Medicare Physician Payment Reform: The Bipartisan Congressional Proposal And How To Strengthen It

Bipartisan health care reform recently reappeared in Congress, when the Senate Finance and House Ways & Means committees released a framework to reform the Sustainable Growth Rate (SGR) formula for physician payment in Medicare. The proposal builds on an earlier bipartisan bill passed by the House Energy & Commerce committee this summer.

Permanent reform of Medicare’s physician payment system is urgently needed. No provider is more important than physicians in determining how patients are treated, yet Medicare’s physician payment system is based on a SGR formula that is not focused on quality of care and has not worked to reduce overall health care costs. The formula was enacted as part of the Balanced Budget Act of 1997 to constrain Medicare spending growth on physician-related services in line with growth of the overall economy, through across-the-board, proportional reductions in physician payments when projected spending exceeds the growth target.

Actual physician spending has consistently outpaced the SGR spending targets over the past decade, so that applying the usual formula would cut physician payment rates by almost 25 percent next year. Of course, such enormous cuts won’t happen, because they would disrupt care and access to services for almost 50 million Medicare beneficiaries.

In every year since 2002, Congress has enacted short-term patches in physician payment to head off the cuts. But these late and repeated adjustments make it difficult for physicians to plan ahead, payments have not kept up with inflation even with the fixes, and the blunt instrument of across-the-board reductions mean that the payment “fixes” do little to support physician efforts to improve the quality of care. Many critical services — such as spending time with patients developing and implementing evidence-based care plans, being available by phone and email to head off preventable complications, coordinating care with other providers, and working with nurses and other professionals as part of effective care teams — are reimbursed poorly if at all under the increasingly tight Medicare payments.

The recent Congressional proposal repeals the SGR and replaces it with a “flat” (i.e., zero percent) update for Medicare fee-for-service (FFS) payments for the next ten years. This will create much needed payment stability for physicians. In addition, the proposal provides a clear, coherent pathway for physicians to move away from Medicare reimbursements based on the volume and intensity of specific services — payments that even with a permanent “fix” are likely to become increasingly tight and out of step with the personalized, coordinated care that individual patients need. Instead of FFS payments, physicians will receive additional payments for implementing changes in practice to improve care and adopting alternative payment mechanisms that provide better financial support for reforms in care delivery that improve quality of care, and in so doing may reduce overall health care costs.

Along with colleagues, we have previously set forth a bipartisan health care reform proposal aimed at supporting health care that is innovative and person-centered. Our Medicare proposal outlines a path forward for physician payment reform similar to the approach outlined here. The key elements besides an SGR repeal and FFS payment stability include providing a pathway for physicians to continue moving to payment systems based on case- and patient-level payments, along with improving measures of quality and better support for physicians in improving care. (We focus on physician payment reform here, but our proposed reforms would also improve support for other clinicians that are part of effective clinical care teams.) Recommendations from MedPAC and many other recent reform proposals share similar elements. (For summaries of recent proposals, see Guterman S, and Nuzum, R. “Finding Consensus on Policies to Slow Health Spending Growth,” The Commonwealth Fund Blog; and Lewin JC, Atkins G, McNeely L. The Elusive Path to Health Care Sustainability, JAMA).

Here, we describe how the Congressional reform proposals represent major progress toward more person-centered payments for health care. We also describe some ways to make further progress. First, additional steps could be taken in the legislation to provide better support for physicians. Payment reform is critical, but provider participation and likelihood of success depends on the development and implementation of better measures of quality and timely data sharing that gives physicians the data they need to improve patient care.

Second, the Committees have so far only released the “spending” side of the proposals. Reaching consensus on how to pay for the approximately $150 billion cost of repealing the SGR is still to come. We describe some potentially bipartisan paths forward for addressing how to pay for these costs.

Reforming Medicare Physician Payment

Currently, physicians receive small increases in their payment rates for reporting on quality through the Physician Quality Reporting System (PQRS), and small increases for meeting the “meaningful use” standards for adoption of health information technology. In addition, starting in 2014, Medicare is scheduled to phase in a “value-based modifier” (VBM) that will also adjust payments based on measures of the quality and efficiency of care. Each program is also scheduled to phase in penalties for non-participation or (in the case of VBMs) poor performance in the next several years.

