Medicare: Payments to Physicians

Publication Date: July 2008

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

Type:

Abstract:

Medicare law specifies a formula for calculating the annual update in payments for physicians' services. The formula resulted in an actual negative update in payments per service for 2002. Additional reductions were slated to go into effect in 2003, 2004, and 2005, but were prevented by congressional action. Many Members were concerned about the potential impact of payment reductions on patients' access to services.

Medicare payments for services of physicians and certain nonphysician practitioners are made on the basis of a fee schedule. The fee schedule, in place since 1992, is intended to relate payments for a given service to the actual resources used in providing that service. Payments under the fee schedule are estimated at $58.1 billion in FY2006 (over one-sixth of total benefit payments). The fee schedule assigns relative values to services that reflect physician work (i.e., the time, skill, and intensity it takes to provide the service), practice expenses, and malpractice costs. The relative values are adjusted for geographic variations in costs. The adjusted relative values are then converted into a dollar payment amount by a conversion factor. The conversion factor for 2005 is $37.8975, a 1.5% increase over the 2004 level, but, 0.9% less than the 2001 level ($38.2581).

The fee schedule places a limit on payment per service but not on overall volume of services. The formula for calculating the annual update to the conversion factor responds to changes in volume. If the overall volume of services increases, the update is lower; if the overall volume is reduced, the update is higher. The intent of the formula is to place a restraint on overall increases in Medicare spending for physicians' services. Several factors enter into the calculation. These include (1) the Medicare economic index (MEI), which measures inflation in the inputs needed to produce physicians' services; (2) the sustainable growth rate (SGR), which is essentially a target for Medicare spending growth for physicians' services; and (3) an adjustment that modifies the update, which would otherwise be allowed by the MEI, to bring spending in line with the SGR target. The SGR target is not a limit on expenditures. Rather, the fee schedule update reflects the success or failure in meeting the target. If expenditures exceed the target, the update for a future year is reduced. This is what occurred for 2002. It was also slated to occur in 2003 and 2004; however, legislation prevents this from occurring through 2005. Congress has not, however, addressed the underlying issues related to application of the formula for the annual payment update. As a result, in the absence of congressional action, a negative update is expected in 2006.

On December 8, 2003, the President signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173). In addition to including a new prescription drug benefit, the law contains numerous changes to the existing Medicare program. It makes a variety of modifications to payment rules for fee-for-service providers, including physicians. The law specifically provides that the updates for 2004 and 2005 can not be less than 1.5%. Further, it contains other provisions designed to increase physician payments. This report will be updated as events warrant.