The Next Exodus: Primary-Care Physicians and Medicare

In late 2009 the highly respected Mayo Clinic grabbed national headlines when it announced that one of its primary-care centers was no longer accepting Medicare. Henceforth, Medicare patients visiting its family clinic in Glendale, Arizona would have to pay cash. In 2008 Mayo lost $120 million on Medicare patients at all of its Arizona facilities. At the Glendale clinic, Medicare had covered only about half of the clinic’s expenses for treating the elderly.1

When physicians limit their exposure to Medicare by either dropping out of the program or restricting the number of Medicare patients they treat, it seldom receives any press coverage beyond local media, if it receives any coverage at all. Nevertheless, physicians’ growing reluctance to accept Medicare patients is becoming a serious problem. If this budding crisis has an epicenter, it appears to be Texas. “Texas Doctors Fleeing Medicare in Droves,” blared a Houston Chronicle headline. Data compiled by the newspaper found that Texas physicians were dumping Medicare at a rate of about 100 to 200 per year.2 In 2010 a Texas Medical Association survey found that 18 percent of the state’s physicians were restricting the number of Medicare patients they treated, while 16 percent were no longer seeing new Medicare patients.3

Nationally, the number of physicians who still participate in Medicare is unclear. As of 2008 only 58 percent of physicians were willing to see all new Medicare patients, while fully 13.7 percent were no longer willing to see any new Medicare patients, a survey by the Center for Studying Health System Change survey found.4 Both a 2010 American Medical Association (AMA) survey and the 2011 National Ambulatory Medical Care Survey found that about 17 percent of physicians were restricting the number of Medicare patients they treat.5

The evidence suggests the primary reason why physicians are fleeing Medicare is that it doesn’t pay enough. Over one-third of physicians surveyed by the Physicians’ Foundation in 2008 said Medicare payments did not cover costs.6 Another 2010 AMA survey found that 85 percent of physicians capping the number of Medicare patients they treated cited Medicare’s stingy payments as a reason.7 According to the Center for Studying Health System Change, about 62 percent of physicians cited inadequate Medicare reimbursements as either a very important or a moderately important reason why they refused to accept new Medicare patients.8

Yet Medicare’s inadequate payment structure does not repel all physicians equally. Among primary-care physicians, who tend to be the physicians who have first contact with a patient, the trend is considerably worse. The AMA survey that found 17 percent of all physicians were limiting the number of Medicare patients they saw also found that 31 percent of primary-care physicians were doing so.9 Because Medicare tends to compensate “specialists” —physicians who focus on one area of medicine— better than primary-care physicians, it is no surprise that specialists aren’t limiting their exposure to Medicare to the same extent as primary-care physicians. According to the Center for Studying Health Change, the percentage of primary-care physicians who were no longer seeing Medicare patients was about double that of specialists.10

Texas showed the same pattern. In 2011, the Texas Medical Association found that only about five percent of specialists had stopped taking Medicare as a form of payment, while over 13 percent of primary-care physicians had stopped.11

One of those primary-care physicians is Dr. Juliette Madrigal-Dersch.

Texas Flower

Dr. Juliette Madrigal-Dersch’s office is in Marble Falls, Texas, not far from Austin. On the wall in one of the patient rooms there hangs a picture frame. It contains a white canvass with a black bead in the middle. Underneath the bead are words that Dr. Madrigal’s daughter, Helena, said to her when she was three years old: “Mommy, I might have accidentally put something in my nose I think.”

It’s indicative of the friendly, relaxed atmosphere that Dr. Madrigal has created in her office.

Spunky and energetic, it’s easy to see why patients flock to Dr. Madrigal. A note left behind by one of her patients reads, “Thanks for weighing my opinion into your decisions.” But praise her for having a good “bedside manner,” and she responds, “I think it’s because I have such great patients.”

“Yes, that’s Dr. Madrigal,” laughs her assistant, Bruce. “She will not take a compliment.”

It’s the first day of school in Texas in 2011, so the traffic in her office this Monday is light. One of the few patients there is a woman, “Pamela,”** who is in her mid-60s.

It’s obvious Dr. Madrigal knows her well as she enters the examination room. She gives her a big hug, followed by an upbeat “How have you been doing?”

Pamela gives a weak smile and replies, “So-so.”

Less than two years ago Pamela had a sarcoma removed from her arm. She’ll soon be heading back to the hospital to have the meniscus in her knee repaired. But those aren’t the reasons she’s paid a visit to Dr. Madrigal.

“My emotions,” she explains to Dr. Madrigal. “I feel good very early in the day, but very lousy in the afternoon. It makes it hard for me to do any work.”

Dr. Madrigal asks her a series of questions, all the while typing answers into her laptop.

After Dr. Madrigal is finished with the questions, she explains, “Your body often treats physical and emotional stress the same. With the cancer and now the knee, these are not letting your stress hormones go back to normal.”

After some discussion, Dr. Madrigal suggests that Pamela try Zoloft, an anti-depressant.

Pamela is also often congested from her allergies, something Dr. Madrigal thinks could be a concern going into the patient’s upcoming knee surgery.

“Whenever the flow is slow, the bugs can grow. If you’re really congested going into surgery, and they put a tube down your throat, it increases the chances of a really bad sinus infection or even pneumonia,” Dr. Madrigal explains.

Dr. Madrigal tells Pamela that she wants to see her just before she goes in for surgery to check her allergies. Pamela assures her that she will make an appointment.

As Pamela gets up to leave, Dr. Madrigal gives her another warm embrace.

On her way out, Pamela takes out her checkbook and pays the receptionist. She does have insurance, but it’s useless in Dr. Madrigal’s office.

“When I started my private practice in 2001, I looked at how much I would get paid from insurance, and it wasn’t worth it,” Dr. Madrigal explained. “I decided to do a cash-only practice. I expected my practice to be in the black in about two years, but I was in the black in about three months.”

She disliked the restrictions that come along with private insurance. “They limit you,” she said. “They decide what tests a patient can have, what medications they can take, and I didn’t want any part of that.”

If you want to see Dr. Madrigal, it will cost $75 if your office visit is a simple one and $150 if it is more complicated. However, if you had been an elderly patient when she started her practice, your Medicare card would have paid for your visit.

