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Recurring SGR Mess: Medicare Doctor Payment Formula Flawed

Posted Jun 30 2010 12:00am

This past week, the House passed legislation to reverse a steep pay cut for Medicare doctors that began on June 1st. The temporary “doc-fix”, as it is called, staved off the 21% cut until December and provides a 2.2% pay increase for doctors who treat Medicare patients.  The Senate had passed the bill unanimously the previous week, but House Democrats sat on the proposal in order to pressure Senate budget hawks to back an extension of unemployment benefits and $15 billion for state Medicaid programs. When it became clear that the tax package would fail in the Senate, however, House Democrats finally and reluctantly brought the stand-alone doc-fix bill to the floor.

The American Medical Association (AMA) has for years urged Congress to repeal the formula that updates Medicare’s physician payments a formula that most health experts agree is flawed. To no avail.  “Delaying the problem is not a solution,” AMA President Cecil Wilson said in a statement. “It doesn’t solve the Medicare mess Congress has created with a long series of short-term Medicare patches over the last decade including four to avert the 2010 cut alone.”

Sadly, the political quagmire created by the SGR legislation can be seen in this latest round of action and inaction.  The SGR system does not work, yet Congress seems unable to muster the courage to fix it. The SGR (sustainable growth rate) concept was introduced in 1997.  It was designed to be a  target rate for growth in Medicare Part B spending for physician and non-physician practitioner (nurses, physical therapists, physician assistants, etc.) services. The SGR system is a key element upon which payment updates are established each year for physicians and other health providers.

This payment dynamic was designed to bring actual spending in-line with allowable spending over time.  It tied increases in volume of services per Medicare beneficiary to growth in the GDP (gross domestic product).  Adjustments can be made for changes in law and regulation, yet, these adjustments have not  reflected increased services resulting from technological advances and expansion of Medicare benefits (cancer screenings, diabetes management, etc.).  This flawed process has resulted in annual payment cuts that have continually been worsened by Congressional actions to stop the cuts, while failing to every adjust the target, leading to ever larger payments cuts being postponed to the next year.

When Congress enacted this law the target was set with 1996 as the base year. Payment updates for each subsequent year are determined by comparing cumulative actual expenditures to cumulative target expenditures in the prior year. Thus, the 2009 payment update was set by comparing actual expenditures from 1996-2008 to targeted expenditures from 1996-2008. If spending exceeds the SGR target, then physician payment updates will be less than the increase in the inflationary cost of providing a service.  Another major flaw is the inclusion of drugs administered in a physician’s office and laboratory tests (actual products), and physician services (set by the fee schedule). Payment updates however, only apply to physician services (fee schedule) – not drugs or lab tests. In January 2002, this formula resulted in a 5.4% cut.  During the intervening time payment rates fell further and further behind inflation in medical practice costs.

Let’s look at the history of these actions by Congress year by year since 2002

2002 -5.4% cut None
2003 -4.4% cut -1.6% increase
2004 -4.5% cut -1.5% increase
2005 -3.3% cut -1.5% increase
2006 -4.4% cut -Freeze at 2005 level
2007 -5% cut -Freeze at 2005 level
2008 -10.1% cut -0.5% increase
2009 -15% cut -1.1% increase
2010 -21% cut

Congress has seemingly been blind to the fact that physicians have no control over a number of demographic facts of life which affect costs such as:

  • The overall increase in population in the US (estimated to exceed 310 million when the 2010 census comes in)  meaning more patients and more medical expenses
  • The expansion in the number of elderly, soon to be made much worse by the 75  million baby boomers turning 65 between 2011 and 2029 again, meaning more patients and more expenses
  • Revolutionary new medical technologies and pharmaceuticals, most of which are initially expensive, but which advance disease management and survival, many of which can and should be available within a doctor’s office, but whose costs are placed on the ledger of doctor costs, when they in fact are not
  • General inflation in the economy and the medical economy in particular
  • Failure of any general relief by government on the medical malpractice front
  • Increased mandates from federal rule makers on physicians (HIPPA, CLIA, OSHA, etc.

