Medicare fees: Will they ever fix the formula?

June 3, 2005

Doctors are once again up in arms over how the government reimburses them.

Physician Medicare pay is once again in the news.

After dodging a bullet in both 2004 and 2005, doctors this year face the prospect of a 4.3 percent pay cut next year and a 26 percent cumulative cut over the next six years. To avert this, organized medicine is calling on Congress to make both a short- and long-term fix. Short term, groups like the AMA, ACP, and the Medical Group Management Association would like to see next year's cut replaced with a modest increase, something at least on the order of the 1.5 percent granted this year and last.

But these groups would also like to see the government change-or, better yet, scratch altogether-the very formula it uses to determine physician Medicare pay for the upcoming year. The biggest flaw in that formula, say critics, is its reliance on changes in the gross domestic product-a leading government measure of how well the domestic economy is doing.

Not everyone buys doctors' argument or their arithmetic. And even those who do point out that reversing a scheduled cut or, worse, fiddling with the basic formula will be costly-both in terms of overall Medicare spending and future premium increases for beneficiaries. Still, doctors have made Medicare pay reform a top legislative priority.

Here's a look at the politics of this effort, along with the controversial formula itself. Why is it causing such problems for doctors? How would critics fix it? And what's the likelihood that anything significant will happen any time soon?

An actuary's delight: the ABCs of the SGRCongress has been fiddling with what the government pays for Medicare physician services for the past 25 years. The current method was adopted as part of the Balanced Budget Act of 1997, and modified slightly by last year's Medicare Modernization Act. It's a cost control methodology that only an actuary could love.

To arrive at the spending target for 2006, for example, officials first looked at the target for 2005, which reflects the cumulative difference between actual expenditures and allowed expenditures for all years between 2005 and the base year of 1996.

Next, they calculated the "sustainable growth rate" or SGR, which measures changes in four areas: physician fees (including lab fees and the cost of physician-administered drugs); Medicare fee-for-service enrollment; the 10-year annual average change in real (inflation-adjusted) GDP per capita; and expenditures for physician services resulting from new laws and regulations. Their calculations gave them an estimated SGR of 2.5 percent. They then updated the 2005 spending target by this amount.

Next, the government fed all this data-along with the difference between actual and target expenditures for 2005 alone-into a mind-dizzying formula that spits out something called the "update adjustment factor" (UAF). For 2006, this came to an eye-popping –21.1 percent. Fortunately, federal law dictates that the UAF can't be less than –7 percent in any one year, so the number-crunchers were forced to overrule their own calculations for 2006.

To account for the annual rise in the cost of conducting a medical practice, the government adjusts the current year's Medicare Economic Index (MEI)-which measures the change in the cost of things like wages, fringe benefits, office expenses, and professional liability insurance-by the UAF.

Multiplying the current MEI of 2.9 percent by the statutorily adjusted –7 percent UAF results in an update for 2006 of –4.3 percent.This will be the across-the-board reduction in physician fees for 2006-unless, of course, Congress intercedes.