An understandable concern of physicians is that multiple, small payment adjustments make participation in each program relatively burdensome and complex given the small payoffs. To address this, the Centers for Medicare & Medicaid Services (CMS), with support from outside organizations such as the National Quality Forum and physician advocacy groups, has been taking steps to encourage consistency in the measures and reporting requirements across the programs.

Value-based additions to FFS payments. The Ways & Means/Finance reform framework has two major elements to promote better quality care. First, for all physicians, the different “adjustments” in physician payment rates related to quality of care would be consolidated and simplified. The Congressional framework takes a big step by combining these programs into a single “value-based performance” (VBP) program starting in 2017 and increasing their potential impact on provider behavior. Under the VBP program, provider payments would be adjusted at the end of each year to reflect performance on a composite index for the physician or practice that takes into account quality measures, resource use, participation in clinical practice improvement activities, and meaningful use of electronic health records (including use of electronic records or registries to report on quality measures). The clinical practice improvement activities are also supported by assistance to small practices, and special attention to rural and underserved areas.

While this step will substantially increase the impact of the various value-based programs, the consolidated VBP program will still be part of the current FFS payment system. That is, the value adjustment remains an adjustment or multiplier for a physician’s FFS payments. The effect mathematically is similar to the current FFS adjustments related to quality: get better quality scores, and get more FFS payments for the treatments billed to Medicare. As a result, physicians will still be pulled in different directions. On the one hand, higher payments for better quality and value will provide important new support for their activities to improve quality and avoid unnecessary costs. On the other hand, because these payments apparently remain multipliers (i.e., adjusters) to FFS payment rates, they will also pay off more when providers bill a greater volume or intensity of services, rather than taking the steps to improve care that are often uncompensated – which may undermine the intended incentives for quality and value.

This conflict could be avoided by decoupling the VBP payment from recent fee schedule billing — for example, by providing the payment as a flat bonus to a physician or group, by tying it to the number of cases or episodes treated, or by tying it to FFS billing in a base year.

Transitioning to Alternative Payment Models. The heart of the payment reform framework is a pathway for physicians to transition from pure FFS payments in Medicare to payments in Alternative Payment Models (APMs) that promote quality care appropriate to the patient, not just more services. We and others have been working with physician groups on a range of such proposals, such as medical homes (including in specialty areas like oncology), bundled payments, and “mixed” systems with partial case-based payments alongside FFS. In primary care and a growing range of specialty care areas, such reforms are not only in development but are in increasingly widespread use.

In the new framework, providers who participate in APMs that meet minimum standards could receive payments through these programs instead of the VBM program, and receive additional financial support. Eligibility for the bonus payments requires providers to receive at least 25 percent of their overall Medicare revenues in APMs (for example, through case- or episode-based payments) in 2016-2017, then at least 50 percent of Medicare revenues in 2018-2019 and 75 percent beginning in 2020. Alternatively, after 2017, providers can also achieve the threshold based on total practice revenue, including revenue from other payers (at least 50 percent total and 25 percent Medicare in 2018-19, and 75 percent total and 25 percent Medicare in 2020-21). While this may seem like an aggressive transition time frame, it seems feasible based on pilots in Medicare and private plans today and the growing activity around APMs in many clinical areas.

It will be important to ensure that the APMs represent an increasingly significant shift away from FFS, not just in revenue share but in content. That is, APMs could be required to be actuarially neutral. For example, based on current utilization, total physician payments to a practice could be required to be the same or lower than they would be under current law. Physicians could still get significantly greater net practice revenues from the changes that they implement in care, because of APM provisions that enable them to share in overall savings (including savings from non-physician payments, as in bundled payments and accountable care reforms) and because of the significant bonus payments they will receive for adopting an APM — five percent each year for 2016-2021.

CMS is piloting many APMs today, a process that can be extremely helpful in turning good payment reform concepts into broadly viable payment arrangements in Medicare. Congress could take additional steps beyond encouraging CMS to test APMs to accelerate their timely availability and relevance, and thus physician participation. Congress could direct CMS to collaborate with physician groups and other experts to develop and implement a specified number of APMs within the traditional Medicare program that meet the Congressional standards within the next few years. This initiative, reinforced by physician group efforts, would increase and speed the availability of APMs to a broader range of physicians.

