'Huge hit' to MD income likely if Medicare 4.5% cut takes effect

Physician Compensation Report, Dec, 2003

Many Chicago-area physicians in private practice probably will take a "huge hit" to income--a reduction of as much as 13% to 15% from 2003 to 2004--if Medicare physician reimbursement drops 4.5% as CMS has ordered, says a practice consultant to several hundred physicians there.

The overall income decline stems not only from the Medicare cut, however, but also from local factors, the most important of which is malpractice insurance rates, cautions Chris Zaenger, president of Z Management Group in Barrington, Ill.

Republican congressional leaders agreed Nov. 15 on the main principles for a Medicare reform bill. Participants in the congressional conference committee trying to hammer out the bill have told physician side lobbyists that the House provision, overriding the CMS cut and providing a 1.5% physician reimbursement hike in each of the next two years, is one of the agreed-upon provisions, says Aaron Krupp, an MGMA government affairs representative.

However, many uncertainties remain for the Republican proposal: bringing Democrats--excluded from much of the bargaining--on board; an opinion from the Congressional Budget Office (CBO) on whether the bill is within overall cost targets; development of precise legislative language on newly negotiated points; and final passage by both houses of Congress without a Senate filibuster.

Avoiding the Jan. 1, 2004, effective date of the CMS physician fee cut requires enactment of the bill this year. Also, if the CBO finds that the bill exceeds budget targets, Congress could hold physician fees to no increase or an increase smaller than 1.5%.

Krupp says that a separate bill on physician fees, if the overall Medicare bill does not go through this year, is extremely unlikely because one such bill was enacted early this year.

$20,000 Income Cut Possible

The following factors lead Zaenger to predict that many Chicago internists in solo and small-group practices--who earn on average about $146,000 per year, close to national median levels, he says--could see their income fall about $20,000 next year.

* Direct impact of Medicare cut. If an internist has a typical ratio of about one-third of revenues from Medicare, the reimbursement cut would result in an overall revenue decline of 1.5%.

* Bottom-line impact of Medicare cut. Since most internists have overhead of about 55% of revenues, the Medicare cut produces a net income reduction of at least 3.3%.

* "Spillovers" to commercial reimbursement rates. Commercial reimbursement often is pegged to some percentage of Medicare reimbursement or to the RVU conversion factor itself, Zaenger says. However, he notes, many of these links to Medicare rates occur with a lag, or are tied to a Medicare rate of several years ago, or even use Medicare rates from regions outside Chicago. Eventually, if the 2004 Medicare cut takes effect, there will be fairly widespread "spillover" reductions in commercial reimbursement rates, he predicts. Because of overhead, commercial revenue cuts will result in sizable net income losses for physicians.

* Malpractice premium hikes. After roughly doubling in the last two years in Illinois--one of the hardest hit of the states that AMA says have a malpractice "crisis"--malpractice premium rates there are rising another 30% to 35% in 2004. Zaenger says this factor is even more important than the possible Medicare cut in reducing physician income. One doctor client who called Zaenger about the doctor's malpractice rate hike for next year was actually crying; "that never happened to me before," Zaenger says, in his career as a practice consultant.

* Other expense increases. Staff pay continues to rise, as do medical supply costs and many other items.

"We are very close to a breaking point" for many physicians, Zaenger says. The impact of a Medicare cut would be greatest on specialists in fields with high percentages of Medicare revenues, such as ophthalmology, urology, cardiology and geriatrics, as well as on internists and family practitioners with similar revenue mixes.

As for solutions to this income loss, Zaenger says doctors are looking at "concierge-like fees" for better patient access, ancillary services, and revenue-sharing deals with hospitals or other organizations when legal. These solutions involve capital investment, he adds, and bank financing is becoming more common for doctors.

Contact Zaenger at (847) 382-6000 or czaenger@zmanagement.net.