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Legal Analysis Shows CMS has Discretion to Fix Errors in Medicare Physician Payment Formula

May 13, 2002

(Washington, DC): The Center for Medicare and Medicaid Services (CMS) has the discretion to substantially change the formula used to calculate Medicare physician payments and to correct for past projection errors, according to a legal analysis performed by Terry S. Coleman, JD, former Health Care Financing Administration (HCFA), Deputy Administrator for the Bush Administration and HCFA Chief Counsel for the Reagan Administration. The analysis was commissioned by the American College of Physicians - American Society of Internal Medicine (ACP-ASIM), the American Medical Association, and other specialty and health professional societies.

If left uncorrected, the faulty reimbursement formula, called the Sustainable Growth Rate (SGR), would by 2005 cut physician Medicare reimbursements nearly 20 percent compared to 2001 payments.

"The legal opinion clearly shows that CMS has the discretion and authority to make two essential changes in the assumptions it has used in calculating the SGR," said Sara Walker, MD, MACP, president of the ACP-ASIM. "These changes would substantially reduce the cost of replacing the flawed formula with a more fair and accurate method based on input prices."

The Medicare formula uses, among other things, the growth in the nation's Gross Domestic Product (GDP) to calculate physician payments. The legal analysis indicates that CMS could restore money taken from physician payments due to inaccuracies in previous projections involving the GDP and enrollment in Medicare+Choice.

CMS has argued that it lacks the authority to correct the errors by increasing future payments, even though it admits that the mistakes lowered payments to physicians by more than ten and a half billion dollars over the past four years. CMS has also argued that because of other mistakes made by the agency in tracking expenditures on new codes, it must lower future payments to recoup such mistaken overpayments.

"Simple fairness dictates that if CMS plans to lower future payments to doctors to correct administrative mistakes made by the agency, it should also increase payments to correct even bigger mistakes that underpaid physicians for their services," said Dr. Walker.

The legal opinion states that covered prescription drugs provided "incident to" a physician service should be removed from the definition of "physician services" in the SGR. CMS has consistently indicated that covered prescription drugs are not physician services, except for the narrow purposes of calculating the SGR.

The analysis argues that CMS should be consistent and remove prescription drugs from the SGR, since they have never been defined as physician services by the program for other purposes. Drugs are not reimbursed under the Medicare physician fee schedule, instead they are paid under a separate methodology. Yet expenditures on such drugs are counted when Medicare determines through the SGR what the update will be for physician services.

"The costs of Medicare-covered drugs are increasing at a much faster rate than physician services," explained Dr. Walker. "Including such drugs in the SGR will penalize doctors for drug cost increases that lie outside of their control. This is simply unfair."

If CMS agreed to both of these changes, it would reduce the cuts pending under the current flawed formula. It will also dramatically lower (by more than half) the total estimated cost of enacting legislation to replace the flawed SGR with a method that more accurately reflects the costs of providing services.

Dr. Walker pointed out several clear benefits of correcting the errors in the current flawed SGR formula.

  • The drastic cuts in payment under the current flawed formula will be reduced.

  • Congress will have to spend far less money to enact an immediate and long-term solution to fix the cuts resulting from the flawed SGR formula.

  • Congress will be subject to less pressure to look for savings in other Medicare program expenditures to fund a solution to the physician payment problem.

  • Most importantly, correcting the errors will halt deterioration in access to care for Medicare patients.

"If CMS declines to make these changes, the legal opinion shows that it is not because they lack the legal authority to do so, but rather the will to act," said Dr. Walker.

The American College of Physicians-American Society of Internal Medicine is the largest medical specialty society and the second largest medical association in the nation. Membership comprises more than 115,000 physicians and medical students.

Jack Pope, (202) 261-4556, jpope@acponline.org

Page updated: 11-04-03

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