Statement of Donald J. Palmisano, M.D., J.D.,
Secretary - Treasurer, American Medical Association
Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means
Hearing on Physician Payments
February 28, 2002
Madam Chairman, Ranking Member Stark and Member of the Subcommittee, my name is Donald J. Palmisano, MD, JD, and I serve as the Secretary-Treasurer of the American Medical Association (AMA). I am a practicing surgeon in New Orleans. The AMA is grateful to you and the Subcommittee for the opportunity to provide our views concerning the Medicare physician payment update formula, as well as the 2002 Medicare payment cut of 5.4 percent. This steep payment cut is alarming. It is critical that Congress take steps to immediately halt this cut before it further jeopardizes the success of the Medicare program and patient access to care.
We thank Chairman Johnson for your leadership efforts and commitment to providing a remedy for the 5.4 percent cut that became effective on January 1, 2002. We especially appreciate your leadership on H.R. 3511. The AMA is eager to work on legislation with you and Representative Stark to address this important matter and appreciates the various efforts of several Subcommittee Members on both sides of the aisle to assist America’s physicians in this regard.
CONGRESSIONAL ACTION NEEDED TO REMEDY ACCESS PROBLEMS
As of January 1, 2002, Medicare implemented a 5.4 percent payment cut that applies to Medicare services provided by physicians and other health professionals, including, but not limited to, physical therapists, speech pathologists, optometrists, advanced practice nurses and podiatrists.
This is the largest payment cut since the Medicare physician fee schedule was developed more than a decade ago, and is the fourth cut over the last eleven years. Since 1991, Medicare payments to physicians averaged only a 1.1 percent annual increase, or 13 percent less than the annual increase in practice costs, as measured by the Medicare Economic Index (MEI). (See attached Chart 1, Medicare Payments vs. MEI, which compares Medicare physician payment updates to increases in inflation.)
The Administration argues that total spending for physicians’ services by the Medicare program is increasing. This assertion misses the more important point — spending per physician service is being cut significantly. Increases in total Medicare spending are due in large part to such factors as the increasing Medicare population, greater longevity in lifespan, expensive technological innovations and greater demand for medical services. All of these factors contribute to spending, and all are beyond physicians’ control. Increased spending resulting from these factors cannot be curbed simply by cutting payments to physicians. A global cap on physician payments cannot successfully control the health care utilization of individual patients.
The current 5.4 percent cut is forcing many doctors to make difficult choices about their ability to continue accepting new Medicare patients, or even whether to retire or change to a career that does not involve patient care. If the pay cut is not immediately halted, it could soon become difficult to prevent serious access problems for elderly and disabled Medicare patients.
For example, the National Committee to Preserve Social Security and Medicare has stated that their members are having difficulty finding a physician who accepts Medicare because physicians cannot afford to keep their offices open. A family practitioner in an underserved part of Kentucky says she now cannot take any new Medicare patients and, if the situation does not improve, she will have to close her practice in a couple years. A cardiology group in Colorado is being forced to lay off employees and, in Texas, spine surgeons at Baylor University plan to stop taking Medicare patients.
The American College of Nurse Practitioners warns that the pay cut is also forcing physicians and nurse practitioners to restrict their Medicare patient loads and cut back on the services they provide. One nurse practitioner in New York described a couple for whom she provides care (the husband is 91 and the wife is 82), and she stated that the cut “will devastate the care received by the neediest segments of our society.”
Because of these growing access problems, immediate action is needed. We appreciate the Subcommittee’s bipartisan commitment to addressing in a timely manner the significant problems resulting from the 5.4 percent cut and the payment update formula. We urge the full Committee to report, and the Congress to enact, legislation that would—
It is critical that Congress not defer legislative action to halt the current payment cut or repeal the SGR. The Centers for Medicare and Medicaid Services (CMS) is projecting that the SGR system will continue to produce additional steep payment cuts in 2003, 2004, and 2005.
We ask the Committee to ensure that its “views and estimates” letter on budgetary and legislative matters, to be submitted to the House Budget Committee, includes a request that appropriate funds be set aside in the budget resolution to replace the Medicare physician payment update formula beginning in calendar year 2003.
