Medicare Proposes Major Physician Cuts

Martin Gold
Technology Access Partners

Each year, the Centers for Medicare & Medicaid Services (CMS) releases its proposed changes to the Medicare physician payment system. As the single largest payer in the United States, those changes could have either a positive or negative impact on the financial well-being of many physicians across the country. This year, Medicare announced that it would be instituting a 9.9% reduction in payment.

Physician payments, which are billed to the Medicare Part B program, are expected by the CMS to exceed $58.9 billion in 2008. Medicare pays for services provided by physicians based on an individual service unit identified by Current Procedural Terminology (CPT) codes. The Medicare list of procedures and associated payments is called the Medicare Physician Fee Schedule.

When determining payment rates for each service on the fee schedule, the agency considers the amount of work required to provide a service, expenses related to maintaining a practice and liability insurance costs. The “value” or relative weight of the service is determined by the relative value units (RVU) assigned to the procedure. The RVU accounts for the relative costliness of the inputs used to provide physician services: physician work, practice expenses and professional liability insurance (PLI) expenses.

The RVUs for physician work reflect the relative levels of time, effort, skill and stress associated with providing each service. The RVUs for practice expense are based on the expenses physicians incur when they rent office space, buy supplies and equipment, and hire non-physician clinical and administrative staff. The PLI RVUs are based on the premiums physicians pay for professional liability insurance, also known as medical malpractice insurance.

The values given to these three types of resources are adjusted by variations in the input prices in different markets. Each of the three RVUs (physician work, practice expense and professional liability insurance) is adjusted to reflect the various cost differences in the local market where the physician provides the service. For example, it may be more costly to operate a physician practice in Westchester, NY than in South Bend, IN. These costs differences are incorporated into the fee schedule through the use of geographic practice cost indexes.

The fee schedule payment amount then is arrived at by summing the adjusted RVUs and multiplying the total by the fee schedule conversion factor (see Figure 1). The proposed conversion factor for 2008 is $34.1457, as compared to the $37.8975 conversion factors paid in 2006 and 2007, resulting in a 9.9% reduction in payment compared to the previous two years.1

Impact to Orthopedics

To assess the expected financial impact to orthopedic surgeons, we analyzed the five most commonly performed orthopedic procedures. The first most commonly performed procedure was arthroscopy of the knee (CPT Code 29850 and 29851) followed by total knee replacement (CPT Code 27447), then rotator cuff repair (Acute: CPT Code 23410, Chronic: CPT Code 23412 and Arthroscopic: CPT Code 29827), then carpal tunnel release (CPT Code 64721) and, finally, total hip replacement (CPT Code 27130). We then listed the current 2007 Medicare payment and the projected 2008 payment incorporating the 9.9% reduction (see Table 1).

While the overall percentage reduction is the same for all procedures, the procedures that are at greatest financial risk are those that are commonly performed in either a surgeon’s office or in a surgeon-owned ambulatory surgery center (ASC) and incorporate the use of a costly implantable device or surgical instrument. In either setting, the costs of these items represent a direct expense to the surgeon. Of the top five procedures, the ones that fall within this category are arthroscopy of the knee, rotator cuff repair and carpal tunnel release. The two remaining procedures, total knee and total hip replacement, generally are performed as hospital inpatient procedures. As a result, the hospital would be responsible for the cost of the implanted devices and surgical instruments; thus, the cost would not represent a direct expense to the surgeon.

Many ASCs and orthopedic surgeons already are sensitive to the increasing costs of the devices and surgical instruments used in these procedures. Should the proposed reductions go into effect in January 2008, you can expect your ASC and surgeon customers to seek additional price concessions from you and resist the purchase of more costly next-generation products.

While Congress has stepped in each year for the last five years and intervened to prevent the implementation of any kind of fee schedule reduction, Medicare statute requires that this 9.9% be implemented. Without Congressional intervention this year, the reduction will go into effect.

What Can You Do?

Medical device companies can influence the outcome of this rulemaking process by a) working with political representatives; b) organizing key physician customers and having them respond to the proposed rule; and c) being sure to respond as a company to the CMS.

The CMS requires that comments must be received at one of the methods provided below, no later than 5 pm on Friday, Aug. 31, 2007. When commenting, refer to the proposed rule file number CMS-1385-P. Responses may be sent electronically at the following Web address: www.cms.hhs.gov/eRulemaking. Click on the link: “Submit electronic comments on CMS regulations with an open comment period.”

Mailed comments should be sent to:

Centers for Medicare & Medicaid Services
Department of Health and Human Services
Attention: CMS-1385-P
PO Box 8018
Baltimore, MD 21244-8018

Reference:

1. Payment Basics: Physician Services Payment System. MedPac. September 2006.

Martin Gold is a principal at Technology Access Partners and eMedLearn, a Suffern, NY-based consulting firm that specializes in designing and implementing reimbursement and training solutions for medical device companies. He can be reached at (845) 369-9833 or by e-mail at [email protected].