1. Government can exert monopsony power
In the study of economics, monopsony describes a market in which one dominant buyer (in this case, the federal government) interacts with many smaller suppliers (physicians and physician groups). As the principal purchaser of goods, the monopsony power dictates terms to suppliers.
A single-payer, universal health-care system in which government is the only purchaser of health services is a good example of monopsony.
Today, federal and state governments collectively purchase approximately 50% of all health services. This effectively gives them monopsony power to dictate to physicians how health services are reimbursed. Federal and state involvement in health care is likely to grow, further consolidating government monopsony power over physicians.
2. Government can put the squeeze on Medicare payments to physicians
Medicare payments to most physicians are currently provided on a fee-for-service basis. Almost all your services are, as you know, assigned a relative value unit (RVU); Medicare then assigns a dollar value to an RVU, with a small adjustment for the local cost of practicing. Total physician revenue paid by Medicare is therefore calculated as:
| sum of all RVUs provided × assigned dollars/RVU. |
The Center for Medicare and Medicaid Services (CMS) has the power to reduce 1) the dollars paid for an RVU and 2) the assigned RVUs for any given service provided. An example of this power: CMS recently proposed reducing the RVUs for a global delivery by 11%—a move that would lead to a direct reduction in physician revenue for a delivery.
More worrisome is the impending (January 1) implementation of a 30% reduction in dollars/RVU mandated by the Balanced Budget Act of 1997. Congress could block implementation of this revenue reduction, but that would add about $360 billion to the federal deficit over 10 years. And it would be paradoxical (and politically explosive) for the newly created Congressional debt super-committee to propose an increase in the federal deficit as its first act….
Many leaders in Congress recognize that Medicare (and Medicaid) costs must be reduced. But they are loath to fan the anger of their constituents by proposing service reductions to Medicare beneficiaries, who come out to vote in large numbers. That’s why some of those leaders have advocated that all reductions in the Medicare budget be borne by you and me, the physician-providers, and by hospitals and nursing homes. Effectively, leaders in Congress view government payments to your practice as a revenue stream that could be reduced to help cover the deficits in the Federal budget.
3. Government can reduce the already penurious level of Medicaid compensation
Historically, the Medicaid program compensates physicians at a dollar per RVU rate far below what is paid for Medicare services. Medicaid serves mostly poor patients, who have little political power and no meaningful resources to finance their health care. Serving Medicaid patients amounts to pro bono work by physicians, whose expectation is that they will receive markedly reduced reimbursement for each service they provide. (This is not necessarily an appalling notion: Providing free or reduced-cost services to the poor is a centuries-old tradition for physicians.)
Regardless of how you view pro bono care of the poor, economic analysis suggests that, even under the best circumstances, Medicaid payments are unlikely to ever be a stable source of revenue that contributes significantly to the financial survival of a medical practice. Yet, when states face recession-associated reductions in tax revenue, many have, abruptly, reduced compensation under Medicaid for care provided by physicians, hospitals, and nursing homes or temporarily suspended Medicaid payments altogether.
In response to such arbitrary actions, providers have sued some states to stop capricious pricing of Medicaid services. The US Supreme Court has agreed to hear such a case to determine if states can legally set the rate for Medicaid payments far below the cost of providing care.
4. Government can expect commercial insurers to play follow-the-leader
For most physicians in private practice, payments from commercial insurers are the stable source of revenue that protects that practice from insolvency. Because most commercial insurers aren’t of sufficient size to exert full monopsony power, physicians have often been able to negotiate rates with these companies that are higher than the reimbursement rates set by Medicare.
There is now growing consolidation in the insurance industry, however, and insurers are prone to adopt the decisions of Medicare administrators—that is, they are using the monopsony power of the government as a proxy to help control physicians and hospitals, who are their principal suppliers.
If Medicare reduces the RVU value assigned to individual services (e.g., the proposed 11% decrease in RVUs for global delivery services), for example, or reduces dollars paid per RVU (e.g., the 30% reduction that I already noted scheduled for January 1), commercial insurers are likely to follow suit when they renegotiate contracts with physician and hospital suppliers. It’s certainly possible, then, that upcoming government-initiated reductions in reimbursement for physicians will trigger industry-wide deflation of reimbursement.