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Do Medicare And Medicaid Payment Rates Really Threaten Physicians with Bankruptcy?
Posted By James Rickert On October 2, 2012 @ 10:23 am In Health Professionals,Insurance and Coverage,Medicaid and CHIP,Medicare,Payment Policy
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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