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Breaking the cycle of patching physician payment in Medicare

Every year, as long as I can remember, the US Congress has been forced to consider physician payment in Medicare, and this year is no different. Many years ago, an earlier Congress put into place a payment formula called the sustainable growth rate (SGR), which was supposed to cut physician payments if the volume of physician services increased much faster than economic growth. For a while, the formula had a good run for many physicians in Medicare: the pace of volume increases was relatively low, and rather than cutting payments, the formula increased them.

Then, in 2002, the volume of physician services accelerated, and physicians were confronted with payment cuts. This is the only year thus far where cuts have actually gone into effect. When push comes to shove, it is challenging to allow payment cuts to go into place – physician organizations oppose the cuts, as do Medicare beneficiary groups who worry about access. As a result, each year except for 2002, Congress has prevented the cuts from occurring. The way the formula works, this “override” has to be made up in future years’ payments. With each successive override, the hole (the amount that the formula calls to be made up with subsequent cuts) gets deeper, making the need for another override inevitable regardless of whether volume has increased or not.

The rationale for the SGR formula at the time was to create an overall budget target that would control volume increases and total spending. But it hasn’t worked to control volume (even if it perhaps has controlled spending by limiting updates for physician payment to those that can be paid for through cuts made to other providers). The very nature of fee-for-service payment drives volume. If a physician sees more patients, he or she will get paid more. And a budget cap set at the national level does not mean much to an individual physician because his or her own actions will seem like a drop in the bucket compared to the total.

Last year, both parties in both houses of Congress agreed to, but did not enact, legislation that would have created a new payment system for physicians in the traditional Medicare fee-for-service program. This proposed legislation would put greater weight on performance and encourage physicians to migrate to value-based care, which would be consistent with what Medicare, Medicaid, and private purchasers are stressing. And in contrast to the old system that set a total budget cap on Medicare payments for physician services, the new system envisioned in the legislation would connect the incentives with individual physician performance. It would weigh quality and volume control much more heavily in reimbursement and create financial incentives for physicians to participate in alternative payment models (APMs) that incorporate value-based care.

Since Congress is considering movement on this legislation again this year, it is a good time to remember what’s in the bill.

  • First, if passed, it would repeal the old SGR formula and create a steady stream of modest updates going into the future. The legislation calls for higher updates for physicians participating in APMs.
  • Second, the Secretary of Health and Human Services (HHS) would consolidate all of the existing incentive programs – 1) electronic health record (EHR) meaningful use incentive program, 2) quality reporting program, and 3) value-based payment program – into one system called the merit-based incentive payment system (MIPS), which would start in 2018. Like in the existing incentive programs, physicians could get increases if they meet performance goals or could have cuts if they miss them. However, the penalties scheduled to go into place around meaningful use this year would not occur; instead, hospitals and physicians would be rewarded for having systems, as has been the policy the last several years. The MIPS program would not only include physicians, but could also include physician assistants, nurse practitioners, clinical nurse specialists, and certified registered nurse anesthetists; the Secretary of HHS could expand this list after the first two years of the program.
  • Alternatively, physicians could participate in APMs which have different performance criteria than in MIPS. Physicians participating in these APMs could gain up to 5 percent higher payment through incentive payments between 2018 and 2023. The Medicare Shared Savings Program is one example of an APM.
  • The Secretary of HHS would pay for chronic care management services for patients with chronic care needs. HHS already has put this provision into place through regulatory authority.

The legislation would contain many other changes, together representing a significant piece of Medicare policy overall. While primarily focused on the traditional program, the legislation would have the Secretary study the feasibility of integrating APMs in the Medicare Advantage payment system.

The legislation also calls for some changes to the underlying payment methodology for physician services. One example is adjusting practice expense calculations using additional data sources. Another example calls for HHS to examine more instances of services that may be paid too much (potentially creating a profit incentive to provide more of the service) or too little (potentially creating access and equity problems). The legislation calls these “misvalued” services. Observers have criticized aspects of the current process for setting payments for particular services, saying the process gives too much weight to new technology and specialized services over primary care. The legislation creates a 0.5 percent target reduction to payments to account for savings from lowering payment rates for “misvalued” services. A third potential change would be around geographic adjustment of payment rates.

It is too early to know whether the legislation will pass this year. Budgetary issues are significant, especially which policies will be brought forth to reduce the overall impact. Political issues are already cropping up as this is viewed by many as legislation that should move forward this year in order to prevent approximately 21 percent cuts to physician payment. The extension of the Children’s Health Insurance Program (CHIP) program, for example, might be part of the legislation to address the SGR; and one question on the table is how long the extension should last.

If Congress successfully works through these issues and enacts this legislation, my take is that this would be another step away from the traditional payment model toward value-based care.


Author bio

Sarah is the managing director of the Center for Health Solutions, part of Deloitte LLP’s Life Sciences & Health Care practice. As the leader of the Center, she drives the research agenda to inform stakeholders across the health care landscape about key trends and issues facing the industry. Sarah has more than 13 years of government experience and has deep experience in public policy, with a focus on Medicare payment policy.