Medicare Physician Reimbursement & SGR Explained

Since Medicares beginning in 1965, the social insurance program has experimented with various formulas to determine the rate of physician reimbursement. Government officials have created complex formulas with funny names — the Medicare Economic Index in the 1970s, followed by the Volume Performance Standard in the 1990s. Each reimbursement formula losing favor and being replaced by the newest formula of the month.

The most recent incarnation of the Medicare reimbursement formula is called the Sustainable Growth Rate (SGR), put in place in 1998. The government uses the formula to set an overall target amount of spending for certain types of medical goods and services. Using Medicare spending in the late 1990s as a baseline, the SGR factored in overall economic growth to create a yearly budget. “It was enacted during a time period when physician payments were not growing rapidly,” said Paul Van de Water, an economist at the Center for Budget and Policy Priorities. “It was assumed that the relative slowdown was likely to continue.”

While the SGR formula seemed sound in 1997, it didn’t account for one huge detail. Overall medical spending grew much faster than inflation. The SGR turned out to be totally unsustainable, leaving physicians with a reimbursement rate that did not keep pace with increasing medical costs, thus requiring a fix — not of the formula but of the payment.

The problem first became apparent in 2002, when Medicare costs outpaced the SGR. A Republican-led Congress stepped in with extra funding the following year, preventing a reduction in physician payments. Congress has continued to do so for seven years now.

Under both Democratic and Republican leadership, Congress has consistently delivered the necessary funds to avoid cuts to physician payments. A CBO report this month estimated that $276 billion would be required to shore up Medicare for the next decade. Not surprisingly, no politician wants to get stuck with that check. So they’ve all politely deferred from the financial commitments in order to avoid the appearance of adding billions of dollars to the national deficit.

But the “doc fix” actually fixes nothing. Health policy experts agree that health spending is not slowing down, so the short-term patches only “kick the can down the road,” as Van de Water put it. “They want to have their cake and eat it, too.” In other words, it’s a face-saving gimmick that makes it look like Congress is sticking to Medicare cost controls when it isn’t, despite numerous red flags over the years. A CBO report in 2006 suggested that “the SGR mechanism … will substantially reduce payment rates for physicians’ services over the next several years. Payment rates could decline by a total of 25% and 35% during that period if physicians continue to provide services at the current rate.”

A 2007 report from MedPac, which advises Congress on Medicare, found that, in addition to failing to keep pace with spending, the SGR had not tamped down physician spending. “The SGR does not appear to have limited the growth in volume — that is, the number of services being furnished to each patient and the level of service intensity provided,” the report concluded.

One option would be to ditch SGR and find a new, better formula that would make the “doc fix” ritual obsolete. The American Medical Association, which has previously supported temporary “doc fix” legislation, has demanded this kind of permanent action, so the short-term fix that landed in the House proposal left them unsatisfied. “The pending Medicare proposal treats the symptoms,” AMA President J. James Rohack said in a statement late last week. “It’s not a cure for the disease. We urge Congress to take action well before the next deadline to cure this problem once and for all to preserve access to care for seniors and military families and enable the success of health system reform and delivery innovations.”

But Congress has declined to move in that direction, and, for now, the exercise carries on. In 2010 alone, Congress has already headed off three scheduled payment drops — in January, March and April. This week, if all goes as the Democrats planned, they will extend the “doc fix” for an additional three years. The problem will be settled in the short term — until the 112th Congress takes up the issue all over again.

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