MEDPAC’S RECOMMENDATIONS TO REPLACE THE FLAWED
MEDICARE PHYSICIAN UPDATE FORMULA
The Medicare Payment Advisory Commission (MedPAC) warned in June 2001 that if the 2002 update was lower than the CMS estimate, which at that time was –0.1 percent, it “could raise concerns about the adequacy of payments and beneficiary access to care.” MedPAC adopted a recommendation that Congress replace the current Medicare payment formula with one that more fully accounts for increases in practice costs. Specifically, MedPAC advised Congress to repeal the SGR system because an expenditure target system, like the SGR, does not appropriately reflect increases in practice costs. MedPAC further recommended that future updates be based on inflation in physicians’ practice costs, less an adjustment for multi-factor productivity.
We strongly agree with MedPAC’s assessment and support the general framework of MedPAC’s recommendations. We look forward to working with the Subcommittee and the Full Committee on the specific details of a new update system consistent with the MedPAC’s framework.
MEDICARE PAYMENT CUTS SERIOUSLY THREATEN
MEDICARE PATIENT ACCESS
The current 5.4 percent Medicare cut for physicians’ services has a broad impact well beyond the physician community and Medicare program. Since Medicare payments for numerous health professionals are directly tied to the physician payment schedule, these practitioners also are experiencing large payment cuts. In fact, nearly one million physicians and other health care professionals are immediately affected by the cut. In addition, many private health insurance plans base their rates and updates on Medicare payment rates, which mean an additional loss of revenue from non-Medicare sources.
Most significantly, the payment cut jeopardizes access for elderly and disabled patients. Two-thirds of all physician offices are small businesses. If a business, especially a small business, continues to lose revenue and operate at a loss, the business cannot be sustained. Thus, when medical practices experience a Medicare cut of the magnitude being incurred in 2002, as small businesses, they may not survive. This means that physicians and non-physician practitioners and their staff are left with very few alternatives for maintaining a financially sound medical practice. These alternatives include:
It is clear from the foregoing that the current Medicare payment cut likely will result in patients having difficulty finding a physician. Indeed, concerns about patient access, due to payment cuts and excessive rate fluctuations, were raised by the General Accounting Office in testimony recently presented to Congress.
Further, recent press reports in many states have documented the access problems resulting from the Medicare payment cut. Excerpts from these reports are as follows:
In order to ensure that the 85 percent of Medicare patients enrolled in the fee-for-service program will maintain access to physicians and health care services, this payment crisis must be addressed immediately.
VARIABLES COMPOUNDING MEDICARE PAYMENT CUTS
Several variables compound the current 5.4 percent Medicare payment cut. First, this cut occurs at a time when premiums for physicians’ professional liability insurance (PLI) are increasing at an alarming rate. For example, the Las Vegas Sun recently reported that a Minnesota company’s decision to get out of the PLI business could force nearly 40 percent of Nevada’s physicians to pay painfully high premiums for new coverage or close their office doors. This trend is occurring across the country. The Miami Herald reported that South Florida physicians’ will see PLI premium increases between 25 and 350 percent this year, if any insurance is available at all. In Pennsylvania, rising PLI premiums threaten to close trauma centers and emergency rooms.
The effects of the payment cut also are compounded by requirements under the Medicare and Medicaid programs that physicians take on expensive new responsibilities without any additional compensation. For example, program integrity activities have led to demands for reams of documentation, expensive new compliance programs and the proliferation of time-consuming certificates of medical necessity that force physicians to police other providers, such as home health agencies and medical suppliers. Patient safety, quality improvement, privacy protection, interpreters for non-English-speaking patients and a host of other well-intentioned requirements also are pushing medical practice costs ever upward.
The magnitude of regulatory burdens on physician is not lost on this Committee. Last year you passed legislation to assist us in this regard. We thank you and look forward to working with you to ensure that it passes the Senate.
Finally, the costs associated with PLI insurance premiums and the continually increasing amount of government-imposed regulatory requirements are not properly reflected in the Medicare payment update for physicians’ services.
MEDICARE PHYSICIAN PAYMENT UPDATE FORMULA
Medicare payments to physicians are annually adjusted through the use of a legislated “payment update formula” that is based on the SGR and the MEI, which measures increases in practice costs. These costs include, among others, such factors as payroll, physician time, office equipment, supplies and expenses.
