In an attempt to pay physicians an "expenditure growth society can afford," the law uses a mechanism known as "sustainable growth rate" (SGR) which ties physicians’ annual Medicare reimbursement updates to the country’s gross domestic product (GDP). Since 2002, Medicare spending on physician services has exceeded targets established by the SGR formula – which then reduces fee updates to below the rising cost of operating a medical practice.

In response to frenetic lobbying over the SGR’s intolerable cuts to physician reimbursement, Congress has repeatedly overridden the cuts. But because the SGR-based spending target is cumulative, all spending that exceeds the target one year is carried over to subsequent years as a growing expense the law says must be recouped.

Medicare’s physician expenditure growth has been so high in recent years – far outpacing GDP growth, and saddled with cumulative target deficits – that the SGR system calls for draconian reductions in physician payment updates – a decline of nearly 40 percent by 2015 if physicians continue to provide services at the current rate, according to the Congressional Budget Office (CBO). Were that to happen, various analysts agree, patients’ access to care would be jeopardized as physicians drop out of a Medicare program in which they can no longer afford to participate.

The American Medical Association’s (AMA) Board Chairman Cecil B. Wilson, M.D., warns that "a Medicare meltdown looms and must be resolved," as payments to physicians are essentially the same as they were in 2001 and lag far behind physicians’ cost of caring for seniors. That cost is projected to increase nearly 20 percent by 2015, warns Wilson, while the leading edge of the baby-boom generation will start enrolling in Medicare in 2010, swelling the program’s enrollment from 43 million in 2010 to 49 million by 2015.

Total spending since the SGR method was enacted in 1997 is currently about $43 billion above the system’s cumulative expenditure target, with the hole growing deeper each year, the CBO notes. Eliminating the SGR target system and replacing it with updates directly indexed to physician practice cost growth – reflected by a measure known as Medicare Economic Index (MEI), maintained by the Centers for Medicare & Medicaid Services – would cost more than $200 billion over ten years, according to CBO projections.

Congress is thus faced with the competing challenges of controlling Medicare spending without endangering patients’ access to the program by pricing physicians out of it, or by raising Part B premiums excessively (which are set as a percentage of expenditures, by law). Congress must also wrestle with the problem of appropriateness and quality of care that physicians provide to Medicare beneficiaries, which most observers say is impeded by the current system.

The failures of the current system may mark a "rare political opportunity," as the budget hole it has created may compel Congress and physicians to consider reform measures they might have otherwise deemed unacceptable, says a report to Congress released last month by the Medicare Payment Advisory Commission (MedPAC).

The MedPAC report analyzes various reform options, including tweaking the current SGR mechanism, replacing a GDP-based physician spending target with other target systems, and discarding spending targets outright and replacing them with a value-based health care purchasing infrastructure. The AMA is promoting the latter proposal and has the signatory support of 76 medical specialty societies. "The SGR is a measure of the economy, and pays physicians less if the economy is not growing. Patients don’t check how the economy is doing before getting sick," says Wilson.

While the medical community stands behind the AMA’s proposal, some organizations are also promoting separate agendas. The American College of Surgeons and American Osteopathic Association, while signatories of the AMA’s proposal, are discussing with legislators the possibility of setting separate national spending targets for six medical service categories. The American College of Physicians is endorsing a separate funding mechanism for its advanced medical home model of care.

Congress is expected to introduce legislation this year to address the problem and has begun to hold a series of hearings on SGR reform. At a hearing convened by the U.S. Senate Committee on Finance on the release date of MedPAC’s report – March 1 – various agencies and stakeholders outlined the impacts of the problem and proposed solutions – including MedPAC, the CBO, and the AMA.

The implications of reforming Medicare physician reimbursement go far beyond payment equity, as stakeholders agree that the current system’s dominant fee-for-service design continues to devour funds while failing to promote quality and efficiency in delivery of services. Reimbursement reform is therefore inextricably linked with the broader trends of cost and quality transparency, and of evidence-based quality improvement, as public and private payors continue to phase in programs driven by a value-driven reimbursement paradigm. No matter how incrementally Congress chooses to adopt reform measures, changes will mark a fundamental evolution of the Medicare program.

