Medicare Reimbursement – Is the Process Rigged Against Physicians?

by Louis J. Wilson, MD, FACG
Chair, Legislative & Public Policy Council
Wichita Falls Gastroenterology Associates
Wichita Falls, TX

Physicians are justifiably wondering how and why their reimbursement could possibly be scheduled for additional cuts. Medicare reimbursement under the Physician Fee Schedule (PFS) has gone down substantially in comparison to other economic indicators and even compared to other Medicare reimbursements (e.g., for hospitals and post-acute care facilities). Why are we being singled out? According to the 2021 Medicare Trustees Report, aggregate PFS reimbursement decreased nearly 6% from 2011 to 2020. We faced cuts in 2021 and again in 2022, requiring Congress to step in.  Remember when Congress “fixed” the sustainable growth rate (SGR) formula  and need for annual crises in Medicare reimbursement? The 3% increase is set to expire at the end of 2022. We currently face an additional proposed 4.4% reduction to the PFS CF for 2023, as well as additional cuts beginning in January 2023, due to Sequestration and PAYGO requirements. In effect, these cuts are anti-physician practice and will threaten access to patients. The PFS is clearly broken and needs both short-term and long-term corrections.  

How did we get here? A review: 

What is the process? 

In determining reimbursement rates CMS uses a variety of data sources. CMS considers recommendations submitted by the American Medical Association (AMA) for physician work (time, intensity, and risk), and direct practice expense or costs (supplies, equipment and labor. If CMS rejects RUC recommendations, they establish these inputs using their own internal analysis. CMS uses outside data sources for  malpractice costs. These inputs are then used to calculate work, practice expense and malpractice  relative value units (RVUs) of each service. CMS then multiplies the total RVUs for each service by the annual PFS CF. Payment rates are also geographically adjusted. Due to the budget neutral nature of the physician fee schedule where increases in spending in one area need to be balanced by decreases n spending elsewhere, the agency may apply budget neutrality adjustments when establishing RVUs as well as to the annual physician CF.  Historically, these budget neutrality adjustments have negatively impacted payment rates. 

What is the Conversion Factor (CF) and why is it important? 

Congress passed legislation (The Omnibus of 1989) that established the components of the CF and annual update. The CF is a dollar amount that reflects the legislative, regulatory, and reimbursement policy changes for that year. Prior to 2015, the Medicare Economic Index (MEI), in combination with the SGR formula, was used to annually update the CF. 

What is “budget-neutrality”? 

This is the root of the problem. Under Medicare law, overall Medicare reimbursement spending cannot be higher than the total spending of the baseline year, or starting point.  Based on our review of the Medicare statute, the “base year” is 1994! Due to budget neutrality requirements, increases to one specialty’s reimbursement requires cuts to another. Specifically, changes in RVUs over $20 million require a decrease in overall reimbursement applied via a CF reduction to preserve budget neutrality. The problem is that this $20 million threshold (established in 1994) is in statute and has neither changed nor is adjusted for inflation!  

It is a “robbing Peter to pay Paul” system that pits specialties against each other on reimbursement issues, with physician practices and patients ultimately losing.   

What is the role of the Medicare Economic Index (MEI)? 

The MEI measures the input price pressures of providing physician services looking at physicians’ own time (compensation) and physicians’ practice expenses. CMS believes that the MEI is the best measure available of the relative weights of the three components in payments under the PFS—work, PE, and malpractice. Yet the current MEI relies on 2006 data for self-employed physicians! The current 2006-based MEI relies on data collected from an AMA survey for self-employed physicians, the Physician Practice Information Survey (PPIS). While in the process of doing so, the AMA has not fielded another survey since that 2006 data collection effort and so CMS has continued to rely on 2006-based costs. 

According to data from the AMA, Medicare physician pay has only increased 11% over the last two decades, or 0.5%  per year on average. And roughly one-third of that increase is this temporary 3.75% update that expires in 2022. Yet the costs to run a medical practice increased 39% between 2001 and 2021, and this is a conservative estimate. Further, updates to hospital payments – which are required by law – have exceeded both the MEI and general inflation as measured by the Consumer Price Index. As a comparison, Medicare hospital updates totaled roughly 60% between 2001 and 2021! Put simply, physician reimbursement under the PFS lags considerably behind the actual costs to deliver care and is treated differently compared to all other health care settings that receive statutorily-required updates.   

In fact, unlike Medicare hospital and outpatient facility fees, there is no automatic annual inflationary update in the PFS. CMS has not used the MEI for physician fee schedule updates since 2015. While other Medicare payment systems include budget neutrality adjustments, the offsets are not nearly as severe under those systems as they are for the PFS because they also have statutorily-required annual payment updates. Therefore, while the costs continue to increase, there are no corresponding increases to the overall PFS budget despite repeated adjustments and cuts due to budget neutrality.  

CMS is considering changing the MEI for estimating base year expenses that relies on publicly available data from the U.S. Census Bureau (Physician Offices). Good news, correct? Unfortunately, this will trigger the budget-neutrality rules for us, ironically resulting in decreases in payment as there will be increases in other areas of the PFS. This should demonstrate how broken the system has become – changes to the MEI that are designed to reflect real world costs may actually cut our reimbursement further!  

What is the role of Congress? 

Without congressional action, the system cannot get fixed. First, Congress has to step in and pass legislation to temporarily avert the upcoming cuts. Congress also exacerbates reimbursement issues by passing other legislation that results in incremental cuts to Medicare reimbursement, such as laws with corresponding impacts due to PAYGO and/or sequestration. These provisions (and the budget neutrality requirements) adversely impact overall reimbursement. 

Second, the calculations under the PFS are simply antiquated and failing, as well as having limited transparency for us to even fully understand or recreate the calculations. Congress has repeatedly had to step in for what has now become an annual routine of temporary corrections at the last minute to forgo cuts. Another important item to note – under current law, there is no administrative or judicial review of Medicare reimbursement changes. Only Congress has the oversight, jurisdiction, and authority to make any changes! 

The lack of administrative and judicial review significantly impedes impacted physicians’ ability to understand both why and how their reimbursement is changing on an annual basis. 

Alarm Bells Are Ringing. How should ACG and other physician groups respond? 

We must vigorously fight these damaging cuts and demand more permanent solutions. This is not easy to distill into a short message, but we need to let members of congress know just how antiquated and broken this reimbursement is to us. We will do this not only for our medical practices, but for the patients and communities we serve.