This update formula originally was intended to cap increases in practice costs. It has several flaws that create inequitable and inappropriate payment updates that do not reflect the actual costs of providing medical services to Medicare patients.
The Sustainable Growth Rate System
Under the SGR system, CMS annually establishes an expenditure target for physicians’ services based on a number of factors set forth in the law. CMS then compares actual expenditures to the target. If actual expenditures exceed the target, the Medicare payment update may be as much as 7 percent below the MEI. Conversely, if allowed expenditures are less than actual expenditures, the update may be up to 3 percent above the MEI.
The target is based on changes in expenditures for physicians’ services due to changes in (i) inflation, (ii) fee-for-service enrollment, (iii) gross domestic product (GDP), and (iv) laws and regulations. It is a highly unpredictable and unstable system that has a number of critical flaws:
GDP Does Not Measure Health Care Needs: The SGR system permits beneficiary Medicare spending for physicians’ services to increase by only as much as real per capita GDP growth — a measure of the economy that bears little relationship to the health needs of Medicare beneficiaries. Incidence of disease did not lessen with recent downturns in the economy.
Specifically, GDP does not take into account health status, the aging of the Medicare population or the costs of technological innovations. Thus, the artificial link between medical care spending and GDP growth under the SGR system creates a system that is seriously deficient. Unlike any other segment of the health care industry, physicians are being penalized with a steep Medicare cut this year largely because the economy has slowed. Yet, the health needs of patients continue, the number of beneficiaries continues to grow and the use of new medical services approved by Medicare increases.
SGR Requires Unreliable Economic Forecasts: To calculate the SGR, CMS must make projections of GDP, enrollment and other factors. It is nearly impossible to make accurate predictions about these factors and thus it is equally impossible to predict future payment updates. When the resource-based physician payment system was first enacted in 1989, it was intended to provide predictability over time. Yet, the current update formula has created payment updates that are unpredictable and subject to sharp swings as economic circumstances, beyond physicians’ control, change.
Further, because the update system is unpredictable, severe payment cuts may be imposed without any warning or opportunity for action by Congress. In March 2001, for example, CMS predicted that the Medicare payment update for 2002 would be a 1.8 percent increase. Ten days later, CMS recanted and stated that the 2002 update would likely be a 0.1 percent decrease. Finally, not until November, only eight weeks before the effective date of the 2002 update and with only a few weeks left in the Congressional session, CMS announced that the 2002 physician payment update would be a 5.4 percent cut. Like any small business, medical practices need to plan their expenses in order to remain financially sound. Small businesses are the engine of the U.S. economy.
For these reasons, as MedPAC has recognized, the current physician payment update system should be replaced.
Problems with SGR Projections: In annually calculating the SGR, CMS estimates of GDP growth and enrollment changes in 1998 and 1999 have shortchanged funding for physicians’ services by $20 billion to date. (See attached Chart 2, CMS Errors in SGR: Impact on Funding for Physician Services.) CMS projected that Medicare+Choice enrollment would rise by 29 percent in 1999, even though many HMOs were abandoning Medicare. In fact, as accurate data later showed, managed care enrollment increased only 11 percent in 1999, a difference of about 1 million beneficiaries. This means that when CMS determined the fee-for-service spending target for 1999, it did not include in the costs of treating about 1 million beneficiaries. Nevertheless, these patients were and will continue to be treated, and since the SGR is a cumulative system, each year since 1999, the costs of treating these 1 million patients have been and will continue to be included in actual Medicare program expenditures, but not in the SGR target. Clearly, this disparity should be remedied.
CMS acknowledged its mistakes in calculating the 1998 and 1999 SGR estimates at that time, but concluded it did not have the authority under the law to correct its mistakes. We disagreed then, and were further shocked by CMS’ announcement in the 2002 final physician fee schedule rule that not only do they have the legal authority, but the legal imperative, to change 1998 and 1999 SGR projections relating to spending for certain CPT codes overlooked by the agency. CMS’ interpretation of the law is perplexing and seems to allow the agency to make SGR changes only when they result in Medicare payment cuts, but not when the same changes would increase payments.
