Reimbursement Changes Needed for Physician-Administered
costs in the United States for 2006 will be approximately $2 trillion. This is roughly
equivalent to the gross domestic product (GDP) of China and constitutes 16% of the
GDP of the United States.1
Projected Medicare spending for 2005 was $325 billion of which 25% is paid for physicians
services. The remainder is spent on inpatient hospital services (40%), managed care
(15%), outpatient hospital services (5%), and nursing homes (5%) the last
10% is distributed between home health, hospice, and drug card services.
In 2004, Medicare expenditures to physicians increased 15% over
2003 levels. This was the largest increase in the past 5 years and was driven by
increases in office visits, minor procedures, imaging, lab tests, and physician-administered
(Part B) drugs. Part B drugs accounted for 11% of the growth. This increase reflects
the availability of new, expensive therapies and an increasing shift from surgery
to drug therapy.
This article will discuss how Medicare establishes reimbursement
for physician services and the potential effects of Part B drugs on physician reimbursement.
HISTORY OF REIMBURSEMENT
In 1989, the Omnibus Budget Reconciliation
Act established the relative value scale and mandated that payment levels for physician
services must be resource-based and reflect physician time and effort, practice
expenses, and malpractice expenses. Physician work values were established by a
survey process in which all physician services were compared to establish a rank
order. The Centers for Medicare and Medicaid Services (CMS) contracted out this
work to a health policy group at Harvard University. Congress intended the same
process to occur for practice expenses and malpractice expenses, but it was not
completed in time for the Jan. 1, 1992, implementation. Therefore, historical practice
expenses and malpractice expenses of 45% were added on to the valuation of the physician
work, and the resource-based relative value system (RB-RVS) was initiated. In 1993,
the Omnibus Budge Reconciliation act required resource-based practice and malpractice
expenses to begin in 1997. These expenses were established by the Practice Expense
Advisory Committee (PEAC), which reviewed every CPT code for actual practice expenses.
Ophthalmology did relatively well in this process because of the high cost of ophthalmic
equipment. Today, the law requires that all components of physician reimbursement,
(physician work, practice expenses, and malpractice expenses) be re-evaluated every
The continuing re-evaluation of physician work is performed by
the Relative Value Scale Update Committee (RUC). The RUC consists of 24 members,
each representing a specialty or subspecialty of medicine or surgery. Ophthalmology
is represented by 1 member through the American Academy of Ophthalmology (AAO).
The RUC meets quarterly throughout the year to review current valuations or to establish
valuations for new procedures. The RUC is a committee of the American Medical Association
(AMA) and although the RUC recommendations are not binding on CMS, the agency accepts
the RUC values approximately 90% of the time.
PART B DRUG COSTS LOWER PHYSICIAN
The central currency in the valuation process
is the relative value unit (RVU). Each CPT code is assigned a total number of RVUs,
which is a summation of the RVUs for physician work, practice expenses, and malpractice
expenses. The total body of RVUs for ophthalmology is limited by the concept of
revenue neutrality. This means that, because the total amount of ophthalmology RVUs
remains constant, if 1 procedure increases or a new procedure is added, the remaining
procedures are decreased. Since these changes are spread over many procedures, the
net effect is often negligible.
The conversion factor is the method for converting RVUs into dollars.
Simply put, the total number of RVUs for a procedure is multiplied by the conversion
factor to equal the dollar payment for that procedure. The conversion factor is
revalued each year based upon a complex formula that measures target and actual
expenditures from the preceding year to create the Performance Adjustment Factor
(PAF). An important factor in this formula is the Sustainable Growth Rate (SGR).
The SGR is determined by changes in the growth of physician services, Medicare enrollment,
regulatory requirements, and the per capita GDP. Growth in physician services increases
the SGR, which decreases the conversion factor. A decrease in per capita GDP, as
occurs in a recession, also decreases the conversion factor. Physician services
include evaluation and management services, surgery, and diagnostic testing. Growth
in these areas beyond a calculated amount acts to decrease the conversion factor.
Another factor that is included in physician services is physician-administered
(Part B) drugs. Until recently, these drugs were primarily used for oncology, but
in the past
10 years there has been an explosion in physician-administered drugs
across all of medicine including ophthalmology. The cost of these new drugs contributes
to the increase in physician services, which in turn, decreases the conversion factor.
The relative contribution of physician-administered drugs to the increase in physician
services is variable from year to year, but as more new, expensive drugs come online
it is likely this effect will increase.
Physician services are also increased by the additional services
necessary to administer Part B drugs. These additional services include increased
number and intensity of office visits, minor procedures (ie, intravitreal injections)
and imaging. The net effect is a decreased conversion factor and decreased physician
reimbursement. The adverse effect of physician-administered drugs on the conversion
factor is frustrating to physicians because they have no control over the cost of
new drugs. Surprisingly, Medicare also has no control over the cost of drugs. The
Medicare Modernization Act of 2003 specifically prohibits CMS from negotiating or
affecting the price of drugs paid by Medicare. Unlike physicians and hospitals,
Medicare has not established cost controls for the pharmaceutical industry.
THE FIX: A WORK IN PROGRESS
It is important to understand that although
part B drugs do adversely affect physician reimbursement, they do not do so on a
dollar-for-dollar basis. In other words, every time verteporfin for injection (Visudyne,
Novartis), pegaptanib (Macugen, [OSI] Eyetech, Pfizer), or ranibizumab (Lucentis,
Genentech) is administered, money is not directly deducted from physician payments.
Unlike with the RUC, there is no ophthalmology-specific drug pool. The effects of
physician-administered ophthalmology drugs are global and frankly minimal, compared
to the tens of billions of dollars spent on oncology and immunosuppressive treatments.
CMS estimates that if the current SGR formula remains unchanged
there will be a 4.6% decrease in the conversion factor for 2007 and a 38% decrease
by 2013.2 There is now a
consensus that the conversion–factor-update formula must be fixed. The problem
is the estimated cost of $50 billion over the next 6 years. The AAO, in partnership
with the AMA, is actively working with Congressional leaders to implement a new
system which will eliminate physician-administered drug costs from the physician
update formula and create a new update formula which realistically and accurately
considers physician costs. The sooner this happens, the better for ophthalmologists
and our patients.
1. Centers for Medicare and Medicaid Services.
2. American Medical Association, Division of Economic and Statistical
George A. Williams,
MD, is chair of the Department of Ophthalmology at Williams Beaumont Hospital and
director at Beaumont Eye Institute located in Royal Oak, Mich. Dr. Williams has
no financial interest in the information contained in this article. He can be reached
by e-mail at
Retinal Physician, Issue: July 2006