Making Medicare Work

How practices are dealing with cuts in the Medicare Physician Fee Schedule

New West Physicians in Denver has been making money treating Medicare patients for the past three years. How? By tightly managing capitated Medicare HMO patients instead of accepting seniors who go the fee-for-service route.

The 47-physician group accepts only Medicare+Choice patients. All of its Medicare contracts are at-risk -- that is, it is paid a per-patient, per-month fee that averages 10 to 20 percent of the Medicare fee schedule per procedure. If the physicians manage patient treatment within that amount, they don't lose money. Even better, if they provide quality care for less than the set amount, they share in a bonus.

New West adopted the plan specifically in response to problems with fee-for-service Medicare. "It was the fee schedule. It was the coding," says CEO Ruth Benton. "Accounts receivable averaged six months. We just couldn't live with that and then get substandard pay." She adds that "the physicians were reluctant to disrupt care, but we just couldn't afford it."

"We consider it vital to our mission to be able to take care of as many members of our community as we can," adds Ken Cohen, MD, medical director for the group. "That's certainly true for seniors, who tend to be financially challenged. ... [Risk] lets us keep as many patients as possible. ... It wasn't the ideal option, but it works."

To switch its patients to risk HMOs from standard Medicare, the group waged an eight-month campaign to educate their patients about the switch and encourage them to enroll in HMO plans. After three letters to patients, each approved by the local office of the Centers for Medicare and Medicaid Services (CMS) and open houses at, each of New West's 16 locations, the practice maintained 95 to 100 percent of its Medicare patients, with slight variations by location.

"The patients wanted to know from their physician, their trusted source, what they were doing and why. Most of them took the leap into an HMO and stayed with us," says Benton.

"Losing people was the hardest part," Cohen says of those who didn't switch over. The patients who didn't adopt an HMO risk plan typically either had medical benefits provided by a former employer that did not offer an HMO as an  option, or live in an area where HMOs don't operate, Cohen explains. He  adds that there are potential patients just a mile or so away from one of his clinics that can't come in because they live in a ZIP code that the HMOs don't cover.

Benton firmly believes that those patients who could and did choose an HMO benefited from the change. "They have an advocate in the primary-care physician as they go through the medical maze. They get coddled in our Medicare plan, much more than in a fee-for-service plan," she says. Besides, the only other option, financially, was for New West physicians to stop seeing these patients altogether.

Denver-based Physician Health Partners also accepts only capitated Medicare patients. The independent practice association (IPA) with 250 primary-care physicians and 500 specialists opened its doors with that policy in place 10 years ago. "That was before anyone was thinking the train was heading for a cliff," says chief medical officer Jay Want, MD. "We just thought risk was a good way to manage managed care; it seemed like we could do well and do good at the same time."

It turned out to be an even better financial decision in the wake of cuts to the Medicare fee schedule. Want says the IPA garners better-than-average fees on Medicare patients. "The interim fee schedule cuts are not the same as if you take straight Medicare. Our capitated rate is really based on the annual per capita costs of taking care of a Medicare patient in this region, so the programs are buffered from the cuts to some extent," he says.

The downside of risk

While moving to capitation has worked for these practices, it won't work for everyone -- particularly those practices that are loosely managed, conservative, in rural settings, or just plain small. Risk contracts have put countless IPAs and physician groups out of business in the past five years and have, in general, fallen out of favor. Ninety percent of IPAs in California have gone out of business, largely thanks to capitation, for example. "People really don't like the risk thing at this point," says Want.

Clearly, New West Physicians and Physician Health Partners are the exception to the rule. That is partly because of very strong financial management. Benton comes from the insurance industry and brought that experience to bear at New West.

"We've become an insurance company, in essence," she admits. The group has stop-loss insurance and puts 50 percent of the bonuses it reaps each year from well-managed patient care into a reserve account in case of catastrophe.  According to Benton, "both those things have saved our butts." But the strategy shows a kind of internal restraint few physician groups are capable of. Wouldn't most physicians prefer to take the bonus as 100 percent compensation?

"It poses some challenges," Cohen says of risk contracting. However, "if you have the initiative to manage care, there is no reason a small group couldn't do this." Cohen feels it's important for even small groups to take advantage of whatever economies of scale do exist and to have a good working relationship with specialists. A small group that refers patients elsewhere needs those specialists to also be concerned about cost-efficient care.

Like New West, Physician Health Partners also has some distinct advantages: strong physician leadership and an exceptional ability to capture and use data so that it knows where it stands financially and clinically.

It's also no accident that both groups are in Denver, a metropolitan area served by commercial payers that still offer Medicare+Choice plans. Many payers have dropped out of the program, finding it a financial drain. According to data from CMS, the number of American seniors with access to a Medicare+Choice plan has dropped 20 percent since 1998.

Even Denver, which had five Medicare HMOs in 1998, currently has only two -- and one of those is considering pulling out in 2004. The picture is even worse outside other U.S. metropolitan areas where only 12.8 percent of seniors have the option of Medicare+Choice.

Tighten the ship

Those practices for which at-risk contracts are not an option are trying to make do by running a tighter ship. No one can claim that improvements in accounts receivable or human resource management can make up for a nearly 10 percent cut in reimbursement -- from Medicare and, in some instances, from commercial payers as well -- especially when it's coupled with increasing overhead costs. Still, strategic changes can make the cut feel a little less painful, at least in the short term.

Lucien Roberts, administrator for Neurological Associates in Richmond, Va., has been forced to make some tough changes. But with 45 percent of the practice's patient population coming from Medicare, he had to do something.

