Medicare Cuts (Annual Physician SGR Issues) Explained In Detail.

The backbone of our nation's healthcare system is in shambles.  Primary care, or better named, comprehensive care, is being hunted to extinction by the very system that needs it most.   The Medicare National Bank and all its failed policies has destroyed the great value that comprehensive care brings to the table.  Read on for a detailed explanation of the physician Medicare cuts and what failure of finding an SGR fix will mean for our country. The backbone of our health care is being destroyed.

Prior to 1992, physicians were paid based on Medicare's customary, prevailing, and reasonable methodology.  But due to rapidly rising costs of health care and concerns that physician payments were rising too quickly, Congress passed the Omnibus Budget Reconciliation Act of 1989 which included an overhaul in physician payment beginning in January 1, 1992.  Specifically, the resource based relative value scale (RBRVS) was instituted.   The RBRVS has three components.  Each component is given a relative value unit (RVU)
  1. Physician work component  (work RVU)
  2. Practice expense component  (pe RVU)
  3. Malpractice component  (mal RVU)
Because it costs more to live in NYC than in KC, a geographical modifier is applied to adjust for these cost of living differences.  Now you add up the RVUs and that is how every single encounter you have is given a relative value (an RVU value).  But how do you assign a dollar value?  Well,  Medicare has an established conversion factor that assigns a dollar value to the RVU.  In 2008, that conversion factor was about $38/RVU.

Every possible encounter is given a current procedural terminology code (reference the AMA CPT 2018 Standard Edition).  If you have a laparoscopic cholecystectomy you are given CPT® code 47562.  If you have it done as an open procedure you are given CPT® code 47600.  If you have a CT of your abdomen without contrast you are given CPT® code 74150.  If you have it done with contrast you are given  CPT® code 74160.  

For surgery, procedures and imaging the CPT® code is much easier to quantify.  The encounter is very definable.  A colonoscopy.  A biopsy.  An MRI.  These are things that can be defined.  But how do you define nonprocedural encounter?  A visit for a cold.  A visit for multiorgan failure.  How do you define an office visit with your comprehensive care doc or your specialist?  Or in-patient consultation or an admission to the hospital.   Enter the horribly complex, archaic, and unforgiving rules called Evaluation and Management guidelines (E&M guidelines).

These are the complex guidelines  payers have been instructed to use when determining whether a doc has over billed an E/M visit.  These are the rules that may be used to  accuse doctors of fraud in  billing and threaten to shut down offices and send doctors to jail.  These are the codes that comprehensive care doctor use as their major source of billing (office visits and hospital visits).  You can find more details in my hospitalist resource center.  

Let me  summarize thus far.  We have every encounter you can imagine assigned a CPT® code.  Your encounter is either a procedural CPT® (imaging, procedure, surgery) or an E&M code (office visits, hospital visits).  Your CPT encounter has an established relative worth established through the RBRVS system by way of established RVUs and adjusted for geographical location.  And every year each RVU is established a dollar amount by Congress, the conversion factor.  From Jan 1st, 2008 through June 30th 2008, that conversion factor was about $38 per RVU.

So now you ask, who establishes the value of RVU and who establishes the conversion factor?  These are two entirely different issues, but both are responsible for the decimation of comprehensive care physicians.

The value of the RVU is determined by the AMA/Specialty Society Relative Value Scale Update Committee (RUC).  This committee recommends to the Center For Medicare & Medicaid Services (CMS) changes in RVU value on existing CPT codes and recommends establishment of RVU values on new CPT codes that are always being added.  This committee has 29 members:

American Medical Association Representative
CPT Editorial Panel
American Osteopathic Association Representative
Health Care Professionals Advisory Committee Representative
Practice Expense Review Committee Representative

Emergency medicine
Family Medicine
General Surgery
Geriatric medicine
Internal Medicine
Orthopaedic Surgery
Pediatric Surgery
Plastic Surgery
Thoracic Surgery

This is your committee.  Four votes of twenty-nine are given a voice in determining the survivability of the primary care backbone of our national health care foundation.   It is this committee of specialists that determine the value of every possible encounter Joe Public has with all third party payers that use the RVU system to determine payments.  They have just four votes in a sea of procedurally oriented specialists.   This is your health care.  This is your Medicare.  This is the destruction of primary care.  This is one core of the problem.  