Physician Payment Formula Challenges

The physician payment mechanism in Medicare’s traditional fee-for-service program – in which nearly 90 percent of Medicare beneficiaries are enrolled – poorly aligns physician incentives for efficiency or quality, and offers no control over the rising volume and intensity of services provided, according to analyses by both the Institute of Medicine (IOM) and the Commonwealth Fund.

An IOM report, Rewarding Provider Performance: Aligning Incentives in Medicare, released last September, points to systemic causes of Medicare’s cost problem that are even more fundamental than questions about SGR formula effects. Because the current Medicare fee-for-service system pays according to the number and complexity of services, the report notes, it tends to reward excessive use of services, expensive and complex procedures, and lower-quality care, while undervaluing services that contribute greatly to early intervention and to high-quality care, but are labor- or time-intensive and rely less on technical resources – such as patient education in self-management of chronic diseases and care coordination.

There is an underlying mismatch between the primary cause of rising Medicare spending – volume and intensity of services provided by physicians – and the SGR mechanism’s focus of setting fees for each physician service, according to Stuart Guterman, the Commonwealth Fund’s Senior Program Officer, Program on Medicare’s Future. In invited testimony delivered last July before the U.S. House of Representatives Energy and Commerce Committee, Subcommittee on Health – entitled Medicare Physician Payment: Are We Getting What We Pay For? Are We Paying For What We Want? – Guterman said that the SGR offers no control over the volume and intensity of provided services.

Unique among Medicare providers in key ways, physicians direct and influence the type and amount of care that patients receive, and they are frequently paid for very small units of service that can be provided in a single visit – such as payment for office visits and separate payments for individual tests and services, noted Guterman. Physicians are also the only Medicare providers subject to an aggregate spending target. The current system may actually create an incentive for physicians to increase their individual practice’s volume and intensity to offset reductions in fees mandated by national spending targets.

The SGR physician expenditure target was seen by Congress as a more stable replacement for its previous attempt to curtail the incentive the payment system gives physicians to increase volume – the volume performance standard (VPS), established in 1992, noted Guterman. The VPS set physician fees for each service and tied their annual update to the MEI – a growth allowance measure of practice cost inflation – while introducing the concept of an expenditure target, benchmarked to the volume of services provided per Medicare beneficiary in three separate categories: evaluation and management services, surgical procedures, and all other services.

Because the system depended heavily on the historical volume trend in physician services – i.e., excess spending relative to the target would trigger a reduction in the reimbursement update two years later – a decline in the service volume trend in the mid-1990s led to large increases in Medicare’s fees for physician services, which Congress attempted to offset with successively larger cuts in fees, further destabilizing the update mechanism, Guterman noted.

In the Balanced Budget Act of 1997 Congress replaced the VPS’s utilization-based spending target with the SGR method, using as a baseline the growth in inflation-adjusted GDP per capita – a measure of growth in the resources per person that society has available – which had been considerably more stable from year to year and generally smaller than changes in the volume of physicians’ services, and could therefore effectively limit total payments to physicians over time, added Guterman. Another difference from the VPS was that the SGR method adjusts spending on physician services cumulatively, such that spending that exceeded the target one year would count negatively toward target calculations in subsequent years.

Updates under the SGR method have also proven to be volatile, however – to the benefit of physicians through 2001, noted Guterman, as the overall increase in physician fees during the first three years of SGR was more than 70 percent higher than the MEI over the same period, as the GDP target also allows for fee increases if GDP growth outpaces spending on physician services. Since then, the reverse has happened, as spending on physician services has far outpaced the SGR target, triggering repeated reductions in physician updates.

In 2002, Medicare cut physician fees by 3.8 percent, and in succeeding years Congress has consistently voted to override fee cuts mandated under SGR, while physician expenditures per beneficiary have continued to rise, and Medicare continues to face a larger and larger physician spending deficit because of the SGR’s cumulative recoupment requirement.

