Running out of patches? Options for fixing the Medicare pay crisis

With Congress heading back to Washington, D.C., and President-elect Obama set to be inaugurated, Chuck Hofmann, MD, a general internist in Baker City, Ore., is keeping a close eye on an issue that promises to make or break his practice: repairing the Medicare pay system.

Dr. Hofmann runs a solo practice with 3,300 patients -- 60% on Medicare. A few years ago he sought and received a rural health clinic designation, which enabled him to stay in business after two physicians left the practice and he couldn't replace them.

Any payment advantage he receives as a rural health clinic would be wiped out if the estimated 21% Medicare cut takes effect Jan. 1, 2010. "It would put us out of business," Dr. Hofmann said. "You can't take a system that runs as leanly as [Medicare] runs now and ... then put 20% cuts on it."

Dr. Hofmann's story is a familiar one to physicians and has resonated with lawmakers. Every year since 2002, Congress has applied temporary patches to stop the cuts and implement small pay updates or freezes.

But 2009 promises to be an unusual year. An 18-month patch, which passed in July 2008 after an override of a presidential veto, provided slightly more time to consider longer-term reforms. Issue fatigue, a new political landscape and a new appetite for comprehensive health reform also are factors that may increase the odds of a more permanent fix.

"There's a big club saying we have got to do something," said Gail Wilensky, PhD, a former Medicare chief who now is a senior fellow at Project Hope. "Congress is clearly getting tired of these short-term patches. They're making them even more onerous in terms of what happens when they wear off, which presumably indicates, among other things, their strong desire to move to a new system."

Whether Congress has the time or willpower to approve a permanent solution by the 2010 deadline remains to be seen.

The sustainable growth rate formula sets a target volume for physician services; if actual spending exceeds the target in a given year, payments are cut in subsequent years. Although Congress has approved numerous patches to prevent cuts from taking place, the spending target has not been reset. So when each patch ends, the system acts as if it had never occurred. Thus, a 21% cut is expected in January 2010.

The SGR formula and the failure of Congress to reset it has created as much as a $300 billion gap over 10 years between what physicians are projected to be paid and how much their costs are expected to increase, according to the Congressional Budget Office.

Future cuts set up by the temporary patches are making it increasingly expensive for Congress to put off approving a permanent fix, said Mark McClellan, MD, a former Medicare chief who now directs the Engelberg Center for Health Care Reform. "Each time Congress does one of these short-term fixes, they dig a deeper hole."

Still, coming up with the money for any pay proposal -- temporary or permanent -- for 2010 likely will be a contentious issue, experts said. This potential is heightened by lawmakers' renewed focus on spending money on comprehensive health system reform.

"The usual way this works is to spread the price squeeze from physicians to other providers and organizations in Medicare so maybe other providers will get a bit less of a payment update," said Dr. McClellan, who said Medicare private insurers may be one group in line for a cut.

Rep. Tom Price, MD (R, Ga.), noted that most pay update proposals involve a finite amount of money that typically is "split up among different specialties and, consequently, the specialties will find themselves fighting each other, which is oftentimes to the delight of policymakers."

Physicians in all specialties, however, are concerned about being paid fairly, said AMA President Nancy H. Nielsen, MD, PhD. "They deserve not to go through this game of Russian roulette every year. That's no way to run a business."

Rep. Michael Burgess, MD (R, Texas), was pessimistic about the chances for long-term pay reform this year. Temporary patches are handy vehicles for lawmakers to pass less popular bills, he said.

Democrats appear ready to take on a whole host of health care issues, particularly now that they hold the presidency, the House and a larger majority in the Senate. Obama already has taken steps to put health system reform high on his priority list, such as tapping former Senate Majority Leader Tom Daschle to be Secretary of Health and Human Services and leader of the White House Office of Health Reform.

Early indications point to a steep price tag for these comprehensive reforms, putting in question whether doctors will go yet another year since 2002 without some level of Medicare cut. Sen. Max Baucus (D, Mont.), chair of the Senate Finance Committee, issued an outline of his own reform proposal in November 2008, which contains a myriad of policy recommendations in addition to proposals for a permanent pay system fix. Cost estimates haven't been released yet, but Baucus acknowledged, in a statement, that "in the short term, health care reform would cost taxpayers more than the government can achieve in savings from all reforms and financing changes."

In the House, Rep. Pete Stark (D, Calif.), chair of the Ways and Means health subcommittee, also has said he plans to take up physician pay reform in the next legislative session, and his staff is drafting legislation.

Even if Congress manages to overcome the challenges and come to consensus on the makeup of a permanent fix, Wilensky noted that some form of temporary patch still may be needed to allow time for any permanent program to be implemented.

Although no clear consensus has emerged on what should replace the sustainable growth rate formula, lawmakers may choose elements from among several proposals that stand out in the debate.

For example, the AMA supports "re-basing" the SGR, as a start. This concept means that Congress updates the spending target baseline used to calculate the formula so that it reflects the rate changes lawmakers have approved over the past seven years, Dr. Nielsen said. "Re-basing means simply accepting reality from now."

This proposal, however, wouldn't mean a blank check for doctors, said Robert Doherty, senior vice president of governmental affairs and public policy for the American College of Physicians, which supports re-basing. "It is going to be tied, I believe, to some other payment reforms that may or may not be the ones the medical community would like."

Another vision of SGR reform would replace a single overall spending target with several targets for different physician service categories. The House passed such a reform in 2007 as part of a larger bill, but that provision didn't make it out of conference committee. Multiple SGR spending targets already are on the legislative agenda for 2009; Baucus included the concept in his proposal.

Payment bundling is a reform concept that's also gaining new attention. This would group services for a patient's predetermined episode of care into one set payment. This billing practice already is in place for other Medicare participants, including hospitals, home health agencies and skilled nursing facilities.

Wilensky noted that some agreement exists on the need to bundle high-cost, high-volume services for complex surgeries and treatment of chronic diseases.

The Baucus plan calls for expanding a Medicare bundling demonstration that is expected to launch in 2010. This project will give physicians and hospitals a global payment for patients who receive cardiac or orthopedic services.

The patient-centered medical home is another concept that has many supporters, Baucus included. "There is real interest in Washington in doing something to help primary care," said Paul Ginsburg, PhD, president of the Center for Studying Health System Change.

A medical home would offer additional payments to primary care physicians or other doctors for coordinating patient care. Medicare is planning a medical home demonstration project in up to eight states, which will launch in 2010.

Other popular proposals include Medicare pay-for-performance, which would establish incentives for physicians to hit quality benchmarks; and gainsharing, which would allow hospitals to share with physicians the savings from improved health care delivery.

"The thing to watch over the next three to six months as this process unfolds, is how much consensus does emerge behind some of these more innovative ways to pay physicians that hold some promise to both make physician jobs easier and to help keep down overall Medicare spending," Dr. McClellan said.

Physicians plan to keep up the pressure from their camp. The financial crunch facing primary care doctors is real, said Ted Epperly, MD, president of the American Academy of Family Physicians. "This isn't a lot of doctors blowing smoke in terms of the impending loss of access for our seniors."