Eye on Washington

Chad Mulvany

Since 2002, Congress has played an annual shell game with Medicare physician payments.

The game begins anew each year when the mechanism used to determine updates to payments-the sustainable growth rate (SGR) formula-dictates a cut in physician payment.

The game ends when Congress passes a one- or two-year fix that provides a modest increase in payment. These SGR fixes stave off payment cuts that could limit Medicare beneficiary access to services. And on the surface, these fixes appear to be budget neutral. However, these SGR changes are a shell game. To achieve budget neutrality, they demand deeper payment cuts in the future and understate the size of the federal budget deficit.

Healthcare Reform and the SGR

Early versions of both the Senate and House reform bills included a permanent fix to the SGR. However, the cost of both attempts were high enough to make it impossible for either reform bill to achieve budget neutrality or to stay within President Obama's cost target of $900 billion for reform.

At press time, the Senate and House-in light of the cost constraints placed on their healthcare reform bills-have taken different approaches to preventing a drastic physician payment cut. Unfortunately, neither approach offers sustainable cost control.

The Senate reform bill currently under debate includes a one-year patch to the SGR by increasing physician reimbursement by 0.5 percent. This essentially kicks the can down the road to the 2011 congressional session. 

To meet President Obama's cost target, the House removed the SGR fix from its reform bill and passed a separate bill. This legislation costs $210 billion over the next 10 years and is not offset by reductions in other expenditures. It attempts to increase the supply of certain services by creating separate update factors for primary care (gross domestic product [GDP] 1 2 percent) and specialty services (GDP 11 percent).

Will the SGR Cuts Go into Effect?

Both time and money make it unlikely that cuts to physician payments can be prevented as part of major reform legislation. It is doubtful the Senate can pass its reform bill, conference with the House to combine bills, and then have both chambers pass that bill before January 1, 2010. For the House, the Senate is the major stumbling block. Earlier in the year the Senate failed to pass a stand-alone SGR fix that was similar to the House's bill. Twelve fiscally conservative Democratic senators joined with Republicans to block the measure's passage.

However, in all likelihood the reduction won't go into effect. It's not hard to envision Congress passing a stand-alone version of the Senate SGR patch at the 11th hour, sparing physicians from drastic payment cuts while leaving the long-term SGR issue to fester for another year.

An Eye to the Long Term

A permanent, effective fix to the Medicare physician fee schedule will be a difficult balancing act from both technical and political perspectives.

Any technical change or replacement of the SGR will need to control costs in a sustainable way. Historical experience has shown that crude, wholesale payment reductions have only exacerbated the problem, resulting in an increase in both the volume and intensity of services provided and jeopardizing access to services for Medicare beneficiaries.

Politically, finding a solution will be just as challenging. The desires of physicians and senior citizens must be balanced against economic realities. While associations representing both groups favor a repeal of the SGR, they want it on terms that are light on cost control. Further complicating the matter, any solution must be budget neutral, or moderates from both parties will vote against it to avoid the spendthrift label during the next reelection cycle.

The most plausible scenario for achieving the needed balance involves passing healthcare reform legislation that includes a body like the Medicare Payment Advisory Commission (MedPAC) that has broad rate-setting authority. Although not immune to political pressure, theoretically this type of body would be removed enough to make the necessary difficult decisions.

Comments at recent MedPAC meetings offer a glimpse of a possible future. Those comments suggest that a MedPAC-like body may use reductions in the traditional Medicare Physician Fee Schedule to encourage physicians to participate in other types of care-delivery and payment structures, such as accountable care organizations. Physicians would receive lower base payments for services provided with the potential for substantial bonuses based on achieving cost and quality targets.

Implications for Hospitals

Hospitals need to closely monitor the deliberations over SGR revisions. SGR changes could have a substantial revenue impact on a facility's employed physicians and freestanding clinics, as well as latent effects.

From a hospital's perspective, changes in physician payment could be both positive and negative, depending on how physician specialties react. Some physicians likely will seek the benefits of hospital employment, creating the opportunity for an expanded integrated network of providers. Instead of accepting all comers, hospitals should take a strategic view of their portfolio of employed physicians and determine what types of specialties they require for success under payment reform.

On the negative side, reduced payment could compel physicians to further expand into areas that compete with hospital services, such as imaging centers and ambulatory surgery centers, to maintain their revenue streams. Hospitals should prepare for this increased competition by closely examining their local markets and identifying physicians who are likely to pursue this approach. This information can then be used to develop a response plan that is enacted once a SGR fix is implemented.

The economic and political realities surrounding Medicare payments to physicians are complex, and developments may occur outside the political arena. Regardless of how the solution is developed, physicians are watching this debate with intense scrutiny. Hospitals would be wise to do the same, because any change made to the SGR will have far-reaching implications for all providers.


Chad Mulvany is a technical manager in HFMA's Washington, D.C., office and a member of HFMA's Virginia Chapter.

Publication Date: Friday, January 01, 2010

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