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On Physician Payment, Medicare Advantage Cuts: A Game Of Chicken



July 1st, 2008

Editor’s Note: Shorter versions of this post have appeared on The Health Care Policy and Marketplace Review and The Health Care Blog. You can also read a related follow-on post by Robert Laszewski here.

Senate Democrats and Republicans are engaged in one heck of a “game of chicken” over the automatic July 1 10.6% Medicare physician fee cuts and cutting the private Medicare program to pay for avoiding those cuts.

When Congress returns on July 7, we will see incredible political theater, and the likelihood that at least one major health care stakeholder is going to lose and one is going to win — big.

The odds are that either the Medicare physicians will take a 10.6% pay cut this month — as well as another 5% cut on 1 January 2009 — or the health plan industry is going to lose its most profitable and fastest-growing private Medicare product — private fee-for-service — on 1 January 2011.

While a compromise that would take care of both sides is still possible and was worked out late last month, this “game of chicken” is now so far down the line that it’s hard to see how either side can back off with a “never mind.”

Since the Democrats took control of Congress in 2006, I have been saying that they are intent on going after Medicare Advantage (MA) and the extra payments Republicans gave that program in 2003 in order to “prime the pump” to get both insurers and seniors interested in the program.

The differences between Democrats and Republicans on the issue of private Medicare can’t be more basic:

* Republicans believe more in the private sector; Democrats believe more in government.
* Republicans see a Medicare entitlement that needs a private-sector solution as the only hope of bringing it under control; Democrats see Medicare as already the most efficient health plan in America.
* Republicans see competition and choice at the core of a Medicare solution; Democrats see universality and avoiding a two-tier system of care as critical.
* Republicans see an opportunity to take away a key element of the Democratic legacy by being successful in fundamentally overhauling the entitlement with market-based principles; Democrats see a cornerstone of their legacy and connection to the American people at stake.

To successfully launch their Medicare reform strategy, Republicans gave health plans and seniors incentives to offer and join the new private plans. Medicare Advantage generally is paid 13% more than Medicare pays out for similar seniors, and private fee-for-service (PFFS) plans get 17% more.

PFFS is a special program because health plans are not required to create managed care networks of doctors, hospitals, and other providers. Instead, the health plan can force providers to treat its members and also force them to accept the Medicare fee schedule in payment. PFFS plans get 17% more than Medicare does for like seniors and don’t have to establish networks of providers, and they can simply pay at the already established Medicare payment schedule.

Health plans commonly pass some of these extra payments on to members in the form of extra benefits, which makes these plans very attractive — almost 10 million seniors are now in them.

Why did Republicans grant these great payment and network provisions to private Medicare? To prime the pump — to get enough plans and seniors into these plans to make the market work in favor of them. But these special advantages were granted in 2003, and the plans have had five full years to get them up and running.

When It Comes To Advantages For Private Medicare Plans,
Democrats Say Enough Is Enough

Democrats are saying that this is long enough, and they point to some health plans that critics complain have been playing games with the system by never intending to build permanent networks. Republicans and health plans are giving no indication they are ready to give the extra payments up. The health plan industry lobbied hard to keep them, and President Bush has said he will veto any attempt to change things.

Democrats just see the private plans getting bigger and worry that if they aren’t stopped now, the Democrats’ Medicare legacy may not be retrievable.

This fight has been brewing since the Democrats took Congress back in the fall of 2006. I fully expected that all of this would come to a head in late 2007 — the first opportunity for the Democrats to use the budget process to undermine private Medicare. Some days during these past two years I have felt like “Chicken Little,” warning that the Democrats would stop at nothing to get at the private program they have seen as a threat to universal Medicare and a big part of their party’s legacy. Looks like the only thing I was wrong about was the timing: instead of late 2007 and the budget process, it turns out that D-Day was mid-2008.

The turnabout in the debate over MA payments in the course of just a few days has been amazing. As much of a pessimist as I have been over whether these payments would continue forever, I really expected that the Democrats would just bide their time until 2009, when they would have even bigger majorities in Congress and a president — either Obama or McCain — much more willing to cooperate than the intransigent Bush on the issue of equalizing MA payments with traditional Medicare. The only thing that has been holding the Democrats off has been President Bush’s threat to veto any cuts to the private Medicare program.

What A Difference A Day Makes

But over the course of just twenty-four hours, everything changed in a dramatic way and in ways not even Democratic leaders would have predicted the day before. The third week in June, led by Senate Finance chair Max Baucus (D-MT), Democrats drafted a perfunctory bill to override the 10.6% physician fee cut and pay for it with cuts to the PFFS program. No one expected it to go anywhere, and it didn’t — failing to advance in the Senate getting only 54 of the 60 votes it needed. Neither Obama, Clinton, nor McCain even bothered to show up for the meaningless vote.