Some, mostly in the halls of academia, have argued that physicians have not met their targets to control spending because of their unwillingness to “limit spending” and “abide by recognized standards of care”.  We have noted in past commentaries that physicians do have a great deal of impact on overall health spending by the use of their pen, but despite that fact, the momentum of the changes occurring is far beyond the control of doctors. The outlined items above are at odds with any suggestion that physician are somehow at “fault” for continuing rises in health spending and renders those opinions to the contrary null and void.


Drugs administered by physicians in their offices offer many advantages.  First is the convenience to patients in not having to go to an outpatient center of similar to receive either an IM (intramuscular) or IV (intravenous) injection.  Second, in many if not most cases, the patients receiving these medications are ill with cancer or similar serious conditions so the ability to see their physician and receive a treatment is the same office setting offers greatly reduced stress for already stressed patients.

Physician do receive modest payments for the actual administration of drugs, but the cost of the drug itself is included in the spending that is used to calculate the SGR. Drug administration is a true physician service and should be included.  The drug product is, on the other hand, is an item that a medical practice must purchase in advance, is NOT a  physician service and should NOT be included.  In the case of cancer medications, these drug costs can be very high and adding them to the SGR inflates the rise in physician services artificially.  Why? Because doctors have NO control over Part B drug costs.  So, as drug costs increase, physicians get penalized under SGR rules.

Spending for physician-administered drugs has grown at higher rates than spending for all other physician services. This cost has increased over the past few years from $1.8 billion to $9.1 billion. This fact alone has significantly contributed to the spread between target and actual spending and large projected reductions in future physician payment rates.

The average annual growth in Medicare spending on drugs included in the SGR was 22% compared with 6% for all services (including drugs) included in the SGR, from the first quarter 1997 through  first quarter 2005.

Growth in Proportion of SGR Spending Consumed by Drug and Lab Costs 1996: Drugs – 4%    Lab – 9%     Fee Schedule – 88%
2007: Drugs – 10%  Lab – 8%    Fee Schedule – 82%
2019: Drugs – 15%  Lab – 13%   Fee Schedule – 73%

Members in current and past Congresses from both parties have joined the physician community in advocating for retroactive removal of drugs from the physician payment system through administrative authority. Despite this, no President (neither Bush nor Obama) has taken any action.  Clearly, it cannot be realistic to finance the cost of life-saving drugs through cuts in payments to physicians. Physician payment cuts only serve to further reduce access to the very drugs that these policies are intended to make more accessible.  Removing drugs from SGR calculation would be a major step toward preserving access to these important drugs and other critical physicians’ services .  At the present time, the Administration’s proposed physician payment schedule for 2010 does indeed retroactively remove drugs from the SGR formula. Estimates are that the cost of eliminating the SGR debt burden and providing a payment freeze DECREASED by $122 billion over 10 years. As a result, the cost of eliminating the debt burden and freezing current payment rates has fallen from $285 billion over 10 years, to $163 billion over 10 years.

Recent Medicare legislation has provided temporary relief from SGR cuts.  Yet, the budgetary crisis is made worse by moving the cuts to the next year. This artificially has increased the severity of cuts and raised the cost of enacting a permanent solution. A key step toward a permanent reform and repeal of SGR is to rebase by setting the baseline to present spending rather than 1996 rates. Budget baselines provide policymakers with a forecast of projected spending and taxpayer obligations. Using the 1996 baseline paints a false picture of actual Medicare spending. Technology, Medicare coverage and benefits, and medical practice costs have changed significantly since 1996 and the SGR fails to recognize those changes. Congress itself, has essentially said the baseline of 1996 is wrong, by acting six times since 2003 to temporarily stop Medicare physician payment cuts. This action has created a large SGR debt burden that is impossible to eliminate if kept on the current path of “kicking the can down the road” to the next year. Congress, by temporarily stopping SGR cuts by moving cuts to future years has created an enormous debt that has no hope of being paid off  – that is unless the SGR debt burden is eliminated and the physician payment system is rebased. The longer Congress delays action, the more expensive SGR reform has become.

