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Do Medicare And Medicaid Payment Rates Really Threaten Physicians with Bankruptcy?



October 2nd, 2012
by James Rickert

Physicians for years now have claimed that their practices lose money when treating Medicare or Medicaid patients.  Doctors use these assertions to portray themselves as yearning to offer treatment to the elderly or indigent but unable to do so due to economic realities. The specter of bankruptcy is often invoked.  Recent studies suggest that physicians may not fully participate in treating the newly insured Medicaid patients resulting from the Affordable Care Act.

The reasons physicians typically give for such refusals revolve around the notion that accepting new Medicaid or Medicare patients would bankrupt their practices.  Rarely, if ever, are such assertions questioned in the general press.  Doctors regularly employ this argument to forestall any reductions in physician reimbursement.

Are such claims justified, or are they used as a smokescreen when refusing care to some individuals for reasons other than economic survival?  The answer to this question depends on the specialty of the physician.

A History Of Claims That Physicians Lose Money On Medicare Patients

The notion that doctors lose money on their treatment of Medicare patients arises frequently.  Highly paid specialty physicians use it quite commonly.  As far back as 2007, the American Medical Association warned that, due to an anticipated 10 percent cut in physician reimbursement under the Sustainable Growth Rate formula, many physicians would be “forced to limit the number of new Medicare patients they can treat.”  Note the word “forced”; this suggests that reimbursement cuts would necessitate limiting Medicare or Medicaid patients to save physician practices from insolvency.

In 2012, Frank Kolicek, the President of OrthoIndy, one of the nation’s largest orthopedic groups spoke more directly about declining reimbursement: “Something has got to give because it’s becoming more and more difficult for us to keep our practices afloat.”  He stated further, “If you look at surveys from medical societies, physicians are already restricting access to Medicare patients because they lose less money by leaving the slot empty than taking the Medicare patient.” Recently, the National Orthopedic Leadership Conference organized visits by orthopedic surgeons to members of Congress.  During these sessions, David Schlactus, the president of the American Association of Orthopaedic Executives, told legislators, “We’ve measured the revenue and costs associated with treating Medicare patients.   After we cover our overhead, the doctors get just $8 per hour.”

Examining The Evidence

Is there any truth to the claim that specialty physicians, such as orthopedists, lose money treating Medicare patients or make just $8 an hour to do so?  The answer is easy to uncover using publicly available data.

Orthopedists. A 2011 survey revealed that orthopedists enjoy a median salary of $514,000.  This is the net physician income after office overhead has been paid.  Overhead costs averaged 46.3 percent for orthopedic surgeons in 2000  and accounted for 45 percent of revenue in 2012.   (This is slightly better than the 50 percent overhead that my practice averages.)  Therefore, the gross practice revenue per orthopedist currently is just over $934,000 with an average overhead cost of $420,000. According to data provided by the American Academy of Orthopaedic Surgeons, orthopedic patients by payer are as follows:  Medicare/Medicaid—31 percent; the uninsured—17 percent; commercial insurance—34 percent; and other sources, such as worker’s compensation—18 percent.  Essentially, half of the average orthopedist’s payment sources are commercial insurance of some type, one third are Medicare or Medicaid, and one sixth is self-pay; this last category—patients paying for their own care—typically contributes only a small amount to practice revenue.

We can test the claim that physicians lose money on their treatment of Medicare patients or make only $8 an hour treating such patients by substituting Medicare reimbursement for the commercial reimbursements to a doctor’s practice.  Would orthopedists truly make $8 an hour or would their practices be bankrupt if all payers used Medicare’s reimbursement schedule?  Remember, this is the articulated position of much of the orthopedic community and a common defense against reimbursement reductions.

According to a comprehensive analysis by the consulting firm, Milliman, in 2008, on average, commercial insurance paid 130 percent of Medicare’s reimbursement, or, seen a different way, Medicare paid 78 cents for every dollar of commercial reimbursement for physicians’ work.   If we reduce the $467,000 in commercial insurance payments to a typical orthopedist’s practice by 22 percent to reflect lower Medicare payments, we obtain $364,000.  Adding this back to the Medicare/Medicaid and self-pay portion of practice incomes yields a new gross revenue figure of $831,000.  This would be the average orthopedist’s practice income if Medicare’s pay scale were universally used.

