of sick people seeking care due to a bad flu season or some other medical factors. “We haven’t actually seen any evidence of that,” he said. “The other possibility is that if you cut payments to physicians and they don’t want their Medicare revenues to go down, they may elect to do more services to make up for it.”

Foster said there was a 7% to 9% growth in the number of office visits, minor procedures, magnetic resonance imaging and CT scans in 2002, while spending for major procedures declined. “That would be consistent with our hypothesis. If you want to generate some more revenue, you don’t really want to be doing surgeries on people.”

But Foster cautioned that the 2002 data were still preliminary and that it was too earlier to definitively state a cause-and-effect relationship. But Scully said the sharp rise in volume clearly indicated physicians had increased the number of services provided to Medicare beneficiaries to offset the payment decrease.

Physician groups countered that much of the volume increase can be attributed to positive steps taken to improve care for beneficiaries.

The Dept. of Health and Human Services “itself has contributed to growth in physician services with new worthwhile initiatives: government-sponsored medical research, Medicare quality improvement initiatives, new disease screening benefits, CMS coverage expansions, and efforts to reduce health care disparities,” said Yank D. Coble Jr., MD, president of the American Medical Association.

Dr. Coble also cited continued declines in death rates from the nation’s three leading killers — heart disease, cancer and stroke — as well as an all-time high in life expectancy.

“Improvements in the health and life expectancy of our nation’s seniors have a cost attached, and the physicians of America certainly should not be penalized for these important achievements,” he said. “Unless we change the payment formula, Medicare payments to physicians will continue to plummet, making it more difficult for our nation’s seniors to get the care they need and deserve.”

The new cuts have prompted numerous groups to renew calls for replacing the update formula based on the sustainable growth rate with one that reflects rising physician costs.

“The SGR system is fundamentally broken and must be replaced by an annual update system that takes into account real practice cost increases,” said William F. Jessee, MD, president and CEO of the Medical Group Management Assn. “It is unacceptable to retain a payment system that would set 2004 Medicare physician payments below where they were in 1998.”

Physician groups have also called for CMS to remove spending for the few Medicare-covered outpatient prescription drugs from the SGR targets, arguing that physicians have no control over drug prices. Spending growth for those drugs was up 25% in 2002 and accounted for a 0.6 percentage point decrease in the 2004 update.

The Medicare Payment Advisory Commission has recommended a new update process that would look at the adequacy of current payment levels as well as the anticipated increase in costs. Using that approach, MedPAC recommended a 2.5% update for 2004.

Lower death rates from heart disease, cancer and stroke keep beneficiaries using Medicare longer.
Eliminating the SGR formula, however, would also remove the prime mechanism for restricting growth in Medicare spending for physician services. MedPAC is now looking at the factors that have contributed to the volume growth in recent years in hopes of recommending alternative ways of controlling increases. However, some commissioners are concerned that new cost controls may limit needed care.

“ÄMedPAC shouldÅ avoid a conclusion that volume growth is somehow evil and that policy should be directed toward controlling it,” said MedPAC Commissioner Alan Nelson, MD. “That’s not the case with less-invasive cardiovascular procedures or colonoscopy or osteoporosis screening or other things in which we seek to increase volume appropriately.”

In March, MedPAC looked at whether recent increases in the use of imaging services could be linked to concerns over medical liability.

“The idea is that, because of fear of medical liability suits, it’s possible that physicians are ordering extra tests and procedures to protect themselves and practice what has been termed defensive medicine,” MedPAC analyst Kevin Hayes, PhD, said.

MedPAC found that areas with higher liability premiums also had higher use of imaging services. However, MedPAC relied on CMS data for liability premiums from 1996 to 1998, before the recent upswing in rates. The premium data also reflected costs for all physicians, not specifically those specialties that ordered the majority of imaging services.

The commission plans to look at additional factors affecting volume growth and hopes to present its finding to Congress in its June report.