To recoup the cumulative deficit rolled over from prior years, the SGR mechanism in 2007 would require an update of 25 percentage points below the MEI, but the SGR mechanism limits each year’s update to no more than three percentage points above MEI or seven percentage points below it. As a result, the SGR calls for a 2007 update set at the maximum negative: seven percentage points below MEI, or minus 5.0 percent overall. Late last year, the Tax Relief and Health Care Act of 2006 overrode the SGR, effectively holding 2007 payments at 2006 levels. Annual updates of at least minus five percent are projected for the next nine years, which Medicare trustees characterize as "unrealistically low" because Congress is unlikely to implement them, says MedPAC.

Each time Congress overrides the SGR there is a direct cost for Medicare beneficiaries because the monthly Medicare Part B premium is set at 25 percent of Part B spending, by law. In 2006, the Part B premium increased by more than 10 percent for the third consecutive year, and is projected to climb almost 40 percent higher than its current level by 2015, which can pose particular burdens on beneficiaries with low incomes, fragile health, disabilities or chronic illnesses, warned Guterman.

In addition to controlling the growth of Medicare spending and keeping the financial burden on the most vulnerable beneficiaries from becoming worse, Congress must weigh a third potentially conflicting requirement: to provide a fair rate of payment to physicians and preserve access for Medicare beneficiaries, added Guterman.

For the Medicare program to get more for what it spends, it must entirely restructure its payment system, and it cannot rely on a fixed SGR system, argued Guterman, citing data Dartmouth Atlas and other data showing wide variation in Medicare spending per beneficiary among different areas in the U.S., with no obvious correlation among cost, quality or mortality rates across areas. Echoing the IOM’s critique, Guterman noted that the current health care financing mechanism is fundamentally flawed because providers are paid for "providing more care and more intensive care, but not necessarily better care," particularly in the way Medicare pays physicians. That flaw, Guterman maintained, is the real issue that confronts the Congress in their deliberations over how to "fix" the SGR.

SGR Reform Alternatives

MedPAC for years has been critical of the SGR physician reimbursement methodology, and its appraisal of the status quo in the 236-page report it released March 1, Assessing Alternatives to the Sustainable Growth Rate System, was largely in agreement with the IOM and Guterman, namely, that Medicare’s current fee-for-service reimbursement method is fundamentally flawed and should be replaced with some form of value-based reimbursement system.

The report was the centerpiece of the March 1 hearing convened by the U.S. Senate Finance Committee, at which MedPAC and the CBO testified, along with other stakeholders including the AMA, which presented its response to the MedPAC report.

The report says that the SGR system is widely considered to be flawed, neither rewarding physicians who restrain volume growth nor punishing those who prescribe unnecessary service. The report deems the SGR to be:

· Inequitable because it treats all physicians, regardless of their individual behavior, and all regions of the country alike.

· Incapable of promoting quality because it cannot distinguish between good and bad care, fails to reward physicians for good performance and does not distinguish between desirable and undesirable growth in volume.

· Ineffective at controlling costs because it offers little incentive for individual providers to control volume, penalizes providers who use health resources conservatively, and may actually create an incentive for individual physicians to provide more services than needed in order to offset reductions in their income.

Despite those criticisms, the report nevertheless lays out a full spectrum of reform analysis, including ways to reconfigure the existing SGR system to improve its performance and examining five alternative types of sub-national physician expenditure targets: geographic area, type of service, group practice, hospital medical staff, and physician outliers.

MedPAC appraised the efficacy of alternative expenditure target systems and offered two possible paths of reform. The first path would repeal spending targets altogether and accelerate development and adoption of approaches to improve incentives for physicians and other providers to furnish higher quality care at a lower cost; while the second would replace the SGR with a new expenditure target system that should: (1) eventually cover all fee-for-service Medicare providers (not just physicians) and initially phase-in hospital outpatient departments, (2) apply the most pressure in parts of the country where service use is the highest to address unexplained regional spending disparities, (3) disseminate peer-benchmarked practice pattern data to providers, and (4) offer rewards to more tightly targeted groups of providers for improved efficiency and quality.

