Clinical Geriatrics

Unlike the rest of the U.S. economy, reimbursement for healthcare is not a simple matter of supply and demand. Reimbursement decisions are based to an increasing extent on politics. Not surprisingly, this nonmarket approach has resulted in quality concerns in healthcare. Less-than-optimum healthcare outcomes are in part due to the lack of capital and incentives available from the current reimbursement system—a reimbursement system that unfortunately has become a matter of politics, forcing physicians and other providers to manipulate or “game” the system in order to obtain more appropriate reimbursement for patient care services they provide.

Sustainable Growth Rate Formuala
Perhaps nowhere in healthcare has reimbursement been based more on politics than with regard to physician reimbursement. Since Medicare’s inception, the federal government has been involved in reimbursement decisions. In the early years of Medicare, when financial constraints were not a major Medicare driver, physician reimbursement was based on usual and customary charges. Later, when funding became an issue, reimbursement was instead dictated to physicians from the federal government. Physician charges are now subject to the Sustainable Growth Rate (SGR) Formula. This formula ties physician payment updates to a number of factors:

• Growth in input costs
• Growth in fee-for-service enrollment
• Growth in the volume of physician services relative to growth in the national economy

The result of this formula is that the more services utilized for reasons of demand, the less the reimbursement to physicians in subsequent years, in hopes that this will decrease utilization and expenditures.

As a result of the SGR formula, there will be a substantial negative payment update from 2006 to at least the year 2011. Despite the SGR formula, the Medicare Payment Advisory Commission (MedPAC) reimbursement recommendations to Congress are based on other factors, such as beneficiary access to services. Table I demonstrates the trends of the physician payment updates against inflation rates over the last 15 years. The net effect on physician practice profitability is the difference between physician reimbursement and input costs. This net difference for a practice is actually greater than the difference using a general inflation number, since physician practice costs are increasing at a rate greater than inflation. Professional liability insurance continues to lead as the fastest growing input cost. However, even using the lower general inflation number, which has averaged 2.76% each year for the last 15 years, physician payment updates have averaged only 2.28% during this same period, resulting in a net average decrease.¹ It’s important to note that physician practice profitability may be used to increase physician income, but is also an important source of potential capital to reinvest back into the practice for health information technology, additional care team members, and other resources to optimize care quality.

The result of the SGR has been to set Medicare payments at less than commercial insurers, although it is important to note that reimbursement amounts have regional variation. For example, a basic check-up that a typical office charges $50 or $55 for is paid by private insurers at $40 or $45, while Medicare pays only about $35. For a patient visit related to a more involved problem such as diabetes—which may take 15-20 minutes—the office charges of about $70 are paid by Medicare as slightly less than $50 and by private insurers anywhere from $55 to $70, with the average private insurer paying $60.

Recognition of Primary Care Issues
The Centers for Medicare and Medicaid Services (CMS) in its new Medicare rule specifically increases financial reimbursement for evaluation and management (E & M) services.