"The trend in decreased Medicare reimbursement is not sustainable," chief medical officer says.
A 3.4% conversion factor reduction in Medicare's 2024 Physician Fee Schedule final rule will make a bad situation worse for healthcare providers, says Catherine "Mindy" Chua, DO, chief medical officer of Davis Health System.
The conversion factor is the number of dollars assigned to a relative value unit (RVU), which is a key element of physician payment by the Centers for Medicare & Medicaid Services. The new Physician Fee Schedule final rule will cut the conversion factor from $33.89 in calendar year 2023 to $32.74 in calendar year 2024.
The biggest financial impact of the conversion factor cut will be on health systems and hospitals, Chua says. "About three-quarters of physicians are currently employed by hospital systems. So, for most physicians who are employed at hospital systems, the conversion factor reduction is not going to affect them in their pocket. What it is going to affect mainly is hospital systems and health system-owned physician practices. It will also affect physicians in private practice and physicians at physician-owned practices."
Health systems and hospitals are taking a hit financially, but they are unlikely to pass along the conversion factor cut to their employed physicians' compensation, she says. "The trend in decreased Medicare reimbursement is not sustainable, particularly for hospitals that employ most of their medical staff. The physician fees are going to the hospitals to maintain the physicians they employ. We are not going to be decreasing what physicians are paid because Medicare is cutting our reimbursement—you are not going to keep physicians if you do that."
The conversion factor cut will pose a financial hardship for many hospitals, Chua says. "Hospitals are having to pay more for supplies and staffing. Many hospitals have negative margins, and the cost of operations continues to go up. Then you decrease one of the main sources of income for hospitals—physician billing—and it is not sustainable."
Hospitals may have to cut services in response to reduced Medicare reimbursement, particularly in rural areas such as those served by Davis Health System, she says. Rural community hospitals must provide certain services to serve their patients such as emergency care and general surgery. However, there are services such as oncology, pulmonology, and orthopedics that are not necessary to operate a rural health system, Chua says.
"The unessential specialties are important for our communities, so patients do not have to travel long distances for care. But for health systems like ours, if Medicare continues to make cuts, we are not going to be able to keep these service lines going," she says.
Targeting Medicare reimbursement reform
It is technically impossible for hospitals to maintain a negative margin and the conversion factor cut comes at a bad time, Chua says. "There have been a significant number of hospitals in small communities that have shut down over the past three years because of financial distress. The reduction in the Physician Fee Schedule conversion factor is only going to make the situation worse."
The American Medical Association has made reforming Medicare payments for physicians a top priority. According to the AMA, Medicare's physician payments have decreased 26% since 2001, when adjusting for inflation.
The AMA is on the right track, but Medicare reform needs to be broader than just addressing physician payments, Chua says. "We need to look at Medicare payment reform overall, and the Physician Fee Schedule is just a piece of that reform. We need to be pushing Medicare toward more value-based contracting, so hospitals can maintain their main priority, which is to take care of the sickest of the sick."
Value-based payments are superior to fee-for-service reimbursement, which still dominates Medicare, she says. "Fee-for-service incentivizes us to not provide quality care. It is a broken system. We must make some hard decisions and make some major changes in Medicare reimbursement. From all accounts, it seems that value-based payments are the way that health systems are going to improve quality and reduce costs."
Value-based payments incentivize health systems to move outside of the four walls of the hospital and help their communities to get healthier, which reduces dollars spent on healthcare, Chua says. "Value-based payments also give providers more time to address social determinants of health. They give us more opportunities and resources to engage patients," she says.
Christopher Cheney is the senior clinical care editor at HealthLeaders.
The 2024 Physician Fee Schedule cuts the dollar figure assigned to a relative value unit, which is a key element of Medicare physician payments.
Most physicians are employed by health systems and hospitals, which will bear the brunt of the payment cut.
The CMO of Davis Health System says Medicare reimbursement reform needs to go beyond physician payments and extend to expanding value-based payments.