Statement of the American College of Physicians-American Society of Internal Medicine
The American College of Physicians-American Society of Internal Medicine (ACP-ASIM) -- representing 115,000 physicians and medical students -- is the largest medical specialty society and the second largest medical organization in the United States. Internists provide care for more Medicare patients than any other medical specialty. We congratulate the Subcommittee on Health for holding this important hearing. Of the College’s top priorities for 2002, addressing the inadequacies of physician payment by the Medicare program is the most critical to our members. ACP-ASIM thanks Congresswoman Nancy Johnson, chair of the Subcommittee, Congressman Pete Stark, ranking member of the Subcommittee, and other members, for convening this important hearing. We also want to extend special appreciation to Chairwoman Johnson for her extensive efforts to seek stability in the physician payment system.
Background
Beginning January 1, 2002, Medicare reimbursement payments to physicians and other health care professionals fell an average 5.4 percent. Despite serious concerns raised by ACP-ASIM and other medical associations, and warnings from the Medicare Payment Advisory Commission (MedPAC), medicine is having to endure the fourth physician payment cut in ten years. Because of flaws in the formula used by Medicare to determine annual updates, the CMS is projecting that Medicare payments will continue to decline over the next four years—by a grand total of 18.3 percent from 2002-2005. This is an absolute reduction in payments; it does not take into account the impact of inflation in the costs of providing services. Using a very conservative inflation assumption of 3 percent per year, Medicare payments per service in constant dollars will be cut by 28.1% over the 2002-2005 period.
This is not a problem that was created overnight. Congress adopted the current physician payment methodology (known as the Sustainable Growth Rate or SGR) in the Balanced Budget Act of 1997. Even then, ACP-ASIM recognized the serious flaws inherent in the SGR payment system and voiced our concern. Congress attempted to make corrections to the payment formula in 1999 with the Balanced Budget Refinement Act, however, it was not sufficient enough to correct the intrinsic problems. The recent economic downturn the country is now facing has only exacerbated the problem.
Recognizing the unfairness of the SGR methodology and the tremendous hardship it has placed on physicians across the country, a super-majority of members of Congress cosponsored legislation that would stymie the magnitude of the 5.4 percent cut. Introduced in the waning days of the first session of the 107th Congress, “the Medicare Physician Payment Fairness Act of 2001,” (H.R. 3351 and S. 1707) would have cut the SGR reduction to physicians to 0.9 percent, rather than the current 5.4 percent cut. ACP-ASIM continues to strongly support this legislation. Unfortunately, Congress failed to act prior to adjournment and physicians are consequently now beginning to feel the effects of an across-the-board reduction in their medical practices.
Flawed Data Used in Formula
The 5.4 percent across-the-board reduction in Medicare payment is primarily due to the flawed SGR system that governs the annual payment for physician services. The SGR system errantly ties physician payment to the Gross Domestic Product (GDP). There is no other segment of the health care industry that uses such a methodology to update payment. What is most unfortunate is that this method of tying physician payment to the health of the overall economy bears absolutely no relation to the cost of providing actual physician services. In the years where the economy is facing a downturn, such as has been the case in the recent past, a reduction in physician payment is significant.
In its March 2002 report to the Congress, MedPAC expresses grave concern about the underlying problem of tying the SGR to the economy. MedPAC reports that the current SGR system may even cause payments to deviate from physician costs because it does not fully account for factors affecting the actual cost of providing services. Specifically, while the current SGR payment system accounts for input price inflation and productivity growth, it provides no opportunity to account for other factors, such as an increase in the regulatory burden of the Medicare program.
In addition to the flawed SGR payment system, physicians have repeatedly been penalized for inaccurate estimates in the past. Since the SGR payment formula was first utilized in 1998 and 1999, Medicare officials have consistently relied upon flawed data for the annual update. Because the SGR formula is cumulative (i.e., it relies on previous years’ estimates), these errors that were never corrected are compounded, further exacerbating the problem year after year. Due to these successive errors, the spending target is about $15 billion lower than it actually should be.
Effect on Physicians and Their Patients
A physician payment cut of this proportion is a tremendous blow to physicians, particularly internists. According to a 2001 Medical Group Management Association study, Medicare payments account for nearly 50 percent more of the average internists revenue than the average primary care physician. The 5.4 percent physician payment cut comes at a time when malpractice premiums are at their highest levels, the amount of regulatory burden it at its peak (such as costs associated with complying with HIPAA), and the cost of other overhead expenses is dramatically increasing. This culmination of events may force physicians to make difficult choices in order to continue to operate.