“As a doctor, you’re actually ‘born’ into the Medicare contract,” she said.

Until recently, once a medical student received his medical degree, he automatically received a Medicare provider number. The regulations were changed a few years ago so that new physicians now have to sign up to be part of Medicare. But when Dr. Madrigal first became a physician, she became part of Medicare whether she wanted to or not.

By 2006, she wanted out.

“To leave Medicare, you actually have to do quite a bit of paperwork,” she said. She turned to the Association of American Physicians and Surgeons (AAPS), an interest group that in recent years has helped physicians exit Medicare. The AAPS recommends that the physician first tell her Medicare patients that she is leaving Medicare. Second, the physician must file an affidavit stating that while she is opting out of Medicare she “will provide services to Medicare beneficiaries only through private contracts,” and “will not submit a claim to Medicare for any service furnished to a Medicare beneficiary during the opt out period.”12 The affidavit must be sent to all of the private companies that handle Medicare claims in the physician’s state.

The physician must then fill out a separate contract with each of her Medicare patients stating that the patient understands that the physician has opted out of Medicare. It states that the patient must accept “full responsibility for payment of the physician’s charge for all services furnished by the physician.” The patient must also understand “that Medicare payment will not be made for any items or services furnished by the physician that would have otherwise been covered by Medicare if there was no private contract and a proper Medicare claim had been submitted.”13 The patient must sign this contract in order to continue to be treated by the physician.

Even though she dropped out of Medicare, Dr. Madrigal’s hassles with the government haven’t ended. The “opt-out” period only lasts for two years, so Dr. Madrigal must re-file up-to-date affidavits biennially. She must make sure that her Medicare patients sign new contracts every two years as well.

Her reasons for leaving Medicare were similar to why she never took private insurance.

“There are things in Medicare that are hard to order,” she said. “For example, Medicare won’t pay for a bone-density scan on a patient to check for osteoporosis unless the patient either has very specific risk factors or already has a diagnosis of osteoporosis.”

The risk factors Medicare considers for osteoporosis are things like steroid usage or the patient takes a drug that causes osteoporosis as a side effect.

“The normal risk factors most doctors would use are advanced age, a small frame, family history, or history of a fracture,” she said. “But that’s not what Medicare uses. So if you have a little 80-year-old lady who is all bent over and looks like her bones could break at any moment, you can’t order a bone-density scan on her unless she already has a diagnosis for osteoporosis. But you can’t get that diagnosis without the bone-density scan. It’s a frustrating catch-22.”

Another reason she dropped Medicare was that it made her feel less than honest. Medicare has very specific guidelines and codes that must be met if a physician wants to order a specific test. The problem is that many patients don’t verbalize their symptoms in ways that easily match Medicare’s guidelines and codes.

“For example, my Mexican-American patients talk about their pains in a very personified way,” said Dr. Madrigal. “They won’t specifically say, ‘I have a throbbing pain in my head that is worse when I cough.’ They’ll tell me, ‘It feels like there is a devil in me and it’s trying to explode.’ Obviously, I can’t code that. So, if I take Medicare, I have to make the patient say something that can fit the code. I didn’t feel comfortable trying to make people say something that would make it legal.

“Otherwise, to make it fit into a code, I have to come up with my interpretation of what the patient is suffering from. The risk is that if the government ever audits me, the auditor could disagree with my interpretation, which could mean I’d be charged with fraud. That was not worth the risk.”

Before she opted out of Medicare, she had about 200 Medicare patients. After dropping Medicare, she initially lost 50 of those patients, although about 40 of them eventually returned to her practice. Despite the fact that any Medicare patient coming to her practice must sign a contract and pay cash, her total number of patients who are covered by Medicare has increased to about 250 now.

“I think the reason is that word has gotten out that I can spend more time with my patients,” she said. “I also think there is some perception that you get what you pay for.”

Despite the various problems, Dr. Madrigal might have continued with Medicare if it had paid her enough to care for her patients.

“But it was not covering my costs,” she said. “I was losing about $5 to $10 per visit when I saw a Medicare patient. All of the hassles and I’m losing money? In the end, it wasn’t worth it.”

Dropping Medicare has led to other very positive results for Dr. Madrigal and her patients.

“I make about the same money I made when I took Medicare, but without the billing and paperwork costs of Medicare, I can now afford to treat some of my patients for free,” she said.

“I don’t charge patients over 90 years old. If you make it that far you are home free,” she laughs. “I don’t charge an established patient who has cancer. And while they are undergoing treatment, I won’t charge their family members to see me either. And the other ones I don’t charge are the ones whose cases are so complicated that it would break my heart to see them go somewhere else.”

Setting Prices, Soviet Style

The reasons why Medicare pay for primary-care physicians is considerably worse than for specialists are many, but three seem to be the most important. The first is the process Medicare uses to update its payment system.

In 1992 the Center for Medicare and Medicaid Services (CMS) adopted a system of price controls for paying physicians known as the Resource Based Relative Value System (RBRVS). This system assigns a numerical value called a “relative value unit” (RVU) to medical services and procedures. There are three basic RVUs. The first is known as a Work RVU that is based on the amount of work, effort, resources and stress that goes into providing a service or procedure. The second is known as the PE RVU that is based on the costs associated with the practice expenses—employee wages, supplies, rent, etc.—required to provide the service or procedure. The third is the MP RVU that is based on the cost of malpractice insurance related to the service or procedure.

Through a rather complicated process, RVUs were assigned for all of the 7,500 services and procedures that Medicare pays for. To get the price of any particular procedure, the three types of RVUs are added together and then multiplied by a dollar amount known as a conversion factor. To ensure that physicians would wield influence over how they were paid by Medicare, the AMA established the Relative Value Scale Update Committee (RUC) in 1991. It is an advisory board composed of representatives from most of the physician specialty societies, such as American Academy of Family Physicians, American Association of Neurological Surgeons, the American College of Cardiology, and so on.

The RUC meets three times annually, and in most years it makes recommendations to CMS on new procedures and services that Medicare should pay for and on ones that need to be revised. Under federal law, every five years CMS must conduct a comprehensive review of RVUs to identify which procedures and services are overvalued and which are undervalued. The RUC plays a large role in the five-year review as well. Overall, RUC wields significant influence over what Medicare pays for procedures and services. CMS has accepted somewhere between 88 and 94 percent of RUC recommendations on RVUs since the early 1990s.14

However, the composition of the RUC results in a payment system that is biased against primary-care physicians. There are 31 members on the RUC, 25 of whom are appointed by the various physician specialty societies. Yet only five are primary-care physicians; the other 20 are specialists.

