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How to survive Medicare payment cuts

Start planning now for SGR-mandated reimbursement reductions early next year

Cuts are coming. At this time, you have no way of knowing how deep they will be. Your practice is more likely to survive them, however, if you create cash-flow projections for your practice.


Medicare's sustainable growth rate (SGR) formula—adopted by Congress in 1997 to keep Medicare spending from growing faster than the economy as a whole—called for a physician reimbursement decrease of 27.4% in January 2012. Congress once again intervened; in mid-February, after a 2-month extension of the existing reimbursement rates, the House of Representatives and the Senate voted to postpone the cuts to January 2013.

Michael J. Wiley
Indeed, SGR-mandated cuts have been averted every year since 2003. But there is no guarantee of another 11th-hour rescue. So you should take action now to limit the effect of a sharp New Year's Day revenue drop.


I recommend that most practices prepare for an overall practice revenue decrease of 10% and hope for less of a cut. A "plan ahead" strategy, rather than focusing on doom and gloom, stresses that although changes will be needed, scenarios exist in which practice owners will continue to make a respectable living.

In the past, when reimbursement was reduced and expenses increased, many physicians simply saw more patients. Now, most doctors are maxed out and cannot increase volume further. Instead, you'll need to take a close look at your practice's income and expenditures and develop a strategic plan to address changes in reimbursement.

Start by looking at your profit-and-loss report, or the data on your tax return, to determine your practice overhead. You can do this by making a spreadsheet that separates general expenses from those expenses that benefit providers. Then divide non-provider expenses by receipts. In Example 1 (to the right), the overhead ratio is 62.4%. Most medical practices operate on a 45% to 65% overhead ratio.

Make copies of your profit-and-loss analysis, then modify it to show how revenue decreases might affect your practice. Example 2 (to the left) shows the effect of a 10% drop in reimbursement, combined with a 2.5% cost-of-living increase in expenses. The result: a 31% plunge in the funds available for your compensation.

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