Medicare’s Flawed Payment Formula

July 21st, 2008 at 09:22am Brian Knabe

  Brian J. Knabe, MD

The subject of Medicare funding has continued to generate news headlines recently.  In a prior blog I mentioned that the government has a couple options to make up for anticipated shortfalls in Medicare funding in the upcoming years – decreasing benefits and increasing premiums or co-pays.  Recent events remind me that I neglected to mention a third option – decreasing payments to providers, including physicians, hospitals, therapists, home healthcare corporations, and others.

It has become an annual ritual for Congress to address the problem of correcting the Medicare physician payment update formula.  Physicians have become very familiar with the nature of this issue, but most of the coverage in the mainstream press does not fully explain the problem.  An understanding of the background of the problem can help the public to realize why this is becoming a long-term problem in need of a long-term solution, and how the problem can affect individual patients.

Medicare physician payments are updated yearly as provided for by law.  The annual update is calculated starting with the Medicare Economic Index or MEI, which is a government index of practice cost inflation.  A national spending target called the Sustainable Growth Rate (SGR) is a seriously flawed model which is then used to adjust up or down from the MEI.  The formula for the SGR was created by Congress in 1997 as a target rate of growth for Medicare spending for physician services.  Various inputs are used to calculate the SGR, including the Gross Domestic Product (GDP), Medicare enrollment, and changes in Medicare benefits.  If government spending for physician services exceeds the SGR targets, then physician payments may be cut drastically.

There are several serious flaws in the SGR formula.  First of all, physician service utilization continues to grow more rapidly than the GDP, so using the GDP as a benchmark means that the SGR will be set too low.  Additionally, certain new technologies such as treatment for macular degeneration and implantable cardiac defibrillators were not considered in the formula.  The likelihood of pay cuts is increased by not including these services in the SGR update.  Changes in practice patterns, such as the transition of some treatments from the inpatient to the outpatient setting and the administration of certain drugs in doctors’ offices, have also skewed the SGR formula in the direction of pay cuts for physicians.  These factors will undoubtedly be compounded as more baby-boomers approach Medicare age.

So, what does this mean to the bottom line for physicians?  Over the past 7 years, practice costs for physicians have risen by about 20%.  During this period, Congress has passed short-term fixes for the SGR formula, thus maintaining physician payments at the about the same level now as they were in 2001.  If Congress and President Bush do not act this month, a payment cut of 10.6% is due for physicians.  In addition, practice costs are projected to rise an additional 20% over the next ten years, and payment rates are scheduled to be cut by 40% during the same period.  In my next blog entry I will explain how this system can affect patient care and access.

Entry Filed under: Medicine