When Dr. Robert L. Wergin’s patients need to be tested for lung disease, he refers them to a hospital 20 miles north of his practice.

That’s because Wergin, 58, a primary care physician at the Milford Family Medical Center in rural Nebraska, hasn’t purchased pulmonary testing equipment for his office. He said he would buy equipment if it were not for the fear of the large Medicare payment cuts mandated by the Sustainable Growth Rate (SGR) formula.

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Approximately 30 percent of Wergin’s patients are Medicare beneficiaries, and while the formula has impacted physician practices only once, the cycle of anticipated payment cuts and short-term 11th hour patches pushed through by Congress causes a tangible uncertainty that prevents some physicians from investing in their practices.

“If suddenly, 30 percent of my reimbursements were cut so dramatically, it would probably cut right to the bone,” he said.

Wergin said three to five years of Medicare payment stability, with some pay increase depending on circumstances, would provide a more reliable cash flow. With that, he says he would invest in technology and hire at least two new employees – including a health care coach to take a proactive role in disease management.

Advocates for health care industry stakeholders have promised to continue pressuring Congress to find a long-term solution for physician payments.

“This patch temporary alleviates the problem, but Congress’ work is not complete; it has simply delayed this massive, unsustainable cut for one year,” AMA president Jeremy A. Lazarus said. “Over the next months, it must act to eliminate this ongoing problem once and for all.”

There’s bipartisan agreement that the SGR formula, passed into law with the Balanced Budget Act of 1997, is flawed. Congress has passed 12 short-term patches since 2003 to keep the formula from going into effect.

The Medicare Payment Advisory Commission (MedPAC), the group of experts who advise Congress on Medicare payments, has said that Congress has two options for dealing with the problem. Option one: repeal the SGR and accelerate adoption of new payment models that improve quality and lower costs. Option two: tweak the SGR or replace it with a new spending target. In option two, Congress should still experiment with new payment models.

Dr. Richard F. Madden, 63, a practicing family physician in Belen, N.M., belongs to the multispecialty physician group Presbyterian Medical Group. He said a spending limit isn’t the answer to controlling health care costs.

“We have got to do things about trying to incentivize the right behavior. Using the carrot as opposed to the stick,” he said.

Stuart Guterman, vice president and executive director of the Commission on a High Performance Health System at The Commonwealth Fund, agrees that incentivizing physicians to participate in quality-centered payment models is an essential part of Medicare payment reform. The SGR, which would have cut physician pay by 27 percent in 2013, undermines the effectiveness of existing incentives, he says.

 “For instance, if you said ‘I want to give a 5 percent bonus to physicians who are high quality and efficient,’, it’s a very different issue than saying ‘Congratulations, you got a 5 percent bonus because you’re more efficient’ versus ‘Congratulations, we are only going to cut your rates by 22 percent,’” Guterman said.

Other experts, however, say spending targets such as the SGR prod Congress into finding ways to keep Medicare payments under control, while pressuring providers into adopting reforms they might not otherwise participate in.

MedPAC Proposal Calls for SGR Repeal, No Spending Target

MedPAC proposed an SGR repeal in October 2011 that would have offset the cost of repeal with $245 billion in cuts to other parts of Medicare. Although their proposal was never voted on in Congress, it represented a serious attempt to grapple with the costs of addressing physician pay.

The proposal included a decade-long payment freeze for primary care doctors and three years of payment freezes for specialists followed by a seven-year pay freeze.

To pay for an SGR repeal, the proposal outlined Medicare cuts totaling $235 billion. MedPAC suggested that Medicare Prescription Drug Plans (Part D), post-acute care facilities and hospitals receive the largest cuts. Laboratories, durable medical equipment suppliers and Medicare Advantage plans (Part C) would have been cut as well.

Simultaneously, MedPAC called for increasing financial incentives for providers to join Medicare’s Accountable Care Organization (ACO) program and payment bundling pilot projects.

For Madden’s organization, which includes many specialists whose pay could be negatively affected by the proposal, the pay freeze in the MedPAC proposal would still have been better than the perpetual payment uncertainty.

