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BITTER MEDICINE: Prescription To Fix SGR Requires A Commitment To Major Medicare Reform

February 12th, 2008

Editor’s Note: In the post below, Paul Ginsburg, the president of the Center for Studying Health System Change (HSC), begins a Health Affairs Blog series on Medicare physician compensation and the Sustainable Growth Rate mechanism. In the coming days, the series will feature posts by Robert Berenson, Jay CrossonMina Matin, Frank Opelka, Eugene Rich, and Gail Wilensky.

The Sustainable Growth Rate (SGR) system is intended to keep spending for Medicare physician services in line with growth in the national economy. The SGR sets physician payment updates on the basis of a formula that includes growth in input prices faced by physicians, growth in Medicare fee-for-service (FFS) enrollment, and growth in the volume of physician services per enrollee relative to growth in the national economy. Based on a comparison of actual spending with a target, the difference is used to add to or subtract from changes in input prices for physician services. In this manner, Congress’ goals for spending (price times volume) are executed by adjusting payment rates (price) in a fee-for-service payment system. 

For each year beginning in 2002, the SGR formula has called for a substantial reduction in Medicare physician payment rates. For 2002, payment rates were reduced by 5.4 percent. In each subsequent year, Congress has overridden the formula, specifying small increases or payment freezes instead of large cuts. But each congressional intervention has deferred rather than cancelled the reductions in payment rates. At this point, a cumulative payment rate reduction of 41 percent is scheduled through 2016 (9.9 percent on 1 July 2008 and approximately 5 percent annually thereafter), in contrast to a 21 percent increase in physician input prices projected by the Medicare Actuary.

The inherent limitation of SGR is that it does not affect the incentives of individual physicians concerning the rate of use of services. Furthermore, as Congress has found over the last few years, the formula is capable of prescribing reductions in payment rates that are so large that policymakers are reluctant to implement them. Not only would large reductions in physician payment rates harm physicians, but they also jeopardize beneficiary access.

The History Of The Sustainable Growth Mechanism

Although SGR was enacted as part of the Balanced Budget Act (BBA) of 1997, its origins go back to a similar system called Volume Performance Standards (VPS), which was enacted in 1989 along with the introduction of the Medicare physician fee schedule. Many in Congress at the time were attracted to the ability of a fee schedule to redress some of the distortion in the payment rates for different types of physician services in different geographic areas. But others in Congress and the administration were concerned about investing significant resources to address relative payments without also increasing the ability of the Medicare program to control spending increases. The Physician Payment Review Commission (PPRC) (now the Medicare Payment Advisory Commission, or MedPAC) suggested a mechanism to control spending by adjusting prices when volume trends differed from targets. 

Although the PPRC recognized that its mechanism did not change the incentives for individual physicians, it believed that some expenditure control could be accomplished through the response of specialty societies to the incentives applied to physicians as a group. If organized medicine increased support for developing practice guidelines and utilization review efforts by the Medicare program, volume trends could be slowed. Separate targets for primary care, surgery, and other services were seen as both facilitating efforts by specialty societies and limiting the degree to which physicians in a specialty were impacted by the actions of physicians outside the specialty, who they could not influence. Needless to say, there were limits to the degree to which organized medicine was willing to, or capable of, slowing the growth in volume of services. 

The change from VPS to SGR addressed some perceived shortcomings in VPS but also was motivated by Congress’s desire to reduce the budget deficit. SGR was more demanding as far as reducing trends in physician spending —- the basis for scoring a projected deficit reduction. But placing more demands on a system without much capability to deliver results led to the situation today in which the prescribed cuts in payment rates greatly exceed the magnitude of the willingness to cut fees. Indeed, any incentive that organized medicine might have had to slow volume trends has likely dissipated now that spending exceeds the target to such a large extent.