Under federal law, revisions to RVUs cannot result in Medicare payments to physicians that add more than an additional $20 million to the annual Medicare budget. This means physicians are divvying up a fixed Medicare pie. Of course, doling out the pie in Washington is seldom done cooperatively. This makes the RBRVS a political pork barrel for physicians and their interest groups, and the RUC is the battleground. Like most political fights in Washington, it produces winners and losers.

Dr. Neil Brooks, who served on the RUC as a family physician, claims that the process is “highly political, with battle lines and alliances drawn between specialties. Usually, the battle lines were drawn between primary-care physicians and everyone else. The specialists often team up to support each others’ proposed increases in Work RVUs.”15 As an article in Kaiser Health News noted, “Since specialties are all fighting over slices of the Medicare physician payment pie, and many specialists make the bulk of their profits on procedures, primary care doctors say those specialists avoid increasing the values of the…codes that are primary care’s bread and butter.”16

Similar sentiments were expressed by Dr. J. Leonard Lichtenfield and Dr. Tom Felger, who represented primary-care physicians on the RUC in 2005. They argued for higher reimbursement for office visits because an increase in older patients with complex conditions had made visits more challenging. During debate on the matter, Drs. Lichtenfeld and Felger almost walked out as discussions seemed to reach an impasse. “I was willing to leave negotiations,” Dr. Lichtenfeld said. “I felt we were being stonewalled for economic reasons.”17

Primary care’s bread and butter largely consists of evaluating and managing the care of patients. The bulk of what Medicare pays primary-care physicians consists of 10 different types of patient visits, depending on the severity of the visit and on whether the patient is a new or established patient. A visit with a patient that has a minor ailment and lasts about 10 to 15 minutes is a “Level I” visit. On the other end is a Level V visit which lasts close to an hour and is for a patient with a serious ailment. Medicare pays less for a visit with an established patient than with a new patient, presumably because much of the diagnostic work conducted on the first visit does not have to be repeated on subsequent visits. For example, in Dr. Madrigal’s neck of the woods, Medicare pays $42.43 for a Level I visit with a new patient, and $19.78 for a Level I visit with an established patient.18

Defenders of the RUC deny that it is biased against primary-care physicians, pointing to 1997 and 2007 when Work RVUs for primary-care visits were increased. “We recommended higher increases in 1997 than CMS accepted,” said Dr. Barbara Levy, then chair of the RUC.19

But the preponderance of evidence does not show that the RUC improves pay for primary-care physicians. First, a look at the years between 1995 and 2010 that were not five-year reviews shows that the RUC seldom recommends new services or redefines services so that primary-care physicians are paid better.20 Of the 2,280 procedures and services that the RUC either recommended as either new or in need of revision, only 115 of them, or barely five percent, were ones for primary care. In short, the RUC does not spend much of its resources looking for ways to improve the pay of primary-care physicians.

Second, the increases in the Work RVUs for primary-care visits that Dr. Levy touts didn’t turn out to be such large increases in the end. In both 1997 and 2007 the RVU increases proposed by the RUC added more than $20 million to the Medicare budget. When that happens, CMS has to institute cost-cutting measures to bring Medicare spending back into balance. In 1997 it cut the PE RVUs for all services and procedures by 8.3 percent.21 In 2007 it reduced all Work RVUs by 10 percent.22 That offset some of the gains made in the Work RVUs for primary-care visits.

Third, some members of the RUC appear to have a conflict of interest. Dr. Roy Poses, president of the Foundation for Integrity and Responsibility in Medicine, discovered in 2011 that 14 RUC members had financial relationships with various medical companies. He noted:

It seemed obvious that a committee dominated by a majority of physicians who perform procedures would tend to favor bigger financial incentives for procedures. But now it appears the committee also includes a substantial number of people who work part-time or have ownership interests in companies that also stand to benefit from increasing use of procedures. Procedures drive increased consumption of drugs, supplies and devices, and lead to larger revenue for hospitals and clinics. Thus these financial relationships could reasonably be suspected of even further distorting the committee’s decision-making in favor of procedures.23

Fourth, there is a broad consensus that many procedures are overvalued by Medicare.24 When the RUC recommends a new procedure that Medicare should pay for, it sets the RVUs relatively high since a new procedure often requires more work to complete. Yet, over time, physicians find ways to do the procedure more efficiently, what economists call “productivity gains.” For example, as physicians gain more experience with a procedure, they can complete it more quickly. Or new technology may also reduce the amount of work required to perform the procedure. As that happens, it should be possible to reduce the Work RVUs for those procedures and redistribute them to primary-care services.

Yet that almost never happens. Of the services and procedures that the RUC made recommendations on in the four five-year reviews, the Work RVUs for 1,046 services and procedures were increased, 1,202 remained the same, and only 209 were reduced.25 There was no redistribution of Work RVUs from over-valued procedures to primary-care visits.

Alas, that is to be expected. The specialty societies on the RUC function as interest groups trying to represent their members. Like almost all interest groups, they go to the federal government to get more money for their members. Finding an interest group that is willing to advocate that its members take a pay cut? You’d have an easier time looking for a Dodo Bird.

In 2011, Dr. Paul Fischer, founder of the Primary Care Center in Augusta, Georgia, and Brian Klepper, a health care analyst, began a movement to replace the RUC. They started a website titled, and in a widely touted piece, Klepper along with Dr. David C. Kibbe, encouraged primary-care groups to quit the RUC.26 By May of 2011 they had gotten the attention of the premiere primary-care group, the American Academy of Family Physicians (AAFP). Later that year AAFP held serious discussions about the possibility of leaving the RUC.27 Had the premiere organization representing primary-care physicians dropped out of the RUC, the reverberations would have been felt not only throughout the medical community but also in Congress, possibly leading to a reassessment of the RUC. In the end, the AAFP decided not to leave the RUC, although, according to one spokeswoman, the leadership of the AAFP would “continue to frequently reassess our involvement.”28

But Dr. Paul Fischer doesn’t give up that easy. In August 2011 he filed a lawsuit in federal court, claiming physicians have been harmed by CMS’s reliance on RUC.29 The case is currently working its way through the courts.

