Medical Practice Sales, Appraisal and Financing

Medical Practice Sales, Appraisal and Financing

Medicare has be fraught will challenges associated with reimbursement cuts, as solutions to exponentially increasing expenditure are sought. The amount of expenditure in this program has skyrocketed since its inception in 1965 despite various measures to control growth. Short-term legislative fixes have been buying time for the development of long-term solutions while various stakeholders stand to win and lose as they are faced with forthcoming reimbursement cuts. Among these stakeholders are the federal government, politicians, third-party payers, Medicare recipients, and healthcare providers. Foreseeable problems exist in implementing reimbursement cuts including barriers to patient care and the financial viability of healthcare providers who rely on Medicare patient revenues. Continual debate over short-term Medicare cuts will be eclipsed by policy changes related to the viability of the program and long-term sustainable healthcare funding and delivery systems.

  1. Introduction
  2. Background and Significance
  3. Legislation
  4. Stakeholders
  5. Implementation issues
  6. Future direction
  7. References



Health care spending currently accounts for 16% of the gross domestic product of the United States (Getzen, 2007). New technology and higher incomes have increased overall healthcare spending and driven up costs. The question raised, is how health care expenditure will be controlled within government programs like Medicare. The formation of Medicare and Medicaid by the Social Security Acts of 1965 established the government as a major payer in health care. Regular reimbursement through government funding allowed hospitals and other institutions to grow in size, capacity, and capital. Controlling growth and costs has become a major concern as proportional expenditure on healthcare has increased. Of the various cost-containing measures employed to control expenditure, reimbursement cuts are some of the most contentious issues.

Background and Significance

Medicare has evolved in numerous ways since its inception in 1965. Physicians were initially reimbursed by the program for services covered and were able to bill patients for non-covered costs. Hospital reimbursement methods also followed similar patterns until a change was made in 1983 from "reasonable cost" to the prospective payment system based on diagnostically-related groups. In 1992 the physician fee schedule replaced the charge-based system. The Sustainable Growth Rate (SGR) of 1998 was created to control spending even further. Annual targets for spending are established and physician payments are reduced if spending exceeds these limits.

The bulk of today’s Medicare costs are different than those of the past. A larger portion of expenditure is attributable to outpatient services covered by Part B of Medicare. This expenditure has consistently exceeded the established formula as specified in the SGR. Forthcoming adjustments in the form of reimbursement cuts propose major problems for physicians receiving reimbursements for services rendered to their Medicare patients. “Whereas over the next several years the SGR formula will cut doctors' reimbursement by an estimated 25 to 35 percent…[and] deep cuts in physician reimbursement will force many doctors out of the Medicare program and leave many patients without access to a physician (H.R. 863 IH, 2007).” These cuts will have a significant impact on physicians and hospitals, and may exacerbate healthcare access barriers to Medicare recipients. New reimbursement cuts are especially troubling in light of evidence that the expansion of Medicare reimbursements to new areas of care can benefit patient health (Gross et al., 2006). The types and amounts of cuts to be made are largely dependent on legislation and actions on Capitol Hill.


Legislative action on Medicare cuts is ongoing. A recent (February 14th, 2008) amendment was proposed in the House of Representatives to adjust conversion factors in Part B of title XVIII of the Social Security Act, increasing Medicare payments for physicians' services through December 31, 2009. These adjustments are temporary fixes in the challenge to create long-term solutions: “The purpose of this Act is to allow adequate time for Congress to determine an appropriate long-term solution for Medicare physician reimbursement rates (H.R. 5445 IH, 2008).” Legislative fixes are influenced by the various groups that are potentially affected by these cuts. Language in these resolutions seems to indicate this. A resolution on December 11th, 2007 in the House expresses the sentiment “…that the Medicare physician payment system must be immediately reformed in a long-term manner in order to stabilize Medicare payment to doctors, return equity to the program, and ensure that Medicare patients have access to a doctor of their choice (H.R. 863 IH, 2007).” Congress is continuously tuning reimbursement-related legislation to slow uncontrolled growth while appeasing powerful constituencies and interest groups.