The SGR: A Discredited And Dysfunctional Tool 

At this time, the SGR system is completely discredited. MedPAC recommends that it be scrapped in favor of payment rate increases based on trends in input prices and productivity. It is maintained only because Congress has not yet come to grips with an unrealistic budget baseline that assumes very large cuts in payment rates over many years. To remove the mandate for such reductions in payment rates, Congress would have to embrace either large reductions in other spending, tax increases, or a larger budget deficit. Through annual last-minute fixes, Congress has achieved some spending cuts in other areas, but by allowing the cumulative difference between the rates specified by formula and actual rates to grow, it is de facto mostly adding to the deficit. 

The annual last-minute legislation to avoid large physician payment rate reductions has provided short-term relief each year but resulted in a long-term policy of not increasing payment rates while physician input prices have increased. I doubt whether this is a good policy decision because it is increasing the likelihood of substantive erosion in Medicare beneficiaries’ access to physicians and contributing to reductions in income for primary care physicians. Difficulties in filling primary care residencies and reports of primary care physicians retraining in dermatology or other specialties raise questions of whether primary care specialties will disappear from the scene at the same time baby boomers need more management of chronic conditions. 

Ironically, during the period in which Medicare payment rate changes have increased little, private insurers also have provided very small rate increases to physicians. They may be related, but not in the sense that private insurers simply imitated Medicare. With Medicare physician payment rates lower than private insurers’ rates in most areas, freezing Medicare rates increases physicians’ desire to limit their Medicare practices. But to do so involves increasing their numbers of privately insured patients, which for many physicians means continuing contracts with private insurers despite rates’ not keeping up with physician costs. 

Primary care physicians are most impacted by the lack of increase in Medicare (and private insurer) payment rates. Physicians in many other specialties can more readily accept declining payment rates because of productivity increases for newer procedures and the ability to increase the number of profitable procedures. With the practice expense relative values for procedural services often much too high, physicians are increasingly bringing more equipment into their offices to provide profitable services that have historically been performed mostly in hospital outpatient departments. These developments are likely contributing to rising physician spending, but the income gains are going only to physicians in certain specialties.

Reforming Medicare’s Physician Compensation Mechanism 

I believe that the key for Congress in resolving this situation is to develop a long-term strategy to more effectively control costs in the Medicare program. Attractive long-term options are unlikely to be mechanical enough so that they can be “scored” with enough savings to offset the higher spending from either ending SGR or restarting a revised version of it. Ultimately, Congress will have to accept cuts in spending elsewhere, higher taxes or a higher deficit — most likely the latter. But if a strong vision were outlined and legislation enacted, then Congress might decide to accept the fiscal heat in the short term. 

A vision for steps to slow the growth in physician spending might include the following: 

  • A more accurate relative value scale that reduces physician incentives to expand offerings of overly profitable facility services; 
  • A broader payment system that compensates physicians for care management and coordination services for patients with chronic diseases that are not reimbursed today; 
  • Developing payment rewards and penalties and patient incentives reflecting physician efficiency and quality in delivering episodes of care; 
  • Sharply increased investments in effectiveness research along with a structure that insulates choice of research topics and dissemination of results from political interference. 

Committing to such a vision will not be easy. Congress cannot guarantee that future Congresses will follow through. Indeed, an element that might be critical for making a credible commitment to long-range reform is to change governance of the Medicare program. Many have recognized the need for a governance structure that would protect the program from the extensive micromanagement that routinely comes from members of Congress representing the special interests of different stakeholders. Perhaps Congress will perceive that ceding some power is the only way to credibly put the Medicare program on the path toward slowing costs and improving the likelihood of long-term sustainability. 

My emphasis on major reform should not preclude improvements in the SGR. MedPAC has done an excellent job of outlining a range of options for Congress, and some initial steps towards improvements have generated interest in Congress. Creating separate SGRs for different categories of services, such as primary care, major procedures, minor procedures, and imaging, has the potential to use the mechanism to address some of the major shortcomings of the fee schedule’s relative values. 