Physicians have a strong sense of commitment to their Medicare patients. They will do everything within reason to continue to provide their Medicare patients with high quality, accessible health care, even in the face of rising costs and declining reimbursement. However, there is a point where the economics of running a practice will force physicians to institute changes to limit the damage from continued Medicare payment cuts. Like any small business, revenue must exceed the costs of providing services in order for a practice to remain financially viable. For practices that are heavily dependent on Medicare revenue, such as a typical internal medicine practice, an after-inflation payment reduction of 28.1 percent over the 2002-2005 period will dictate that they take preventive steps to cut their losses from seeing large numbers of Medicare patients.
Physicians will have essentially only four options available to them to offset the losses from declining Medicare payments and rising costs. They can reduce their reliance on Medicare revenue, by restructuring their practices to decrease the share of their practice revenue that comes from Medicare while increasing the share that comes from more reliable (non-Medicare) payers. This would be accomplished by putting limits on how many Medicare patients will be seen while marketing the practice to non-Medicare populations. They can cut costs—eliminating beneficial services and technology. They can do both: cut beneficial services and reduce their reliance on Medicare. Or they can go out of business, by closing their practices entirely.
We believe that it is extremely probable physicians will be forced to limit the number of Medicare patients in their practice; lay off staff that help Medicare patients with appointments or medications; relocate to areas with a younger, non-Medicare eligible patients; spend less time with Medicare patients; discontinue participation in the Medicare program; limit or discontinue investment in new technology; limit or discontinue charitable care; or in some cases, retire or close their practices. Physicians will make such changes reluctantly, but the laws of economics will leave them no choice but to do so.
The effects of the most recent and projected cuts in reimbursement will most likely be hardest felt in rural and other areas that are already underserved. The problems that we see today will certainly only get worse unless the severely flawed methodology utilized by Medicare to compute physician payments is immediately addressed.
Physicians’ efforts to reduce their reliance on an unstable and unreliable Medicare payment system will make it even more difficult for patients to gain access to an increasingly under-funded health care system, particularly as the number of Medicare patients increases from 34 million today, to 40 million in 2010, to 60 million in 2030. More Medicare beneficiaries will be seeking care, yet fewer and fewer physicians may be able and willing to provide care to Medicare patients. As Medicare is increasingly viewed as an unreliable payer whose reimbursement does not cover the costs of providing services, young physicians will be disinclined to go into specialties that are viewed as being heavily dependent on Medicare--particularly internal medicine and geriatrics--at the time when those specialties should be most in demand to provide care to an aging population.
A recent American Academy of Family Physicians study confirmed that physicians are already making tough decisions, citing that nearly 30 percent of family physicians are not taking new Medicare patients. Other recent studies confirm doctor frustration with inadequate reimbursement from all areas of physician payment. In Washington State, for example, a Washington State Medical Association poll of members in November 2001 revealed that 57 percent of physicians said that they are limiting the number of or dropping all Medicare patients from their practices. The report blames the many years of decline of the state’s health care delivery system, characterized by a slow erosion of funding for public health, growing administrative expenses for practitioners and mounting frustrations of physicians trying to cope with myriad of regulations.
The subcommittee will be hearing testimony today from Dr. Paul Ginsburg, Director, Center for Studying Health System Changes, which provides further evidence to support the view that the availability of care for Medicare patients has already deteriorated over the past four years. He reports that the percentage of Medicare patients who did not receive or delayed needed care increased from 9.27 percent in 1997 to 11.1 percent in 2001. The percentage of primary care physicians accepting all new Medicare patients declined steadily over the 1997-2001 period. These changes were occurring even before the impact of the 5.4 cut went into effect, and before most physicians have become fully aware that they will have to cope with an after-inflation cut of 28.1% over the 2002-2005 calendar period.
In December 2001, the American Medical Association conducted a state-by-state analysis of the impact of the 5.4% Medicare cut, which revealed a tremendous blow to the states. In Connecticut, for example, physicians’ Medicare losses will total $33.8 million. In California, physicians are expected to lose more than $205 million. New York physicians stand to lose more than $207 million, the highest physician payment reduction total of any state.
MedPAC Recommendations to Congress
In its March 2001 report to the Congress, MedPAC recommended that the Congress replace the SGR system with an annual update methodology based on factors influencing the unit costs of efficiently providing physician services. According to MedPAC, getting the price right is more important than controlling spending through the payment mechanism. The Commission noted that the main problems with the SGR were that it failed to account for all relevant factors that affect the cost of providing services, and the system exacerbates Medicare’s problem of paying different amounts for the same service depending on where it is provided (physician’s office, hospital outpatient department, ambulatory surgical center). The Commission added that other inherent problems with the SGR system stem from its volatility and unpredictability. These problems are as true today as ever.