The bill would have ended the PFFS program by 2011, not by direct payment cuts to the most controversial part of the private Medicare program, but by requiring that any PFFS player establish networks by that time — converting PFFS members to mainstream Medicare Advantage. With PFFS gone in 2011, the Congressional Budget Office (CBO) estimated that $14 billion in savings could be transferred to physician payments.

Immediately after the failed Senate vote, Baucus and ranking Republican Chuck Grassley (R-IA) did what everyone expected they would do: they worked out a smaller compromise that would avoid the doc cuts and freeze their payments in 2009, and dropped the elimination of PFFS by 2011 that would have paid for the bigger defeated Senate bill. None of these proposals would cut the extra payments from the mainstream MA program.

Problem solved, real fight deferred until 2009, let’s go home.

But then something quite unexpected and really amazing happened. On Tuesday, June 24, the day that will mark the turning of the tide for Medicare Advantage in Washington, the House took up the failed Senate bill in what everyone saw as just a meaningless political exercise.

Son of a gun, the House didn’t just pass the failed Senate bill on a meaningless party-line vote, they passed it by a vote of 355-59. Two-thirds of the Republicans joined the Democrats voting for a fix to the Medicare physician fees in a way that would go beyond just freezing the doc payments in 2009 by giving them a 1.1% raise––and getting the money out of PFFS by killing the program in 2011!

Turns out the House Republicans had been feeling enormous heat from the physician lobby, about all other providers looking to establish the precedent that it needs to be the health maintenance organizations (HMOs) that pay to keep the provider payments whole, AARP who long ago decided that the HMO payments need to suffer on behalf of Medicare providers (and gave political cover among seniors for members voting for Medicare Advantage cuts), and a general sense that defending all of these extra payments to private Medicare just isn’t worth it anymore.

The House vote reflects a turning of the tide where even Republicans have made their choice: providers over private Medicare plans that are seen as overpaid for what they do at a time when money is getting more and more scarce in Medicare.

In Battle Of The Health Care Lobbies, It’s Docs Over Health Plans

Who has the strongest health care lobby in Washington, providers or health plans? The 355-59 vote makes that clear: the docs. Docs versus HMOs — not even close.

Once Senate Democrats saw the House vote, the Baucus/Grassley compromise suddenly was shelved. If Republicans would so easily abandon their president in the House, why not in the Senate?

Late on Thursday night, the Democrats brought the House-passed bill back to the Senate for another vote. The House bill differs from the original Senate bill because it also suspends the upcoming competitive bidding program for durable medical equipment — something that has strong bipartisan support. By just one vote, the Senate effort failed on Thursday night to get the needed 60 votes. Senator Ted Kennedy, undergoing cancer treatment in Massachusetts, did not come back to Washington this time, and his vote would have made the difference.

Now what? For the Democrats, the choice was to take the Baucus/Grassley compromise, spare PFFS, and have the fight on better ground in 2009 or play one big “game of chicken” and send the Republicans home to the physicians, who were now facing a 10.6% fee cut in a matter of a few days. The Democrats, emboldened by the House vote and having seen what the provider lobby did to House Republicans, picked option two.

The Democrats are calculating not only that they can get one more vote to get to 60 and put the House bill on Bush’s desk but that they can get to 67 votes in the Senate — a veto-proof majority.

Also impacting the Senate Democrats’ decision to push the issue was the criticism they took from House Democrats during the budget fight last fall. Senate Democrats acceded to the threat of a Bush veto over a bipartisan State Children’s Health Insurance Program (SCHIP) bill, and House Democrats angrily charged their Senate colleagues with giving in too easily on an issue they apparently had the high ground on.

Senate Democratic leader Harry Reid (NV), still smarting from that, had himself another lopsided House vote in favor of a health care bill and didn’t back down this time.

It looks like the Democrats see the big physician fee cut issue as a win-win situation. The way the Dems see it, they can “win” by passing their bill, or they can “win” by letting Republicans incur the wrath of every doctor in America for “putting HMO payments in front of patient care” and the potential for a lot of angry seniors if their physician does what so many have threatened to do: stop taking Medicare patients if the pay cut goes through.

As I travel the country, I am constantly asked, “Would Democrats really risk cutting Medicare Advantage with almost 10 million seniors already in the program?” Any other questions?