Failure to resolve the SGR problem and continued dependence on yearly fixes will lead to a worsening of festering problems. It likely will mean continual reduction in inflation-adjusted payment rates for physicians. Ultimately, beneficiaries’ access to physicians will erode sufficiently that Congress will be called to account by influential constituents, who paid Medicare taxes for decades and find themselves with access that is inferior to what they had before reaching Medicare eligibility. 

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1 Trackback for “BITTER MEDICINE: Prescription To Fix SGR Requires A Commitment To Major Medicare Reform”

  1. Our Own System » Blog Archive » The Need for More…Primary Care Physicians
    February 14th, 2008 at 7:44 am

10 Responses to “BITTER MEDICINE: Prescription To Fix SGR Requires A Commitment To Major Medicare Reform”

  1. juliazk Says:

    I always wondered why managed care companies make millions and millions and this is allowed by the insurance in the state. Those monies need to be in the hands of the provider and member. This makes no sense why managed care co. make this money. The provider/member have to spend hrs on the phone, being transferred as much as 10 times, to reconcile claims or attempt to pre-cert. Why are they not taken to task? Is there bribary going on? Let’s get real here. Why should providers become in-network? For this? Who standardized what is customary and reasonable? Is it because providers had little option but to take less money to help out the member? Running an office is expensive. The managed care companies do not pay their employees enough either. There seems to be no accountability here.

  2. pglusker Says:

    My reply to L. Ozeran is

    He misunderstands the meaning of ‘profit’ versus pay. I am not talking socialism. I am talking about social concerns about societies members, not socialism

    Everyone is entitled to fair pay for fair work, and fair pay reflects the skills and training needed to provide it. Pay, vacation, sick leave, etc, etc are all legitimate costs of doing business. They are not ‘profit’. Insurance company premiums include a portion for their expenses and a portion for the corporate profit, likewise pharmaceutical prices, equipment makes, etc, etc.

    Human suffering is part of life, and caring for it is what physicans, nurses, and others
    involved in health care provide, directly or indirectly. Profit, on the other hand, is an economic gain that does not go to the provider of the care, but to the shareholders in a

    I think it is ethically wrong to be generating an economic profit from human suffering. I think society needs to recognize that and rethink what parts of capitalism work (better than anything else in history) and what parts are not working, and rethink the system a bit.

    peter glusker

  3. Arvind Cavale Says:

    Quite to the contrary. I understood the logic behind the “at-cost” concept. Unfortunately, cost of providing any particular service varies according to region, type of activity, even based on the group of people that is being served. So there is no real method to establish a truly not-for-profit system. I suppose one way of looking at it would be to measure the percentage of premiums insurance companies actually use to provide health care for their members. One should not forget that without appreciable “profit” no human enterprise can sustain its performance in the long run. Even dedicated scientists expect pay raises, bonuses, paid vacations, etc. that may not be possible without generation of healthy profits by the employing entity.

  4. L Ozeran Says:

    I appreciate Dr. Glusker’s attempt to create a system with both a socialist cost structure and socialist payment structure. *IF* you could make it work, it might be sustainable. However, in a capitalist society such as ours, I think it would be far easier to create a capitalist payment system.

    I have a number of disagreements within his proposal which I shall address sequentially.

    “it is ethically wrong to profit economically from human suffering” Why? It would be ethically wrong to *create* human suffering in order to profit. It is not ethically wrong to be paid for your services, particularly when they were provided to relieve human suffering. In fact, it is necessary if we want to have individuals and companies provide their services. When a roof is destroyed in a storm, is it ethically wrong for the roofer to profit from the repair? When your basement floods at midnight, is it ethically wrong for the only 24-hour plumber in your area to charge an extra fee for getting out of bed at 1 AM to fix your plumbing leak?

    Dr. Glusker’s concern about profit being seen repeatedly in the value chain is somewhat misplaced in our society. Profit is what drives our economy – jobs and prosperity – without profit you cannot get goods or services. No owner or investor will create the jobs in the first place if they have no chance to be rewarded for their risk.

