Payors pull back from links to Medicare physician pay rates

While physicians, practice managers and their trade groups in Washington, D.C., frequently bemoan the many contracts between physicians and payors that directly link the Medicare RVU dollar conversion factor with commercial fee schedules (e.g., “125% of Medicare”), payors say they are severing some of those links and looking to other factors to change physician rates.

These direct price links greatly intensified the revenue problems that plagued many medical groups following the 5.4% Medicare RVU dollar value cut in 2002. The problems would become all the deeper if the 4.4% Medicare cut scheduled for March 1, 2003, takes effect. (See article, this page.)

In addition to a seeming payor reluctance to cut physician rates in lockstep with Medicare, practice managers have developed negotiating strategies to get these linkages out of their commercial contracts. Jeff Milburn, senior vice president of 70-physician Colorado Springs (Colo.) Health Partners, says it would be inappropriate for payors to cut physician rates while the health plans themselves are receiving double-digit increases from employers. Higher practice operating costs also justify higher rates, Milburn asserts.

Where the price linkage between Medicare and commercial reimbursement is maintained, however, medical groups are expecting steep revenue losses starting in March.

Medicare Just One Factor in Pricing

Three multistate payors, Anthem Inc., CIGNA HealthCare and UnitedHealthcare, note that physician pricing is a decision for their local divisions, and that even within a metro area, pricing varies from contract to contract. Medicare prices are a market factor to consider along with many other factors, those companies say, so that following Medicare rates up and down–for instance, this coming March–is not a common policy for these firms.

Anthem spokeswoman Patty Coyle Locke says, “For the most part, our rates are not tied to Medicare.” However, in at least one state, Colorado, the firm often uses such linkages because they are very common in that marketplace, she says.

“Generally–if there is a `generally’,” says UnitedHealthcare spokesman John Penshorn, “there is no relationship between Medicare fees and our contracted rates. Of course, exceptions exist.”

The key physician pricing factors for CIGNA, says spokeswoman Amy Turkington, are usually the reasonable and customary charges in a geographic area. Because Medicare prices are just a “point of reference,” CIGNA does not use direct linkages in any of its local markets, she says.

Medicare prices “have no impact at all” on Blue Cross of California’s prices, which are set based on “trends and patterns that we identify in the [physician] network,” says spokesman Michael Chee. He notes that, in contrast to Medicare’s pricing volatility, BCC’s physician prices have risen steadily by several percent in each of the last five years. About a third of BCC’s physician services are covered by capitation contracts with large medical groups. Capitation is not affected by Medicare fee-for-service prices.

“We don’t peg ourselves directly to Medicare” in setting physician prices, says Deborah DeVaux, vice president of provider contracting at Blue Cross and Blue Shield of Massachusetts. The firm says it will not cut rates on March 1.

Groups Maneuver to Cut Linkage

Milburn, who handles managed care contracting at Colorado Springs Health Partners, says that in mid-2001–when he expected the 2002 Medicare factor to be flat, rather than the steep cut that occurred–he amended pricing provisions with all his major commercial carriers to use the 2001 Medicare RVU conversion factor as the basis for future price changes.

He even dropped one carrier, the payor for more than 2,000 patients, that refused to make any pricing changes.

Under the amended provisions, the carriers make year-to-year changes based on overall market conditions. For 2002, and now for 2003 with all but a few small carriers with which he still is negotiating, Milburn’s group has won price hikes up to 5%.

Milburn’s contracts still have an RVU dollar conversion factor, which equals the 2001 Medicare value modified by subsequent annual increases. When the 2003 values are compared with the likely 2003 Medicare value, some fairly high multiples of Medicare prices can result, he notes, giving some payors “sticker shock.” He has been willing to substitute certain quality and patient satisfaction bonuses for the 2003 increases.

Edward Freeman, FACMPE, chief operating officer of Greater Cincinnati Digestive Health Network, also is using the 2001 Medicare value as a basis for rate-setting in payor contracts. The Cincinnati market has among the lowest commercial rates in the nation, Freeman notes. He refuses to negotiate based on the 2002 Medicare rate or the scheduled 2003 rate.

Gregg Winston, executive director of 17-physician Potomac Physician Associates in Bethesda, Md., says that direct linkages to Medicare prices are uncommon in the Washington, D.C., market.

Linkage: `Tough Situation’ Now

At least 60% of commercial payors at 100-physician Midwest Physician Group in the Chicago suburbs tie their pay rates directly to Medicare rates, says Chief Financial Officer Deborah Nelson. Adding the scheduled Medicare cut to the linked commercial cuts, Nelson estimates that 70% to 75% of the group’s reimbursements will fall by 4.4% starting in March.

“It’s a tough situation,” she says, noting that malpractice and other costs are rising. Her efforts to renegotiate contracts in recent months so far have not borne fruit. The group is examining withdrawals from some commercial networks as well as reducing its exposure to Medicare.

Greg Lowenstein, CEO of Dallas-based US Radiology Partners (USRP), says about 60% of his firm’s commercial contracts are tied to the Medicare conversion factor. Practices partnering with USRP are in Louisiana, Texas, Florida, Oregon and Arizona.

“On a per-exam basis,” Lowenstein says, “our reimbursements have definitely fallen” in 2002. The main reason is the linkage of commercial rates to Medicare, he asserts. USRP’s revenues rose in 2002 because unit volume jumped faster than prices fell.

Contact Locke at (317) 488-6249, Penshorn at (952) 936-7214, Turkington at (860) 226-3489, Chee at (805) 557-6791, DeVaux at, Nelson at (708) 503-3979 or, Milburn at (719) 538-2900 or, Freeman at (513) 936-0334 or, Winston at (301) 942-2750 or, and Lowenstein at (972) 929-6633 or

COPYRIGHT 2003 Atlantic Information Services, Inc.

COPYRIGHT 2003 Gale Group

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