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Federal Advocacy
Medicare Physician Payment

Preventing Medicare Payment Cuts Fact Sheet

The American Optometric Association (AOA), working in cooperation with other health provider organizations, is urging Congress to correct the flawed Medicare payment formula that has threatened to cause unacceptable cuts in Medicare reimbursement since 2001. Although a long-term fix is needed, Congress and the President, citing budget constraints, continue to deal with this issue with year-by-year approach.

Last year, when OD’s and other physicians were faced with a 4.4% Medicare payment reduction for 2006, the AOA played a key role in securing enactment of legislation (Public Law 109-171) to completely reverse the cut and maintain payment rates. With the new threat of an across-the-board cut in the Medicare payment rate of about 5% due to take effect on January 1, 2007, the AOA is a is again leading on this issue and urging Congress to avert a cut again this year.

The Medicare payment formula involves the sustainable growth rate (SGR) which is flawed because it penalizes providers with lower payments when the growth in utilization of health care is greater than the growth in the gross domestic product (GDP). Linking the SGR to the GDP is flawed because growth in health care is driven by factors other than the GDP, such as patient health needs, new technology, and public policies that encourage patients to seek certain services such as preventive benefits – none of which providers have control. The 2006 Medicare Trustees Report projects cuts in physician payment rates totaling 37 percent through 2015, resulting from this flawed SGR component.

Many health programs in the private sector link their payment system directly to Medicare rates; therefore this affects non-Medicare patients as well. Although many policymakers envision transforming the physician payment system to emphasize health information technology and quality improvement, that vision will not become reality as long as SGR payment cuts continue. In the long run, all patients may find it more difficult to find a physician. The Council on Graduate Medical Education predicts a shortage of 85,000 physicians by 2020, and multi-year cuts in Medicare are nearly certain to exacerbate this shortage by making medicine a less attractive career and encouraging retirements among the 35 percent of physician who are 55 or older.

There is widespread consensus that the SGR formula needs to be replaced. The Medicare Payment Advisory Commission (MedPAC) has recommended that the SGR be replaced with a system that reflects increases in practice costs. The Centers for Medicare & Medicaid Services (CMS) has indicated that the current system is not sustainable. The health care provider community is united in its support for a new Medicare physician payment system that adequately reflects increases in the cost of practicing health care. Providers must receive Medicare payments that keep pace with the cost of treating our nation’s seniors. The SGR formula must be eliminated and replaced with an annual system that reflects increase in provider’s practice costs.


  1. Take action this year to prevent provider payment cuts in 2007 and secure a positive payment update that accurately reflects practice cost increases.
    • For 2007, the Medicare Payment Advisory Commission has recommended that Medicare payment rates be increased by 2.8%.
  2. Replace the unsustainable growth rate formula with a payment system that accurately reflects practice cost increases, thereby preventing the need for congressional intervention each year to avert steep cuts.

For additional information in regards to the impact of Medicare cuts on a particular state, see information provided by the AMA at http://www.ama-assn.org/ama/pub/category/6930.html.