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January 7, 2014

Medicare’s sustainable growth rate formula may finally be repealed

Caretaker assisting senior man with walker

This may be the year in which  which Medicare’s Sustainable Growth Rate (SGR) formula is finally repealed. The formula is one of Congress’s less-successful attempts at controlling health care costs. It is part of a law that each year threatened to cut physicians’ pay for Medicare services by a substantial percent, but then Congress stepped in and canceled the cut for that year.

The SGR was enacted as part of the Balanced Budget Act of 1997. Congress was concerned that the Medicare fee schedule would not sufficiently constrain spending for physicians’ services under Part B of the Medicare program because physicians, for example, might increase the volume of services to make up for a loss in revenue on per-service payments. If the cost of Part B exceeded limits specified by the formula, Medicare rates for the following year would be reduced.

Formula tied to growth in economy

The formula is a complex one. It takes into account multiple variables, including change in physicians’ fees, the number of Medicare beneficiaries, growth in the gross domestic product (GDP) per capita, and changes in health care spending due to laws and regulations. The broad goal of the formula is to not allow spending for physicians’ services to increase faster than the growth of the economy.

For the first four years of the program, there was not a problem. Actual expenditures were less than or close to the target expenditures. So the updates to the physicians’ fee schedule provided increased reimbursements to physicians for each of those years. In 2002, expenditures exceeded targets, and physician reimbursements were cut by 4.8 percent.

That was not acceptable to physicians and lawmakers. So for all years after 2002, Congress provided what has been referred to as the "doc fix" or "pay patch" - a law that suspended the payment cuts and usually provided a moderate increase for physicians.

The underlying formula, however, was not changed or repealed. Each year, the amount of payment cuts that would have to be made in order to balance the books under the formula increased. Under the formula, if Congress does not solve the problem between now and the end of the year, Medicare reimbursement rates for physicians in 2014 will be reduced by about 25 percent.

Broad support for repeal

There is near-universal agreement that the SGR formula needs to be repealed or changed. The formula has not served to cut costs, and if the formula were applied, the number of physicians willing to treat Medicare beneficiaries would be reduced. Support for change comes from Republicans, Democrats, the White House, the Medicare Payment Advisory Commission, and the American Medical Association (AMA).

In a letter to Congressional leaders urging repeal of the SGR formula, the AMA’s Executive Vice President and CEO, James Madara, M.D., said, "Stable and predictable payment models are necessary to ensure physicians can plan for investments in capital improvements and continuously make advancements in delivering higher quality and more efficient care."

Part of what has delayed coming up with a permanent remedy has been the cost of repeal. The Congressional Budget Office (CBO) scores legislative proposals to determine their cost. Until recently, the cost of repeal of the SGR formula had been set at $244 billion over 10 years. This year, the CBO reduced its estimate to $138 billion over 10 years. That will make repeal more politically palatable.

The Affordable Care Act provides alternate ways to save health care dollars, particularly in the Medicare program. The act provides for an increase in "value-based purchasing" by which the government (and private payors) will make more payments based on value received rather than just fee-for-service. Providers with good outcomes and cost-effective care may receive bonuses; providers who do not meet quality and cost targets may find their reimbursement rates cut.

There also will be increased use of "bundled payments" by which groups of providers - including hospitals, physicians and home care agencies - will receive a single fixed payment for treatment for an episode of care or of a particular condition. For example, the care of a patient with a broken hip or the care of a patient with diabetes for a certain period of time would be a fixed global payment that would be divided among providers. The payments likely will utilize adjustment factors for severity of the patients’ conditions and case mix.

Getting the details right on adjustment factors will be challenging. The AMA’s Madara said the Centers for Medicare and Medicaid Services "is not ready to implement the value-based payment modifier and…any efficiency measures [should] be tested in large group practices before they are imposed more broadly."

Some political leaders view health care spending as a zero-sum game. If payments to physicians go up, payments to other health care providers will need to be reduced or at least not rise as rapidly as in years past. Thus, it is expected that payments to hospitals, skilled nursing facilities and home health agencies will be cut or rise more slowly. In a recent "doc fix," the physicians’ rates did not drop, but the money for physicians came by reducing payments for public health, prevention and hospitals.

Health care reform has some similarities to squeezing a balloon. If one tries to fix a problem on one part of the balloon by squeezing it, another part of the balloon will bulge out and need its own fix.

Jeff Atkinson (JAtkin747@aol.com) teaches health care law at DePaul University College of Law in Chicago.



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