Law Introduced to Stop Medicare Sequestration

Valuation Implications

On September 13, 2022, Representatives Ami Berra (D-CA-7) and Larry Bucshon (R-IN-8) introduced the Supporting Medicare Providers Act of 2022 (H.R. 8800), which aims to infuse the Medicare Physician Fee Schedule (MPFS) with a 4.42% funding increase for 2023. With a bipartisan coalition of 12 co-sponsors, the bill would have the practical effect of negating the impending 4.42% cut to the MPFS conversion factor. This article discusses the bill.

On September 13, 2022, Representatives Ami Berra (D-CA-7) and Larry Bucshon (R-IN-8) introduced the Supporting Medicare Providers Act of 2022 (H.R. 8800), which aims to infuse the Medicare Physician Fee Schedule (MPFS) with a 4.42% funding increase for 2023.[1] With a bipartisan coalition of 12 co-sponsors, the bill would have the practical effect of negating the impending 4.42% cut to the MPFS conversion factor.

Physician fee schedule payments are calculated according to Medicare’s Resource Based Relative Value Scales (RBRVS) system, which was designed with the intent of bringing medical practice payment more in line with a prospective payment system and away from a purely fee-for-service (FFS) system. The RBRVS system assigns relative value units (RVUs) to individual procedures based on the resources required to perform each procedure. Under this system, each procedure in the MPFS is assigned RVUs for three categories of resources: (1) physician work (wRVUs); (2) practice expense (PE RVUs); and (3) malpractice expense (MP RVUs). Further, each procedure’s RVUs are adjusted for local geographic differences using geographic practice cost indexes (GPCIs) for each RVU component.

Once the procedure’s RVUs have been modified for geographic variance, they are summed, and the total is then multiplied by a conversion factor to obtain the dollar amount of governmental reimbursement. The conversion factor is a monetary amount that is multiplied by the RVU to determine the payment amount for a given service.^[2] This conversion factor is updated yearly by a formula that takes into account: (1) the previous year’s conversion factor; (2) the estimated percentage increase in the Medicare Economic Index (MEI) for the year (which accounts for inflationary changes in office expenses and physician earnings); and, (3) an updated adjustment factor.^[3] Notably, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) contains a predetermined schedule of updates to the MPFS conversion factor. However, these annual updates have been relatively small, with an update of 0.5% from 2016 to 2019, and an update of 0% for years 2020 through 2025.^[4]

For 2023, the Centers for Medicare & Medicaid Services (CMS) proposed decreasing the conversion factor by 4.42% from the 2022 conversion factor of $34.61, which would have been a second straight year of conversion factor decreases.[5] These conversion factor decreases emanate from MACRA’s statutory update of 0%, the end of the temporary 3% payment rate bump for 2022 pursuant to the Protecting Medicare and American Farmers from Sequester Cuts Act, and budget neutrality adjustments.[6] Further, as pointed out by the Medical Group Management Association (MGMA) in response to the proposed rule, the conversion factor could be further reduced by the impending Pay-As-You-Go Act (PAYGO) sequestration, which is scheduled to take effect on January 1, 2023. PAYGO requires that “all new legislation changing taxes, fees, or mandatory expenditures, taken together…not increase projected deficits” and “is enforced by the threat of automatic across-the-board cuts in selected mandatory programs [including most Medicare payments] in the event that legislation taken as a whole does not meet the PAYGO standard.”[7] Consequently, Medicare payments could be cut by an additional 4% (the maximum amount allowed by law) for the next several years, barring congressional intervention.[8]

Since the release of the 2023 MPFS proposed rule, physicians and their professional trade associations have lobbied furiously to educate lawmakers on what is at stake should these Medicare physicians payments be cut by 8.42% (a combination of the reduced conversation factor and the implementation of PAYGO), amid “rising costs, staff shortages and record inflation.”[9] To provide “a unique perspective into the real-world consequences such dramatic physician payment cuts would have on physician practices’ ability to treat patients,” MGMA surveyed its members, which “offer[ed] an alarming look into the projected impact.”[10] Of the 517 medical group respondents, 92% reported that in 2022 (before the cuts even occur), Medicare reimbursement has not adequately covered the cost of care provided.[11] According to the survey (which was published prior to the introduction of the Act), providers are considering a number of options to offset the payment reductions:

• “58% are considering limiting the number of new Medicare patients;
• 66% are considering reducing charity care;
• 58% are considering reducing the number of clinical staff; and
• 29% are considering closing satellite locations.”[12]

As a result of these actions, MGMA listed its predictions of five practice themes that will emerge, should the cuts go into effect:

1. “Reducing or eliminating the number of Medicare beneficiaries served”;
2. “Projected delays in scheduling care, resulting in up to 6 months’ wait for visits”;
3. “Decreased ability to recruit staff at all levels, including physicians, clinical support staff, and administrative staff, especially in rural areas”;
4. “Reduced participation in value-based payment contracts as limited resources and revenue are diverted away from non-essential practice activities”; and
5. “Closing satellite offices or selling the practice due to insufficient revenue streams.”[13]

