Legal opinion argues for changes to pay update formula

Former government official says CMS can act to lessen impact of Medicare payment cuts on physicians.

By Markian Hawryluk, amednews staff. May 27, 2002.

Washington -- A coalition of physician groups has new evidence it says shows the Bush administration can and should correct past errors in the Medicare physician payment update formula. Such a move could increase physician payments over the next 10 years by $62 billion.

Earlier this month the coalition, which includes the American Medical Association, released a legal opinion by Terry Coleman, who served as chief counsel of the Health Care Financing Administration during the Reagan administration and deputy administrator during the first Bush administration. He concluded that the current administration has the legal authority to make the changes requested by physician groups.

The issue stems from the use of estimates to determine Medicare physician spending targets for 1998 and 1999. Those estimates missed the mark, and because physician payment updates are cumulative, the errors continue to cost physician practices.

Correcting these mistakes would add about $46 billion to physician payments over the next decade and would make passing modifications to the formula in Congress that much more affordable. House Ways and Means Committee Chair Bill Thomas (R, Calif.) and health subcommittee Chair Nancy Johnson (R, Conn.) have urged the administration to make those changes.

The Centers for Medicare & Medicaid Services has argued that it lacks the power to correct the errors, but AMA Chair Timothy T. Flaherty, MD, said that Coleman's analysis clearly shows that isn't the case.

"The administration should use this authority to revise its estimates of baseline spending and help Congress fix the update formula," Dr. Flaherty said.

Physicians face a 20% pay cut over the next 4 years unless Medicare's pay formula is fixed.

Coleman also argued that CMS should not include payments for outpatient drugs administered by doctors in physician spending calculations. The inclusion of these figures makes it more likely that physician spending will exceed its target, which results in reduced payment in future years.

In 1997, when Congress established the sustainable growth rate formula that sets the spending target, it mandated the use of a different definition for physician services, which did not include those drug costs. But CMS is still using the old definition, Coleman said. "The inclusion of drugs in the calculation is particularly unfair to physicians because the growth in Medicare expenditures for drugs has been in large part the result of the introduction of costly new cancer drugs, rather than a failure on the part of physicians to control utilization."

Removing the cost of the drugs from the calculations would provide an additional $16 billion over 10 years, the physician groups said.

Unless CMS and Congress act, physicians face a 20% cut in payments over the next four years, bringing 2005 payments below 1991 rates. The physician groups said even if CMS agrees to make the changes, Congress would still need to fix the payment formula to avoid patient access problems.