For many physicians – particularly those with large Medicare populations – the Deficit Reduction Act of 2005 (DRA) is approaching like a slow-motion avalanche that threatens to engulf their practices. The act was signed into law in February 2006 with the objective of reducing Medicare and Medicaid spending by a combined total of $11.1 billion between 2006 and 2010.

The cuts began this year and will continue to take progressively deeper bites out of physician income in 2008 and beyond. While stop-gap efforts aimed at forestalling the most severe reductions were successful last year, it seems unlikely that the full force of the DRA can be avoided much longer.

And it’s not only physicians with sizable Medicare populations that are at risk. Commercial payers, just like the federal government, are extremely interested in reducing utilization and reimbursement. Consequently, many of the DRA reimbursement cuts should eventually work their way into commercial contracts and further increase the financial pressure on physicians.

For most doctors, the only way to counter reimbursement cuts is to work longer and harder. Thus, materials managers who are involved with physicians in major purchasing initiatives or cost-control projects should be sensitive to the physician’s financial realities.

Understanding that physicians are grappling with serious, if not practice-threatening, financial challenges could go a long way toward helping the materials manager establish a better working relationship with the doctor.

As ominous as the DRA is for many physicians, it is only part of the paradigm shift now underway in Medicare. The Centers for Medicare and Medicaid Services (CMS) currently is conducting a series of demonstration projects designed to reward providers for meeting quality objectives. The programs are expected to be expanded as pay-for-performance (P4P) continues to gain traction in the private sector. Most observers believe it is only a matter of time before significant portions of the Medicare system are linked to incentive-based payment schemes.

A major CMS demonstration project, the Physician Quality Reporting Initiative (PQRI) was launched on July 1, 2007. PQRI established financial incentives to encourage physician participation in a voluntary quality reporting. Those who successfully report a designated set of quality measures on claims for dates of service from July 1 to Dec. 31, 2007, may earn a bonus payment, subject to a cap, of 1.5 percent of total allowed charges for covered Medicare physician fee schedule services.

Not surprisingly, many physicians are skeptical about P4P and concerned about the practicality of implementing the programs. Without a comprehensive electronic medical record, they believe that that Medicare P4P could create a crippling administrative burden for practices. They also question whether quality can be accurately measured. These concerns have been made worse by growing disillusionment about Medicare reimbursements generally.

For materials managers, it is possible that the growing emphasis on quality will lead to increased friction over medical device purchasing, given that physicians will be less interested in the cost of a particular device and more interested in whether it will produce a quality outcome. As a result, it is important that the materials manager work with physicians to develop specific criteria for matching a patient’s requirements to a particular medical device before P4P becomes the dominant payment mechanism.

By pointing out to physicians that cost ultimately will be weighed with quality in assessing physician performance, materials managers can get a head start on developing a more cost-sensitive clinical environment and one that theoretically will benefit all concerned: The hospital, the physician and the patient.

Materials managers can also help boost physician involvement in cost-cutting initiatives by working with administrators to identify various "carrots" aimed at rewarding or incentivizing cooperation. Whether it is something as simple as a new microscope or as complex as a new service line, administrators and materials managers should listen closely to physicians when they describe what it would take to do their jobs more effectively. To the extent that the requests make sense financially, hospitals should try to meet the physician’s needs.

Many people, both in healthcare and without, have a difficult time mustering much sympathy for physicians who may be looking at significant pay cuts. Even with a loss of income, most doctors still will make far more than the average American. Yet this fact obscures the reality that faces young and recently established physicians today. As the cost of higher education has increased, many younger physicians have been forced to take on enormous debt to get through medical school. At the same time, a practice’s operating expenses, from malpractice insurance to labor to regulatory compliance, all have steadily increased.