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MEMORANDUM

Action Requested
The Medicare fee schedule for 2002 was released on November 1, 2001; under the schedule a large reduction in physician fees is anticipated. In an effort to reverse the fee decrease, the AGS asks that all members send the attached letter to their Senators

Summary of Problem
The cause of the large reductions is an across-the-board 5.4 percent reduction in the conversion factor. The 2002 conversion factor is $36.1992, a reduction from $38.2581 in 2001. This reduction is due in large part to a legislatively mandated update formula that is based on the gross domestic product and the amount of Medicare services provided by physicians. Thus, the slumping economy, combined with increases in physician services, played a significant role in the fee decreases.

Most (4.8 percent) of the reductions in the conversion factor are due to a legislatively mandated update formula called the sustainable growth rate (SGR). Another 0.4 percent is a budget neutrality offset for increases in work values from the five-year review (see below). A final 0.2 percent is a behavioral offset that assumes that physicians suffering from fee cuts will increase the volume of services they perform to make-up for those income reductions.

There is widespread agreement among policy makers that the sustainable growth rate formula is an inappropriate mechanism for determining physician fee updates. The SGR ties the update to changes in the economy, the total cost of all physician services in previous years, the number of Medicare beneficiaries in fee-for-service medicine and several lesser factors. It has resulted in fee updates of 5.4 percent in 2000 and 4.5 percent in 2001. Those relatively large increases were due to a booming economy and a slower than expected growth rate in the volume of physician services. That decline in the growth rate was due in large part to physician down-coding of physician office visits.

There are numerous problems with the SGR. The growing costs of medical care have traditionally outpaced the economy's growth rate because of the dynamic growth in the variety of treatments offered to beneficiaries. The SGR also fails to account for the fact that many services are shifting from the hospital setting to less costly physician offices (this tends to reduce total Medicare expenditures) but this factor is not accounted for in the development of the SGR. The SGR formula also forces the CMS to rely on data estimated at the beginning of a year rather than the final figure. Thus, physician fees were unfairly reduced in previous years when fewer Medicare beneficiaries switched to managed care than CMS had anticipated.

AGS Response to Conversion Factor Reductions
When news of the significant reduction of the Medicare conversion factor reached the AGS several weeks ago, the Society, in concert with the American Medical Association (AMA) and other physician specialty societies, began working aggressively with the CMS and Congress to address the issue. Activities involve signing on to a physician wide letter to all Members of Congress, a separate AGS letter to the key Committees reviewing a potential legislative fix, grassroots communications to members to contact their Members, and meetings with Congressional staff and the AMA-led coalition on joint efforts to overturn the fee reductions. These items are attached.

The CMS has said it does not have the statutory authority to change the formula and that it requires a legislative fix. Congress, meanwhile, has been focused almost strictly on legislation related to the Sept. 11 terrorist attacks and appropriations. A number of "must-do" pieces of legislation have still not been passed, and Congress is essentially unwilling to act on anything that is not budget neutral. Thus, a legislative fix is unlikely this year.

Regardless, we must work through our grassroots network to urge Congress to remove the fee decrease. In this regard, please send the attached letter to your Senator. A list of U.S. Senators can be found at http://www.senate.gov/senators/senator_by_state.cfm. E-mail is the preferred form of communication. Senate offices can be e-mailed directly by going to http://www.senate.gov/contacting/index.cfm and scrolling down to the name of the Senator you wish to contact. To mail the letter, send it to the following address:

U.S. Senator
U.S. Senate
Washington, D.C. 20510

This is the highest-priority issue for the AGS and the AGS will continue to push for administrative and legislative changes to mitigate the impact of the reductions, retroactively if necessary. More information on AGS efforts will be communicated to AGS members in the coming weeks.