• Health Policy and Government Relations
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• SVS Health Policy Committee Meets with Senators/Staff
• Priority Issues
• Imaging Cuts
• SAAAVE Act
• Physician Payment
• Pay For Performance (P4P)
• Fistula First Initiative
• Malpractice Reform
• Reimbursement
• Regulatory Issues
• Political Action Committee
• 110th Congress Committee Assignments

P4P: Current Reimbursement System

Last year, 2005, marked the 40th anniversary of the Medicare and Medicaid law that President Lyndon Johnson signed on July 30, 1965. Currently, over 42 million seniors and disabled persons take advantage of this national system for most of their health care needs. The physician reimbursement system, which was once based on what was known as customary, prevailing, and reasonable charges, well compensated procedure-oriented specialties such as surgery. That system was felt to be inequitable and inflationary. In 1992, Medicare instituted the resource-based relative value scale (RBRVS), significantly changing the way physicians are paid. The RBRVS, the brainchild of William Hsiao, a professor of economics at Harvard University, aimed to decrease payment for procedure-oriented specialties and increase it for those specialties considered to be “cognitive” in nature, leading to the prediction at the time that this new system would increase reimbursement for those specialties by over  50%.¹ The RBRVS includes “relative values” for each Current Procedural Terminology (CPT) code based on estimates of the amount of physician work, practice cost, and medical liability premium costs involved. Each of these components is geographically adjusted and then multiplied by a conversion factor that translates the total unit value for the CPT code into a dollar amount.

The value of the conversion factor is determined by the Centers for Medicare and Medicaid (CMS) on an annual basis by using a complex formula defined by federal statute that reflects Medicare’s inflation rate (known as the Medicare Economic Index, or MEI) and an “adjustment factor” based on the Sustainable Growth Rate (SGR). The SGR was created by Congress in 1999 to control Medicare spending on physicians’ services. It sets expenditure targets that take into account the number of fee-for-service Medicare beneficiaries and the nation’s overall economic growth. If total physician spending exceeds the spending target set by SGR, a negative adjustment of up to -7% is applied to the MEI when the conversion factor is updated each year. Conversely, if total spending is below the SGR, a bonus of up to 3% may be applied to the MEI. The problem with SGR is that it attempts at the same time to set prices for individual services while controlling total Medicare spending. These two goals can very seldom be accomplished simultaneously because as the number of Medicare beneficiaries increases and the services provided to them gets more complex and costly, the total spending for Medicare part B expands. To control this expansion in Medicare spending, reimbursement for individual services, as reflected by the value of the conversion factor, has to drop in order to meet SGR targets. The Medicare Payment Advisory Commission (Med-PAC) warned in its report to Congress (to the Subcommittee on Health of the Committee on Ways and Means of the House of Representatives) as early as 2002 that this method used to determine the value of the conversion factor is flawed, recommended that Congress repeal SGR, and predicted 4 years of negative impact on the value of the conversion factor if this system was not repealed.²

MedPAC’s predictions were right on target; the value of the conversion factor was supposed to decrease on an annual basis for a total decrease of 8.7% from 2003 to 2005. Under pressure from physicians’ and surgeons’ groups, Congress reversed this trend every single year, increasing the value of the conversion factor by 4.5% in the same time period. Similarly, for 2006, the conversion factor was supposed to decrease by 4.4%; again Congress reversed it and froze the value at the 2005 level. In addition, the Government Accounting Office (GAO) projects that the conversion factor will continue its decline on an average of 4% to 5% per year over the next 5 years if the SGR law is not repealed by Congress, a total of 20% drop by 2010 (Fig 1). MedPAC and GAO predictions were validated by the Medicare Trustees report of 2006, which projects that physician payments will be cut 4.7% in 2007 and that payment rates would have to be reduced by 4% to 5% each year through at least 2015.³ If the increase in practice costs and inflation are factored in, the problem is even more amplified. MedPAC’s report noted that this projected decrease in physician reimbursement would have a negative impact on Medicare beneficiaries’ access to health care and recommended controlling total Medicare spending, not only physician reimbursement. The American Medical Association (AMA) predicted that this projected decrease in physician reimbursement will have a profound effect on Medicare beneficiaries. The results of an AMA-conducted survey indicated that if Medicare payments are cut by 5% beginning in 2007, 45% of physicians plan either to decrease (29%) or to stop (16%) the number of new Medicare patients they accept, 20% may be forced to reduce the number of established patients they treat, 42% plan to discontinue nursing home visits, 37% of physicians whose practices serve a rural area will discontinue these services, and 71% will make one or more significant changes in the care of their patients, including reducing time spent with Medicare patients, referring complex cases, or discontinuing certain services.⁴ The results of this survey confirm the fears of MedPAC regarding Medicare beneficiaries’ access to quality health care. One of the solutions proposed by GAO was to replace SGR with fee updates based on MEI; it was estimated that if the change were to take place, fee updates would be in the range of 2.1% to 2.4% from 2006 to 2014 instead of the projected drop. Obviously, this system, which is intended to control volume and cost, perversely creates incentives to increase volume; if physician reimbursement continues to drop and Congress does not interfere on an annual basis to reverse the negative updates in the conversion factor, physicians may respond by increasing volume to make up for the decrease in their income. This prediction was also made by MedPAC report of 2002:

“An expenditure target approach, such as the SGR, assumes that increasing updates if overall volume is controlled, and decreasing updates if overall volume is not controlled, provides physicians a collective incentive to control the volume of services. However, this assumption is incorrect because people do not respond to collective incentives but individual incentives . . .. If anything, in the short run an individual physician has an incentive to increase volume under such a system and the sum of those individual incentives will result in an increase in volume overall.²”

A system that encourages volume inflation is a flawed system, and many, including the American College of Surgeons (ACS), called for repealing SGR. Congress has also been concerned that this system encourages volume inflation without rewarding quality.

Article References

Reprinted from Journal of Vascular Surgery, Volume 44, Number 4, October 2006, Anton M. Sidawy, MD, MPH, Washington, D.C., "Pay for Performance: The process and its evolution," 892-902, Copyright 2006, with permission from The Society for Vascular Surgery.

Journal of Vascular Surgery (http://www.jvascsurg.org)