In response to the introduction of the Act, while MGMA stated that it “strongly supports” the proposed funding, it noted that “[e]ven with the stabilization offered by this bill, the Medicare conversion factor will be the lowest it has been in ten years at a time when medical groups face runaway inflation and significant workforce shortages. Freezes to Medicare payment rates have caused reimbursement to fall far below the true cost of furnishing care.”[14] In addition, MGMA has asked Congress to authorize an inflationary update based on the MEI and “waive the 4% PAYGO sequester,” pointing out that the legislation that triggered PAYGO was unrelated to Medicare.[15] Other physician trade associations shared MGMA’s sentiments. The Surgical Care Coalition (SCC) commended lawmakers for introducing the legislation and “also urge[d] lawmakers to support solutions to stop the pending 4% PAYGO cut and address the stagnant payment that has failed to keep pace with inflation for years to further stabilize the Medicare system and ensure patients have access to the high-quality care they deserve.”[16] The College of American Pathologists (CAP) and American Physical Therapy Association (APTA) echoed the SCC’s statements.[17]

Interestingly, the Act is reminiscent of past congressional “Horatius at the Bridge”[18] interventions related to the sustainable growth rate (SGR) formula. Prior to the implementation of MACRA, the SGR formula was utilized to provide annual target updates to the MPFS, based on a number of estimates. However, the SGR formula indicated downward adjustments to the MPFS every year since 2002, requiring Congress to repeatedly intervene and override the MPFS decreases to the conversion factor, sometimes replacing scheduled cuts with increases in payment.^[19]

Valuation Implications

The 2023 MPFS may have several implications for healthcare-related valuations (both of entities and compensation arrangements). The value paid in a healthcare transaction, whether it be for a physician compensation arrangement or the acquisition of a healthcare business (or interest therein), is determined on the future economic benefits for the involved willing buyers. Therefore, employed valuation methodology must be forward-looking.

For instance, the market approach, i.e., the utilization of compensation amounts paid in comparable agreements to establish the value of the subject arrangement, is the most common valuation methodology employed for the valuation of physician compensation arrangements. There are numerous surveys available that report physician compensation benchmarks. However, these surveys report compensation practices that occurred in the past. If the amount of reimbursement that the buyer, or employer, of the physician services will receive for the services acquired from the physician(s) is expected to change (increase or decrease), consideration must be given to the impact of the reimbursement change on historical survey data for the applicability to future compensation arrangements.

Similarly with the valuation of healthcare businesses, changes in future reimbursement for the subject business’s services or goods have a direct impact on the post-transaction earnings available to the buyer, and valuation methodology, such as earnings forecasts or adjustment to historical pricing multiples, must consider any future decreases, or increases, in reimbursement.

 

[1]      “H.R.8800 – Supporting Medicare Providers Act of 2022” Congress.gov, https://www.congress.gov/bill/117th-congress/house-bill/8800/text?r=1&s=1 (Accessed 9/22/22).

[2]        “Physician Reimbursement Under Medicare” By Alan M. Scarrow, MD., Neurosurgical Focus, Vol. 12, No. 4: Article 8 (April 2002), p. 2.

[3]        “Part B Payments: General Limits and Payment Rules” In “2009 Master Medicare Guide” CCH Health Editorial, Wolters Kluwer, 2009, p. 901.

[4]        “Medicare Access and CHIP Reauthorization Act of 2015” Pub. L. No. 114-10, § 101, 129 Stat. 87, 89–90.

[5]      “Calendar Year (CY) 2023 Medicare Physician Fee Schedule Proposed Rule” Centers for Medicare & Medicaid Services, July 7, 2022, https://www.cms.gov/newsroom/fact-sheets/calendar-year-cy-2023-medicare-physician-fee-schedule-proposed-rule (Accessed 7/18/22); “Physicians brace for 8.42% cut to CMS rates; many consider dropping Medicare patients” By Alan Condon, Becker’s ASC, September 21, 2022, https://www.beckersasc.com/asc-news/physicians-brace-for-8-42-cut-to-cms-rates-many-consider-dropping-medicare-patients.html?origin=ASCE&utm_source=ASCE&utm_medium=email&utm_content=newsletter&oly_enc_id=9207F7402078E2D (Accessed 9/22/22).

[6]      “Calendar Year (CY) 2023 Medicare Physician Fee Schedule Proposed Rule” Centers for Medicare & Medicaid Services, July 7, 2022, https://www.cms.gov/newsroom/fact-sheets/calendar-year-cy-2023-medicare-physician-fee-schedule-proposed-rule (Accessed 7/18/22).

[7]      “The Statutory Pay-As-You-Go Act of 2010: A Description” Office of Management and Budget, The White House, https://obamawhitehouse.archives.gov/omb/paygo_description/ (Accessed 11/17/21).

[8]        It is worth noting, however, that the PAYGO sequester has never gone into effect. “Medicare Sequester Cuts Possible Without Congressional Action” JD Supra, November 10, 2021, https://www.jdsupra.com/legalnews/medicare-sequester-cuts-possible-5800140/ (Accessed 11/16/21).