On Friday, concluding a breathtaking week, the Bush administration reaffirmed that Bush will veto the House bill if it gets to his desk and also announced that they are administratively deferring the 10.6% physician fee cut for the first ten days of July — apparently in the hope that things can get settled by then, and giving Republicans some short-term relief.

Throughout this debate, I have said that the physician fee cut will not happen — that both Republicans and Democrats are committed to not letting it go into effect. Now I am not so sure. I don’t think the Democrats are going to back down — they have really got the bit in their teeth over this one and think that even a 10.6% physician fee cut really works for them in this election year. I also don’t see Bush backing down on his threat to veto the House bill.

My sense is that the only way to avoid a 10.6% Medicare physician fee cut in July is for Senate Republicans to back down and therefore give the Democrats the 67 votes they need. This means that seven or eight Senate Republicans have to change their minds.

Congress comes back to work on July 7. During the holiday break, Senate Republicans are going to feel extraordinary pressure from the most powerful health care lobbies — the physicians, about every other provider constituency looking to establish a precedent (providers over HMOs), and AARP — giving members enormous political cover with seniors to vote against private Medicare.

Here’s another startling fact. The House bill, as well as the Baucus/Grassley compromise, would defer the physician payment cut only until 1 January 2010. The CBO has just reported that either way, the doctors will be facing a 21% cut on 1 January 2010!

That kind of unavoidable cut can only be dealt with by a fundamental restructuring of — and reduction in — – Medicare physician payments (and we just saw how powerful their lobby is) or cuts to Medicare Advantage that will have to go way beyond PFFS and cut into the heart of the mainstream Medicare Advantage program.

That discussion will take place late in 2009, when Congress will likely have an even larger Democratic advantage with a President Obama (who has already called for $155 billion in MA cuts to help pay for his health plan) or a President McCain who voted against the 2003 Medicare Modernization Act, calling it a “boondoggle.”

In the midst of all this great political theater, it is also important to point out that the Sustainable Growth Rate (SGR) scheme is telling us something by developing all of these automatic physician fee cuts: Medicare’s physician costs are not sustainable, no matter how much money the Congress finds in the various corners of the Medicare program. Ultimately that fact will become unavoidable.

But for now, whatever happens in July, one thing is clear: the tide has clearly turned in the battle over defending extra payments for Medicare Advantage in Washington.

The sky is falling.

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6 Trackbacks for “On Physician Payment, Medicare Advantage Cuts: A Game Of Chicken”

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9 Responses to “On Physician Payment, Medicare Advantage Cuts: A Game Of Chicken”

  1. Christian Hatchett Says:

    You are right. I’m really foolish not to see that physicians and hospitals do, in fact, charge everybody the same price. Silly me. Ok. So, you charge everybody the same and then insurance companies and Medicare adjust the costs by nearly 50% and self-pay patients pay the full amount of what you charge. I see now. I was confused earlier. You see, I was concerned that maybe self-pay patients have to pay at least twice as much insurance companies and Medicare and now that you put it that way, I understand completely. Gosh, I just mixed up ethics and law; charges and payments.

    I really never thought about the medical errors or hospital acquired infections not being caused by physicians until you said something. See, I was mostly thinking about all the deaths that are caused by doctor’s archaic methods of writing prescriptions instead of e-scribing. But, now that you mention it, you’re probably right. Physicians hardly touch their patients or spend enough time with their patients to do too much harm.

    Oh, and when I pointed out how the minimum wage has not been raised significantly in the past ten years, you replied:
    “minimum wage workers don’t have employees who demand raises, ever increasing rents, IT costs, billing companies to pay, hospital previlage fees, skyrocketting liability insurance premiums, etc. So its a poor comparison.”

    You are soooo right. It is an awful comparison. Poor people, who make $15,000/ year only have to worry about the cost of food and gas, where as people who make $100,000+/ year have more important things to worry about.

    You sure are smart and I sure am stupid. No wonder schooling for doctors is so expensive. I know my flattery may hit too close to home for you since you said “comments made on a personal level [should be] be avoided.” But I figure you don’t mid since you made reference to my “utter and complete ignorance” just three paragraphs later.

    Thanks Doctor!

    Thanks.

  2. Arvind Cavale Says:

    In response to Christian Hatchett’s tirade, I must insist that the blog managers insist that some degree of objectivity be insisted upon, and comments made on a personal level be avoided. However, let me specifically counter each of Christian’s allegations.

    “It is true that the AMA rated insurers on how quickly they paid and if they paid according to the agreed to schedule and Medicare was a top performer.” – I haven’t read the AMA’s survey since I don’t belong to that organisation. For more objective “ratings” of insurers I would refer the readers to Athenahealth’s website – this is open to the public and has real time data with comparison to the last year. Medicare comes nowhere close to best here.

