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What If Response: Physician Payments

physiciansA physician asked What If:

As our total health care bill increases, why are physician reimbursements stagnating?

Great question, and here’s our answer:

Spending on health care is continuing to rise.

Growth in the health care sector currently outpaces GDP (Gross Domestic Product) growth.

  • This means that the percentage of our GDP spent on healthcare is increasing, and will continue to do so if the system remains unchanged.

And spending on physician and clinical services outpaces productivity gains as well:

  • The Centers for Medicare and Medicaid Services (CMS) predicts an average annual growth rate of 6% for these services over the next five years, while our GDP growth averages 5.6%.

This is true despite the fact that, as our reader correctly points out, physician reimbursements have remained the same in the recent past, and may even be cut in the near future.

So how can the amount spent on physician and clinical services be growing even as the reimbursements that physicians receive for every patient that they see or every test that they administer remain the same?

First, let’s look at who sets the payment rates for physicians and why those rates have not changed in recent years.

Physician reimbursements nationwide are largely determined by Medicare:

  • A Medicare advisory committee called the RVS Update Committee (RUS) sets the fee-for-service rates that Medicare pays to generalists and specialists.
  • Private insurers use the Medicare standard to set their own payment schedule for doctors. Therefore, cutting the Medicare rate affects all doctors, not just the doctors who treat Medicare patients.

Beginning in the 1990’s, Medicare started to limit physician payments:

  • In the 1980’s, doctors’ fees grew very quickly. Between 1984 and 1989, physician incomes rose by 30 percent, or twice as fast as the average increase for other full-time workers.

To control spending, Medicare not only clamped down on physician fees, but was also permitted by Congress to invest in private insurance plans which became known as Medicare Advantage (MA) plans in 2003.

  • Legislators bought into the argument that private insurers could do a better job of controlling the cost of providing care, and invested public dollars in the private market.
  • As we’ve shown before, the MA plans not only failed to control the rising cost of care, they actually increased Medicare expenditures overall.
    • It costs the government 13% more to cover an individual through a private MA plan than if the government just administered the services itself.
  • We pay $94 billion per year to private insurers through MA. Of that amount, $15 billion is classified as wasteful spending, or in other words, spending on the administrative costs that are inherent to private insurance.

When the cost of the Medicare program gets too high due to other factors such as rising prices and demand for government dollars elsewhere, doctors face automatic fee cuts.

As we showed here(1), here(2) and here(3), legislators waged a battle this past summer over an 11% physician pay cut planned to take effect in 2009.

The political battle:

  • Democratic lawmakers argued in favor of reducing subsidies to private insurers who administer MA plans, which would have allowed for a 1.1% increase in physician payments.
  • Republicans, backed by President Bush, vigorously fought this proposal.
  • In the end, a bipartisan group passed a bill allowing for an 18-month delay in physician payment cuts. The bill also mandated that the widest-used MA plans spend their public dollars more efficiently.

The result? There is enough funding available now to cover physicians at their current reimbursement rates, but future fee cuts are likely if Medicare Advantage is not handled.

What happens when payments to physicians are cut (or stagnate)?

  • A doctor’s pay must cover not just the cost of treatment, but the expenses of running the medical practice: office space, staff, payroll, etc. These administrative costs are expected to rise 20% within a decade, so cutting doctor pay doesn’t just mean they take home less at the end of they year, it means their practice can’t function as well.
  • In the short-term, physicians take on more patients to make up for lost revenue. This leads doctors to spend less time with each patient, and contributes to professional burnout. Doctors are forced to focus on volume (number of patients seen) versus quality (time to listen to and care for patients).
  • The increased number of patients is the reason that spending on physician and clinical services continues to grow, despite the failure to increase reimbursement rates.
  • In the long-term, 60% of physicians predict that they will have to limit the number of Medicare patients they accept if the payment cuts go into effect. Around 1 in 7 doctors would leave the patient care field entirely if the change took place.

The Future for Physician Payments

  • For the time-being, physicians are not likely to see their current reimbursement rates cut further by Medicare. It’s predicted that the Obama administration will slash subsidies to private insurers under Medicare instead.
  • A royal battle is coming: At the core of this issue is the question of whether or not the government should subsidize the for-profit insurance industry by paying private insurers for the MA plans offered to seniors. We’re likely to see legislators line up along party lines in opposition to (Republicans) and in support of (Democrats) the subsidy cuts that Mr. Obama is championing, although some Republicans may be willing to cross over.
  • Mr. Obama also campaigned to increase payments to primary care physicians, which would occur at the expense of specialists. Although physicians’ reimbursement rates are stagnant across the board, specialists typically make far more than what primary care physicians earn, which is leading to a shortage of primary care physicians nationwide.
    • This is also contributing to a divide between primary care physicians and specialists.
  • We’ll have to wait and see whether the Democrats are able to pass their proposed physician pay increase this year.
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