But how is that dollar value determined? Medicare Part B (the  Supplemental Insurance program ) covers physician services, outpatient hospital services, durable goods, physical therapy, and other services.  Unlike the rest of the Medicare system,  this program has been hogtied by the unsustainable sustainable growth rate formula.  Established in 1997 as part of the Balanced Budget Act of 1997, it stated goal is to control the growth in physician expenditures.  

After calculating expected outlays for physician services, as determined by law in the 1997 Balanced Budget Act, the sustainable growth rate spits out a total value of expenditures for physicians for that year.  This flawed system is responsible for the 10.6% cut starting July 1st 2008.  It will be responsible for another 5% cut every year for the foreseeable future.  Clearly an unsustainable and completely irrational approach to cost control.  The sustainable growth rate is implemented by changing the conversion factor.  In this case, starting July 1st, 2008 the conversion factor, which was about $38/RVU was decreased to a mandated approximate value of $34/RVU.  Interestingly, the initial conversion factor in 1992 was $31/RVU.  Here is a table of the last 15 years of conversion factor adjustments.

Between 1992 and July 1st 2008, the conversion factor has gone up all of $3/RVU.  A 9.7% rise in value over 16 years.  Just to match the consumer price index (CPI) a $31/RVU in 1992 should be worth $46.64 in 1997.  Instead, in 16 long worthless price control years, it is worth just $34/RVU on July 1st, 2008 and $38/RVU on June 30th, 2008.  Now add to that the 50.8% cumulative rise in physician practice expenses, as calculated by the Physician Medicare Economic Index.

This is the double whammy that has killed comprehensive care.  Inflation is far outstripping payment in the setting of business expenses that are far outstripping payment.  Add  educational expenses that are far outstripping inflation and it is no wonder why comprehensive care has become the red headed step child of options for our up and coming doctors.   Medicare is failing primary care.

This is your government that is killing comprehensive care  with its failed policies.  This is your 100% Medicare for system.   A single payer government run example happening now.   An organization that has categorically decimated comprehensive care by the numbers.  A very organized, systematic betrayal of the backbone of cheap affordable health care intervention and prevention.

Then you sit back and you wonder why you have to wait an hour in the waiting room.  You wonder why nobody will return your phone calls.   You wonder why you always seem to see the nurse or PA instead of the doctor at your visit.  You wonder why we do so much.  You wonder why we spend so much and get so little back.  It's not a mystery folks.  It's right here.

Why has cost control failed from a price approach?  The answer is in the volume of services being performed.  More technology.  More procedures.  More CPT codes being given high RVUs.  The major driver is volume.  People living longer and living sicker.  We are doing more to patients because we can.   Increasing volume is the only way to maintain revenue in a declining payment environment.  So we do more to sustain the business model.  It is an undeniable necessity to survive and to thrive.

For comprehensive care physicians,  their only option is to increase volume of office visits.  That means shorter visits, use of  extenders,  more referrals,  more imaging,  less history and less physical.  The other options include more ancillary office charges such as lab and xray as well as botox, facial peels and mud baths.  It also means not taking phone calls.  It also means two hour waits in the front office.

The result of the failed economics of sustainable growth rate is a volume of services spiraling out of control  The vast increases in volume of imaging and procedural codes has created a world of unsustainable payment rates for E/M medicine known as comprehensive care.  In the current system of Medicare,  all docs are created equal.  The sad truth is less than 15% of medical students are choosing to enter one of the comprehensive care fields at a time when the baby boomers are just now getting sick.  The reasons are entirely financial.  The failure of our nation to value the cost effective relatively cheap services of comprehensive care has lead to the skewed expensive specialization of our system.  A Medicare system that cannot sustain itself with over 30 trillion dollars of unfunded mandates in the next several generations.

