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**RSC Policy Brief:**

**Medicare Physician Payment Policy**

*June 23, 2008*

**The RSC has prepared the following policy brief providing background
information on current policies regarding Medicare physician
reimbursement.**

**[History and Background]{.underline}**: In 1989, the Omnibus Budget
Reconciliation Act (P.L. 101-239) established a new physician fee
schedule for Medicare, replacing the reasonable charge payment formula
that had existed since the program's inception. The fee schedule was
designed to alleviate perceived disparities in physician reimbursement
levels by more closely tying payment to the amount of resources used for
a given service or procedure. The Balanced Budget Act of 1997 (P.L
105-33) modified the fee schedule formula, creating the Sustainable
Growth Rate (SGR) mechanism as a means to incorporate cumulative
physician spending into reimbursement levels. In addition to slowing the
growth of Medicare spending by setting an overall target for physician
expenditure levels, the SGR was also intended to eliminate the
fluctuations associated with setting annual (as opposed to cumulative)
spending targets.

**[Payment Formula]{.underline}**: Under current Medicare law, doctors
providing health care services to Part B enrollees are compensated
through a "fee-for-service" system, in which physician payments are
distributed on a per-service basis, as determined by the fee schedule
and an annual conversion factor (a formula dollar amount). The fee
schedule assigns "relative values" to each type of provided service,
reflecting physicians' work time and skill, average medical practice
expenses, and geographical adjustments. In order to determine the
physician payment for a specific service, the conversion factor
(\$38.0870 through June 2008) is multiplied by the relative value for
that service. For example, if a routine office visit is assigned a
relative value of 2.1, then Medicare would provide the physician with a
payment of \$79.98 (\$38.0870 x 2.1) for that service.

Medicare law requires that the conversion factor be updated each year.
The formula used to determine the annual update takes into consideration
the following factors:

-   Medicare economic index (MEI)--cost of providing medical care;

-   Sustainable Growth Rate (SGR)--target for aggregate growth in
    Medicare physician payments; and

-   Performance Adjustment--an adjustment ranging from -13% to +3%, to
    bring the MEI change in line with what is allowed under SGR, in
    order to restrain overall spending.

Every November, the Centers for Medicare and Medicaid Services (CMS)
announces the statutory annual update to the conversion factor for the
subsequent year. The new conversion factor is calculated by increasing
or decreasing the previous year's factor by the annual update.

From 2002 to 2007, the statutory formula calculation resulted in a
negative update, which would have reduced physician payments, but not
overall physician spending. The negative updates occurred because
Medicare spending on physician payments increased the previous year
beyond what is allowed by SGR. The SGR mechanism is designed to balance
the previous year's increase in physician spending with a decrease in
the next year, in order to maintain aggregate growth targets. Thus, in
light of increased Medicare spending in recent years, the statutory
formula has resulted in negative annual updates. It is important to note
that while imperfect, the SGR was designed as a cost-containment
mechanism to help deal with Medicare's exploding costs, and to some
extent it has worked, forcing offsets in some years and causing
physician payment levels to be scrutinized annually as if they were
discretionary spending.

Since 2003, Congress has chosen to override current law, providing
doctors with increases each year, and level funding in 2006. In 2007,
Congress provided a 1.5% update bonus payment for physicians who report
on quality of care measures, and legislation enacted in December 2007
(P.L. 110-173) provided a 0.5% update for January through June of 2008.
The specific data for each year are outlined in the following table.

+-------------+------------------------+-------------------------------+
| **Year**    | **Statutory**          | **Congressional "Fix" to the  |
|             |                        | Update (%)\***                |
|             | **Annual**             |                               |
|             |                        |                               |
|             | **Update (%)**         |                               |
+-------------+------------------------+-------------------------------+
| 2002        | -5.4                   | -5.4\*\*                      |
+-------------+------------------------+-------------------------------+
| 2003        | -4.4                   | +1.6                          |
+-------------+------------------------+-------------------------------+
| 2004        | -4.5                   | +1.5                          |
+-------------+------------------------+-------------------------------+
| 2005        | -3.3                   | +1.5                          |
+-------------+------------------------+-------------------------------+
| 2006        | -4.4                   | 0                             |
+-------------+------------------------+-------------------------------+
| 2007        | -5.0                   | +1.5\*\*\*                    |
+-------------+------------------------+-------------------------------+
| 2008        | -10.1                  | 0.5 (Jan.-June)               |
+-------------+------------------------+-------------------------------+

> \* The annual update that *actually went into effect* for that year.
>
> \*\* CMS made other adjustments, as provided by law, which resulted in
> a net update of - 4.8%; however, Congress did not act to override the
> -5.4% statutory update.
>
> \*\*\* The full 1.5% increase was provided to physicians reporting
> quality of care measures; physicians not reporting quality of care
> received no net increase.

Because the Tax Relief and Health Care Act (P.L. 109-432), signed into
law in December 2006, provided that 2007's Congressional "fix" was to be
disregarded for the purpose of calculating the SGR in 2008 and future
years, the 10.1% negative annual update for 2008 will be restored once
the December 2007 legislation expires on July 1, 2008, absent further
Congressional action.