Taking out $420,000 in overhead, we see that an orthopedist surviving solely on Medicare reimbursements would receive $411,000 in take-home pay, or approximately $100,000 less than we actually enjoy with the current mix of insurance payers.  While I agree that this is a steep reduction, it is abundantly clear that such reimbursement would by no means bankrupt a practice or yield an hourly wage anywhere close to $8 per hour.  Therefore, such statements are gross hyperbole.

Family Practitioners. Looking now at a typical Family Practice, the average family practitioner (FP) earns $189,000 per year, obviously much lower than the typical orthopedic surgeon.   A typical FP’s overhead is 60 percent of the practice gross income, with a gross practice income of $472,000.  If we again substitute Medicare reimbursement rates for commercial insurance payments, the average FP’s new gross revenue would be $420,000.  After paying overhead, the net income for the doctor would be $137,000.

This level of income would not bankrupt the medical practice.  However, unlike payment cuts for specialty physician who would still earn close to half a million dollars from all-Medicare-and-Medicaid practices, further reimbursement reductions to general practitioners would be very challenging, especially considering the long hours that all doctors work, educational debt, and the costs of new practice infrastructure.

Therefore, the argument that further cuts to Medicare or Medicaid might bankrupt a physician’s practice is significantly more compelling when coming from primary care doctors.  These physicians will require higher reimbursement to achieve the laudable goal of developing their practices into medical homes, and payment reform efforts must address their needs.  However, for procedural specialists, like orthopedic surgeons, claims of impending bankruptcy are empty rhetoric.  Specialists’ refusal to treat Medicare or Medicaid patients is a matter of personal choice—one that reveals personal priorities; it is nowhere near the question of survival that is often used to cloak that choice in false and obscuring rhetoric.

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10 Responses to “Do Medicare And Medicaid Payment Rates Really Threaten Physicians with Bankruptcy?”

  1. Blob Says:

    I can’t believe someone referred me here a year later: Your premise is incorrect, and ultimately reiterated incorrectly. If the only patients were Medicare patients, the income would not support the overhead (31 percent of 1,000,000 or $300,000). If you add the medicaid rate, it is absurd; therefore the practice is and needs to be supported by the “overpayment” of private subsidies. Just like Obamacare, government subsidies for the inadequate coverage of the cost of goods, private insurance bears the cost. If you think $60 per RVU is helpful, as you know it is built into post op care for three months (nine months of pregnancy), then count up your total RVU’s and back calculate your hourly wage. Hmmm. Oh and you get 50 percent of that prior to taxes – sounds like Stagehands in NYC make more. If only I could collect only the Overpriced Private insurance…sounds like concierge medicine.

  2. dpearson Says:

    creativegirl is correct about money being taken from doctors retroactively several years later and about patients not paying. I would like to add a comment about insurance of any kind eligibility – Check for eligibility to insure payment, they say? Every insurance company has a disclaimer on their eligibility site that says that if they say the person in front of you has insurance it does not mean that they really have insurance. Why on earth are doctors putting up with that?

    Even with these problems that all doctors have I say try being a pediatrician. We have these problems and we drool over Medicare reimbursement rates which are in general 140% greater than ours. Medicare rate cuts are not taken but Medicaid cuts happen. Our practice gross is going down every year while seeing the same number of patients.
    RVUs for a child’s physical are much lower than for an adult because – why? (I really don’t understand this part – there are a myriad of screenings and tests you are responsible for that are “bundled”). We are overrun by form requests from every kind of institution out there. (I think we should be able to charge the schools for the paperwork they generate for us.)

    Parents love their children dearly, but think your office should do everything for free and that they have no responsibility to understand their insurance or lack of it. The AAP is always about “the children,” but never about what they can do for the pediatrician, and their website is all about the money, as opposed to the AAFP website. I have two pieces of advice in this age of Medical Home (which translates to more unpaid work for the doctor) for medical students: 1) don’t become a pediatrician, and if you do, 2)never take a capitated plan.