The lower pay of primary-care physicians might not matter much if the expenses of running a primary-care practice were considerably lower than for specialists. Lower expenses would, of course, make it easier for primary-care physicians to make money on what Medicare pays them. Unfortunately, practice expenses—rent, salaries, supplies, billing costs, etc.—eat up a larger portion of the incomes of primary-care physicians than specialists. As Table 4 shows, on average practice expenses eat up over 62 percent of primary-care physicians’ income versus about 55 percent for specialists.


One of the biggest expenses that any insurance program, including Medicare, will impose on a physician’s practice is billing costs—the coding and paperwork that physicians must complete to receive payment. Physicians must spend time on billing, time that is not spent making money by treating patients. It also requires them to hire clerical staff to make certain that the physician does the coding properly. Talk to most primary-care physicians and they’ll say they find coding and paperwork to be a frustrating, complicated hassle.

Paperwork As Stool Sample

Dr. John Slatosky grew up in Idaho, joined the National Guard out of high school, and then used the G.I. Bill to attend Idaho State. He attended medical school at the University of Missouri at Kirksville, graduating in 1996.

“I’ve always liked rural areas,” he said. “I just couldn’t see myself as anything but a country doctor.”

For some people the word country may evoke the term “conservative.” While that can be a stereotype, for Dr. Slatosky the term fits. He has little use for government involvement in health care.

In the waiting room of his office is a newspaper story of Torron Eeles, a plumber who lives in England, where most people are covered by the National Health Service. In December 2008 he broke his left upper arm in a fall and needed an operation so that the humerus bone would heal properly. At the time of the article, he had been waiting 10 months for the operation. In the meantime, the humerus had knitted back together, leaving Mr. Elese’s arm grotesquely contorted.30 Above the article Dr. Slatosky has written, “An example of the Miracles of Government-Run Health Care.”

He also is not shy regarding his thoughts on ObamaCare, which he refers to as a “stool sample.” When asked why he replied, “It’s like Speaker Nancy Pelosi said, ‘Congress had to pass the health care bill so you could find out what’s in it.'”

He met his wife, Dana, a physician’s assistant, while at medical school. Afterwards he moved back to Idaho to open a practice. But making ends meet as a country physician in Idaho was difficult, and his wife had mixed feelings about living there.

“My wife, she just couldn’t stand the Idaho winters,” he said. “My dad always told me that if momma isn’t happy, then no one’s happy. So I figured I better find a place for us to live where my wife would be happy.”

The obvious choice seemed to be Randleman, North Carolina, where Dana’s parents lived. In 1999 he interviewed with a hospital nearby in Liberty, about 90 miles Northeast of Charlotte. The hospital made him an offer, and he accepted. After working there for a year and a half, they moved him to an affiliate hospital in Randleman.

“I was a typical physician employed by a hospital,” Dr. Slatosky said. “I had all the say so of a janitor. We had no say in scheduling or work hours, and if you needed a day off you had to beg for it.”

Looking back, he reflects that in that setting he was unable to provide quality care to patients.

“Most hospitals lose money on their primary-care practices because they are so top-heavy with bureaucracy. But this hospital was trying to make its primary-care network profitable, so the physicians had to see about twice as many patients as you would at a normal physician practice. Hospitals are used to dealing with big charges, of thousands of dollars. But primary-care is about small charges. Most of it probably costs $50 to $200.

“But with seeing so many patients, you only get to see them for a short time. And you try to take care of things quickly, and you miss things. If you want quality, you have to take some time with your patients, and patients have to be willing to pay for that.”

In 2005, Dr. Slatosky had had enough of working at the hospital and started his own practice in Randleman. He currently has over 5,000 patients, about 10 to 15 percent of whom are on Medicare.

On a Monday in September 2011, Dr. Slatosky is visiting with one of his patients, “Pete,” a man in his late 60s who is on Medicare. Pete is complaining of pain in his right knee.

“About two months ago, I knelt down and I felt a sharp pain in my knee,” he says. “It’s been there, off and on, since. I think I might need an X-ray.”

Dr. Slatosky begins talking him out of it. “An X-ray might not show much, and it might be a simple problem.”

Dr. Slatosky has Pete lie back on the examining table and begins manipulating the leg. “Do you feel that ‘click’ in your knee?” he asks. Pete nods.

After asking the patient a few questions, Dr. Slatosky concludes that he most likely has arthritis.

“What we can do is start you on some anti-inflammatory medicine,” he says. “If that doesn’t help, then we can give you a shot of Kenalog, a steroid, in the knee. If that doesn’t work then we can move on to an X-ray or an MRI.”

Pete says he’d prefer to try the medication first. He looks uneasy when Dr. Slatosky says the word “shot.”

Dr. Slatosky, ever the smart-aleck, says, “Oh, don’t worry about getting a shot. It’s not bad. I’ve done it to myself and I’m a sissy.”

Pete laughs. He has reason to be cheerful beyond Dr. Slatosky’s joke. Dr. Slatosky will still accept payment from Medicare to cover his visits. That’s because he became a patient of Dr. Slatosky before the end of 2007, when Dr. Slatosky decided to stop taking any new Medicare patients. From then on, any Medicare patients in the Randleman area who were not already part of Dr. Slatosky’s practice would have to go elsewhere.

Dr. Slatosky bids Pete goodbye and heads back to his office. On his way back he explains, “I lose about $10, maybe $15, per patient visit on Medicare. I’m doing better now that I’ve stopped taking new Medicare patients. If I had a lot of new Medicare patients, I’d be in big trouble.”

Once at his office, he starts in on his least favorite part of the job: paperwork.

“I can spend four to five hours a week on paperwork that I don’t get paid for,” he complains. He explains that he particularly dislikes paperwork involving Medicare:

The biggest problem with Medicare, anytime someone needs anything, the paperwork to get it done can be astronomical. Let’s say you have a patient who needs a nebulizer for their cardio-pulmonary obstructive disorder. They run between $60 and $120. To get that, you have to fill out this big form with all these questions, most of which have nothing to do with a nebulizer. So you have to pick out which questions are pertinent. Then you have to send it to a durable medical equipment supplier who then gets the patient a machine. It can be a seven to ten day turn around. Well, if the person is struggling with acute asthma or COPD, he doesn’t have seven to ten days. So we purchased six nebulizers and we keep them in the office. That way if someone needs a nebulizer long term, they borrow one of ours until they get one of their own.