In MedPAC’s March 2002 Report to Congress, the Commission will once again recommend that Congress repeal the SGR system due to these same concerns. This time, however, MedPAC offers more concrete recommendations for Congress to direct the Secretary of HHS to implement for the year 2003 and beyond.
MedPAC’s proposed payment method would make updates to physician services similar to the updates for other services and promote the goal of “achieving consistent payment polices” across ambulatory care settings, including physician offices, hospital outpatient departments, and ambulatory surgical centers. MedPAC’s recommendations are as follows:
The Congress Should Require the Secretary to Update Payments for Physician Services Based on the Estimated Change in Input Prices, Less an Adjustment for Growth in Multifactor Productivity
In MedPAC’s first recommendation to repeal the SGR system, the Commission states, “Replacing the SGR system in this way would solve the fundamental problems of the SGR system.” The adjustment the Commission recommends would change the current measure of input price inflation for physician services – the Medicare Economic Index (MEI) – to make it a forecast of input price growth for the coming year. Further, the productivity adjustment from the MEI would also be removed so the MEI would only be a price measure. Productivity would be considered separately in update decisions.
The Secretary Should Revise the Productivity Adjustment for Physician Services and Make it a Multifactor Instead of a Labor Only Adjustment
MedPAC’s second recommendation to revise the productivity adjustment to account for labor and nonlabor factors is consistent with the way physician services are produced. While labor accounts for the majority of the costs for providing physician services, other inputs, such as office space, medical materials and supplies, and equipment, are also important to consider. This adjustment would more accurately measure growth in productivity by considering all inputs. However, ACP-ASIM cautions that factoring in physician productivity in order to lower the physician payment update may be problematic. Increased compliance with federal regulations, such as Medicare paperwork and HIPAA mandates, may be what is contributing to the lower productivity, and may therefore skew the update. MedPAC acknowledges this problem, but admits that it has little or no data to support compensating for this issue.
The first two recommendations in physician payment methodology would allow the updates to more fully and accurately account for factors affecting costs, and it would decouple payment updates from spending control. Further, the revision to the productivity adjustment will make payment of physician services consistent with modern methods of measuring productivity, and make payments stable and predictable from year to year.
Congress Should Update Payments for Physician Services by 2.5 Percent for 2003
MedPAC’s third recommendation to update physician services by 2.5 percent for January 2003 is the application of the first two recommendations. Since input prices are expected to rise 3 percent in 2003, when combined with a 0.5 percent productivity adjustment, the result yields a 2.5 percent payment increase.
Solution
ACP-ASIM strongly supports the MedPAC's goal of "achieving consistent payment polices" for physicians and their practices. Therefore, ACP-ASIM supports the Commission's recommendation to replace the SGR system and to require Medicare to update payments for physician services based on the estimated change in input prices for the coming year as measured by the Medicare Economic Index (MEI). We agree that any productivity adjustment for physician services should be based on several factors instead of being based on labor costs alone, and that this should be applied as a separate adjustment to the update, rather than being included in the MEI itself. Further, ACP-ASIM supports the Commission's recommendation to update the physician fee schedule by 2.5 percent for 2003.
We are recommending one addition to the MedPAC’s recommendations, however. Legislation to eliminate the SGR formula and replace it with the MedPAC update framework should specify that if Congress declines in any given year to enact legislation to establish the physician fee schedule update based upon recommendations of the MedPAC, a default update equal to the modified MEI, i.e., the MEI excluding the productivity factor, MINUS a separate .5% productivity adjustment, shall apply. This adjustment would, at the very least, assure some predictability and stability in the update in the coming years, notwithstanding our reservations about applying an automatic productivity adjustment to the update.
Finally, ACP-ASIM continues to seek a halt to the 5.4% cut that went into effect in January 2002 and calls on Congress to enact immediate relief. Correcting the problem in 2003, by replacing the SGR formula with the MedPAC framework, will not be sufficient to undo the harm created by the 5.4% cut. We are concerned that Congress may delay action on halting the 5.4% cut by bundling this relief into other Medicare reforms that may not be acted upon until late in the congressional session.
We urge the Committee to report legislation to (1) put an immediate halt to the 5.4% reduction (2) replace the SGR formula with the MedPAC framework, with the addition of the above default mechanism recommended by ACP-ASIM and (3) establish the 2003 update at 2.5% and (4) urge the House Budget Committee to include money in the budget resolution to accomplish these changes. Such measures should be reported and acted upon by Congress prior to, and independent of, other needed Medicare reforms.
Conclusion
ACP-ASIM is pleased that the Subcommittee is addressing the serious problems associated with the current SGR based physician payment system. Our organization stands ready to assist the Subcommittee in resolving this pressing issue in any way we can.