If Congress chooses to use expenditure targets, MedPAC concluded that such targets should not apply solely to physicians because Medicare has a total cost problem, not just a physician cost problem, and producing the optimal mix of services requires that all types of providers work together, rather than at cross purposes, to keep costs as low as possible while increasing quality.

Saying that the complexity of the issue makes it difficult to recommend any option with confidence, the report notes that MedPAC members disagreed about the utility of expenditure targets and did not reach consensus on reform paths.

The report did declare that national expenditure targets, by design, do not create proper incentives for physicians and other providers because they operate at a level far removed from day-to-day clinical practice and individual accountability. "Experience with the existing SGR should serve as a warning that well-intentioned policies can cause as many problems as they solve," the report says, and it instead urges thinking of an expenditure target as a tool for exerting policy pressure, alerting policymakers that spending is rising more than anticipated, and stimulating debate over the physician payment updates – a debate which the report says may compel providers to support payment reforms that they might otherwise find objectionable. An expenditure target may "mimic the pressure for improvement that ideally exists in competitive markets" and spur changes needed to improve the system, MedPAC says.

MedPAC members were in agreement that value-based reimbursement policies of some kind should accompany any reform, and the report states that "an aggregate target alone is inadequate to resolve the most pressing challenge Medicare faces: to identify and reward excellent performance – at a level of detail and specificity that prompts individual providers to improve." That effort will require a much larger investment in CMS, both in dollars and administrative flexibility, to develop and improve information systems, quality and resource use measures, and contracting for specialized services, MedPAC adds.

The report recommends several specific ways in which Medicare should change payment incentives, collect and disseminate information, and improve program integrity and provider standards:

· Linking payment to quality by basing a portion of provider payment on performance.

· Encouraging coordination of care and use of care management processes, especially for chronic care patients.

· Ensuring accurate prices by identifying and correcting mispriced services.

· Allowing shared accountability arrangements, including gainsharing, between physicians and hospitals.

· Bundling services to put providers at greater financial risk for the services provided and encourage judicious ordering of them.

· Promoting primary care, which can lower costs without compromising quality.

· Rethinking Medicare’s cost-sharing structure and its ability to steer beneficiaries to lower cost and more effective treatment options.

· Measuring physicians’ resource use over time and sharing results with physicians.

· Encouraging the development and use of comparative-effectiveness information to help providers and patients determine what constitutes good quality, cost-effective care.

· Using standards, where appropriate, in physician offices to ensure quality.

· Continuing to improve program integrity, capitalizing on the opportunity presented by administrative contractor reform.

"The challenge for Medicare, and all payers, is to encourage providers to furnish an optimal mix of services. Finding that optimal mix, which will change continuously with advances in medical science, requires clinical judgment and collaboration among different types of providers. An approach to expenditure control that relies exclusively on a formula provides no incentive for physicians to furnish optimal care and thus is destined to fail," the report says.

An expenditure target, however it is designed, is at best a complement to a major investment in Medicare’s ability to develop and refine payment systems to reward quality and efficient use of resources while improving payment equity, MedPAC says, noting that Medicare spending for physician services has climbed more than nine percent per year since 2000, largely because of increased number and complexity of services furnished – while much of the rise in volume is unexplained, even after adjusting for the proliferation of new technology, demographic changes and shifts in care to the physician office setting.

MedPAC’s report weighs the pros and cons of tweaking the current SGR system, as well as replacing it with five alternative sub-national target systems.

The cumulative aspect of the current SGR system could be moderated or eliminated, or an additional allowance around the spending target could be implemented – for example, increasing the target for utilization growth per beneficiary to GDP plus one percentage point rather than GDP alone (raising the target), or limiting payment updates to within two percent of the MEI, instead of the current range of MEI plus three percent to MEI minus seven percent (slightly reducing the allowable payment increase range and significantly reducing the allowable payment decrease range). Either approach would allow some excess volume to be forgiven, relieve some of Medicare’s budget pressure and result in more favorable physician reimbursement updates, but also would increase total expenditures and would not change the inflationary incentives inherent in fee-for-service payment, according to MedPAC.

