Government

MedPAC: It's time to either scrap Medicare pay formula, or expand it

Replacing next year's predicted 9.9% cut and subsequent reductions with cost-based increases would run more than $260 billion, the Congressional Budget Office says.

By David Glendinning — Posted March 19, 2007

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A divided Medicare Payment Advisory Commission offered one way Congress might address flaws in the Medicare physician payment system without ditching its expenditure targets. However, the proposal got a frosty reception from physician organizations and lawmakers alike.

An eagerly awaited MedPAC report on alternatives to Medicare's sustainable growth rate formula arrived March 1 on Capitol Hill along with the panel's annual report on how the program should pay all of its participants next year. Although commissioners had hoped to unite behind a single set of long-term reform recommendations, they could not agree on whether to retain the formula's annual spending limits that are designed to keep expenditures in check.

"Alas, in this particular case, the SGR, it has not been possible for us to forge a consensus within the commission about what to do," MedPAC Chair Glenn Hackbarth said the same day at a Senate Finance Committee hearing on the reports.

In lieu of recommendations, the panel offered two distinct "pathways" for Congress to consider. The first option would completely scrap the sustainable growth rate in favor of a calculation that reflects physician practice costs. The second one would expand over time the formula's spending limits to all of Medicare. If they followed the latter pathway, lawmakers first would adjust the limits based on physicians' geographic areas and eventually would transition hospitals, nursing homes and others into the mix.

It is this second pathway that physician organizations swiftly rejected.

The day before MedPAC unveiled its report, the Centers for Medicare & Medicaid Services announced that the 2008 physician pay cut is expected to be an unusually high 9.9%. The prediction gave doctors more ammunition in their arguments against broadly applying the sustainable growth rate.

Expanding a failed Medicare payment policy would only perpetuate the need for doctors year after year to appeal to Congress for a Medicare update that meets the needs of physicians and beneficiaries, said American Medical Association Board of Trustees Chair Cecil B. Wilson, MD.

"As long as spending targets remain in place, this annual cycle has no end in sight," he said at the congressional hearing. "This is no way to do business and no way to treat Medicare patients."

Others questioned why the commission would be so divided on the issue.

"We are perplexed as to why MedPAC would one minute state the SGR is broken and unsustainable and in the next breath recommend extending it to all health care providers," said Thomas R. Russell, MD, executive director of the American College of Surgeons. "If it is broken, fix it, don't expand it."

Congressional prospects

None of the lawmakers who commented on the physician pay formula alternatives embraced the expanded expenditure limit suggestion.

"Our experience with the SGR has demonstrated that a target-based system that cuts payment rates may not be a very effective way to control the volume of services or overall spending," said Senate Finance Chair Max Baucus (D, Mont.).

Even the second proposal's interim step, under which physicians in certain regions could see rate increases or reductions depending on how much aggregate spending they incurred, sparked concerns from some lawmakers.

"I'm a little leery -- actually I'm frightened to death -- of this regional-based business in regards to the rural health care delivery system after all of the problems we've been through in underserved areas," said Sen. Pat Roberts (R, Kan.).

But amid the congressional reluctance to consider MedPAC's second pathway, Hackbarth noted that its supporters on the commission consider some form of expenditure target essential to ensure a fairer system while getting a handle on total program costs.

Applying the spending cap across the board would put more pressure on high-cost regions and encourage physicians and others to band together in "accountable care organizations" that would place a higher value on better quality and more efficient care, he said.

Despite the practically unanimous sentiment from lawmakers that the reimbursement system is broken, Hackbarth hinted that it might be serving as a convenient policy tool that gives Congress more control over the program.

"Some commissioners believe that expenditure targets make it more difficult to grant large rate increases to providers," he said. "Moreover, they may create the political leverage to force providers to accept reforms that they might otherwise resist."

Baucus noted that his committee and the rest of Congress would have a tough time dealing with long-term physician payment reform if MedPAC's inability to craft a consensus is any indication of the difficult road ahead. Some lawmakers already are writing off the possibility of major action before the congressional and presidential elections in 2008.

"I doubt we'll do it in the 110th Congress, but I suspect in the next decade we'll have no other choice," said Sen. Gordon Smith (R, Ore.). "Our history is that we don't make the hard decisions until we have no other option."

Meanwhile, the most pressing threat so far to physician reimbursements is less than a year away.

The anticipated 9.9% cut, which could change during the year as CMS revises its projections, is a direct result of last year's congressional action. Because lawmakers froze the 2007 rate conversion factor at 2006 levels but did not update the reimbursement baseline, next year's cut is expected to be about twice as large as it would have been.

MedPAC recommends instead that next year physicians receive a boost that is more in line with rising practice costs. Under current estimates, this move would give doctors a 1.7% increase. The AMA strongly supports this recommendation, Dr. Wilson said.

Changing the current formula for just one year would come at a significant cost. But the price tag becomes even more daunting when contemplating a replacement of the sustainable growth rate formula with a practice cost-based model.

The Congressional Budget Office, which compiles legislative cost estimates for lawmakers, projects that aligning physician pay with the increasing price of providing care would cost the federal government $262 billion over 10 years, said CBO Director Peter R. Orszag, PhD.

Making the situation even more politically complex is CBO's projection that beneficiary premiums would increase by $70 billion over that time unless Congress finds additional money to hold seniors harmless. Beneficiaries foot 25% of the Medicare outpatient bill, so any physician pay increase would raise their premiums.

Transitioning to a new payment program must not come at beneficiaries' expense, said Byron Thames, MD, an AARP board member.

Lawmakers could offset some of the expense of reform by tapping a $1.35 billion reserve fund set aside in last year's Medicare rate freeze legislation, a move supported by the AMA. MedPAC also recommends in its annual payment report that Congress reduce Medicare Advantage payments to fee-for-service levels, a revision that could free up more than $8 billion next year and nearly $65 billion over five years.

But America's Health Insurance Plans and several Republican lawmakers warned that such reductions would reduce managed care benefits for vulnerable seniors.

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ADDITIONAL INFORMATION

Unheeded advice

Since the Medicare Payment Advisory Commission first urged lawmakers in March 2001 to do away with the formula that determines physician reimbursement, the panel has made a payment update recommendation each year. Congress, however, has taken its own path.

Medicare
formula
MedPAC
recommendation
Actual
update
2002 -4.8% 2.6% -4.8%
2003 -5.7% 2.5% 1.7%
2004 -4.4% 2.5% 1.5%
2005 -1.7% 2.6% 1.5%
2006 -4.4% 2.7% 0.0%
2007 -5.0% 2.8% 0.0%
2008 -9.9% 1.7% Not known

Note: 2008 figures are projected. Source: Medicare trustees, MedPAC

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The genesis of Medicare cuts

For each of the past five years, Medicare physician spending exceeded yearly limits determined by what doctors view as a flawed reimbursement formula. This has prompted Congress to scramble several times to prevent the physician payment cuts that would have resulted. The gap is expected to widen for years to come, paving the way for the maximum annual rate reductions possible for most of the next decade.

Cumulative expenditures (billions)
Allowed Actual Difference
2000 $253.4 $246.4 $7.0
2001 $315.4 $312.7 $2.7
2002 $382.5 $383.6 -$1.1
2003 $454.5 $461.8 -$7.3
2004 $531.2 $548.9 -$17.7
2005 $611.3 $640.0 -$28.7
2006 $693.0 $734.9 -$41.9

Note: 2006 figures are projected. Source: MedPAC

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External links

Medicare Payment Advisory Commission (link)

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