The Doc Fix

Medicare compensates physicians via a universal fee schedule. To limit costs, the “Sustainable Growth Rate” (SGR) was adopted in 1997 to allow for increased Medicare expenditures based on national economic growth.

The sustainable growth rate (SGR) is a statutory formula created in 1997 to annually update physician fee-for-service payments in the Medicare program in order to allow for cost increases tied to growth in the overall United States economy (GDP growth). However, the rate of growth of the medical economy has outstripped that of the general economy most years since 2001, leading the SGR formula to calculate negative updates in order to get expenditures back down to expected levels.

Since cutting payments to doctors that provide care for senior citizens (an extremely powerful voting bloc) does not make much political sense, Congress has often stepped in to avoid SGR-mandated cuts. Unfortunately, in today’s economy the archaic formula calls for a 21 percent cut in physician payments. This went into effect on Friday to the dismay of physician groups such as the American Medial Association.

Many health policy experts have declared the SGR a flawed formula for controlling health care costs. In fact, the SGR only affects physician costs (which amounts to 21 percent of national health expenditures) and not hospital or pharmaceutical costs. By trying to put a control valve on only 1/5 of the nation’s health care costs, the SGR does nothing to check the growth of nearly 80 percent of national health expenditures.

In 2007, the Medicare Payment Advisory Committee (MedPAc) produced options on reforming the system and presented their findings to Congress. First among MedPac’s conclusions was that annual negative updates to the physician fee schedule are unrealistic because Congress has a record of being unable to allow them. And even if large cuts were allowed, as the SGR might suggest, access to care for Medicare enrollees might suffer.

Instead, MedPac recommended that payment policies be designed to place incentives on delivering quality care and not worrying about the volume and intensity of care (the two major components of health care costs). As such, MedPac favored policies such as comparative effectiveness research and pay-for-performance, two mechanisms currently in their infancy in the Medicare program.

MedPac also discussed alternatives to the SGR. One would be using regional units to update fee schedules. However, this might be even more difficult to administer as it would ultimately produce multiple fee schedules across the country.
Another alternative would change expenditure targets based on the type of services provided. However, a similar program existed prior to the SGR and was subsequently replaced.

A third alternative would be compensating physicians differently based on membership in a multi-specialty group. Unfortunately only 20 percent of physicians practice in such settings and not all multi-specialty groups necessarily engage in a resource-efficient manner.

A fourth alternative suggested was the hospital medical staff method, creating a virtual multi-specialty group. However, there may not be significant incentive for individual physicians to practice in concert simply because they work in the same hospital.

A final alternative to the SGR would be an outlier method where Medicare would identify individual physicians who were utilizing too many resources and eventually applying negative updates to their fee schedules but not those of all physicians. This too might become administratively burdensome.

Even MedPac, a national panel of experts, could not determine a rational and universally agreed upon way to change the physician payment system. It is no surprise then, that Congress keeps providing short term solutions to a decades long problem.

Commentary
The annual (or sometimes semi-annual) ritual of postponing cuts to the Medicare fee schedule will remain a problem for policy makers until a new payment methodology is established. This, and other important aspects of the health system – such as practice design, tort reform, and workforce diversity – remain to be addressed in the wake of health reform. As implementation proceeds on PPACA, health policy experts should shift attention to these neglected policy questions in order to make a more streamlined and coherent health care system.

MedPac. “Assessing  alternatives to the sustainable growth rate.” March 2007.

by
Cedric K. Dark, MD, MPH

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