Strengthening quality measurement and improvement. Better quality measurement is foundational to the success of these payment reforms. The Congressional proposals take important and necessary steps to advance the use of meaningful quality measures by aligning Medicare’s various quality programs, strongly encouraging the utilization of electronic health records, promoting transparency, and providing funding for the development and stakeholder endorsement of quality measures. However, as the Senate Finance Committee noted in its roundtable on quality measurement last summer, there are still important gaps in the availability of meaningful quality measures, particularly in terms of outcomes that matter to patients and key aspects of patients’ experience with care. Further, to have more confidence in such outcome measures, physician specialties have developed and are expanding an increasing array of structural quality measures, process of care measures (evidence-based where possible), and additional, proximate outcome measures. Physician payment reform should encourage these steps as well.

To do so, the SGR reform could include a requirement for Medicare to implement a core set of key quality and cost measures that are practically relevant and outcomes-oriented. These measures would gradually replace the many process-oriented measures currently used in PQRS. The core set of measures should cover the bulk of the spectrum of clinical care, reflect the six priority areas outlined by the National Quality Strategy, and be produced in consultation with the National Quality Forum (NQF), provider organizations, and additional experts. This might mean, for example, that additional funding for NQF would emphasize the endorsement and updating of a limited number of performance measures reflecting key outcomes and patient care experiences to support the goal of person-centered care.

The further development and widespread use of meaningful key performance measures will be difficult. It will require the concentration of development and endorsement resources as the top funding priority. Because such measures are influenced by many factors and are not the only important aspects of quality, reform should also support a more efficient way to handle the many clinically plausible quality measures that currently make up the bulk of PQRS and other physician performance programs, and it should support the development of promising systems to help physicians improve care on these key measures and others.

Detailed and extensive measures to help physicians identify specific opportunities for performance improvement make up the bulk of a growing array of clinical quality improvement systems today, including some clinical registry programs, some board maintenance of certification programs, some private-sector quality improvement tools, some regional health information exchanges, and a growing number of other resources. Instead of trying to develop a detailed certification or endorsement program for all of these diverse programs and measures, CMS, with assistance from outside groups, could identify some basic core elements of supporting systems for performance measurement and improvement. Physicians could then use the support system that best reflects their needs and the opportunities for care improvement in their community. The APMs would thus focus on reporting and improvement on the key performance measures, supported by a rich and potentially diverse set of quality improvement programs.

Also critical for physicians to succeed under these payment reforms is timely access to actionable data on their beneficiaries. CMS has taken important steps in this direction through new data sharing programs in CMMI payment reform pilots and in the Medicare Shared Savings Program for Medicare accountable care organizations. The data sharing generally consists of Medicare claims data for beneficiaries who do not opt out, and periodic summaries of performance measures calculated from those files, for all beneficiaries treated by the physicians involved in the payment reform. However, Medicare claims files can be hard for physician practices to use (especially smaller practices), and providers may have trouble replicating and thus predicting how they will do on performance measures related to both quality and spending that CMS calculates.

To address this issue, the SGR reform proposal could include the establishment of and funding to support a specific program, either within CMS or through an independent contracted entity, to provide timely relevant Medicare claims data and the capacity for physician groups to calculate performance measures accurately based on those data. Timely feedback will enable physicians to see in as close to real time as possible how they are doing on key performance measures involving Medicare data and where the gaps and opportunities for improvement are. There would be specific performance standards for data reliability, usability, and timeliness, and for the accuracy and actionability of interim performance measures produced for the physician groups. Ideally, this entity would get support in consistent data sharing and measurement standards from private insurers and Medicaid plans as well.

Budgetary Cost And “Pay-Fors”

The estimated budgetary cost of the reform framework was not released. For an official score by the Congressional Budget Office, additional details are likely to be needed, such as how likely APMs are to be “budget neutral” versus provide ways for certain providers to get higher payments than otherwise, and how the VBP system would be financed and operate. The score is likely to be in the range of $150 billion. This includes the cost of replacing the SGR with a zero percent update over the next ten years, plus some additional costs related to bonuses for participating in alternative payment systems, as well as expenditures for providing the quality and cost measures and the support needed for the physician payment reforms to succeed.

Failing to enact these reforms will not avoid these costs; indeed, Congress has spent approximately $150 billion on short-term SGR fixes over the past ten years. However, financing the short-term fixes generally involved squeezes on other provider payment rates in Medicare, reducing the predictability of payments for other providers and giving them little support for improving quality as well. Implementing a permanent reform that would reduce overall Medicare costs through a person-centered focus could do much more for improving quality and value across the Medicare program.