Here is a graphic of the cost of doing business compared with payment adjustments since the SGR went into affect in 1997.  Using the numbers obtained at the bottom of this article here, which gives the yearly rise in physician expenses and the yearly rise in  payment,  I will show you how the current system has decimated primary care. Let's start with a practice 100% Medicare.  With gross revenue in 1997 of $300,000 and an overhead expense of 50%.  That leaves the physician with $150,000 take home in 1997, some generous assumptions indeed:

Year Revenue($) Overhead($) Take Home($)
1998 306,900 153,300 153,600
1999 313,958 156,826 157,132
2000 331,226 160,903 170,323
2001 347,787 164,281 183,506
2002 331,094 168,552 162,542
2003 336,722 173,608 163,114
2004 341,772 178,642 163,130
2005 346,898 184,179 162,719
2006 347,591 189,336 158,255
2007 347,591 193,312 154,279
2008 312,485 196,791 115,694 Estimate
2009 296,861 (-5%) 201,710(+2.5%) 95,151 Estimate
2010 282,108 (-5%) 206,753 (+2.5%) 75,429 Estimate
2011 268,003 (-5%) 211,921 (+2.5%) 56,082 Estimate
2012 254,603 (-5%) 217,219 (+2.5%) 37,394 Estimate
2013 241,873 (-5%) 222,649 (+2.5%) 19,224 Estimate
2014 229,780 (-5%) 228,215 (+2.5%) 1,565 Estimate

Several statistics are worth noting.
  • In a practice expected to be fully supported by Medicare, which for all the single payer, government run fanatics out there is the equivalent scenario,  you see that under the current government mandated payment system a comprehensive care physician making $150,000 a year in 1997 would be making $154, 279 a year, with out increasing the volume of services being performed.  In other words,  without increasing volume, a physician would be making no more now than they did 10 years ago.  When you factor in the cost of living increases by the consumer price index (CPI), that physician would have to make $196,382 a year in 2007, just to maintain their lifestyle of 1997.  It is no wonder why volume rules in a system that uses top line cost control measures.  For comprehensive care physicians, that means double and triple booking clinics and extenders.  For specialists that means hiring extenders for all their low paying E/M encounters and spending more time in the procedure lab making the much higher relative profit while adding exponential cost to Medicare without an increase in quality.
  • If the 2008 July 1st cuts are allowed to stand, a comprehensive care physician would earn 23% less now than they did in 1997, on an absolute basis.  Adjusted for inflation,  that is a 59% paycut from 1997.  
  • The current SGR mandated by Congress is set to make comprehensive care physician income on par with the average take home pay for all Americans in 4 short years.  That means a college educated nurse will be making more than the average comprehensive care physician.  The unionized laboror with a high school education will be making more than your comprehensive care physician.
  • Based on current SGR economics mandated by your Congress, in five short years, your comprehensive care physician will be collecting welfare,  earning the approximate equivalent of minimum wage.
This is not an alarm,  this is a category 5 hurricane that has already swept through our health care system.  Medical students with their $200,000 in debt are speaking with their wallets.  According to the uneducated masses with the mentality that doctors make too much money,  I should be collecting food stamps.  In five short years,  your government mandated health care system is set up to do just that.

The current cuts will decimate comprehensive care physicians.  The volume game has been maxed out in comprehensive care physicians.  You can only book so many people in one slot.  The options now are quit, retire, specialize, sell cash only goods and services or exit Medicare entirely.  These are the only viable options.  If you aren't ready to quit or retire,  your only option really is to exit Medicare or to accept the consequences.

I walked you through the entire system of payment for docs in this country.  And I explained to you how comprehensive care docs are being destroyed.  I walked you through the reality of the economics for a comprehensive care doc and what the near future has in store.   In five short years  the current government mandated payment rules have your comprehensive doctor collecting food stamps. What happens if there is no SGR fix?  We are about to find out as our country heads closer and closer to the fiscal cliff of December 2012.  