To address services that are growing quickly – which MedPAC says may signal that prices for those services are set too high relative to the costs of furnishing them – CMS could analyze changes in both the number of physicians furnishing the services and the number of hours physicians worked to flag services for closer examination of their relative work values, or it could automatically correct such mispriced services and leave it to the Relative Value Scale Update Committee to evaluate these changes during its regular five-year review.

The geographic area alternative – one of five replacement targets for the SGR that MedPAC examined – would set different fee update amounts by region, acknowledging that regional practice patterns vary and contribute differentially to overall volume and expenditure growth. While the aim would be improving equity across the country reducing geographic variation, MedPAC said that tradeoffs would be involved in attempting to choose the optimum geographic unit. Using smaller units such as counties, for example, might increase physician accountability but would also increase year-to-year volatility and be difficult to administer. Using different regional updates could also create wide disparities in payment rates by area, while a physician who practices conservatively in a high-volume region would still be penalized.

A type-of-service alternative would recognize that expenditure growth differs widely across types of services and would set expenditure targets for different types of services, which also could be designed to boost payments for primary care services, which some believe are undervalued, MedPAC says. Such targets, however, would conflict with the resource values underlying Medicare’s physician fee schedule, which sets payments for services based on the resources needed to furnish them. Payments would vary because of differences in their relative resource values, as well as disparities in volume growth – requiring targets to be set based on a complex and perhaps unknowable calculus – i.e., what constitutes the optimal mix of services – which evolves with changes in the population served, patterns of illness, and medical knowledge and technology, says MedPAC.

A group practice-based expenditure target alternative would capitalize on evidence that physicians in multispecialty group practices may be more likely to use care management processes and information technology and to have lower overall resource use, but MedPAC concluded that payment policies focusing solely on group status may not be effective because only 20 percent of physicians currently practice in multispecialty groups, not all group practices engage in activities that improve quality and manage resource use, and using separate targets for group and nongroup physicians could be viewed as inequitable, since efficient physicians in smaller practices would be ineligible for the payment updates that physicians in multispecialty groups would receive.

A hospital medical staff target system would use Medicare claims to assign physicians and beneficiaries to an "accountable care organization" (ACO) based on the hospitals they use most, creating a virtual physician group using the extended hospital staff as the organizational focal point, and would analyze practice patterns of different ACOs to adjust payments for their differences in resource use and quality, says MedPAC. This approach could allow individual physicians more readily to see a link between their own actions and those of their ACO in meeting its target, potentially inducing physicians and other providers to practice more as a system, optimizing care delivery and reducing overall expenditures. MedPAC notes, however, that hospitals and physicians may sometimes be competitors who will not easily collaborate with one another, and that physicians – especially those who rarely refer patients for hospital care – may resist having Medicare assign them to an entity to which they may feel little or no affinity.

Under the fifth target system MedPAC analyzed, an outlier alternative, Medicare could identify physicians with very high resource use relative to their peers and provide confidential feedback to physicians. Once greater confidence in resource-use measurement tools is gained, policymakers could use the results for additional interventions such as public reporting, targeting fraud and abuse, pay for performance, or differential updates based on outlier status – promoting individual accountability and enabling physicians to more readily see a link between their actions and their payment. Physicians would have to be convinced of the validity of the system’s episode grouping tools and per capita measures, and episode information would need to be properly case mix adjusted and allow for valid cross-geographic comparisons, MedPAC added.

The CBO, which also delivered testimony at the Senate Committee on Finance hearing, projected the budgetary impacts of various reform options and combinations of options, including removing Part B drugs (physician-administered – primarily cancer drugs) from the SGR, establishing a new base year from which to set future targets (forgiving the excess spending accumulated from prior years), eliminating altogether the cumulative aspect of spending targets, and modifying the allowance for growth in volume and intensity.