 “A freeze is way better than a cut,” said Madden. “It would affect our medical group because some of the specialties would be taking a cut, but there could be innovations that go along with that – encouragement for primary care – along the lines of a blended payment model, that would help a lot. A payment system that’s not just fee-for-service.”

MedPAC decided to not include a spending target in its proposal, although some members felt a target was a valuable tool to get Congress to act.

 “It is better to think of an expenditure target as a tool for altering the behavior of policymakers than as a tool for improving how providers deliver services: An expenditure target first alerts policymakers that spending is rising more rapidly than anticipated and then makes it more difficult for them to increase payment rates,” a 2007 MedPAC report reads.

Smarter Spending Targets

One of the problems with the SGR, many experts say, is it treats all providers in the same manner, regardless of the quality of care they provide.

In a piece she wrote for Healthcare Financial Management Association, Gail Wilensky, an economist and senior fellow at Project HOPE, explained that the biggest problem with the SGR is that, “Nothing a physician now does (or doesn’t do) affects what happens to the SGR, because no single physician or physician practice can affect total spending on Medicare physician services. For those of us who believe incentives matter, this lack of a linked relationship is problematic.”

Spending targets could also be used to nudge physicians into participating in ACO programs.

In a March 2007 report, MedPAC listed many of the options for new spending targets, and the pros and the cons for each:

Payments based on geographic area. Spending targets would be tied to the efficiency and health care costs of practices within a geographic area. It’s not clear which level of geographic unit (state, county, etc.) would be most appropriate.

• Pro: Over time, it might improve payment equity across the country and lower geographic variation.
• Con: It would not entirely address the inequities in the payment system. Efficient physicians in inefficient regions would still be punished. Differing payment rates among geographic areas might cause beneficiaries to cross geographic lines to receive care.

• Pro: Proponents say this would helpfully differentiate between high-volume, high-cost services and low-cost services. The formula could be designed to bolster primary care services.
• Con: Setting spending targets for services would undermine the values attached to services in the physician fee schedule. Congress would have to decide on the correct mix of services, which is a difficult task because the proper mix of services is constantly evolving.

• Pro: Encourages physicians to participate in multispecialty group practices, which some studies suggest are more likely to use care management processes and information technology, while using fewer overall resources.
• Con: A relatively small percentage of physicians are in specialty groups, and not all of these are providing efficient, high-quality care, meaning participation in these practices doesn’t necessarily lead to the right behavior. Rural physicians will have few, if any, opportunities to participate in multispecialty group practices.

• Pro: Physicians would be able to see the link between their actions and an ACO meeting its spending target. Ideally, over time, physicians and other providers would collaborate to improve care delivery and reduce spending.
• Con: Some experts have argued that hospitals and physicians are natural competitors and, therefore, unwilling collaborators. Physicians, especially those who rarely refer patients for hospital care, might push back if they’re assigned to institutions they feel they have no affinity with. 

• Pro: This formula would increase accountability and perhaps help physicians see the link between their actions and Medicare spending.
• Con: Putting in place an outlier system based on bundled payments would be challenging if physicians aren’t convinced the tools used to group payments are valid. Initial physician scores could cause controversy when physicians realize their efficiency isn’t in line with their peers. 

This would involve either eliminating the cumulative aspect of the formula, or allowing room for additional payments.

• Pro: Physicians would receive more favorable updates, and it would temporarily relieve budget pressure.
• Con: It would increase spending and not change the incentive structure of fee-for-service.

MedPAC insists that Congress should invest in alternative payment approaches – such as bundled payments and capitation (a lump sum paid to physicians for the care provided to each patient) – even if they adopt a new spending target.

Wilensky advocates for a practice-level alternative to the SGR formula. This new formula would directly link payment updates to the behavior of physicians within the practice.

Wilensky wrote that practice-level payments would work well for larger practices, and while the formula may not work as well for smaller physician groups and individual practices, these groups and individuals might use a default SGR based on costs typical of similarly sized practices in a geographic region.

Of course, spending targets are only one piece of the Medicare’s provider payment puzzle.

Guterman, of The Commonwealth Fund said, “While (Medicare’s financial problems) are immediate problems – the equivalent of the burning pier – we need to certainly do what we need to do to keep the program going, but we need to think about what the underlying problems are. We need to change the kinds of incentives that we offer in our health care system.”