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10 Outbursts:

  1. I feel your rage...and as a comprehensive care provider also agree that the medicare cuts need to stand. Maybe that will light a fire.

  2. How do I forward this to my congressmen and the AARP?

  3. This is the perfect article to give to all my dim family members who love to tell me in a patronizing tone that doctors make to much money. Thanks!

  4. From one comprehensive doctor to another...thanks for a complete and eye-popping summary of just how low we have sunk.

  5. Hmm, how come there isn't a revolt within the AMA, to for a dramatic shift in the organization of the committee?

  6. Easily one of the best blog posts I've ever read. I don't know how you have time to put all that together.

    I just blogged about the AMA making stupid recommendations to lower the cost of med school to encourage more people to go into primary care.

    I'll link to your post to prove my point. Amazing work.

  7. I'm a specialist, but over 70% of my billing is E&M as well. While it is easier to see larger volumes of patient in dermatology, doing so requires both larger clerical and clinical staff, with diminishing returns. The public as a whole does not realize how much trouble their healthcare system is in -- they simply know that they pay too much for it. Quite a mess that we find ourselves in.

  8. As a gynecologist who makes his living mostly with procedures, and with a low Medicare percentage, I can still feel your pain.

    I work for a large hospital owned group which is a dance with the devil. Yes, they pay my overhead and give me a paycheck (based on RVU's), but I am basically an at-will employee who accepts their salary or is free to hit the road.

    My question to you is what do you think would happen if the Medicare system is abandoned? What would rise up in its place? Many (all?) of these folks over 65 are basically uninsurable on the market. This is a serious question and I wonder how it would play out.

    You state (perhaps facetiously, but I gather not): "If you aren't ready to quit or retire, your only option really is to exit Medicare. My next blog entry will argue why the Medicare cuts NEED to stand in order to revolutionize the delivery of comprehensive care in this country. Medicare is decimating that back bone as I showed you above. "

    I am the fourth generation physician in my family, and while my lifestyle is not as rich as my radiologist father enjoyed, it is certainly better than my grandfather the thoracic surgeon and my great=grandfather the general practitioner.

    I'll save you the preaching on my part, but a medical career is truly a calling. We accept what patients will pay. Period. Today, Medicare patients pay what they are willing to pay. Many have second homes, vacation around the world, give their children expensive gifts, but will not pay one more dime for their health care. Many are too poor to pay anything beyond their benefits.

    I'm not picking on "Granny", I'm just saying that this is NO different than previous generations, so get used to it. You can accept only cash, and if you are in a large enough market and your reputation is strong enough, then you will make a very nice living. Otherwise, you are at the mercy of what Granny and her "insurance company"-- Medicare-- are willing to pay.

    I enjoy your banter, it makes me think and makes me glad i saved my money instead of living an expensive lifestyle these past 13 years!

  9. All of your ire seems to be directed at the way medicare funds are distributed rather than the cost of healthcare itself. Sure, you could come up with a more fair system that would compensate primary care docs better. But that won't change the fact that we still pay way more per capita for healthcare in this country than anywhere else - and that costs are only continuing to rise. One way or another, the government is going to have to do something to control costs and that's ultimately going to mean a certain amout of rationing. And yes, that is going to mean the government making some of the rules instead of the doctor-patient relationship making all the rules. That's just the price you pay for living in a society where everyone is entitled to affordable healthcare.

  10. I know I'm late to this party, but HH, you're not looking at the big picture when you compare national single-payer to Medicare. The huge benefit to physicians of a single-payer system would be overhead reduction.

    As a hospitalist, you probably don't know how many billers are employed by your organization. But most group practices need a large staff, with people who specialize in getting payments from each payer. A Medicare specialist. A BCBS specialist. An Aetna specialist. Whatever. Not to mention the people checking eligibility before office visits, and the insurance enrollment staff.

    Single payer = single set of rules = reduced staffing costs. Which should equal a higher proportion of reimbursement going to the physician who did th ework in the first place.


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