Finally, with the passage of the Balanced Budget Act of 1997, Congress replaced the MVPS with the SGR. Rather than trying to control costs by reducing payment amounts for specific services, the SGR attempts to control spending by setting yearly and cumulative spending targets. If actual spending for a given year exceeds the spending target for that year, reimbursement rates for the following year are adjusted downward by decreasing the conversion factor (CF) for RBRVS relative value units (RVUs).

The SGR formula uses 1996 spending levels as the basis for projected spending targets, which artificially links medical care today to what medical care spending was 18 years ago.

Under the SGR system from 1997 through 2001, the physician updates were positive and ranged from a modest 0.6 percent in 1997 to a high of 5.5 percent in 2000. However, payment rates were cut for the first time in 2002 by 4.8 percent. The uproar from the provider community was predictable, loud, and at least partially effective. Since 2002, Congress has prevented any further negative updates to physician payments by passing legislation that temporarily prevents the scheduled SGR reductions from going into effect. Although there haven’t been any more negative updates, the highest update has only been 1.7 percent, with a whopping 0 percent update in three of the past 10 years. Without any negative updates, the amount owed under these temporary delays continued to increase as long as Medicare expenditures exceeded targets.

Where are the warts? First, the SGR limits spending by setting a spending target linked to the nation’s GDP. Historically, spending on health care has had no direct correlation to the growth in the overall economy. Second, the SGR formula uses 1996 spending levels as the basis for projected spending targets, which artificially links medical care today to what medical care spending was 18 years ago. Lastly, by reducing or providing negligible positive updates, all the SGR did was encourage physicians to do more services and create more spending. Thus, the ironic paradox of the SGR: in order to make the same amount of total money, physicians provided more “services” because the payment per service was less.

Hopes for a Fix in 2014…And What About the IPAB?

As the proverbial can got kicked farther and farther down the road, the overall price tag on a permanent fix got bigger and bigger and has been more than $300 billion in recent years. However, due to a recent unexplained decrease in Medicare expenditures, the Congressional Budget Office (CBO) has estimated that the cost for a one-time permanent fix would now be “only” $120 billion over 10 years. This reduction has provided an impetus for Congress to act to create a permanent fix. At the end of 2013, Congress passed a budget agreement that included yet another temporary three-month patch, which will expire at the end of March 2014. Even before the passage of this last patch, three key committees in Congress, the House Energy & Commerce, House Ways and Means, and Senate Finance committees, all had voted to support proposals that would eliminate the SGR permanently and replace it with fixed annual updates and changes to quality-based incentive programs. On Feb. 6, Rep. Michael Burgess (R-TX) introduced H.R. 4015, and Sen. Max Baucus (D-MT) introduced S. 2000: The SGR Repeal and Medicare Provider Payment Modernization Act of 2014. These companion bills would give providers 0.5 percent updates for 2014–2018 and 0 percent updates for 2019–2023 as well as create a new quality-incentive program titled the Merit-based Incentive Payment System (MIPS). MIPS would be a roll-up of the three systems currently utilized to incentivize physician payment: Electronic Health Records (EHR) Meaningful Use, the Physician Quality Reporting System (PQRS), and Value-Based Modifiers. These bills were actually crafted and overwhelmingly passed (at the committee level) with bipartisan support. There was agreement on the need to replace the SGR, create a more stable payment model, and incorporate quality incentives into Medicare reimbursement. This was the most comprehensive and most supported plan to replace the SGR since its creation in 1997. So will this bill ever become law? It probably won’t in 2014. The committees did great work on how to reimburse physicians under Medicare, but they failed to address how to pay for it. The bill contains no fiscal offsets or other new revenue to make up for the $120 billion that physicians still “owe” the federal government. The chief supporter of the bill in the Senate, Finance Committee Chairman Baucus, left the Senate to serve as US ambassador to China, making passage in 2014 much less likely.