In response to the 5.4 percent Medicare cuts in 2002, Roberts first trimmed labor costs. Staff now pay for part of their health and dental insurance premiums -- and will pay 20 percent more in 2003 if the expected Medicare reimbursement cuts go through. That may be a blow to employees, but it doesn't even cover the 35 percent increase in premiums the practice will pay this year.

Roberts also cut raises, from a maximum of 5 percent of salary to 3 percent. Overtime was limited. And physicians accepted a $5,000 reduction in contributions to their retirement plans.

"What I'm most proud of my management team for over the past year is that we made all those changes without losing a single employee," says Roberts. "I've got incredible employees, the kind that, if you were stuck in a dark alley, you'd want them at your back." Roberts believes brutal honesty has to be part of the picture; all employees understand what the practice is facing and why the cutbacks are necessary.

And it's not just employees who feel the pinch. Beginning last March, Neurological Associates started charging nonMedicare/Medicaid patients $25 for missed appointments. Says Roberts, "We don't do it to get rich, but to reduce no-shows," which cost the practice in staff time and other overhead expenses and represent lost revenue. Patients are warned about the policy when they make their appointment, when they are reminded of their appointment, and at every other opportunity, including signs posted in the office. The result? A 50 percent reduction in no-shows.

Since November, Roberts has been charging Medicare patients the same penalty fee, which patients have to cover out-of-pocket. "We don't want to hurt Medicare patients, but another 4.4 percent cut on 45 percent of my business is obscene," he says.

To brace for that possibility, the group is considering reducing privileges at two of the seven hospitals it serves, reducing call services for Medicare patients. Since the practice does "nearly all the neurological work" in the area, that decision would clearly negatively impact patient care, but Roberts sees few other options. On the upside, cutting some call could also help control the group's malpractice costs, which went up 80.6 percent for this year.

Time to drop Medicare?

For now, Neurological Associates has decided to continue serving its Medicare patients, but refusing new Medicare patients "will be a consideration a year from now if there is another cut," says Roberts. "Also, we will look at [dropping] Medicaid, which has a lower fee schedule and a lower compliance level. ... My top priority is to make ends meet."

In fact, more and more physicians are deciding to opt out of Medicare, although it is a decision they struggle with. Already, the number of family physicians who no longer accept new Medicare patients is up 28 percent from a year ago, according to a survey by the American Academy of Family Physicians (AAFP). If this year brings further cuts in reimbursement, 42 percent of participating physicians would drop out of Medicare, reports a study by the AMA.

So far, Hughes Melton, MD, has managed to avoid restricting access to Medicare patients, but it's not an impossibility. For now, 28 percent of patients at his Highlands Family Medicine in Lebanon, Va., are Medicare beneficiaries. To some extent, he feels the two-physician practice, which opened in July 2000, needs to keep accepting all new patients. "We just kind of absorbed the 2002 cuts and ran with it since we're a growing practice."

Melton likens accepting Medicare to offering prenatal and obstetrical care to his mostly rural patients. He loses money on OB services, especially since doing so raises his malpractice premium. But he prefers it to seeing patients show up for their first obstetrical appointment at the emergency room -- already in labor.

"We're willing to accept the losses, but that's only because, overall, the practice is profitable," Melton says. The practice has higher charges per visit and stronger collections (most within 30 days) compared to many other family practices, thanks to careful coding with an electronic medical record, and a billing system that helps the practice to charge accurately at the time of service.

Not every physician is so lucky. Debbie Haynes, a Wichita, Kansas, family physician, feels a moral obligation to her Medicare patients but can't see a way to continue treating them. She now turns away new Medicare patients; further cuts will probably force her to stop taking Medicare altogether.

"I'd like to have a mission to serve all patients...[But] for every dollar that I charge, my expenses are about 65 cents. When I charge Medicare, I get paid 60 cents. My Medicare patients are subsidized by my patients with commercial payers," she says.
James Martin, a family physician in San Antonio, Texas, and president of the AAFP, feels the same way. "We really are subsidizing the government by taking care of Medicare patients. No one would do it for financial reasons. ... There is no cost shifting that can take place anymore."

Although he hates the idea of turning away seniors, his practice might also be forced to do so. "This is not an amorphous group. This is your grandmother," he says. "We're talking about Tom Brokaw's greatest generation. We owe them something."

Even more distressing, a domino effect is likely. Those practices that do continue to accept Medicare will find themselves overwhelmed by patients forced out elsewhere. When Medicare inevitably becomes a higher part of their payer ratio, they, too, might be forced to close their doors to seniors.

The result? Lots of patients who can't get care, and a system that doesn't seem to care.

Lobby for change

At least the system hasn't appeared to care up until now. As this publication goes to press, there is still a chance that Congress could change the Medicare fee schedule formula for 2003; chances are even better for changes in following years, particularly if patients and physicians make their voices heard now.

"Physicians need to start playing hardball; they've been playing too nice for too long," urges Thomas Terrill, a professional advocate for the health industry. "Grassroots activism is probably the most powerful way to effect change. We can't depend on the associations anymore. ... With the united effort of the physicians, it'll happen."

One strategy to start with: If you are considering dropping Medicare, tell your patients -- then redirect their anxiety to Congress. Tell them to write letters to the representatives in your area asking for change, Terrill suggests. Add letters of your own. Major medical associations also are orchestrating letter-writing campaigns physicians can join.

The writing, figuratively, may be on the wall, but it may not contain the final word. The best bet for physicians is to explore all their options for reducing the impact of further Medicare cuts and begin advocating loudly and regularly for relief.

Physicians Practice has posted a copy of the final 2003 Medicare Physician Fee Schedule in the Tools area of

Pamela Moore, senior editor, practice management for Physicians Practice, can be reached at

This article originally appeared in the January/February 2003 issue of Physicians Practice.