But even paperwork required for more routine work adds to his costs. Dr. Slatosky estimates that for every 10 to 15 minutes he spends with a patient, he’ll spend a quarter to one-third of that on documentation and coding. He also has an employee who ensures that he has done the coding correctly in order to get paid. And it adds up, since he will have to do that for every patient he sees who has Medicare or private insurance.

Dolphin Bites

In 2009 a group of researchers published their findings on the costs physicians incur interacting with health insurers.31 They put the physicians into three categories, primary-care physicians, medical specialists and surgical specialists. Unfortunately, the researchers did not break the data down so that it was possible to determine which expenses were due to Medicare and which were due to other health insurers such as Medicaid or private insurance. Nevertheless, it yielded considerable insight into the costs of claims and billing.

Claims and billing ate up the largest portion, 55 percent, of time physicians’ practices spent interacting with health insurers. For primary-care practices, it accounted for about 53 percent. Clerical staff spent the largest number of hours on claims and billing, spending an average, per week, of 27.1 hours in primary-care practices, 29.8 hours in medical specialists’ practices, and 28.7 hours in surgical specialists’ practices.

For small, one-to-two physician practices, the annual cost of dealing with health insurers was greater for primary-care physicians than medical or surgical specialists. Small primary-care practices spent an average of $72,675 interacting with health insurers. Medical specialists spent $70,788 and surgical specialists spent $61,187. The clerical staff, which accounted for the bulk of the hours spent on claims and billing, cost small primary-care practices an average of $31,666 annually, while they cost medical specialists $27,595 and surgical specialists $27,977. The data strongly suggests that primary-care practices could save substantial time and money by reducing if not eliminating billing expenses.

Billing entails a complicated system of coding. There are two types of codes that physicians must use for billing Medicare, private insurance, or any other insurance provider. The first is Current Procedural Terminology (CPT) codes. These are five digit codes that denote the service or procedure that a physician is providing. For example, the CPT code for a Level I visit with a new patient is 99201, while for a colonoscopy it is 45378.

The second is International Classification of Disease (ICD) codes. These are a system of diagnosis codes that explain to the insurance provider exactly what the patient is being treated for. Depending on the diagnosis, ICD codes are from three to five digits in length. So, if a physician sees a new patient and he diagnoses him with anemia, he would add the ICD code 280 next to the CPT code 99201. If it is a more serious type of anemia, like Plummer-Vision Syndrome, the ICD code used would be 280.8. At present there are about 18,000 ICD codes.

Billing is a bigger expense for primary-care physicians than specialists because primary-care physicians have to use a far wider array of ICD codes.

Dr. Madrigal explains:

When you are a primary-care physician, you are going to see a much wider variety of illnesses. If you are a specialist you are going to see a much more finite number of illnesses, especially if you are, say, an orthopedic surgeon who does primarily knees, probably 90 percent of all your codes are going to be the same five codes. As opposed to primary care, you never know what’s going to walk through the door. You could get something very rare. And now you have to be so specific with the codes. You have to code for “fall from uneven ground,” or “fall from tractor.”

Dr. Madrigal isn’t kidding about the specificity. It will get worse in October 2014 when CMS switches from version 9 of the ICD codes to version 10. ICD-10 will expand the number of codes to about 140,000. The codes will run from three to seven digits and will demand far more specificity. Under ICD-9, if a patient has been bitten on the finger by an animal and the finger is bleeding, the physician would probably use 883, the ICD code for an open wound on a finger. Under ICD-10, the physician will have to code based on the animal that did the biting.

The initial bite from a dog is coded W540XXA while a cat is coded W5501XA. A bite by a parrot is W6101XA, and for a macaw it is W6111XA. If the bite is from some other exotic bird, the physicians should use code W6121XA. There is even a code for getting bitten by a dolphin, W5601XA. And for the swimmer that didn’t take the hint the first time, there is code W5601XD for getting bitten by a dolphin in a subsequent encounter.

There are ICD codes for where an injury took place, such as in a mobile home, an opera house, or near a lamp post. There are codes for the things that cause injury by striking people, like lightning, or by getting hit by a falling object in a passenger ship, sailboat, canoe, or other unspecified water craft.32 Despite the effort at micromanaging physicians that CMS put into the new ICD codes, it failed to include one for “devil exploding in head.”

Dr. Madrigal, of course, doesn’t have to worry about that anymore. Indeed, getting rid of the billing costs that go along with Medicare was a huge relief. “I saved on overhead costs by dropping Medicare. I’d probably have to hire two more people if I took Medicare, just to do the billing, to make sure I was coding properly and then resubmitting claims and making sure those claims came back in.”

For Dr. Slatosky, it will only mean higher overhead costs as he or one of his employees must spend more time tracking down the appropriate ICD codes so they can get paid by Medicare. It may only be a matter of time before he switches entirely to a direct-pay practice.

“Even though Medicare’s rates are some of the lowest, I could charge all of my patients, even those with private insurance, Medicare rates if all of my patients paid me out-of pocket,” he said. “Without all of the paperwork hassles I have to deal with to get paid, I could spend more time with my patients and have a pretty lucrative practice.”

Sustainable Headache

While the RUC and Medicare’s billing costs impose a substantial financial burden on primary-care physicians, the Sustainable Growth Rate (SGR) was the proverbial straw that broke the camel’s back. Indeed, the implementation of the SGR roughly coincides with the increase in physicians limiting their exposure to Medicare. The SGR first took effect in 2002 and has threatened physicians who take Medicare ever since. According to the Texas Medical Association, 78 percent of Texas physicians were still accepting all new Medicare patients in 2000.33 By 2011 that had dropped to 67 percent.34

Passed by Congress in 1997, the SGR is a formula that is supposed to help control Medicare’s costs by limiting payments to physicians. Each year the SGR sets an expenditure target for the amount Medicare spends on physicians’ fees. If the amount that Medicare actually spends exceeds the expenditure target, then the following year physicians’ fees are supposed to be cut by an amount that brings Medicare spending back into line with expenditure targets.