Well-developed ideas that could pay for SGR reform include reforms in other Medicare payment systems that reinforce the same movement away from FFS and into more person-centered payments. In particular, current Medicare payments for post-acute care (PAC) vary based on where patients are treated and the intensity of service, rather than the needs of the beneficiary or the value of services provided. CMS has worked extensively on methods for standardizing the assessment of patients at discharge, as well as tracking their functional status and complications in a consistent way across care settings and over time, enabling the development of a person-centered PAC payment system. A transition to partial or more complete case-based payments based on beneficiary needs could do more to promote appropriate and well-coordinated care for beneficiaries than other recent proposals to simply reduce payments to various PAC providers, while still achieving significant budgetary savings. Analogous reforms to make payment rates more equal for certain ambulatory and outpatient procedures that are currently reimbursed at much higher rates in hospital outpatient departments compared to physician offices and ambulatory surgical centers could also provide savings while encouraging higher-value care.

Reforms in Medicare benefits and Medigap that could reduce Medicare costs without increasing payments by beneficiaries have also been widely proposed, including by us. These reforms include a single deductible, modernized copayments, and an out-of-pocket limit on Medicare spending, along with reforms limiting or imposing fees on “first-dollar” Medigap coverage to reflect their impact on program costs. They can be implemented in ways that give beneficiaries better protection against high medical costs and reduce beneficiary out-of-pocket spending on average, along with reducing overall Medicare spending. These reforms would also reinforce the physician payment reforms, because beneficiaries would have more opportunities to save money when they engage in getting better care – for example, by enrolling in a lower-cost Medigap plan that offers lower copays for choosing providers who achieve better outcomes at a lower cost.

Finally, other Medicare reform proposals, such as greater means testing of Medicare benefits, have garnered some bipartisan support as well. Putting together such a set of financing reforms to offset the cost of physician payment reform will be difficult in the limited time ahead. But if the bipartisan momentum for reform can extend to the financing side as well, the proposal could provide needed political momentum for at least a “small bargain” on the overall Federal budget at the end of the year.

Short-Term Alternatives

Congress is appropriately focusing on a permanent reform of the SGR, for all the reasons we have described. However, in the event that permanent reform is not feasible as part of the end-of-year legislative process, it is possible to move forward on the initial steps of the payment reform outlined here. In particular, a zero-update for one or two years could be implemented at a cost of only about $18-36 billion. The transition of the various quality-related payment incentives in Medicare to a more comprehensive Value-Based Performance Payment program in 2017 could be accomplished with little net budgetary cost. While a long-term bonus payment for moving to APMs would not be feasible, Congress could provide a more limited funding pool for bonuses for providers who move to early APMs that become available between now and 2015. These bonus payments could be front-loaded to fit primarily within a two-year window; they would have limited budgetary cost because only a more limited range of physicians would be ready to participate and have APMs available. The experience with this initial program would provide valuable experience as well as a foundation for later, more comprehensive Medicare physician payment reform proposals.

Some funds should also be included to move forward with the reformed financing for quality measure development and use (focusing on key measures that involve outcomes that are meaningful to patients, and backed by supporting quality improvement systems and programs) and the support for better data for physicians to help them improve care and lower cost. These additional programs would likely add about $5-10 billion to a two-year “fix,” could be financed by the same kinds of reinforcing provider payment reforms that we have described above, and would represent real progress toward a permanent solution.


There is broad consensus that we need to move away from paying for each individual service delivered, which encourages more and not better care, to a person-centered payment approach that supports better quality and lower overall costs for patients as its core elements. The most important part of such payment reforms is how physicians are paid, since their leadership is essential to the success of any real health care reform effort. The Senate Finance and House Ways & Means Committee draft reflects key ideas included in proposals by our “Bending the Curve” collaboration and many other bipartisan efforts, by placing patients at the center of the health care system and aligning provider incentives to deliver high-value care. This is a momentous step down the road to real health care reform.

The post is part of the Richard Merkin Initiative on Payment Reform and Clinician Leadership and the Bending the Curve Project at Brookings. In particular, the post reflects the contributions to the projects by Sara Bencic, Christine Dang-Vu, Keith Fontenot, Larry Kocot, Farzad Mostashari, Kavita Patel, Alice Rivlin, and Darshak Sanghavi. We also thank the Irene Diamond Fund for financial support.