The executive branch also plays a major roll in the determination of alternate Medicare cuts. The Bush Administration recently proposed a measure to control the explosive growth in the program. On February 18th, 2008, “the Bush administration…submitted a measure to Congress to reduce Medicare spending by increasing prescription drug plan premiums for higher-income beneficiaries and by increasing the use of health information technology, such as electronic health records, among other provisions (Carey, 2008, p.1).” This move was triggered by a condition of the 2003 Medicare law. When a financial warning is issued by Medicare trustees the administration is mandated to submit legislation reducing program spending or increasing revenue. “The warning is issued when trustees for two consecutive years predict that federal general fund revenue must be used to pay for 45% or more of total Medicare costs within seven years (Carey, 2008, p.1).” Monies required to pay for Medicare exceed allotted funds and the program’s encroachment on other fund sources is closely monitored.


Among the major stakeholders in this issue are the federal government, politicians, third-party payers, Medicare recipients, physicians and hospitals.

The federal government stands to win by moderating uncontrolled growth in the Medicare program. In recent years total expenditure and federal reimbursement has exceeded target rates. “By the 2000-2004 period, society was willing to devote over 20 percent of the cumulative increase in GDP and the cumulative increase in Federal outlays towards health care (Hartman, Smith, Heffler, & Freeland, 2006, p.41).” The growing size of Medicare threatens to encroach on other fund sources and programs. It is in the best interest of the federal government to reform Medicare and keep expenditure within manageable boundaries. Despite the benefits involved in implementing cuts, the types of cuts which are made have the potential for backlash. Cuts to reimbursements are exceptionally contentious in the healthcare community. The federal government must seek and implement responsible controls to mitigate harm while effectuating reform.

Politicians are another group affected by policies on reimbursement cuts. Their role is fairly complex as their duties and functions are reflective of the competing interests of different populations, groups, and political parties. Expenditure reduction and reimbursement cuts affect a wide range of constituents in different manners. The role of Medicare reimbursement cuts in political decision-making depends on how these groups are impacted. Politicians may win or lose depending on how the effects of these cuts unfold. The amount of healthcare lobbying that takes place on Capitol Hill speaks to the magnitude of interests involved.

Third party payers are heavily influenced by Medicare reimbursement methodologies. Medicare reimbursement cuts may likely equate to reimbursement cuts by other third-party payers, thus exacerbating many of the problems experienced by healthcare providers. Significant resentment already exists from problems associated with current reimbursements models and additional cuts may hurt payers in the short-run. In the long-run payers will benefit from moderated expenditure and more stable growth rates.

Medicare recipients are another prime group affected by cuts. A major concern associated with reimbursement cuts is the reduction of benefits and programs to these recipients. Technological advancement has provided patients with a vast array of services, procedures, and pharmaceuticals. Benefit and program cuts may translate into a reduction of these features which they have become reliant on. Reimbursement cuts may also contribute to barriers in accessing care. Lower reimbursements from Medicare may lead providers to be less inclined to accept new Medicare patients. Studies have already been conducted on barriers associated with general and specialized care related to payer type. In a study conducted on appointment setting for dermatology patients, “…some access limitations in hot spots where Medicare payments are low relative to commercial insurers suggest that patients in these areas may be most sensitive to further payment reductions (Resneck, Pletcher, & Lozano, 2004, p.85).” The case can be made that additional reimbursement cuts may further expand these “hot spots” for Medicare recipients. Additional barriers may emerge as the expected cuts related to the SGR come to fruition. In the short-term seniors stand to lose from reimbursement cuts but may benefit in the long-run from a more sustainable delivery system that can result from Medicare reform.

Physicians and hospitals stand to lose in the short-term. The healthcare community is at odds with current reimbursements models and believes that further cuts will significantly erode revenues. A study featured in Pain Physician acknowledges that “physicians in the United States have been affected by significant changes in the pattern[s] of medical practice…and escalating healthcare costs have focused concerns about the financial solvency of Medicare (Manchikanti & Giordano, 2007, p.607).” The payment rate cut which was released on July 12th, 2007 includes a 9.9% reduction. Many physician practices and hospitals will be drastically affected but may benefit in the long-run from programs that are moderated in growth and can remain solvent.