  3. JohnLynch Says:

    How refreshing – an American medical specialist who isn’t genetically predisposed to whine about his lot in life. Congratulations!

    Specialists in the U.S., of course, make roughly double what their peers in other developed countries make and also about double what their primary care counterparts make here. Yes, they have more intensive training and higher malpractice costs, but these are captured by your overhead calculations that leave them with net incomes reflecting these lucrative disparities.

    I did a similar comparison in my book on Obamacare (http://ourhealthcaresucks.com/obamacare-the-good-the-bad-and-the-missing/) based on a 2007 survey that showed the following:

    All physicians $273,000 avg net income $240,000 at 100% Medicare rates

    Cardiologists $483,000 avg net income $450,000 at 100% Medicare rates

    Radiologists $488,000 avg net income $390,000 at 100% Medicare rates

    While no one likes to take a pay cut, it’s pretty clear that we’ll never get our medical spending under control unless and until these incomes are reduced. And it’s not just physician incomes, but their ripple effects. Every dollar of income to specialists generates $3-4 dollars in hospital or ancillary service costs.

    Until your colleagues accept responsibility for milking our fee-for-service system for all it’s worth, acknowledge that it’s no longer sustainable, and take leadership roles in reforming the corrupted RUC process that perpetuates these unsustainable physician payments, I’m afraid voices like yours will be lost in the wilderness.

    Please know, however, that many of us appreciate your willingness to stick your neck out and incur the wrath of far too many of your colleagues. If only more of them would follow your brave example.

  4. Jean Antonucci Says:

    Dr Rickert’s article is challenging, on target, and well done. Creative girl, whose role in health care is unclear, comments on the real difficulties that all providers face. The burden of billing, coding, and administrative trivia that falls on family docs is currently close to unmanageable — and sometimes imposed, may I say, by specialists who begin a request for an appointment with the 20th century phrase, “Do you have our form?” disregarding the fact that my EMR cannot populate their form. Yet we make 20% or less!

    Unfortunately, as a rural, solo, self-employed family doc, who has superb quality data, I cannot make close to the so-called average salary of $189,00. Not close to even 20% of what orthos seem to be taking home. Yet we know that primary care, when done well, lowers costs and improves outcomes (work of B Starfield).

    For many years this country has forced primary care to work with two hands tied behind its back, crushed in a myriad of ways, struggling to offer the comprehensive longitudinal first access care that we do well and that benefits patients. Hearing that my colleagues in orthopedics may make a half a million dollars, when I cannot make 20% of that, does call for speaking out and examining the path to change. Even if malpractice risk is factored in, looking at average costs around the country, an orthopedic doc comes out at $100,00 a year, every year, ahead of the highest earning family doc. This kind of disparity does not go unnoticed by medical students who head into specialties and leave the country with a dearth of what it needs most — primary care. If we cannot solve this disparity ourselves, others will do it for us

    If we are to lower costs and improve outcomes int this country , if we are to put patient care at front and center and reduce barriers to primary care, we must realize that times in primary care are extremely desperate. Somehow or other we need to be willing to not get our backs up nor get ugly, and be willing to look openly at what has gone so badly wrong. Dr Rickert’s courageous thoughtful work should begin a dialogue. Otherwise when one of YOU needs primary care the lights will be out. and no one around to help.

    Kudos to Dr Rickert for beginning a difficult conversation!!

  5. HarrisMeyer Says:

    Interesting article. Readers might also be interested in reading my recent Medscape article on physician compensation (free login required)
    http://www.medscape.com/viewarticle/771433

