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MedPAC's 2008 Report

I have been reviewing the Physician chapter of MedPAC's newly released Report to Congress http://www.medpac.gov/documents/Mar08_EntireReport.pdf.  There are a number of significant findings and recommendations, notably - again - aimed at the excessive growth in imaging. The growth rate in High Tech Imaging (MR, CT) has slowed considerably in the 2005 to 2006 year compared to prior years, particularly Brain MR. Importantly, MedPAC attributes this slowing to the actions taken by Congress aimed at same, such as the DRA.

An analysis of the Report and its recommendations for imaging give considerable insight into what future legislation might look like and MedPAC has an excellent batting average when it comes to getting its recommendations adopted.  Page 96 reminds one of the fact that the practice expense component of imaging will decline (by a total of 9%) thru 2010.  More significantly, MedPAC is now suggesting that the 50% utilization assumption for physician-based equipment be increased - a provision that was in one version of last year's SCHIP legislation - which would have a dramatic downward effect on technical component revenue. A short example helps illustrate the dramatic effect this provision could have.

For MR, the technical component represents about 80% of the global fee. That technical component assumes that the equipment is being used 50% of the time.  Last year's failed SCHIP legislation would have raised that 50% to 75%. Assume the fixed costs of an MR are $300,000 per year and expected volume at 50% is 1000 cases; this nets a reimbursement of $300 per case. If the volume assumption is raised to 75%, the expected cases are 1500 which nets a reimbursement of $200 per case, a drop of 33%!

Next, the Table at the top of page 100 and the recommendation immediately below it are what drive reimbursement decisions and therefore potential future cashflow growth rates. Bottom line is that the indicated 2.6% estimated increase in costs leads to a 1.1% increase in fees because of increased utilization; thus, increased utilization is offset by decreased fees because technical component costs are recovered over a higher volume - that is what also underlies the recommended change in the utilization assumption for physician-based equipment.

Finally, what might be considered an obscure observation if one was not familiar with MedPAC's successful track record also appears on page 97. Here, there is a suggestion that those portions (equipment and supplies!) of the practice expense component which do not vary geographically be dropped from the geographic adjustment! This could lead to considerable cuts in high cost areas such as Florida, New York, Boston, San Francisco and the like.

MPFS Proposed Rule changes to Stark

Imaging remains under attack on all fronts it seems. CMS suggested in the 2008 Proposed Rule that it may limit the applicability of the in-office ancillary services exception and prohibit use of per click mechanisms where physician-lessors of equipment also refer to the facility-lessee; perhaps more significant, so-called "under arrangements" structures would be constrained or eliminated.

Legislation currently in Congress would replace the current single conversion factor with six - with a lower one for imaging! - and pay for the SCHIP expansion with further reductions in imaging reimbursement.

All of these potential changes increase the risk of future cashflow from Medicare-sourced procedures and need to be considered in an appraisal or valuation.

Forthcoming Article

In the next edition of Financial Valuation and Litigation Expert I will have an article summarizing the changes in ASC payments by Medicare, the Medicare Physician Fee Schedule Proposed Rule and most importantly, CMS' hinted changes in the Stark law regulations, which will likely have significant impact on discount rates and/or cashflow forecasts for the affected sectors.

2008 ASC Final Rule

CMS published the Final Rule for the new Ambulatory Surgery Center payment system pegged to the Hospital OPPS rates, using a factor of 67% versus the 62% contained in the 2006 Proposed Rule.  Although the payments will be somewhat better than originally thought, the 5% spread is not indicative of the true difference because certain required adjustments have not yet been made.  One big winner in the Final Rule was the payment for cataract surgery, which was set at 8% higher than in the proposed rule and nearly 4% higher than the present payment.

Despite being pegged at the outset to OPPS rates, future increases in ASC rates will be based on the CPI for Urban Consumers while OPPS rate increases are based upon a separate "market basket" of cost inputs for hospital outpatient departments.  The market basket is usually higher than the CPI.

