Quest for SGR reform: Avoiding the eleventh-hour drama

There may be more agreement than ever on the need to overhaul the Medicare physician payment formula, but the process has snagged again on familiar budget disputes.

By Charles Fiegl amednews staff — Posted July 18, 2011

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Back in May, Rep. Michael Burgess, MD (R, Texas), discussed his idea for reforming the much-maligned formula that helps determine Medicare physician pay. Under the plan, House lawmakers would hold hearings that month, mark up a bill in June and approve legislation before Congress recessed for its annual August break.

The plan was ambitious, but at first it appeared to be on track. House committees held several hearings on the issue and promised to hold more. Moving beyond the issue of whether the pay formula should be scrapped, Democrats and Republicans started soliciting ideas about the system that should replace it from dozens of associations representing physicians. At least initially, there appeared to be a level of momentum behind the issue that had not always been present.

But June came and went, and House lawmakers had not crafted any legislation. Instead, the momentum slowed due to a persistent budget problem that has helped prevent a solution for the past decade: where to find the funding -- now in the hundreds of billions of dollars -- that is needed to stop deep cuts to doctors over the long term.

Physician pay quickly became an issue in the bitter fight between Democrats and Republicans over raising the nation's statutory debt limit. Democrats pushed for a sustainable growth rate formula overhaul to be factored into negotiations over federal deficits. This move was backed by dozens of organized medicine groups. Republicans insisted that Medicare pay reform has nothing to do with the debate over deficit cuts -- which the GOP said must accompany any increase in the debt ceiling -- because SGR reform actually would increase federal spending.

The disagreement interfered with Dr. Burgess' original plan, but the head of the Congressional Health Care Caucus said he wasn't giving up. He said key House committees will continue to hold hearings and consider proposals with the hope of passing a bill soon.

Dr. Burgess maintained that the House Republican leadership is committed to the physician payment issue. Because committee staff members already have worked on some legislative language, he said he is still holding out hope that the House will be able to vote on long-term physician pay reform before it becomes too late in the year.

"Progress continues to be made," he said. "It's a little slower than I would like, but it's one of the important things we're working on."

At this article's deadline, no overhaul bill had reached the committee markup stage.

A formula's flaws

Medicare payments are set to drop 29.5% on Jan. 1, 2012, according to the latest estimate from the Centers for Medicare & Medicaid Services. Doctors have been in line for several pay decreases during the past decade that required congressional intervention, but the 2012 cut would be the largest.

The sustainable growth rate formula was created in the Balanced Budget Act of 1997, a deficit reduction bill. Lawmakers designed the SGR to keep Medicare expenditures in check by using targets for physician spending growth that require pay cuts when the thresholds are exceeded. For a few years, the formula worked to doctors' advantage. Physicians received positive pay adjustments from 1998 to 2001, ranging from 2.3% to 5.5%.

But in 2002, CMS was required to implement a 4.8% cut. The reduction was linked to several factors, but the basic cause was that spending for physician services went over the target, CMS spokeswoman Ellen Griffith said.

There had been some disagreements about whether growth targets in previous years should be revised to reflect certain new economic data -- revisions that would have led to higher targets and thus no pay reductions or smaller cuts, Griffith said. But lawmakers gradually came to agree that the SGR had systemic flaws that required a large-scale overhaul.

The problem of patches

Despite growing calls for the SGR's demise, Congress continued to be able to muster only short-term solutions to the broken formula. In 2010, the practice was at its most evident, with Congress using two one-month overrides, two two-month overrides and one six-month override to stave off double-digit pay cuts -- sometimes after the deadline already had passed.

"Significant problems arose in 2010 when updates applied to shorter time periods and were so delayed that they had to be applied retroactively," the Medicare Payment Advisory Commission stated in its June 2011 report. "In addition to added administrative costs for CMS' claims processing and cash-flow problems for some clinical practices, the most disturbing outcome resulting from the short-term fixes was damage to patients' and providers' confidence in Medicare."

Rep. Pete Stark (D, Calif.) said there is plenty of blame to go around for the mess brought about by the short-term patches in 2010. No one wanted to see physician payments cut, but lawmakers ran into the recurring problem of finding the roughly $300 billion needed over a decade to replace the SGR, he said. All the while, the long-term cost projection of a real solution kept creeping up.

"We are all well aware of the inadequacies of the [SGR] formula as a payment policy, and we are also aware of the budgetary burden that failing to fix the problem has caused," House Energy and Commerce Committee Chair Fred Upton (R, Mich.) said.

