Medicare’s payment update formula for physician reimbursement has been seriously flawed since its inception in the late 1980’s. CMS Administrator Tom Scully, who oversees the program, has admitted as much in numerous public appearances. AMGA recommends a two-step process to correct this continuing infringement upon quality patient care:

(1) Immediate relief through Congressional discretionary authority implementing MedPAC’s recommended 2.5% increase for physicians’ FY2004 and FY 2005 payments. While not covering the rising costs of care, this interim relief enables Congress to develop support for a permanent remedy to the update formula.

(2) Once immediate relief is provided, Congress should develop and enact a new physician update formula that parallels the payment update calculation used for other Medicare services, such as hospital inpatient services. This formula should encompass three factors: an adjustment for adequate payment levels; an estimate of input price inflation; and an update adjustment for growth in multifactor productivity.

Regardless of the outcome of Medicare reform deliberations, the American Medical Group Association (AMGA) advocates an immediate adjustment to the physician payment formula to halt the downward spiral that threatens health care access and quality. AMGA represents multispecialty medical group practices, including the nation’s most prestigious integrated health care delivery systems, that are struggling to balance their commitment to Medicare beneficiaries with their fiscal responsibilities. 

One typical AMGA member group practice reports that their FY 2000 Medicare revenue was 71.52% of cost for fee for service; in FY2001 it was 70.59%; in FY2002 it was 67.7%; and for FY2003 it is projected to be 65.76%.  This gap between cost and revenue for physician Medicare services illustrates that this downward spiral in reimbursement cannot continue if Medicare is to remain viable with the requisite physician participation levels. Additionally, the revenue impact of such low reimbursement severely compromises the ability of those remaining Medicare providers to provide necessary services to beneficiaries.

An authority no less than the Medicare Payment Commission (MedPAC) recommended to Congress in 2002 that the physician payment update formula be revised by eliminating the Sustainable Growth Rate (SGR) and revising the Medical Economic Index (MEI). Due to the damage inflicted on Medicare from the flawed payment update formula, AMGA urges that the MedPAC recommendation be implemented as soon as possible.

An Interim Remedy

Given the political realities, and the inherent difficulty of quickly enacting needed reform, an interim adjustment is a reasonable approach that would ameliorate the damage of the physician payment updates for 2004 and 2005, while a permanent solution is developed. The effect of Congress’ judicious intervention in 2003 through the omnibus budget resolution should be replicated for the intervening years until successful deliberations produce the revised update formula.

Congress should enact a 2.5% increase for the Medicare physicians’ FY2004 and FY2005 updates. While this update amount fails to cover actual increased costs of patient care, it is politically feasible within the purview of Congress’ exercise of its discretionary authority. By enacting this two-year interim remedy, Congress provides ample opportunity to develop and enact a permanent correction of the physician payment update formula.

Radical revision of this formula has been called for repeatedly by an authority no less than the Medicare Payment Advisory Commission (MedPAC). According to MedPAC, physician payment updates since 1999 have been less than the increases in input prices. MedPAC has repeatedly warned Congress that the Sustainable Growth Rate (SGR), an integral part of the payment update formula, is so seriously flawed that it will never adequately address the costs of physician services.

No other profession or business would tolerate such income uncertainty and consistent underpayment for services compared to measured costs.

AMGA recommends that once immediate relief is provided, Congress should develop and enact a new physician update formula that parallels the payment update calculation used for other Medicare services, such as hospital inpatient services. This formula should encompass three factors: an adjustment for adequate payment levels; an estimate of input price inflation; and an update adjustment for growth in multifactor productivity.

AMGA recommends Congress’ enactment of the MedPAC corrections to the Medicare physician update formula:

Eliminate the Sustainable Growth Rate (SGR) from the update calculation.
As with the update calculations for other Medicare providers, the physician update calculation formula should be based on the actual cost increases in the physician service marketbasket of input prices. By eliminating the SGR expenditure cap that is unrelated to physician cost increases, the update formula would accurately reflect increases in costs of physician services.

Require the Medical Economic Index (MEI) to forecast input price inflation.
Currently, the MEI updates input price inflation by applying the previous year’s inflation measure of input price inflation. To remedy this inaccurate estimate of the forthcoming year’s inflation rate, the MEI should be revised to use forecasts of inflation changes in input prices for the coming year.

Remove the productivity measure from the MEI.
The adjustment for productivity growth should be removed from the MEI and considered separately in update determinations. This permits the MEI input price indices to address only the changes in prices, not other changes in cost. MedPAC determined that other factors affecting costs frequently offset each other

Include a multifactor adjustment for productivity.
The current labor-only productivity growth adjustment should be expanded into a multifactor measure encompassing non-labor inputs. The labor-only adjustment does not reflect how physician services are produced and rendered. Relevant additional inputs should be office space, medical materials and supplies, and equipment to accurately measure productivity measurement. As MedPAC noted, a multifactor productivity growth measure will conform to productivity measurement implemented by the Bureau of Labor Statistics 20 years ago.

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