[9]      “Physicians brace for 8.42% cut to CMS rates; many consider dropping Medicare patients” By Alan Condon, Becker’s ASC, September 21, 2022, https://www.beckersasc.com/asc-news/physicians-brace-for-8-42-cut-to-cms-rates-many-consider-dropping-medicare-patients.html?origin=ASCE&utm_source=ASCE&utm_medium=email&utm_content=newsletter&oly_enc_id=9207F7402078E2D (Accessed 9/22/22).

[10]     “MGMA statement on Medicare payment reduction findings” By Anders Gilberg, Press Statement, Medical Group Management Association, September 20, 2022, https://www.mgma.com/advocacy/advocacy-statements-letters/advocacy-statements/september-21,-2022-mgma-statement-on-medicare-paym (Accessed 9/22/22).

[11]     “Impact of Payment Reductions to Medicare Rates in 2023” Medical Group Management Association, https://mgma.com/getmedia/b0716bbf-d21f-4ead-b1cb-9371485e62ff/09-21-2022-Impact-of-Payment-Reductions-to-Medicare-Rates-in-2023-Full-Report.pdf.aspx (Accessed 9/22/22).

[12]     “Impact of Payment Reductions to Medicare Rates in 2023” Medical Group Management Association, https://mgma.com/getmedia/b0716bbf-d21f-4ead-b1cb-9371485e62ff/09-21-2022-Impact-of-Payment-Reductions-to-Medicare-Rates-in-2023-Full-Report.pdf.aspx (Accessed 9/22/22).

[13]     “Impact of Payment Reductions to Medicare Rates in 2023” Medical Group Management Association, https://mgma.com/getmedia/b0716bbf-d21f-4ead-b1cb-9371485e62ff/09-21-2022-Impact-of-Payment-Reductions-to-Medicare-Rates-in-2023-Full-Report.pdf.aspx (Accessed 9/22/22).

[14]     “September 13, 2022: MGMA statement on the Supporting Medicare Providers Act of 2022” Medical Group Management Association, Press Statement, September 13, 2022, https://www.mgma.com/advocacy/advocacy-statements-letters/advocacy-statements/september-13,-2022-mgma-statement-on-the-supportin (Accessed 9/22/22).

[15]     “Impact of Payment Reductions to Medicare Rates in 2023” Medical Group Management Association, https://mgma.com/getmedia/b0716bbf-d21f-4ead-b1cb-9371485e62ff/09-21-2022-Impact-of-Payment-Reductions-to-Medicare-Rates-in-2023-Full-Report.pdf.aspx (Accessed 9/22/22).

[16]     “Surgical Care Coalition Statement on Supporting Medicare Providers Act of 2022” Press Release, Cision PR Newswire, September 3, 2022, https://www.prnewswire.com/news-releases/surgical-care-coalition-statement-on-supporting-medicare-providers-act-of-2022-301623712.html (Accessed 9/22/22).

[17]     “The CAP Commends the Introduction of Supporting Medicare Providers Act of 2022” College of American Pathologists, September 16, 2022, https://newsroom.cap.org/latest-news/the-cap-commends-the-introduction-of-supporting-medicare-providers-act-of-2022/s/4be14f2f-a6d4-4b9f-b361-f5fa1f65cfd7 (Accessed 9/22/22); “Potential Fee Schedule Reprieve Introduced in U.S. House” American Physical Therapy Association, September 14, 2022, https://www.apta.org/news/2022/09/14/fee-schedule-legislation (Accessed 9/22/22).

[18]     Publius Horatius Cocles was an ancient Roman officer who defended the Pons Sublicuis, the bridge that allowed entry into Rome, from the invading army of Clusium (an ancient city in Italy).

[19]      “Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System” By Jim Hahn, Congressional Research Service, June 12, 2014, http://greenbook.waysandmeans.house.gov/sites/greenbook.waysandmeans.house.gov/files/R40907_gb.pdf (Accessed 3/12/15), p. 1, 6-7.

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Todd A. Zigrang, MBA, MHA, ASA, CVA, FACHE, is president of Health Capital Consultants, where he focuses on the areas of valuation and financial analysis for hospitals and other healthcare enterprises. Mr. Zigrang has significant physician-integration and financial analysis experience and has participated in the development of a physician-owned, multispecialty management service organization and networks involving a wide range of specialties, physician owned hospitals as well as several limited liability companies for acquiring acute care and specialty hospitals, ASCs, and other ancillary facilities.

Mr. Zigrang can be contacted at (800) 394-8258 or by e-mail to tzigrang@healthcapital.com.

Jessica Bailey-Wheaton, Esq., is vice president and general counsel for Heath Capital Consultants, where she conducts project management and consulting services related to the impact of both federal and state regulations on healthcare exempt organization transactions, and provides research services necessary to support certified opinions of value related to the fair market value and commercial reasonableness of transactions related to healthcare enterprises, assets, and services.

Ms. Bailey-Wheaton can be contacted at (800) 394-8258 or by e-mail to jbailey@healthcapital.com.