Medicare Physician Payment Reform: Will 2014 Be the Fix for SGR?

Mark B. McClellan, Kavita Patel, and Darshak Sanghavi

The year-end passage of bipartisan legislation to avert the reduction in Medicare physician payment rates required by Medicare’s sustainable growth rate (SGR) formula is nothing new. The SGR formula, enacted as part of the Balanced Budget Act of 1997—the last substantial legislation to reform Medicare payments and reduce the deficit—adjusts Medicare physician payment rates so that total spending on physician-related services increases in line with the overall economy.

Every year since 2001, the SGR formula has called for an across-the-board reduction in payment rates, because the overall increase in the volume and intensity of physician-related services has exceeded the target SGR. Since 2002, Congress has stepped in with short-term legislation to avert the payment reduction. These “patches” have failed to keep up with inflation over time and also have resulted in a divergence between the actual level of Medicare physician-related spending and the target in the SGR formula, so that the budgetary cost of permanently fixing the SGR runs into hundreds of billions of dollars.

Because the SGR constrains the physician fee schedule across the board, the formula has led to continued debate over the “value” of particular kinds of physician services relative to others. Since 1992, the relative rates for each service have been determined by the resource-based relative value system (RBRVS), a technically complex schedule intended to reflect the relative time, effort, skill, and other inputs required for more than 8000 different services ranging from laboratory test performance and interpretation to major surgical procedures. Based on adjustments recommended by a technical committee composed of physicians, as well as adjustments implemented by Medicare, fees for some “cognitive” services such as evaluation and management have been increased somewhat, whereas fees for “technical” services such as some radiology and laboratory procedures have been reduced. Disagreements continue about how different kinds of services should be valued relative to each other, generally pitting different medical specialties against each other.

What is different this year is that the patch has been enacted for only 3 months. This is because the congressional committees with jurisdiction over Medicare also passed bipartisan legislation to “fix” the SGR permanently and support a transition to payments based on a fundamentally different definition of value, with higher payments related to measures of better quality and efficiency for patients, not greater volume and intensity of services.

The main features of the legislation have been detailed elsewhere. In brief, Medicare’s existing payment adjustments related to quality—including payment bonuses for participating in Medicare’s physician quality reporting program and for adopting and using electronic records and the upcoming value-based modifier—will be consolidated into a single value-based performance index that will adjust the payment rates. The payment adjustments will start at up to 4% of physician payments in 2017 and increase to more than 10%. (One complication is that this new value index would adjust payment up or down on every single service provided by a physician, so when a physician delivers care more efficiently, the financial benefit of the higher value multiplier could be offset by reduced billing for services. However, this could be fixed

The most fundamental change in the legislation is to give physicians an option to leave the traditional Medicare fee-for-service system behind. Physicians can receive bonuses of up to 5% per year from 2017 to 2022 for transitioning to “alternative payment models” in which payments are increasingly related to value defined as measured quality and total cost of care. In contrast, fee-for-service rates will only increase by 0.5% annually. The alternative payment model must account for an increasing share of a physician’s practice, rising to more than 75% in the next decade. While the details of the alternative payment models are not clear, the alternative payment would generally involve augmenting or replacing some of the current fee-for-service payments with a patient-level payment amount not related to volume or intensity. To receive full payment in the alternative payment arrangement, physicians would have to meet meaningful measures of quality of care. Qualifying alternative payment systems must not increase overall Medicare costs.

For example, primary care physicians might opt for a medical home model in which some fee-for-service payments are replaced with a per-patient payment. This payment could be used for evaluating and managing a patient, performing laboratory tests, coordinating with other providers, or other needed services that receive little or no financial support in Medicare today. Specialists might receive single bundled payments instead of some of their fee-for-service payments, such as an “specialty medical home” payment for oncologists or nephrologists, or a single case-management fee replacing fees for administering drugs, obtaining radiology services, or other specific services. Participating in broader payment bundles with other providers, such as for a surgical procedure or a colonoscopy, or participating in an accountable care organization with a partially capitated payment could also qualify.

The payment bonuses for moving to the new system are intended to defray the effort and expense involved in redesigning care to make it better, such as setting up registries and other support systems for improving care or implementing new ways to work with other clinicians.

There are several reasons physician payment reform legislation is moving forward now. One widely cited reason is the much lower budgetary cost of a permanent fix: since last year, the 10-year cost of replacing the current SGR declined by more than half, from $297 billion to $117 billion for a 0% update and to $136 billion for a 0.5% update.

The other, perhaps less appreciated reason is that support among physician groups is growing for alternatives to both the short-term SGR patches and RBRVS. Many primary care and specialty groups have been developing and in some cases implementing the kinds of payment reforms described above, in some cases in Medicare pilot projects and frequently in private insurance plans and state Medicaid programs. As a result, these alternatives are gaining traction as a potential way out of the endless payment rate cuts and physician frustrations with the lack of support in fee-for-service payments for steps they would like to take to improve care and lower costs.

One major challenge to the ultimate success of the reform legislation is whether effective alternative payment systems can be developed quickly enough. Although there is promising evidence for many payment reforms now, no specific alternative payment models have been identified that could clearly reduce costs while improving quality across the nation. Moreover, participation in Medicare’s Physician Quality Reporting System has been limited, and many physicians believe that it has not improved quality. The development of effective alternative payment models could be accelerated through a range of steps, including more timely and consistent sharing of Medicare data with clinicians, using consistent quality measures that meaningfully reflect results that matter to patients, and reducing burden and increasing physician capacity for improvement by using measures that are available from the electronic systems and other tools used by physicians to improve care.

Before Medicare reaches that stage, however, there is one difficult legislative step ahead: finding a way to pay for a permanent SGR fix: 10 years of patches plus the costs of transitioning to the alternative systems. Over the past decade, Congress has only been able to cobble together offsetting savings to pay for short-term patches, mostly by shifting the payment rate cuts to other Medicare providers. These incremental reductions in payments to hospitals, nursing homes, home health agencies, and others have added up to close to $150 billion. Roughly the same total amount would need to be legislated all at once for a permanent fix, requiring more substantial reforms.

For example, larger savings could be possible through such steps as reforming payments for postacute care in Medicare, equalizing payments across different sites of services, and making a range of other payment corrections that have been proposed by expert groups like the Congressional Budget Office. But these payment reforms are unlikely to amount to more than half of the needed cost savings. For larger savings, further steps that affect beneficiaries more directly would likely be needed, such as increasing premiums for higher-income beneficiaries and reforming Medigap and beneficiary co-payments. Reforms like these have generally occurred as major federal entitlement reform and revenue legislation, like the Balanced Budget Act of 1997. There appears to be little political interest in such a “grand bargain” now.

An alternative, if Congress cannot agree on how to pay for the full cost of the permanent fix, would be to implement a 5-year stabilization of physician payment rates accompanied by the same steps for moving to alternative payment models as in the current legislation. This alternative would likely cost less than half as much as the permanent fix. It would leave the task of paying for the second 5-year fix to a future Congress but would give physicians significantly more predictability while implementing new payment models.

How much physician payment reform occurs in 2014 may come down to how much physicians are willing to advocate for alternatives to the predictable but consuming short-term patches—alternatives that may not be permanent or clear but that would give physicians much more opportunity to lead in reforming health care.