The SGR was exactly the sort of boneheaded idea one would expect Congress to come up with to control Medicare physicians’ fees. It actually gave physicians incentives to increase the amount of fees they charged Medicare. As one former administrator of the CMS said:

The problem is that the SGR neither affects nor is driven by the spending of any individual physician. If anything, individual physicians are provided with an even greater incentive to increase spending, because nothing they do as individuals can affect overall spending, but their fees will be affected by what other physicians do collectively, irrespective of their own behavior.35

Any physician foolish enough to do his small part to meet the expenditure targets by reducing the amount of services he provided for his Medicare patients would be penalized twice. First when he received less income from Medicare, and second when the SGR cuts were triggered anyway due to other physicians not reducing what they did for their Medicare patients.

The year 2001 was the first time that Medicare payments to physicians exceeded the SGR expenditure target, resulting in a 5.4 percent cut in physician fees in March 2002. Interest groups representing physicians did not take the cut lying down. Faced with another cut of 4.4 percent in March 2003, physician groups threatened to hit Congress where it would hurt the most. “Physicians cannot afford to treat Medicare patients under the new rates,” said Dr. James C. Martin, president of the American Academy of Family Physicians.36 The American Medical Association followed up with a survey in January 2003 showing that if another round of SGR cuts were to take place a significant number of physicians would restrict the number of Medicare patients they saw.37 Apparently members of Congress were less than enthused by the prospect of a lot of senior voters struggling to find physicians who would treat them. Congress suspended the 4.4 percent cut and replaced it with a 1.6 percent increase.

For the next decade this kabuki dance would repeat itself. As the date that the SGR cuts would take effect drew close, physician groups would issue warnings about the number of physicians who would have to stop treating Medicare patients. Congress would suspend the cut and usually increase payment rates by one to two percent. This ended up increasing the difference between the SGR expenditure target and what Medicare was actually spending so that each subsequent proposed cut was larger than the last. By early 2012, Congress had to suspend an SGR cut of nearly 30 percent.

Even though Congress routinely suspended the SGR cuts since 2002, the SGR still had the effect of reducing Medicare payments to physicians. That’s because the small one to two percent increases to Medicare’s payment rates that Congress usually added when it suspended the SGR cuts were not enough to keep up with inflation. Factor in inflation and physicians were being paid less over a decade. Consider the reimbursement for a Level I visit with a new patient. In 2001, before the SGR took effect, Medicare paid $35.19 for that type of visit in the Austin, Texas area. By 2011, Medicare paid $40.80.38 Yet if reimbursement rates had grown at the rate of inflation during that time, Medicare would have paid $45.08. In effect, physicians in Austin experienced a 10.5 percent reduction in their Medicare rates for that service.

The SGR affects all physicians, primary-care and specialists alike. But its impact is hardest felt by primary-care physicians, since they tend to earn less than specialists. A Texas Medical Association survey in 2011 polled physicians on what their response would be if a looming SGR cut of 29.5 percent went into effect in 2012. It found that 41 percent of primary-care physicians had either stopped seeing new Medicare patients or would do so if the cut went into effect, versus 23 percent for medical specialists and 27 percent for surgical specialists.39

The SGR also has the pernicious effect of creating uncertainty among physicians. Congress usually waits until right before the SGR cut takes effect before suspending it. On a few occasions Congress has actually suspended it shortly after it took effect. Not knowing if they will face reductions in their Medicare payments year after year has been a major factor in causing some physicians to restrict their acceptance of Medicare. The 2010 AMA survey found that of the 17 percent of physicians who were limiting the number of Medicare patients in their practice, over three-quarters listed the “ongoing threat of future payment cuts makes Medicare an unreliable payer” as a reason.40

That is the main reason Dr. Slatosky stopped taking new Medicare patients.

“It was in 2007, when the cut was going to be about 10 percent,” he said. “Then Congress came in at the last second and stopped it. But the news stories noted that Congress would have to come in and suspend it again in six months. I pretty much saw the writing on the wall that this was going to be a perpetual mess. You knew Congress was not going to fix it permanently.”

Dr. Slatosky decided he wasn’t going to keep expanding the number of Medicare patients in his practice while also worrying that every year or so Medicare might cut the amount it paid him to treat them. It was not a decision he made easily.

“It bothered me a lot because now there were going to be Medicare patients who would have the hassle of trying to find another physician in this rural area,” he said. “But in the end, it was better to have a physician here seeing some of the Medicare patients in the area than me losing my business and having no physician here at all.”


In 2008, Dr. Douglas Iliff, a primary-care physician, wrote an article with the provocative title, “Does Primary Care Need Medicare?” He complained of Medicare’s “reimbursement level that barely covered [his] overhead.” Furthermore, after changes made by Congress in the mid-1990s, it was easier for federal prosecutors to go after physicians for Medicare fraud. Dr. Iliff saw federal agents close down a colleague’s office and confiscate her billing records. “Although she was found innocent of wrongdoing,” Dr. Iliff wrote, “I imagine she had some difficulty getting her reputation back.”

That was enough for Dr. Iliff to finally drop Medicare. In the end he lost some Medicare patients but saw his bottom line improve now that he was able to spend more time with patients who had better paying insurance. “It certainly makes you wonder,” he concluded, “what would happen if primary care resigned from Medicare?”41

Is that really the kind of result we want? If enough primary-care physicians leave Medicare, it could eventually result in serious access problems for the program’s beneficiaries. It would be especially difficult for those patients unable to pay for services out-of-pocket, most likely the elderly poor and the disabled.

It would be especially worrisome since the Medicare population is one that may be in the most need of primary care. Patients with multiple illnesses (in medical lingo “comorbidities”) are most likely to be found among the elderly and the disabled. Considerable evidence shows that primary care is vital to effectively treating people with comorbidities.42 Additional research suggests other reasons to keep primary-care physicians as part of Medicare, such as primary care’s ability to prevent illness and death and reduce costs.43

Ultimately, what we should want is a Medicare system that pays primary-care physicians without the maddening inconveniences. We should want a way of paying primary-care physicians that no longer puts them at the mercy of the RUC, that eliminates most if not all Medicare-related billing costs for primary care, and renders the SGR moot.