The new rates were supposed to be implemented using a 50-50 split with the old rates in 2008 and full implementation in 2009.  The Final Rule changed this to a 4-year phase-in using a 25-75, 50-50, 75-25 schedule.  Thus, those procedures who would lose under the new payments will lose less and those who would benefit will benefit less.

2008 Proposed Rule for Medicare Physician Fee Schedule

In July, CMS published the 2008 Proposed Rule for the Medicare Physician Fee Schedule reflecting a -9.9% negative update in the Conversion Factor, which would result in a value of $34.15 versus the $37.90 that has been in place for the last three years.  One of the surprises was that anesthesia received a 14% increase in relative value primarily due to a reevaluation of work RVUs.  Because of the budget neutrality requirements of the RVUs, this results in decreases in the RVUs for most of the other service areas paid thru the Conversion Factor.  Thus, most specialties will see a decrease in per unit reimbursement of greater than 10% unless Congress acts yet again to eliminate the cut.

MEDPAC 2007 Report

Unfortunately, MedPac did not offer us much insight this year on the physician side, limiting their recommendations to:

The Congress should update payments for physician services in 2008 by the projected change in input prices less the Commission’s expectation for productivity growth.

There are indications in the Report that the growth in high tech imaging slowed in 2004-2005 from its recent historical levels. Next year's data should be particularly interesting to see if the reductions in Technical Component for same day scans and the DRA changes reduced or increased utilization. Increased utilization often comes from reduced fee per unit.

Physician practice expenses were expected to grow at 3.1%; including physician compensation, the increase is 3.0%. Physician productivity growth is estimated at 1.3%, suggesting an increase in the fee schedule of 1.7%. However, there does not appear to be any money for this and the conversion factor has been flat for three years now.

Independent Diagnostic Testing Facilities

CMS has withdrawn the announced changes.

Independent Diagnostic Testing Facilities

CMS issued guidance January 26, 2007, that could have a dramatic impact on independent diagnostic testing facilities (IDTFs) and other providers. Although there are a variety of changes scheduled to be implemented at the end of February, the most significant one appears to be that shared facilties - e.g., where a provider group rents the facility for a specified number of days per week - would be prohibited. This change could be aimed at leasing structures intended to nominally fit into the In-Office Ancillary Services exception under the Stark regulations.

This is but one more strategy aimed at reigning in the explosion in high-tech imaging utilization and is another example of what the panel in the BVR February 8 Teleseminar highlighted: the government giveth and taketh away. When valuing any health care provider, rapid increases in utilization should serve as strong evidence that cutbacks are in the offing.

Coding and RVUs

The changes in the work RVU component of the RBRVS scheduled for implementation this year can generate a dramatic increase in the revenue for a given practice; a lesser effect can occur from the practice expense RVU changes. For instance, CMS estimated that Internal Medicine practices would see an average increase of 5% in 2007 as a result of the increased value of office-based E&M services, among others. The purpose of this post is to emphasize that the ACTUAL increase a practice can expect cannot be determined without first doing a basic CPT code analysis - as Frank Cohen and I indicated in our recent (Fall 2006) CPA Expert article.

The typical IM practice in the Medicare database has about 30% of its established patient visits coded Level 4 and 55% coded Level 3. The increase in the value of the Level 4 code, however, is about 18% while the Level 3 increase is about 23%, using the fully phased in PE RVU values. This is dramatically different than the 5% estimate by CMS! A practice using primarily these codes and not providing in-hospital services (such as where a hospitalist is used) will see a very different change in revenue than the generic 5%.

Conversion Factor

As reported in Modern Healthcare's Daily Dose, the Medicare Part B Online and the AHLA Heath Lawyers' Weekly, among others, it appears that House and Senate Conferees have agreed upon legislation that would overturn the 5% cut in the conversion factor and substitute a 1.5% increase for 2007, perhaps effective July 1, 2007, for those practices that submit quality data.