    “You didn’t answer my question about how much private insurers pay you for a certain procedure versus Medicare. You only get 50% of what you bill? That is pretty much the norm. You charge an inflated price and then Medicare and private insurers adjust for the allowable amount. Right?” – In our region, private insurers pay anywhere from -5 % to +10 % of Medicare payments. It is however critical to note that Medicare only pays 80% of “allowable” and we are required to submit additional claims either to patients or secondary carriers – this increases our cost to produce claims as well as delays payments (since Medicare almost never relays its payment information to the secondary carriers) by several weeks to months. If Medicaid is the secondary payer, we have to write it off because Medicaid never pays, so we end up with 80% of “allowable”. In contrast, most private payers pay within 14 days (compared to 30+ days with Medicare) and pay the full “alowable” amount. In this case time lost is worth more than the 5% loss in revenue, not to mention the hastle factors. Besides, each private carrier has a Rep we can contact directly in case of dispute; with Medicare, there is nobody – its probably easier to talk to God! Who decides what “inflated amount” is. I really thought you had a thinking head on your shoulders until I read this statement. Anyway, if you contract with an independent contractor for home repairs, who sets the prices? If you or the contractor does not like each other’s quote/counter-offer, each one is free to walk away from the deal. This is exactly what I was talking about when I said I may want to walk away from such a terrible deal. What’s worng with that?

    “I am sure you spend a lot of time and money haggling a price” – Actually, don’t be so sure, because we don’t. Most physicians don’t have that opportunity because its always “take it or leave it” offer. Medicare and insurance just set their rates without any link to actual costs of providing care. There is no “haggling”, which is why the entire insurance/Medicare is a system of official price fixing and does not reflect true capitalism. If physicians were able to offer their services for a fair price, patients would be able to decide what a physician’s service would be worth for him/her, so that true competition would help good practioners thrive and poorly functioning ones would be eliminated from the marketplace. In the current rigged system, you get paid the same lousy amount irrespective of the qulaity of service you would provide. Its like you pay the same for either a Ford or a Cadillac – would such a thing ever occur in other businesses/industries?

    “why don’t physicians charge every patient one fair price, not one inflated price that can be adjusted by some, but not for others” – This is where you show your utter and complete ignorance. We are required by law to charge everybody the same (our standard fee schedule) – this is exactly what happens. But insurers and Medicare only pay what they choose to pay (under the guise of “allowables”) whereas a self-pay patient has to pay the full amount. I sure hoped you should have known that it is illegal for us to charge less for self pay patients.

    “If you give so much charity care and love it ,than why would a 10% cut hurt you so much offend your conscience so greatly?” – The reason is that when I choose to give charity care, it is of my own free will, not forced down my throat by the government or anybody else. Charity done under coersion is called slavery. I thought this was abolished a while ago.

    “And I believe that the American people have gone about ten years with out a hike in minimum wage.” – You believe incorrectly, my friend. Please get your facts straight. I wonder if the blog editors would verify this for us. Besides, minimum wage workers don’t have employees who demand raises, ever increasing rents, IT costs, billing companies to pay, hospital previlage fees, skyrocketting liability insurance premiums, etc. So its a poor comparison.

    Finally, please stop repeating the AMA’s words, because you won’t find any traction with physicians – most don’t belong to it and don’t consider it to represent them. FYI, hospital-acquired infections and errors have multiple causes, physicians being only a tiny component of it. Instead of making sound bites, I suggest you do some reading about these topics – I have already spent years researching and educating those concerned about such matters. And I clean my stethoscope more often than you would care to know, so let’s get back to the topic. I hope that you finally understand why I characterise your beliefs as myths and that you will soon come to realise the validity of my arguments.

  3. Christian Hatchett Says:

    How can you say I am perpetuating myths? Like what? It is true that the AMA rated insurers on how quickly they paid and if they paid according to the agreed to schedule and Medicare was a top performer. You didn’t answer my question about how much private insurers pay you for a certain procedure versus Medicare. You only get 50% of what you bill? That is pretty much the norm. You charge an inflated price and then Medicare and private insurers adjust for the allowable amount. Right? And if a patient is uninsured or under insured they get charged the full price, which is on average 2.5 times higher than what private insurers or Medicare pays. How is that right? It is price discrimination for other industries and there are consumer protection acts preventing such flagrantly unethical practices. I am sure you spend a lot of time and money haggling a price (although some crooks didn’t find negotiating with Medicare via dead doctors IDs so difficult, according to USA Today, but why don’t physicians charge every patient one fair price, not one inflated price that can be adjusted by some, but not for others. Wouldn’t that save money, for doctors too? My ideas are legitimate. Don’t pretend other wise. And just to clarify, I do not support the Advantage program either.