The best way to do this is to give Medicare funds to Medicare beneficiaries and let them pay their physicians directly. Each year Medicare should deposit $1,200 in a “Medicare Primary Account” for every beneficiary. Under such a system, every primary-care physician could charge his Medicare patients what he believed was a reasonable price for a visit. If the patient agreed, he would pay the physician directly out of the Medicare Primary Account using either a debit card or a checkbook that would come along with the account. If the Medicare patient felt the price was unreasonable, he could look around for a physician whose prices he thought were better.

Medicare could also give beneficiaries flexibility with their Medicare Primary Accounts. The accounts could be used for more than just primary-care visits. Beneficiaries could also use them to pay for visits to specialists, low-cost medical tests, and other health care services.

It would not be cost-prohibitive. There were about 47.5 million Medicare beneficiaries in 2010. Giving each one of them a $1,200 Medicare Primary Account would cost Medicare about $57 billion. Medicare spent more than double that, $140 billion, on physicians’ fees in 2010.

Furthermore, the accounts could be set up so that both beneficiaries and taxpayers would benefit from any savings. Simply let beneficiaries keep 50 percent of whatever is left over in the account. So, if at the end of the year the beneficiary has saved $400 in his account, he will get to keep $200 to spend on whatever he wants. The other 50 percent would revert back to Medicare to be spent on the Medicare Primary Accounts in the following year.

What about beneficiaries whose expenses exceeded $1,200 in a single year? In those cases Medicare would keep paying for their primary care and other low-cost expenses through the Medicare Primary Accounts. Such beneficiaries would simply be ineligible to keep any savings since they had used up the initial $1,200.

Primary-care and other physicians who accepted payment through Medicare Primary Accounts would no longer be at the mercy of Medicare’s price control regime. They wouldn’t have to worry about the politicking within the RUC or the harrowing deadlines of the SGR. Their fees would be determined by the supply and demand of the marketplace.

They would save money by eliminating billing expenses associated with Medicare. Ultimately, it makes no sense to have billing expenses for primary-care physicians. As Dr. Slatosky said, primary-care charges are relatively small charges. Reducing transaction costs helps when the price for your services ranges from $50 to $200. Primary-care physicians already deal with expenses such as employee salaries, rent, and supplies, and the added expense of billing makes it more difficult for them to generate profit.

Indeed, billing expenses for primary care is an artifact of having a health insurance system in which we expect insurance to pay for everything, even charges that we should pay for directly. Consider, how many areas of our economy do we spend relatively low amounts on goods and services and then expect the provider to bill a third-party payer to get paid? Exactly none, and with good reason. It would just add to the cost of those goods and serves, thereby increasing the prices that consumers pay. Paying directly for goods and services is obviously more efficient.

Likewise, we should pay directly for primary-care services. A system of Medicare Primary Accounts moves us in that direction.

David Hogberg, Ph.D., is Washington correspondent for Investor’s Business Daily and a former health care policy analyst for the National Center for Public Policy Research.

** The names of the patients in this chapter have been changed to protect their privacy.


1 David Olmos, “Mayo Clinic in Arizona to Stop Treating Some Medicare Patients,” Bloomberg, December 31, 2009, at (Jan 7, 2011).

2 Todd Ackerman, “Texas Doctors Fleeing Medicare In Droves,” Houston Chronicle, May 18, 2010, at (Feb. 4, 2011).

3 “Survey of Texas Physicians: Preliminary Research Findings,” Texas Medical Association, March 2010.

4 Ellyn Boukus, Alwyn Cassil, and Ann S. O’Malley, “A Snapshot of U.S. Physicians: Health Tracking From the 2008 Health Tracking Physician Survey,” Center for Studying Health System Change, Data Bulletin, No, 35, September 2009, p.7.

5 “The Impact of Medicare Physician Payment on Seniors Access’ to Care,” American Medical Association, AMA Online Survey of Physicians, May 2010; and Sandra L. Decker, “In 2011 Nearly One-Third of Physicians Said They Would Not Accept New Medicaid Patients, But Rising Fees May Help,” Health Affairs, August 2012, Vol. 31, No. 8.

6 “The Physicians’ Perspective: Medical Practice in 2008,” The Physicians’ Foundation, Survey Summary and Analysis, October 2008.

7 “The Impact of Medicare Physician Payment on Seniors Access’ to Care,” May 2010.

8 Data downloaded from “HSCdataOnline – Physician Survey,” at (March 10, 2012).

9 “The Impact of Medicare Physician Payment on Seniors Access’ to Care,” May 2010.

10 Boukus, et al., p.7.

11 “Medicare SGR Survey,” Texas Medical Association, August 2011, p.3.

12 “Opt-Out – Physician – standard Physicians Contract,” Association of American Physicians and Surgeons, at (March 14, 2012).

13 “Opt-Out – Patient – standard Patient Contract,” Association of American Physicians and Surgeons, at (March 14, 2012).

14 Miriam J. Laugesen, Roy Wada, and Eric M. Chen, “In Setting Doctor’s Medicare Fees, CMS Almost Always Accepts The Relative Value Update Panel’s Advice On Work Values,” Health Affairs, May 2012, Vol. 31, No. 5; and Joe Eaton, “Little-Known AMA Group Has Big Influence On Medicare Payments,” Center for Public Integrity, October 27, 2010, at (August 4, 2011).

15 Eaton, 2010.

16 Ibid.

17 Anna Wilde Mathews, “Dividing the Medicare Pie Pits Doctor Against Doctor,” The Wall Street Journal, April 7, 2011, at (April 19, 2012); also see Anna Wilde Mathews and Tom McGinty, “Physician Panel Prescribes the Fees Paid by Medicare,” The Wall Street Journal, October 26, 2010, at (April 19, 2012).

18 “Physicians Fee Schedule Search,” Center for Medicare & Medicaid Services, at (August 4, 2011).

