Cold Iron Truth

Inflation will be the end of medicine


Inflation is the senility of democracies.

–Sylvia Townsend Warner

What is the greatest threat to your practice? COVID? Government rules and regulations? Stagnant reimbursements? Electronic medical records? No, all of these are minor annoyances in the face of the practice killer, inflation.

Dr. Brett M. Coldiron, a dermatologist and Mohs surgeon in Cincinnati.

Dr. Brett M. Coldiron

Physicians live in a closed box where medical reimbursements are fixed, directly or by contract proxy to the government (Medicare) pay rate. Inflation is projected to be between 5% and 10% this year. We cannot increase our rates to increase the salaries of our employees, cover our increased medical disposable costs, and pay more for our state licensures and DEA registrations. No, we must try to find savings in our budget, which we have been squeezing for years.

Currently, medicine is facing a 9.75% cut in Medicare reimbursements, which will reset most private insurance rates, based on a percentage of Medicare. The temporary 3.75% conversion factor (CF) increase for all services is expiring. Also expiring is the 2% sequester from the Budget Control Act of 2011 (BCA), signed into law in August 2011. This was originally scheduled to sunset in 2021, but is going to continue to 2030.

A 4% statutory pay-as-you-go (PAYGO) sequester resulting from passage of the American Rescue Plan Act is being imposed. Statutory PAYGO is a policy written into law (it can be changed only through new legislation) that requires deficit neutrality overall in the laws (other than annual appropriations) enacted by Congress and imposes automatic spending reductions at the end of the year if such laws increase the deficit when they are added together.

There is a statutory freeze on Medicare Physician Fee Schedule (PFS) updates until 2026, at which time an annual increase of 0.25%, which is lower than inflation, will be enacted. This adds up to a 9.75% cut in Medicare pay until at least 2026. Recall that almost all of your private insurance contracts are tied to Medicare (some more, some less) and that this cut to the physician is doubled if your overhead is fixed at the typical 50% for most practices. This means an almost 20% cut in take-home pay for most physicians.

Now, when considering the most recent inflation number, which projects 5%-10% inflation for this year and at least 2% annually in the future, which compounds yearly (the Fed target), you are looking at catastrophic numbers.

The conversion factor – the pool of money doled out to physicians – has failed to keep pace with inflation – even at 2%-3% a year – and reimbursement is only 50% of what it was when created in 1998, despite small increases by Congress along the way. A recent Wall Street Journal guest editorial claimed that Medicare payments benefited from cost of living adjustments, same as Social Security. I do not agree, hence the 50% pay gap since 1998.

In addition, the costs of running a practice have increased by 37% between 2001 and 2020, 1.7% per year, according to the Medicare Economic Index.

Some of this may include general inflation, but certainly new OSHA rules, electronic medical records, Medicare quality improvement measures, and assorted other costs do not. So based on my own conservative estimate, on top of the 50% decline in the payment pool, physicians’ noninflationary operating costs increased by at least another 10% over the last 20 odd years. This is a 60% decline in reimbursements!

Medicare payments have been under pressure from the Centers for Medicare & Medicaid Services (CMS) anti-inflationary payment policies for more than 20 years. While physician services represent a very modest portion of the overall growth in health care costs, they are an easy target for cuts when policymakers seek to limit spending. Although we avoided direct cuts to reimbursements caused by the Medicare sustainable growth rate formula (SGR) – which was enacted in 1997 and repealed in 2015 – Medicare provider payments have remained constrained by a budget-neutral financing system.

There used to be ways out of the box. Physicians could go to work for hospitals or have their practices acquired by them, resulting in much better hospital-based reimbursement. This has been eliminated by site-neutral payments, which while instituted by President Trump, are unopposed by President Biden. You could also join larger groups with some loss of autonomy, which could presumably negotiate better rates with private insurers as another way out, but these rates are almost always based on a percentage of Medicare as noted above.

There may be a bit of good news, with price transparency being instituted, which again is unopposed by the Biden administration. At least private practice physicians may be able to show their services are a bargain compared to hospitals.

One could also take the low road, and sell out to private equity, but I suspect these deals will become much less attractive since some of these entities are going broke and all will feel the bite of lower reimbursements.

Physicians and patients should rise up and demand better reimbursements for physicians, or there will be no physicians to see. This is not greed, a bigger house, or a newer car, this is becoming a matter of practice survival. And seniors are not greedy, they have paid hundreds of thousands of dollars into Medicare in taxes for health insurance in retirement.

Physicians and retirees should contact their federal legislators and let them know a 9.75% cut is untenable and ask for Medicare rates to be fixed to the cost of living, just as Social Security is. Before we fund trillions of dollars in new government programs, perhaps we should look to the solvency of the existing ones we have.

Dr. Coldiron is in private practice but maintains a clinical assistant professorship at the University of Cincinnati. He cares for patients, teaches medical students and residents, and has several active clinical research projects. Dr. Coldiron is the author of more than 80 scientific letters, papers, and several book chapters, and he speaks frequently on a variety of topics. He is a past president of the American Academy of Dermatology. Write to him at [email protected].

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