Interactive: The Problem with Medicare Spending — and the Proposals to Fix it

For the last decade, the U.S. government has been spending more on Medicare, the federal health insurer for the elderly, than the current funding formula allows. In order to get back in check, Congress would have to drastically cut doctors’ reimbursement rates, which physician groups say would severely limit the availability of medical care for seniors. Instead, lawmakers have repeatedly passed legislative Band-Aids to increase or freeze reimbursement rates, each time including provisions to recoup their overspending with future cuts.

In January 2012, if lawmakers don’t approve yet another Band-Aid or permanently change the funding formula, physicians’ Medicare reimbursement rates will plunge an anticipated 29.4 percent, which physician groups call devastating. Use this Trib interactive to understand the budget hole federal lawmakers have dug, Texas physicians’ response to the problem and the cost of varied proposals to change how Medicare is funded.

Under the current Medicare funding structure, lawmakers use a formula to control costs. Depending on changes in Medicare enrollment, the cost of Medicare in the previous year, and the rising cost of inflation, lawmakers set a target spending level each year. The amount physicians are reimbursed for different types of services is then calculated depending on the target spending level.

If spending exceeds the target level, the Medicare funding formula requires physician payment rates to be reduced in subsequent years to recapture the costs. When Medicare spending first rose above the target level in 2001, lawmakers reduced physicians' payment rates by 4.8 percent.

Every year since, spending has exceeded the target level. And Congress has repeatedly overridden the requirement to reduce rates. These overrides sought to prevent doctors from opting out of Medicare, accepting fewer Medicare patients or limiting their services to the elderly.

Two legislative methods — called the clawback and the cliff — have been used a total of seven times to delay reductions to physicians’ payment rates. Although different, both methods require future reductions in reimbursement rates in order to recoup costs above target spending set by the funding formula.

In 2004 and 2006, lawmakers used clawback legislation, which increases payment rates briefly, and then reduces rates by the maximum amount allowable under the current funding formula in future years until the costs are recovered.

When the 2006 clawback legislation expired in 2007, lawmakers knew the method could not be used a third time without extending the time period necessary to recoup the costs beyond a 10-year budget window. So they opted to use the cliff method, which was given its nickname because it allows payment rates to drop below the maximum allowable amount under the Medicare funding formula when the cliff legislation expires. Unlike the clawback legislation, when the cliff legislation expires, future reductions to payment rates are based on the spending level of the year the legislation was enacted — not the spending level of the previous year.

Lawmakers have passed cliff legislation five times since then — meaning when the current legislation expires, rates will drop to below 2007 rates — or 29.4 percent lower than current rates. A cut that deep would not account for the rise in inflation, increased costs of new services and technology or increased enrollment in Medicaid that has occurred since 2007.

According to a survey of Texas physicians conducted by the Texas Medical Association in August 2011, only a third of Texas doctors would continue to accept Medicare clients if lawmakers approved those cuts. More than half of Texas doctors said they’d consider opting out, and 10 percent said they’d definitely opt out of Medicare.

Doctors surveyed said that under current Medicare payment rates, it is already difficult to pay staff and cover the administrative costs of running a practice. One doctor said he’s considering dropping health insurance for his employees. Another said that because some private insurance companies use Medicare payment rates as benchmarks for reimbursement, whether a physician opts in or not, the costs of running a private practice is becoming unsustainable.

The Congressional Budget Office projected Medicare spending under a variety of proposed funding options. The options include the cliff and clawback methods, which lawmakers used in previous years to temporarily halt reductions to physician payment rates. Other proposals would reset the current funding formula, so the federal government wouldn’t be required to reduce payment rates in order to recoup spending above target levels. Still other proposals would permanently change the funding structure of Medicare by freezing current rates or setting consistent increases. Variations on the proposals shown below and a full explanation by the Congressional Budget Office can be found here.

Cliff: Option 1 — Freeze current physician payment rates for 2012-13, then cut physician payment rates by 38 percent in 2014.

Cliff: Option 2 — Update physician payment rates by the cost of inflation of medical expenses for 2012-13, then cut physician payment rates by 39 percent in 2014.

Clawback: Option 1 — Freeze current physician payment rates for 2012-13, then recoup spending above the target level by reducing rates by the maximum allowable amount over a 10 year period.

Clawback: Option 2 — Update physician payment rates for inflation of medical expenses for 2012-13, then recoup spending above the target level by reducing rates by the maximum allowable amount over a 10-year period.

Reset Spending Targets — Reset the target spending level at the amount spent in 2010, then continue with the same funding formula.

Fiscal Commission's Policy Recommendation — Freeze current physician payment rates through 2013, then reduce physician payment rates by 1 percent for 2014 and reset the spending target in 2015 at the 2014 spending level.

Freeze physician payment rates through 2021 — Freeze current rate through 2021.

Update for medical inflation through 2021 — Update physician payment rates by the cost of inflation of medical expenses through 2021.

Increase physician payment rates 2 percent through 2021 — Increase physician payment rates 2 percent annually through 2021.