Although each of those approaches would to some extent reduce the severity of SGR-mandated cuts in the short term, the CBO said that modifying the current formula would carry a large price, and does not alter the dynamics that led to the current problem, as the SGR system’s allowance for volume and intensity growth is approximately 2.3 percent per year, while projected volume and intensity growth are higher – about three percent per year for physician services alone and about four percent per year including Part B drugs. "To offset the increased spending associated with higher volume and intensity growth, the SGR system will reduce updates below the increase in the Medicare Economic Index," leading to sustained negative updates in the future, the CBO said.

Physician Response

The AMA endorses MedPAC’s first reform path: repealing the SGR target while accelerating Medicare adoption of value-based techniques used by private payors to control costs. "Given the fatal flaws in the SGR formula and the resulting cuts that threaten the foundation of the Medicare program, the AMA strongly supports its repeal," replacing it with a system that adequately reflects increases in physicians’ medical practice costs, such as the MEI, said Wilson in written testimony submitted to the Senate Finance Committee on March 1.

Wilson says that efforts by medical professionals themselves would be far more effective in identifying and correcting inappropriate use of services and constraining health care costs than spending targets that cannot distinguish between appropriate and inappropriate care. The key ingredient to identifying and preventing inappropriate use of physicians’ services is committed physicians, maintains Wilson, which he says is only possible if the system seeks physician input early in the reform process, rather than imposing "arbitrary targets set by federal officials and based on imperfect data."

To that end, the AMA has sent to Congress a policy proposal, Joint Recommendations to Congress On Eliminating the SGR and Supporting Efforts to Promote Health Care Quality and Appropriateness, signed by the AMA and 76 other medical specialty societies. The policy includes the following five proposals:

The SGR should be repealed and replaced with an update system that reflects increases in physicians’ and other health professionals’ practice costs. All of the alternatives currently under consideration, including regional targets and expanding the targets to include other providers, would inject significant administrative and political complexities, and could create obstacles to the purchase of health information technology for quality improvement and to the development of care coordination programs.

Congress should support initiatives by organizations representing physicians and other health care professionals to bridge gaps in care and assure the appropriateness of services provided to Medicare beneficiaries, which could include:

· Instructing HHS to work with organizations of physicians and other professionals to develop methodologies to provide accurate, confidential and comparative information to individual practitioners on how their quality and utilization compares to their peers as tools for self-improvement.

· Encouraging physician and other health professional organizations to develop voluntary guidelines on appropriate resource utilization and to analyze utilization growth and quality of services by condition, type of service, episodes of illness, region and specialty.

· Providing financial support and positive incentives to encourage acquisition of tools and information technology to provide consistent and high quality care.

· Directing Medicare to pay medical practices for care coordination services that fall outside of a face-to-face encounter, which could be partially funded by system-wide savings achieved by these programs, such as reductions in hospital admissions and readmissions (Part A) and more effective use of pharmacologic therapies (Part D).

· Supporting efforts to improve the accuracy of Medicare’s resource-based relative value scale to ensure that all costs, including uncompensated care and updated practice expenses, are recognized and that the payment system does not inadvertently encourage inappropriate treatment decisions.

If immediate repeal of the SGR is not possible, Congress must:

· Establish by law a transition, pathway and "date certain" to complete elimination of the SGR.

· Provide positive physician/health care professional updates set by statute for each year until repeal takes effect.

· Stabilize payments for a minimum of two years by providing positive baseline updates to all physicians/health care professionals.

· Spend down the costs of repealing the SGR by fully funding the positive updates.

· Urge CMS to remove physician-administered drugs from the SGR and make other refinements in the formula to help reduce the cost of Congressional action.

The transitional 2007 Medicare Physicians Quality Reporting Initiative should be re-examined before being expanded into future years.

· The program should focus on meaningful improvements in patient care rather than conditioning positive updates for all physicians and practitioners on "reporting for the sake of reporting."

· It should be designed so that timelines for implementation are realistic and CMS has the capability to effectively administer the program.

· If the program is continued beyond 2007, funding should be sufficient to provide additional payments beyond the positive inflation update for those who report on clinical measures.

· Any physician-level clinical measures used in a pay-for-reporting program must be developed through a multi-specialty consensus process organized by medicine (the Physicians’ Consortium for Performance Improvement).