The Physician Fee Schedule

Experts agree that the codes in the Medicare physician fee schedule, which determine what physicians are paid, should be updated to reflect actual costs of labor and practice.

Paul B. Ginsburg, president of the Center for Studying Health System Change, said that even if new payment reforms are successful, the fee-for-service payment system will likely remain a large part of Medicare and reforming the fee schedule should continue to play an important role in discussions surrounding Medicare reform.

 “It is therefore critical to address the current shortcomings in the Medicare physician fee schedule, because it will affect physician incentives and will continue to play an important role in determining the payment amounts under payment reform,” he wrote in the September 2012 issue of Health Affairs.

Since its inception in 1989, the physician fee schedule has become distorted. The costs attached to various physician services have not been updated to reflect reality, economic experts say.

The Centers for Medicare & Medicaid Services (CMS) estimated that in 2008 about 2,900 services had payment values dating back to the 1980s, which accounted for about $5 billion in spending, or 8 percent of total spending.

The Relative Value Update Committee was set up in 1991 to advise the CMS on updates to payment values. The committee, managed by the American Medical Association, is disproportionately composed of numerous physician specialties, which has led to an underrepresentation of primary care physicians, Ginsburg wrote.

“This structure and composition of the Relative Value Update Committee makes it very difficult to lower the assigned values for specific services, even when improved efficiencies might dictate such adjustments,” Ginsburg wrote. “Physician specialty societies cannot be expected to identify services their members perform for proposed reductions in relative values, and they can be counted on to resist such attempts by others.”

He points out that in 2002, the committee reviewed 807 pay codes and raised the values of 469 services, while lowering the values of 27 services.

It is within the CMS’ power to adjust the value of physician services, but the organization has been slow moving to do so.

“I cannot tell you exactly why (the CMS has not adjusted the values), but limited resources and concerns about pushback from stakeholders may be part of it,” Ginsburg said.

Sections 3102 and 3134 of the Affordable Care Act (ACA) should embolden the CMS to adjust the fee schedule. As listed in Ginsburg’s Health Affairs piece, the ACA includes directives to revise the payment levels for:

• services with rapidly increasing volume;
• services first valued three years earlier;
• services with a substantial increase in practice expense;
• multiple codes often billed in conjunction with furnishing a single service;
• services with low values, especially those billed multiple times during a single treatment;
• and services not reviewed since the implementation of the fee schedule.

Congress

The deficit reduction plans and Federal budgets proposed to Congress have not included SGR-alternatives that are dramatically different from the current formula.

Rep. Paul Ryan’s (R-Wis.) FY 2013 budget would limit the growth of Medicare spending for new beneficiaries to GDP growth plus one-half percentage point starting in 2023, when the premium support system outlined in his budget would take effect. The limit gives physicians a little more wiggle room than they have under the SGR but doesn’t change the structure.

Simpson-Bowles, one of the most widely publicized deficit reduction plans of the last couple of years, establishes a global budget for total Federal health care spending that limits growth to GDP plus 1 percent, a larger spending corridor than Ryan’s budget. His budget projections assume an SGR repeal, but the budget doesn’t detail how a repeal would be funded.

The FY 2013 White House budget calls for scrapping the SGR but doesn’t offer ways to offset the costs.

Many physician lobbying groups supported the Medicare Physician Payment Act of 2012. The legislation, sponsored by U.S. Reps. Allyson Schwartz (D-Pa.) and Joe Heck (R-Nev.), would repeal the SGR and offset the costs by using $300 billion savings from the winding down of the wars in Iraq and Afghanistan.

Similar to the MedPAC proposal, the legislation wouldn’t implement a new spending target but instead would call for expanded testing of new payment and delivery models. By 2018, physicians participating in approved health care delivery models would begin receiving rewards. In 2019, physicians still participating in the fee-for-service system would see pay cuts.

Govtrack.us says the likelihood of the bill passing is 2 percent.

On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012. The legislation, hastily crafted to avoid the so-called ‘fiscal cliff,’ delays the SGR for one year. Congress has until Jan. 1, 2014, to repeal the SGR. If Congress doesn’t act, physicians will see a 26.5 percent pay cut.

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