The SGR formula for January 1, 2010, required a 21.5% cut. Over the next few years these cuts will pass 40%.  If not stopped these cuts will limit patient access as doctors will limit Medicare patients, or outright eliminate Medicare patients from their practices. Physician practices, even large one, are still small businesses.  As such, they simply cannot these losses. No small business could survive with steep cuts year after year. Delaying action will only cause cuts to grow and a solution will become even more expensive. Congress must also enact a PAYGO exemption  (from the current budget rules which dictate that all spending must be paid for).  Without this action, it may well be impossible due to the to replace the SGR with a new Medicare physician payment system. The Administration’s proposal to remove drugs from the SGR formula MUST be coupled with a legislative PAYGO exemption in order for the SGR debt burden to be eliminated – removing drugs from the formula alone will not move us toward a permanent solution of the SGR problem.Regardless of political ideology, physicians are the of our health care system. Actions such as are outlined here would help to support physicians and allow Medicare to fulfill its promise of high quality, cost-effective health care to seniors and disabled persons.  This is especially of concern as Medicare begins enrolling the first wave of baby boomers in 2011 (enrollment is expected to increase from 44 million in 2011 to 50 million by 2016).

Projected SGR cuts exacerbate the ongoing physician shortage.  Rebasing and repeal of the SGR will favorably affect the future supply of physicians. The Council on Graduate Medical Education predicts we will face a shortage of 85,000 physicians by 2020. The Association of American Medical Colleges (AAMC) reported in November, 2008, that there will be a shortage of at least 124,000 physicians by 2025 across all specialties. Adopting a new baseline means billions of dollars each year that are spent providing a temporary SGR fix would be available for other important health reforms.

Since many other payers tie their rates to Medicare including military members, their families, and retirees in TRICARE, retired Federal employees, and those enrolled in state Medicaid programs, rebasing and repeal of the SGR provides stability to patients covered by these programs.  It would also a great help to physicians dealing with private payers, who also, across the board, look to Medicare rates as a base for their fee schedules.  A permanent SGR fix would bolster our economy by helping sustain the jobs of some 3 million individuals employed by physicians and related businesses affected by the Medicare physician payment cuts.  Physicians and patients deserve better than this continuing series of eleventh-hour temporary SGR fixes which Congress seems to be wedded to.  As with all of our current problems, bold action is needed by Congress, instead of piecemeal attempts to avoid political fallout . . . obi jo and jomaxx

House passes ‘doc fix’ bill to stave off cuts – http://thehill.com/blogs/healthwatch/medicare/105453-house-approves-six-month-doc-fix

‘Doc fix’ calms physicians for now – http://www.chicoer.com/ci_15383737?source=most_viewed

Congressional Dems push ‘doc fix’ – http://www.politico.com/news/stories/0510/37579.html

Short-Term Medicare ‘Doc Fix’ Approved – Cuts are stalled for six months, but critics say temporary patches undermine physician practices – http://www.aarp.org/health/doctors-hospitals/info-06-2010/_shortterm_medicare_doc_fix_approved.html

Medicare (United States) – http://en.wikipedia.org/wiki/Medicare_%28United_States%29

SGR Patch Bill Signed -http://new.mgmanv.org/component/content/article/56-sgr-patch-bill-signed.html?date=2010-07-01

New Health Policy Brief: Medicare Physician Payment – http://healthaffairs.org/blog/2010/06/28/new-health-policy-brief-medicare-physician-payment/

Paying Physicians For Medicare Services – http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=18

Medicare Physician Payment System SGR Reform Fact Sheet – http://www.aad.org/gov/documents/SgrFactHsrCenter.pdf

Physicians, Congress, and Medicare Fees – http://www.allacademic.com/meta/p_mla_apa_research_citation/2/8/1/0/8/p281083_index.html

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