Upton and many other Republicans blame Democrats for leaving a physician payment provision out of the health system reform law. Such a provision had been in early drafts of the legislation, but it eventually was taken out when the associated cost made the final price tag more than moderate Democrats were willing to spend on health reform.

Later that year, House Democrats approved a separate bill to eliminate the SGR. But only one Republican, Dr. Burgess, supported the measure. Democrats in the Senate could not cobble together enough votes to pass a similar reform measure, and an overhaul bill never made it to President Obama's desk.

Swept up in the debt talks

The American Medical Association is among the many physician organizations that have urged lawmakers to make an SGR repeal part of any agreement to raise the federal debt ceiling. Although overhauling the formula to prevent pay cuts would carry a cost, the AMA and other groups argued in a June 27 letter that the price of delaying that move would be even higher for the government.

"There is wide bipartisan agreement that permanent reform of the broken Medicare physician payment system is critical and that we must address our growing national debt," said Cecil B. Wilson, MD, AMA immediate past president. "These problems must have a shared solution. The longer Congress waits to enact permanent physician payment reform, the greater the burden will be on our national debt."

Although Republicans insisted that additional spending measures had no place in talks designed to cut deficits, some Democrats worried that the real reason physician cuts were being pushed off the table is so that they could be used as a bargaining chip later in the year to repeal certain health system reform law provisions. "They are holding the physicians hostage," Stark said.

Rep. Henry Waxman (D, Calif.) said the SGR problem on the House side ultimately falls to the Republicans who are in power.

"It's a problem of finding the money," he said. "The administration has proposed setting aside certain money for the SGR, but I know when we're talking about deficit reduction people are saying, 'Take that same money and use it for deficit reduction.' "

Republicans are not the only ones who have proposed using scheduled Medicare reductions to offset other spending. Dr. Burgess noted several such cuts that were used as budgetary offsets in the health reform law. Other Medicare cuts are used by lawmakers in unrelated legislation. For instance, a recent early draft of a trade deal with South Korea employed Medicare diagnostic imaging payment cuts to offset new spending.

Philosophical differences

All members of the House GOP leadership recognize that the SGR is broken and needs to be fixed well before the Jan. 1, 2012, deadline, said House Republican Policy Committee Chair Tom Price, MD (R, Ga.).

So far, Dr. Price said, most of the legislative activity has been in the GOP-controlled House. But one additional obstacle to SGR reform, aside from finding the hundreds of billions to offset the cost, is finding enough agreement among lawmakers about the long-term plans for the entitlement program as a whole.

House Budget Committee Chair Paul Ryan (R, Wis.) has proposed a major reform plan that eventually would move Medicare from a traditional fee-for-service system to a voucher program for private insurance. When it comes to the SGR, committees have begun exploring the idea of transitioning to different payment models, ideas that have varying levels of popularity among doctors and others. Democrats and Republicans have traded accusations that the other party would "end Medicare as we know it."

"We're trying to save Medicare and allow patients and families to continue to see their doctors," Dr. Price said. "That plays into the reimbursement issue. It needs to be reformed so the system can get out from under the heavy hand of government."

Dr. Price pointed to Obama's plan for using the Medicare Independent Payment Advisory Board to control costs during the long term, an idea opposed by the AMA and other physician organizations. GOP opposition to the board and calls for its repeal have put the party in the unusual position of arguing against statute that is projected to lower federal deficits by reducing entitlement spending.

But Dr. Price dismissed the contention that Republicans would need to find budgetary offsets to eliminate the IPAB if they are to follow their own principles on deficit reduction.

"The notion that you have to come up with money to repeal an entity that will ration health care I don't accept," he said.

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A familiar -- and growing -- funding problem

View in PDF

Click to see data in PDF.

Both the cost of a 10-year Medicare pay freeze and the cost of scrapping the sustainable growth rate formula have increased drastically since first proposed. The latest figures have the cost of a 10-year Medicare pay fix at more than $350 billion.

Year Cost of a 10-year Medicare pay freeze Cost of a 10-year Medicare pay fix with cost-based raises
2005 $48.6 billion $154.5 billion
2006 $127.2 billion $218.2 billion
2007 $177.7 billion $262.1 billion
2008 $220.1 billion $288.1 billion
2009 $285 billion $344 billion
2010 $275.8 billion* $329.9 billion*
2011 $298 billion $358 billion

* The cost of physician-administered drugs was removed from the calculation of the SGR in fall 2009. The drop in the 2010 scores are due to the savings from this administrative move.

Sources: American Medical Association; Congressional Budget Office

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