Implementation issues

Various groups are involved in seeking solutions to this problem including the Medicare Payment Advisory Commission (MedPAC), the Government Accountability Office, physician and hospital organizations, economists, and other interest groups. The U.S. Senate and House of Representatives are separately working on two different ways to alleviate the inconsistencies in costs and corresponding reimbursements while trying to establish long term sustainable solutions. One of the most significant implementation challenges is the financial fallout to providers relying on reimbursements (physicians, hospitals, and other affected providers). Medicare accounts for a sizeable portion of revenues to some health facilities and healthcare providers. Further reducing reimbursements for services will have a major financial impact and the healthcare community has been especially active in resisting additional cuts. Some of the most vocal groups have been providers and their affiliated interest groups. It is common to find multiple reimbursement-related articles in trade journals and specialty magazines. Certain specialties will be impacted more heavily than others and this is reflective in payment changes by CPT code.

Impact to Medicare recipients is another major implementation issue. Cost-containment may have negative effects on patient access to services and resulting health outcomes, though this is not generalizable across the board. At least one study has shown that health outcomes were not impacted for patients receiving treatment in hospitals affected by past reimbursement cuts (Volpp et al, 2005). Counterintuitive results from studies like this make implementation even more intricate and perplexing. Legislation must be drafted based on truly measurable effects to recipients, providers, and cost-containment goals.

Future direction

Medicare reimbursement reduction is a major policy issue affecting large strata of interests. Within government it is recognized that more time is required to generate sustainable strategies. Balancing long-term objectives with the immediate effects of cuts is a delicate matter. Policymakers will need to make difficult and calculated decisions about efforts to reduce healthcare spending. Some believe that a greater focus on preventive care has the potential to alleviate expenditure trends. A significant portion of current expenditure in Medicare and other programs comes from long-term maintenance of chronic conditions. This trend accounts for a large portion of uncontrolled growth. Medicare reimbursement cuts are merely stop-loss strategies in a losing equation rather than robust long-term solutions. A greater focus on preventive care has the potential to extend the viability of U.S. healthcare systems.


Carey, M.A. (2008). CQ's carey discusses bush administration medicare proposals, senate action to block medicaid rule, house scrutiny of FDA drug approval process. Medical News Today. February. Retrieved from htttp:// on 2/22/2008.

DoBias, M. (2006). Medicare cuts rile providers. Bush's 2007 budget 'not reflective of political reality'. Modern Healthcare. 36(7): 8, 9.

Getzen, T. (2007). Health economics and financing. 3rd ed. New Jersey: Wiley.

Gross, C.P., Andersen, M.S., Krumholz, H.M., McAvay, G.J., Proctor, D., Tinetti, M.E. (2006) Relation between medicare screening reimbursement and stage at diagnosis for older patients with colon cancer. JAMA. 296:2815-2822.

Hartman, M., Smith, C., Heffler, S., Freeland, M. (2006). Monitoring health spending increases: Incremental budget analyses reveal challenging tradeoffs. Health Care Financing Review. 28, 1.

H&HN: Hospitals & Health Networks. (2005). Seniors drive surge in ED visits; Medicare cuts could make it worse, ACEP warns. 79, 7.

Hoffman, J. M., Doctor, J.N., Chan, L., Whyte, J., Jha, A., Dikmen, S. (2003). Potential impact of the new medicare prospective payment system on reimbursement for traumatic brain injury inpatient rehabilitation. Archives of Physical Medicine and Rehabilitation. 84:1165-72.

H.R. 5445 IH: To amend part B of title XVIII of the social security act to increase medicare payments for physicians' services through December 31, 2009. 110th Cong., 2nd Sess. (2008).

H.R. 863 IH: Expressing the sense of the house of representatives that the medicare physician payment system must be immediately reformed in a long-term manner in order to stabilize medicare payment. 110th Cong.,1st Sess. (2007).

Konetzka, R. T., Zhu, J., Volpp, K.G. (2005). Did recent changes in medicare reimbursement hit teaching hospitals harder?. Academic Medicine. 80, 11.

Manchikanti, L., Giordano, J. (2007). Physician payment 2008 for interventionalists: current state of health care policy. Pain Physician. 10:607-626.

Resneck, J., Pletcher, M.J., Lozano, N. (2004). Medicare, medicaid, and access to dermatologists: The effect of patient insurance on appointment access and wait times. Journal of the American Academy of Dermatology. 50(1): 85-92.

Riley, G.F. (2007). Long-term trends in the concentration of medicare spending. Health Affairs. 26, 3.

Volpp, K.G., Konetzka, T., Zhu, J., Parsons, L., Peterson, E. (2005). Effect of cuts in medicare reimbursement on process and outcome of care for acute myocardial infarction patients. Circulation. 112; 2268-2275.

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