19 Eaton, October 27, 2011.

20 Federal Register, “Part II, Department of Health and Human Services,” Friday, December 8, 1995, pp. 63162-63164; Federal Register, “Part, III Department of Health and Human Services,” Friday, October 31, 1997, pp. 59085-59088; Federal Register, “Part II, Department of Health and Human Services,” Monday, November 2, 1998, pp. 58889-58890; Federal Register, “Part III, Department of Health and Human Services,” Tuesday, November 2, 1999, pp. 63162-63164; Federal Register, “Part II, Department of Health and Human Services,” Wednesday, November 1, 2000, pp. 65421-65423; Federal Register, “Part II, Department of Health and Human Services,” Tuesday, December 31, 2002, pp. 80002-80005; Federal Register, “Part II, Department of Health and Human Services,” Friday, November 7, 2003, pp. 63233-63235; Federal Register, “Part III, Department of Health and Human Services,” Monday, November 15, 2004, pp. 66365-66368; Federal Register, “Part II, Department of Health and Human Services,” Monday, November 21, 2005, pp. 70277-70280; Federal Register, “Part II, Department of Health and Human Services,” Tuesday, November 27, 2007, pp. 66365-656368; Federal Register, “Part II, Department of Health and Human Services,” Wednesday, November 19, 2009, pp. 69883-69890; and Federal Register, “Part II, Department of Health and Human Services,” Wednesday, November 25, 2009, pp. 61950-61953; Federal Register, “Part II, Department of Health and Human Services,” Monday, November 29, 2010, pp. 73342-73349.

21 Medicare Program; Revisions to Payment Policies and Five-Year Review of and Adjustments to the Relative Value Units Under the Physician Fee Schedule for Calendar Year 1997, Final Rule, Federal Register, November 22, 1996, p. 59721.

22 Medicare Program; Revisions to Payment Policies, Five-Year Review of Work Relative Value Units, Changes to the Practice Expense Methodology Under the Physician Fee Schedule, and Other Changes to Payment Under Part B; Revisions to the Payment Policies of Ambulance Services Under the Fee Schedule for Ambulance Services; and Ambulance Inflation Factor Update for CY 2007, Final Rule, Federal Register, December 1, 2006, pp.69735-69736

23 Roy Poses, “Conflicts of Interest Among The RUC’s Members,” Care and Cost, April 28, 2011, at (April 19 2012).

24 Jerry Cromwell, Nancy McCall, Kathleen Dalton and Peter Brau, “Missing Productivity Gains in the Medicare Physician Fee Schedule: Where Are They?” Medical Care Research and Review, November 2010, Vol. 67, No. 6.

25 “Report to Congress: Medicare Payment Policy,” Medicare Payment Advisory Commission, MedPAC, March 2006, p. 142; “Medicare Program; Five-Year Review of Work Relative Value Units Under the Physician Fee Schedule and Proposed Changes to the Practice Ex0pense Methodology, Proposed Notice,” Federal Register, June 29, 2006, pp. 37174-37188; and “Medicare Program; Five-Year Review of Work Relative Value Units Under the Physician Fee Schedule , Proposed Notice” Federal Register, June 6, 2011, pp. 32423-32427.

26 Brian Keppler and David C. Kibbe, “Quit The RUC,” Kaiser Health News, January 20, 2011, at (April 19, 2012).

27 Brian Klepper, Paul Fischer and Kathleen Anne Behan, “Stifling Primary Care: Why Does CMS Continue To Support The RUC?” Health Affairs Blog, May 24, 2011, (April 19, 2012)

28 “AAFP Opts to Remain in the RUC: Academy Vows to Advocate Change, Frequently Reassess Involvement,” AAFP News Now, American Association of Family Physicians, March 13, 2012, at (April 19, 2012).

29 Brian Klepper and Paul Ficscher, “Stifling Primary Care: Why Does CMS Continue To Support The RUC?” Health Affairs Blog, (April 19, 2012).

30 “Plumber with shattered arm left horrifically bent out of shape has operation ‘cancelled four times’,” The Daily Mail, October 8, 2009, at (May 10, 2010).

31 Lawrence P. Casalino, Sean Nicholson, David N. Gans, Terry Hammons, Dante Morra, Theodore Karrison and Wendy Levinson, “What Does It Costs Physician Practices To Interact With Health Insurance Plans?” Health Affairs, July/August 2009, Vol. 28, No. 4.

32 Anna Wilde Mathews, “Walked Into A Lamppost? Hurt While Crocheting? Help Is On The Way: New Medical-Billing System Provides Precision; Nine Codes for Macaw Mishaps,” Wall Street Journal, September 13, 2011, at (September 20, 2011).

33 “The Impact of Medicare Physician Payment on Seniors Access’ to Care,” May 2010.

34 “Medicare SGR Survey,” August 2011.

35 Gail Wilensky, “Reforming Medicare’s Physician Payment System,” The New England Journal of Medicine, February 12, 2009, Vol. 360, No. 7, p.654.

36 Robert Pear, “Medicare to Cut Payment To Doctors 4.4% Next Year,” The New York Times, December 21, 2002 Section A, p. 14.

37 Aparna Narayanan, “Medicare, Medicaid funding problems,” Asbury Park Press, March 20, 2003, Section 18, p.18.

38 “Physicians Fee Schedule Search.”

39 “Medicare SGR Survey,” August 2011.

40 “The Impact of Medicare Physician Payment on Seniors Access’ to Care,” May 2010

41 Douglas Iliff, “Does Primary Care Need Medicare”” Family Practice Magazine, January 2008, Vol. 15, No. 1, at (March 2, 2012).

42 Barbara Starfield, Klaus W. Lemke, Terence Bernhardt, Steven S. Foldes, Christopher B. Forrest, and Jonathan P. Weiner, “Comorbidity: Implications for the Importance of Primary Care in ‘Case’ Management,” Annals of Family Medicine, May/June 2003, Vol. 1, No. 1; and Thomas Bodenheimer, Edward H. Wagner, and Kevin Grumbach, “Improving Primary Care For Patients With Chronic Illness,” Journal of the American Medical Association, October 9, 2002, Vol. 288, No. 14.

43 Barbara Starfield, Leiyu Shi, and James Macinko, “Contributions of Primary Care to Health Systems and Health,” The Milbank Quarterly, 2005, Vol. 83, No. 3; and Kevin Grubach and Thomas Bodenheimer, “A Primary Care Home for Americans: Putting the House in Order,” Journal of the American Medical Association, August 21, 2002, Vol. 288, No. 7.

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.