The full magnitude of this problem has only recently become apparent. Information supplied by CMS suggests that the total amount of this latest “missing code” error was nearly $5 billion. Recent predictions by CMS of continued payment cuts for several more years show that its decision to continue using bad data in the target while correcting the errors in actual spending will ultimately have a devastating impact on payments for physician services.
Flawed Productivity Adjustment under the Medicare Economic Index
In the early 1970s, pursuant to congressional directive, CMS developed the MEI to measure increases in physician practice costs. A key component of the MEI has been a “productivity adjustment,” which offsets practice cost increases. Over the last eleven years, CMS estimates of productivity gains have reduced annual increases in the MEI by 27 percent. Such estimates contrast with MedPAC estimates of the degree to which productivity gains offset hospitals’ cost increases. In fact, in 2001, MedPAC’s estimate for hospitals was –0.5 percent, while CMS’ estimate for physicians was –1.4 percent. It is highly improbable that physician practices could achieve such substantial productivity gains in comparison to hospitals, which arguably have a much greater opportunity to utilize economies of scale.
We continue to believe that the productivity adjustment in the MEI is overstated. First, it is widely recognized that productivity growth in service industries is typically lower than that in other types of industries. Indeed, productivity data from the Bureau of Labor Statistics show productivity growth in the general non-farm economy of 2 percent per year from 1991 to 2000, compared to 4 percent annual productivity growth for manufacturing.
Second, we believe that productivity growth in physician practices is likely to be low in comparison to other service industries due to the previously-mentioned massive regulatory burden imposed on physicians. The cost of these requirements is absorbed by physicians with no offset paid by the Medicare program. In establishing the annual update for hospitals, however, MedPAC includes a category for these costs, and in its recommended update for 2000, for example, the Commission included a 0.2 percent increase to help cover hospitals’ Y2K conversion costs. None of these government-mandated costs are presently captured in the MEI.
In recommending a framework for future payment updates, MedPAC is advising that the MEI should simply measure inflation in practice costs and that productivity should be separately reported. MedPAC further recommends that the productivity adjustment be based on multi-factor productivity instead of labor productivity, and estimates that this would significantly reduce the productivity adjustment that CMS currently uses in updating the Medicare fee schedule.
Cost of New Technology Not Taken Into Account
Unlike most other Medicare payment methodologies, the Medicare physician update system does not make appropriate adjustments to accommodate new technology, and thus physicians essentially are required to absorb much of the cost of technological innovations.
Congress has demonstrated its interest in fostering advances in medical technology and making these advances available to Medicare beneficiaries through FDA modernization, increases in the National Institutes of Health budget, and efforts to improve Medicare’s coverage policy decision process. The benefits of these efforts could be seriously undermined if physicians continue to face disincentives to invest in important medical technologies as a result of reliance on a defective expenditure target system. New technologies, including ever-improving diagnostic tools such as magnetic resonance imaging, new surgical techniques including laparoscopy and other minimally-invasive approaches, have significantly contributed to quality of life for Medicare beneficiaries. For example, a paper published by the National Academy of Sciences indicated that from 1982-1994 the rates of chronic disability among the elderly declined 1.5 percent annually.
Technological change in medicine shows no sign of abating, and the physician payment update system should take technology into account to assure Medicare beneficiaries continued access to mainstream, quality medical care.
All of the foregoing factors contribute to a payment update system that does not adequately reflect increases in the costs of caring for Medicare patients and is already undermining Medicare patients’ access to necessary medical services provided by physicians and other health professionals.
Again, we thank the Subcommittee for its continued support and commitment towards mitigating the ongoing problems resulting from the Medicare physician payment update formula.
We urge the full Committee and Congress to (i) immediately halt the 5.4 percent Medicare payment cut; and (ii) replace the Medicare payment update formula with a new system that appropriately reflects increases in practice costs.
We further ask the full Committee to include in its “views and estimates” letter of budgetary and legislative matters submitted to the House Budget Committee that appropriate funds be set aside to replace the Medicare physician payment update formula beginning in calendar year 2003.
We appreciate the opportunity to provide our views about Medicare’s physician payment update formula, and we look forward to working with the Subcommittee to quickly reach a satisfactory resolution to this critical problem.