How the SGR Medicare physician-payment formula became flawed and why a fix is unlikely in 2014

Even before its passage into law in 1997, the Sustainable Growth Rate (SGR) Medicare physician-payment formula was inherently flawed and doomed to worsen the problem it was intended to fix. By artificially, and unfairly, linking physician payments under Medicare to changes in the gross domestic product (GDP), the Balanced Budget Act of 1997 established a system of payment that has actually worsened spiraling spending in the Medicare program. Since 2002, the SGR has likely led to higher Medicare spending by encouraging physicians to increase the volume of services provided to compensate for negative or negligible updates in reimbursement. Because everyone in the universe agrees that the SGR system is broken, physician advocacy groups, like the American Medical Association (AMA) and ACEP, annually parade to Capitol Hill to beg, plead, and demand that Congress fix the problem and replace the flawed formula. Unfortunately, more political posturing and a lack of true leadership in Congress will likely have us parading up to Capitol Hill again this year. How we ended up with a broken formula is easy to understand, but how to fix is not.

The History of Medicare Physician-Payment Reform and the SGR

Close your eyes, and imagine you are a “GP” back in the early 1970s. In many cases, after a claim for services was submitted, the check that arrived was actually for the full amount you billed, assuming the Medicare carrier felt the charge was reasonable under the “customary, prevailing, and reasonable” (CPR) system. There were no hard limits on payment per service. Now, I know many of you have opened your eyes and have screamed, “No way!” Better yet, if Medicare didn’t pay you the full amount billed, you could legally balance-bill your patient. Well, to no one’s surprise, Medicare expenditures began to rise under this system as more people enrolled in Medicare and more services were provided. Since the mid-’70s, Congress has failed to limit the amount of spending for Medicare Part B payments to physicians.

“Those who cannot remember the past are condemned to repeat it.” —George Santayana

Starting in 1975, Congress has attempted to reduce Medicare spending on physician services through a series of equally ineffective spending-control systems (eg, Medicare Economic Index [MEI], Medicare Fee Schedule [MFS], Resource-Based Relative Value Scale [RBRVS], and Medicare Volume Performance Standards [MVPS]). None of them worked.

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.

So what happens to physician reimbursement and the SGR now? By the end of March, Congress will likely do what Congress seems to do best: push the problem off until next year. In the spirit of election-year politics, neither the Republicans and certainly not the Democrats will want to be seen as giving doctors a “raise,” especially if it’s not paid for by some other budgeting gymnastics. When the three-month patch expires at the end of March, we’re likely to see another nine-month patch, with an extension of the current 0.5 percent update through the rest of 2014. Santayana will be shaking his head and smiling as this most recent exercise of futility will find history repeating once again.

Dr. Cirillo is director of health policy and legislative advocacy for Emergency Medicine Physicians in Canton, Ohio.