The first threat to many physicians’ incomes arrives January 1 when the 2013 Centers for Medicare and Medicaid Services (CMS) fee schedule takes effect. Finalized on November 1, the fee adjustments at the time of printing reflected increases for only a few specialties, such as family practice physicians with an increase of seven percent and both internal medicine and pediatrics with an increase of five percent.
But numerous specialties will be taking reductions and most physicians will see no increase in reimbursements at all next year, though expenses will rise. Hit the hardest will be radiation oncologists with a 14 percent reduction, while radiologists face a four percent drop, and cardiologists’ will sink by three percent.
CMS could hit physicians with an additional across-the-board fee reduction at a massive scale on January 1 if Congress doesn’t override the annual sustainable growth rate (SGR) recommendation. Mandated by the 1997 Balanced Budget Act and meant to reduce budget deficits, Congress has been overriding the scheduled SGR reductions since 2002. This year’s recommendation would cut all physician fees by 27 percent.
“What has happened over the years is that before January, Congress comes in and overrides the SGR recommendation for a few months at a time,” says Mary Elliott, CPA, with Warren Averett Kimbrough & Marino. But she warns that with the elections, Congress may not act before the New Year.
“Practices need to be prepared if Congress does not do something to stop the cuts from happening,” Elliott says. “Because the CMS may stop payments for those first two weeks in January to wait on Congress.”
If so, practices need to figure out now how to cover overhead for those first few weeks in January. “It’s difficult, because at the end of the year, most accountants are telling practices to spend their profits so they don’t have to pay tax on it twice, once this year and then next,” Elliott says.
If Congress has still not acted by mid-January, CMS will start paying reimbursements at the 27 percent reduction. “Congress knows that doctors would quit seeing Medicare patients if they allow this cut,” Stroud says. But he warns that this isn’t an all or nothing option. Congress could still pass some sort of overall reduction.
Physicians could take a third hit to their income from the government if Congress does nothing about the expiration of the Bush tax cuts on January 1. “They were put in place with a defined expiration date that was extended once already,” Stroud says. The result will be a noticeably higher tax bracket for most physicians.
Elliott recently ran the numbers on one physician client. “It’s going to cost him an additional $80,000 in taxes if those cuts expire,” she says. Physicians need to plan for that extra withholding starting in January if Congress hasn’t taken action within a few weeks. Otherwise if they wait until summer, they’ll have to pull the tens of thousands for that tax payment from only six months of salary rather than twelve.
Other new taxes, such as those imposed by the Patient Protection and Affordable Care Act and the bundling of reimbursements, mean physicians and practices likely face less income in the near future.
“If a practice takes a 20 percent cut in reimbursements and half their revenue is Medicare, then they take a ten percent reduction in total receipts, because their overhead won’t change,” Stroud says. “So a ten percent reduction in reimbursements for a practice means a 20 percent reduction in physicians’ salaries.”
For instance, in a practice, generally half of the revenue goes to overhead and half to doctors’ salaries. In a $1 million-revenue practice, a ten percent drop leaves $900,000. But with the $500,000 in overhead remaining constant, the physicians’ income must decrease to $400,000 to absorb the revenue loss.
With overhead unable to be cut, the only expense left to reduce for a practice will be debt. “There’s good debt and bad debt,” Stroud says. Good debt for a practice is borrowing to buy a piece of equipment that the practice can bill for its use, like an x-ray machine. “Bad debt is borrowing to simply to prop up physicians’ bonuses at the end of year,” he says.
On the personal finance side, Elliott says young physicians usually have a full array of debt, from education to cars, and wonder where to put their first earned dollars. “Pay off the highest interest-rate debt first,” she says. “Then anything that with interest that’s not tax deductible, and, finally, any with monthly fees.” Freeing up those monthly fees means more cash flow to put toward other debts. “So you get a cascading effect to paying all your debt off faster.”
Stroud says practices have an added issue with debt of an aging physician population. “When they leave the group, they leave behind the repayment responsibility of that debt,” he says. ”So you don’t want to be the last physician standing.”