    If you give so much charity care and love it ,than why would a 10% cut hurt you so much offend your conscience so greatly? And I believe that the American people have gone about ten years with out a hike in minimum wage.

    Its odd to see the president of the AMA on “Washington Journal” say that she has never seen physicians so galvanized by anything, as the automatic pay cuts, when 100,000 people die every year because of medical errors and hospital acquired infections. I would think that such an alarming rate of iatrogenic deaths would be of more concern. Oh, and one more question when the last time you cleaned your stethoscope?

  4. Arvind Cavale Says:

    Dear Christian Hatchett: Please open your eyes and get to know the facts. Let me enlighten you a litle. Medicare currently pays less the 50% of what I bill (i.e. it pays less than $ 100 for a $ 200 bill). We have to jump through hoops and spend 5-6 cents to the dollar just to get paid a month after the service was rendered. In my opinion, this is worse than charity care, because when I give charity care (which we do all the time FYI) we don’t expect to be paid.

    By the way, the Senate did us a great favor by holding Medicare payments at last year’s level. This means that Medicare payments stay at 2001 level (since it has not changed since 2001). How many bonuses and salary increases have you had since 2001, I wonder. May be you should consider a pay freeze for 7 years to appropriately understand our situation…I suggest you get your facts straight before submitting your myths in writing. BTW I have never had a BMW even after 14 years in practice, if it makes you any happier…

  5. Christian Hatchett Says:

    Arvind Cavale, I can’t believe you would consider cutting of your Medicare patients because of a 10% cut! Really? And here the rest of America still has the classic image of a doctor making his way through a storm, to make a house call on a sick child, even though you can’t afford to pay. Its really a very sad testament to the motives of modern doctors. You are telling me that if you want $200 for a procedure, but Medicare will only pay $180, that you will deny access to care for Medicare patients? That’s awful. How much less do private insurers pay you than Medicare? The AMA recently rated insurers and Medicare preformed the best. The Medicare program shouldn’t have to subsidize your discounts to private insurers or your new BMW. It looks like health ethics has its price.

  6. Arvind Cavale Says:

    It is now 2.15 pm on July 9th, a few hours before the “freeze” on Medicare claims processing is “unfrozen” and we haven’t heard a thing from our Senators. As a solo practitioner, I will decide tomorrow if I can continue to serve Medicare patients without incurring a loss. Clearly if I decide not to accept any new Medicare patients, it will unfortunately decrease their access to my service, which has been accepted in various circles as the highest quality in the region. So how does “universal coverage” matter if such coverage does not result in better access to quality care? This is what I meant in my earlier post. All those who prescribe universal coverage as a solution must understand this aspect clearly before moving ahead with such ideas.

  7. Neil Gardner Says:

    Arvind Cavale said:

    “So society (including politicians) will have to decide between costs and availability of adequate quality care – I would prefer the latter.”

    I think this opens the door to the real over all system argument over whether the entire system can adequately solve the triangular riddle of

    (1) access for all to
    (2) proven quality care
    (3) at an affordable system expense!

    Remember that if universal coverage was ever to become a fact in America, then access to care providers may well have more to do with number of providers and practice gudelines than cost of care!

  8. Arvind Cavale Says:

    Very appropriate and accurate summary of events. However, this statement brings a frown to my face “Medicare’s physician costs are not sustainable, no matter how much money the Congress finds in the various corners of the Medicare program”. If this seems like a big problem, a more serious problem would be the real time access to care that Medicare beneficiaries will likely face in the not-to-distant future if the SGR formula is not abandoned (just look at Medicaid beneficiaries’ access to care and everyone will get a good reality check).

    So society (including politicians) will have to decide between costs and availability of adequate quality care – I would prefer the latter.

  9. R Lande Says:

    You state:
    “Health plans commonly pass some of these extra payments on to members in the form of extra benefits, which makes these plans very attractive — almost 10 million seniors are now in them.”
    How much of the extra taxpayer money is not going to extra benefits but simply to the profits of these insurers? How many of the seniors who signed up were interested in extra benefits, and how many were confused about this versus the private drug plan? If as the republicans believe, private insurers can be more efficient, then why can’t the insurers show this efficiency by working with the same payments that the government program works with? Why should taxpayer money be diverted into insurance profits when there is a less costly alternative?

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