To make Medicare sustainable in the future, Congress should identify and begin to enact additional reforms which will be necessary to create incentives for judicious use of services and to adequately fund the program.

Wilson notes that the Physicians’ Consortium for Performance Improvement, convened by the AMA in 2000, has thus far developed 155 performance measures which hold promise for future value-based reimbursement policies, including 60 of the 74 measures in Medicare’s Physician Quality Reporting Initiative – the Medicare physician reporting program that CMS will use beginning this July.

The AMA strongly opposes expanding the SGR to other providers or using an alternative spending target, and Wilson notes that MedPAC itself recommended against expanding the SGR spending target in March 2000, after concluding that it was unworkable because of the inability to predict or adjust for shifts in site-of-service with a rigid formula such as the SGR. That MedPAC analysis also projected that payment updates would be reduced by an additional one to three percent if the spending target were expanded to hospital outpatient and ambulatory surgical centers – an impact that Wilson says is likely to be larger today because hospital outpatient spending is now higher than what MedPAC simulated in 2000.

The AMA agrees with MedPAC’s long-term vision of hospitals and physicians working together in accountable care organizations, as long as the system establishes positive incentives to foster voluntary alliances, rather than attempts to drive such alliances by using "top-down" spending targets, says Wilson.

Finally, the AMA recommended two administrative actions to reduce the cost of repealing the SGR: (1) remove the cost of Part B physician-administered drugs from the SGR calculation retroactively to 1996; and (2) include in the SGR calculation the impact on physician spending due to new services covered under Medicare pursuant to formal or informal rulemaking such as national coverage decisions – which has expanded Medicare’s coverage to include services such as PET scans, bariatric surgery, transluminal percutaneous angioplasty with carotid artery stents, and ocular photodynamic therapy with Verteporfin for patients with macular degeneration. There have been over 100 national coverage decisions of that sort between 1999 and 2006, which cause aggregate physician spending to exceed the SGR target at even greater rates, says Wilson.

As to whether the absence of any numerical baseline of physician cost containment is a "tough sell" to Congress, Wilson replies, "That’s Congress’s job – to see to it that the Medicare program provides quality care to senior citizens. If that goal is important enough, it is their responsibility to do it." The best measure of cost containment is appropriate, better quality care, and the reality is that many best practice guidelines will result in more service volume in the short term – i.e., preventive and coordinated care – which in the long term will lead to better health outcomes, lower incidence of disease and higher productivity, says Wilson. That framework shifts the cost control equation to one that measures the cost/benefit impact on society, he adds.

In response to concerns that an increase in Medicare payments for physicians and other health professionals fuels Medicare Part B premium increases and causes potential hardship for beneficiaries, Wilson says that physician pay cuts will ultimately cost beneficiaries more because those cuts will force physicians to discontinue providing certain services in the physician’s office or force longer wait times for a physician office visit, while patients will have to receive those services in higher-cost hospital or emergency department settings – which add inconvenience and higher deductibles and co-payments to beneficiaries’ burdens.

Wilson adds that other providers continue to receive payment updates that keep pace with their medical inflation, even though increased spending on hospital outpatient services also increases beneficiary premiums. Although outpatient hospital spending accounts for only about 13 percent of total Part B spending, it accounts for one-third of the increase in the 2007 premium, while spending for physician fee schedule services accounted for only about 14 percent of the increase in the Medicare premium for 2007, notes Wilson, citing CMS figures. One in four Medicare beneficiaries are also protected from premium increases because they can get extra assistance that enables them to pay little to no premium for Medicare Part B services, he adds.

Some medical societies which have signed on to the AMA’s reform proposals are also endorsing their own variant of reform.

The American College of Physicians (ACP) strongly supports SGR repeal and opposes replacing it with a new target system, while it also endorses a separate, prospective and risk-adjusted payment structure to facilitate primary care practice redesign that it says can facilitate more effective and efficient care delivery through an advanced medical home model of care – in which a patient’s personal physician coordinates and integrates all of a patient’s care needs across the health care delivery system (see PND’s March 2007 cover story).