  6. James Rickert Says:

    Thanks to Mr. Levine for his comment. I also used MGMA’s data. Please click on the link describing physicians’ reimbursement. Orthopedists enjoyed net pay of $514,000 at the top of our payment system while FPs earned $189,000 at the other end of our payment scales. Medicaid payments, which are often about 30% lower than Medicare, were evaluated in the analysis; they were included in physician reimbursement figures; the only variable changed was substituting Medicare reimbursement for commercial insurance. This was done to see whether docs could keep practicing under such a scenario. I know that I could earn a very good living by just treating Medicare and Medicaid patients, but, as an orthopedic surgeon, I’m lucky to be near the top of reimbursement schedules.
    Accounting practices that include, among other things, physician earnings as an expense can make it seem like medical practices are not making any money. For instance, if a practice pays all of its physicians a million dollars per year, they can prove that they can’t stay afloat on Medicare reimbursements, but the doctors are actually being paid quite well.
    I agree that money is tight for FPs and sometimes for multispecialty groups with a large number of generalists. The most obvious solution to this problem is to increase the value of RVUs for evaluation and management codes, even if, due to budgetary constraints, it is necessary to lower the RVU rate for procedural specialists like me.

  7. stlevine Says:

    As someone who has personally conducted several of those physician surveys, I find your logic specious and your math a bit off. First of all, you conveniently avoid talking about Medicaid payments, which in Texas are about 30 percent less than Medicare’s.

    This is from our Healthy Vision 2020 document (http://www.texmed.org/healthyvision if you want to read more):

    The Medical Group Management Association’s (MGMA’s) data show that, for 2010, most physician groups were operating on razor-thin margins. MGMA each year compares physicians’ office costs and revenue in dollars per unit of service. (To simplify the accounting for the thousands of different types of services physicians provide, one unit of work is measured in relative value units or RVUs. This is a Medicare measure of the units of service produced. One unit of work is approximately the value of the simplest office visit for a new patient. Physician compensation is 30 percent of the total cost.) In 2010, physician-owned multispecialty groups brought in an average of $59 per unit of work while spending $60 to keep their clinics open, for an operating loss of $1 per unit of work. Family practice groups brought in less ($46 per unit of work) but only spent $45, for an operating profit of $1 per unit of work.

    To stay open, any business must collect enough revenues to cover costs. Especially for patients covered by government insurance programs, this isn’t happening for physicians. MGMA data show that Medicare pays only 61 percent of physicians’ average costs. Medicaid payment per unit of work varies, but for most services, Medicaid payments cover less than half of the average cost to provide services. Faced with losses on every service delivered, physician practices are often forced to limit services to Medicare and Medicaid patients if they cannot make up the losses elsewhere. Physicians in a number of Texas communities say they have no other options but to move or retire.

  8. taokon Says:

    Your conclusion is clearly not true for oncology. Just examined a 20-oncologist practice that found the following relating to Medicare. After paying all costs of overhead and staff there was a little over $2,000 (annually) to pay 20 oncologists. If the practice was entirely covered by Medicare it would be bankrupt. Changes in Medicare payment to oncology has had 2 pronounced impacts since 2005. First, there has been tremendous consolidation, marked by closing cancer clinics and consolidating back into hospitals and health systems. This is driving up costs for patients. Read the series of articles recently run in the Charlotte Observer to get the facts. Second, Medicare reimbursement changes for cancer drugs is the cause of drug shortages. Read the Bloomberg report on that released Monday.

  9. James Rickert Says:

    Thanks for your comment. I am a practicing orthopedic surgeon myself, and I personally know several hundred more.

  10. creativegirl Says:

    You leave out a bunch of facts that do not support your argument. 1) You assume that all other insurances pay readily, when in fact, most doctors have to hire 2-3 employees to submit and resubmit, recode, resubmit to get reimbursed. 2) You also assume that most patient balances (after-reimbursement) are easily collectible, which is also not the case. Many patients, who owe a portion of the bill assume that “rich” doctors can handle it, so they don’t pay the balances on their accounts. I know doctors have a real problem chasing this uncollected income, which also eats into the bottom line. 3) Orthopedics liability is way more expensive as far as medical malpractice than primary care physicians 4) Medicare routinely slashes reimbursements retroactively (sometimes 4 years later!!!!), that amount to tens of thousands of dollars. No other business in the world has to wait sometimes a year to get paid, then be told 4 years later, oh, we over paid you so we will now debit your account for $20,000. Trying to be a doctor in this country is ridiculous. Articles like this don’t help. Did you even ask any orthos before you wrote this?

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