**[Participation and Assignment]{.underline}**: When treating Medicare
beneficiaries, physicians may choose to accept assignment on a claim,
agreeing to accept Medicare's payment of 80% of the approved fee
schedule amount---with the beneficiary paying the remaining 20% as
coinsurance---as payment in full for the claim of service. Physicians
who agree to accept assignment on *all Medicare claims* in a given year
are classified as participating physicians. Physicians classified as
non-participating---those who may accept assignment for *some, but not
all*, *claims* in a given year---only receive 95% of the fee schedule
amount for participating physicians on those claims for which they
accept assignment. The Medicare Payment Advisory Commission (MedPAC)
reports that 93.3% of physicians and other providers who bill Medicare
agreed to participate in Medicare during 2007, with 99.4% of allowed
charges being accepted on assignment from physicians (both participating
and non-participating).[^1]

In cases where a physician considers the Medicare payment level under
the fee schedule and SGR formula an insufficient reimbursement for the
time and resources necessary to perform the relevant service, the
physician's opportunities to charge beneficiaries the full value of the
service performed are extremely limited. Non-participating physicians
may "balance bill" beneficiaries for charges above the Medicare fee
schedule amount on claims where the physician does not accept assignment
from Medicare. However, physicians may not bill beneficiaries in excess
of 115% of the non-participating fee schedule amount---which, because
Medicare fees are lower for non-participating physicians, has the effect
of limiting "balance billing" to 9.25% above the fee schedule amount for
participating physicians. Moreover, providers who wish to "balance bill"
their beneficiaries in some cases will therefore be classified as
non-participating, resulting in a 5% reduction in fee schedule amounts
for all claims---including those for which the provider is willing to
accept assignment---in a given year.

**[Conclusion]{.underline}**: The Medicare funding warning issued by the
plan's trustees last year, and again this past March, provides an
opportunity to re-assess the program's structure and finance. These two
consecutive warnings---coupled with the trustees' estimate that the
Medicare trust fund will be exhausted in just over a decade's
time---should prompt Congress to consider ways to reduce the growth of
overall Medicare costs, particularly those which utilize competition and
consumer empowerment to create a more efficient and cost-effective
Medicare program.

Viewed through this prism, the current Medicare physician reimbursement
fee schedule may be perceived by some conservatives as symptomatic of
the program's larger problems. While the SGR mechanism has provided
several opportunities in recent years to review physician payment
levels, the changes made by Congress as a result of such reviews have
generally only made minor, temporary adjustments to the current system
of government-dictated fee schedules. These legislative vehicles have
not revamped or repealed the fee schedule formula to take market forces
into account, instead delving into the minutiae of provider
reimbursement levels to arrive at a short-term fix that meets budgetary
muster. However, as Senate Finance Committee Chairman Baucus recently
conceded at a health care summit: "How in the world am I supposed to
know what the proper reimbursement should be for a particular
procedure?"[^2] Therefore, even though supporting actions that yield
budgetary offsets slowing the growth of Medicare spending, some
conservatives may still view legislative outcomes that do not
comprehensively address the lack of market forces in a
government-dictated fee schedule as lacking.

Some conservatives may support legislative provisions designed to repeal
prohibitions on "balance billing" by providers, either for all Medicare
beneficiaries or only for those beneficiaries already subject to
means-testing for their Part B premiums. Such a measure, which has been
introduced by several RSC Members in various forms in recent Congresses,
would inject some free-market principles into Medicare, by allowing
providers to charge reasonable levels for their services rather than
adhering to government-imposed price controls. Additionally, this policy
change could have the potential to slow the growth of health costs at
the margins, by providing slightly greater beneficiary exposure to the
true cost of care, which in some cases may be subsidized by the
monopsony power Medicare exercises over providers.

On a more fundamental level, some conservatives may also support a
premium support model that would convert Medicare into a system similar
to the Federal Employees Benefit Health Plan (FEHBP), in which
beneficiaries would receive a defined contribution from Medicare to
purchase a health plan of their choosing. Previously incorporated into
alternative RSC budget proposals, a premium support plan would provide
comprehensive reform, while confining the growth of Medicare spending to
the annual statutory raise in the defined contribution limit, thus
ensuring long-term fiscal stability. Just as important, by potentially
shifting the focus of Medicare from a government-run program to a series
of private payers, it would reduce or eliminate the need for the
seemingly annual ritual of adjustments to Medicare fee schedule amounts,
and may ensure that providers receive more reasonable and consistent
reimbursement levels. By confining the growth of Medicare spending and
limiting the opportunities for Congress to tinker with physician and
other reimbursement policies, some conservatives may view a premium
support model as a return to the principle of more limited government.

For further information on this issue see:

-   [*CMS Data on Sustainable Growth
    Rates*](http://www.cms.hhs.gov/SustainableGRatesConFact/)

-   [*CRS Report on Medicare Physician
    Payments*](http://www.congress.gov/erp/rl/pdf/RL31199.pdf)

**[RSC Staff Contact]{.underline}**: Chris Jacobs,
<christopher.jacobs@mail.house.gov>, (202) 226-8585

\###

[^1]: Medicare Payment Advisory Commission, "Report to the Congress:
    Medicare Payment Policy," (Washington, DC, March 2008), available
    online at <http://www.medpac.gov/documents/Mar08_EntireReport.pdf>
    (accessed June 16, 2008), pp. 110-11.

[^2]: Quoted in Anna Edney, "Bernanke: Health Care Reform Will Require
    Higher Spending," *CongressDailyPM* June 16, 2008, available online
    at
    <http://www.nationaljournal.com/congressdaily/cdp_20080616_8602.php>
    (accessed June 16, 2008).