In a March 1 letter to Congress, the ACP makes that proposal, along with recommending that the SGR system be phased out within five years or earlier, and be replaced with a physician payment update system that reflects practice cost increases, performance based payments, and additional payment increases to fund desirable policy objectives, such as stimulating an increase in the supply of primary care physicians. The ACP also calls for accuracy improvements in the Resource Based Relative Value Scale (RBRVS) to provide incentives for health information technology adoption and quality reporting and improvement efforts.

While the American College of Surgeons (ACS) and the American Osteopathic Association (AOA) are both signatory supporters of AMA’s policy proposals, they are endorsing a "Service Category Growth Rate" (SCGR) alternative in the event that Congress insists on keeping some kind of expenditure target for physician services. Under their proposal, the national SGR target would be replaced with six distinct targets representing categories of physician services: evaluation and management, major procedures and related anesthesia services, radiology services and diagnostic tests, minor procedures, diagnostic laboratory tests, and physician-administered drugs under Part B. Each service category target would have its own growth allowance and payment structure, as well as a floor and ceiling on yearly updates.

The proposal is aimed at allowing for flexibility in controlling spending and implementing value-based purchasing, for example, allowing evaluation and management services to grow at a rate double that of other service areas like surgery, according to ACS Executive Director Thomas R. Russell, M.D., who says that growth in areas like preventive services and disease management is good for patients and the overall health of the Medicare program.

By encouraging recognition of the uniqueness of different services, the proposal establishes a construct for more precise quality measurement and improvement, as Medicare could establish separate pay-for-performance incentive payment pools that are sensitive to the various approaches each service category takes to performance improvement, notes Russell, e.g., primary care is often focused on patient management and process, while in surgery it is on outcome and the surgical team, and for labs it is on efficiency and accuracy.

The proposal would also address the inequity of a universal spending target, under which physicians in a specialty whose service volume and intensity have grown slowly are penalized equally with physicians in specialties with rapid service growth. With respect to surgery, major procedures have experienced among the slowest volume and intensity growth rates, while bearing a disproportionate share of the SGR burden, says Cindy Brown, director of ACS’s Division of Advocacy and Health Policy.

Legislators Have the Ball

Whether, when, or to what extent Congress will act on Medicare payment reform for physicians is an open question. According to U.S. Senate Finance Committee Chairman Max Baucus (D-Mont.), "solving this problem won’t be simple and even MedPAC had difficulty determining how to move forward. Some proposals are going to be difficult, but I plan to work with my colleagues to determine the best way forward. There are also some ideas on the table right now that can have a big impact. Paying for quality of care rather than volume, and comparing the effectiveness of products and services to establish standards of care, are options MedPAC suggested that I’ve long urged Congress to adopt."

While there haven’t been any bills introduced on this issue as of yet, Baucus says he plans to introduce legislation this year to fix the SGR for 2008 so the scheduled cut does not go into effect.

In remarks presented this February to the AMA National Advocacy Council, U.S. Rep. David Camp (R-MI), Ranking Member on the Health Subcommittee, U.S. House Committee on Ways and Means, said that the SGR formula is inherently flawed and needs to be overhauled, that it is past time for Congress to find a permanent fix to it, and that he intends to work with Health Subcommittee Chairman Pete Stark, and with Ways and Means Committee leadership to find the right formula.

Camp said he strongly believes the MedPAC report (which at the time of his remarks was to be released in a few weeks) will assist Congress in thinking creatively to find alternatives to the SGR formula, but will not resolve the cost issue, for which Congress needs the help of the Administration and of physicians – the former to help alleviate the price burden by removing drugs from the SGR formula both prospectively and retrospectively, which Camp said would take care of approximately $113 billion of the $252 billion cost of replacing the SGR with a working alternative over 10 years.

"The Administration can also start looking at measuring the resource use of physicians, as well as re-evaluating the prices of certain procedures," according to Camp, while he said physicians can take part by participating in value-based purchasing programs to achieve better health outcomes and more efficient delivery of care, and also by participating in coordinated care programs or medical home models, which he said the lead to more effective and appropriate care for beneficiaries.