    When discussing Medicare, it is important to acknowledge the growth of the program itself over time. Since the creation in 1965 by President Johnson referenced, it now covers chronically disabled, renal failure, electric wheel chairs and more. The promises made initially which resonated with the American public have been repeatedly expanded without the resources needed to fund such promises.

    “This Health Board would require that all goods and services used for health care be derived from not-for-profit companies” – This seems untenable to me. It would require that there be non-profits effectively across all industries: steel, plastics, mining, manufacturers, service providers, etc. This would require an entire change in our capitalist system, which seems extremely unlikely.

    Dr. Gasker states that non-gain objectives can enable the system he describes. Taken to its extreme, everyone would be paid exactly the same hourly wage because those who wish to do medicine will want to put in the extra effort for the good of humanity. I suggest that he read Freakonomics. This assessment of human motivation demonstrates repeatedly and convincingly that personal gain is our motivation. The gain can be as concrete as a car, less concrete as good public relations or as abstract as being rewarded in the hereafter. The ethical implementation of seeking personal gain is to do so in a way that you also meet the personal needs of others. At our base, we are organisms looking for every advantage to survive. We do so ethically when we choose to do things which benefit us that also benefit others. That is the nature of commerce and fair trade.

    While many of us choose our career based upon our interests, what excites us, if we are not paid in some fashion, we do not eat, we cannot dress and we have no shelter. Profit is still required.

    Therefore, rather than move to a socialist economy, I believe it would be a far better and more workable solution to provide a capitalist payment mechanism.

  5. pglusker Says:

    Arvind Caravale’s comments about my proposal miscontrues my concept. There is a big difference between costs, such as payroll and materials and research, and profit from sales. It is perfectly possible to provide services and material (drugs, scans, hospital care) at cost, which includes appropriate salaries and other expenses. That is what I mean by a truly not-for-profit reorganization of health care.

    Peter Glusker

  6. Arvind Cavale Says:

    Dr. Ozeran’s comments are truly applicable to any physician in this country. Well done website, Dr. Ozeran. Unfortunately, I find Dr. Plusker’s ideas rather naive. Theoretically the idea of the Bandaid is very interesting. So also is the idea of the scientists. But he fails to understand that the scientists’ salaries are coming from the employers (pharma’s) profits for the most part. How does a physician provide care if there is no profit from his enterprise, because profit is his/her take-home salary? It is an argument with little logic, I am sorry to say.

    As physicians we all feel very passionate about our work and compassionate for our suffering fellow humans. But we will elect when we would like to provide our charity care, rather than an external entity forcing us to do it. In fact, we do just that every day – seeing patients with no guarantee of getting paid. Where is the compassion when we are denied our legitmate compensation on an ever-increasing basis? Compassion has to be a shared responsiblity in society, not just the domain of one group of professsionals….

  7. pglusker Says:

    It seems to me that we need to step outside the box to fix the problems. Here is an op ed piece I published last September which makes my point succintly.


    Issue Date: September 21, 2007

    Universal health care that’s not-for-profit can work


    Universal health care provided by a single-payer system has been proposed as the most viable way to remedy the human, economic and medical problems created by the large number of medically under- and uninsured.

    Examples of universal health care systems include the Veteran\rquote s Administration model, the Canadian model, or the systems of European countries. None of them offer a viable model for good-quality health care for our entire population because their costs are too high. In each of them, health care delivery is ineluctably dependent on economic profit.\par

    All goods and services used in health care, from a simple Band-Aid to a brain scanner to insurance policies, are produced by companies that require a dollar profit for their shareholders. The profit portion is added to the actual dollar costs of production.

    There are two things wrong with this system. First, it is ethically wrong to profit economically from human suffering. Knowledgeable friends tell me dryly that economics is not concerned with ethics. They are right, and wrong. Economics is one of society\rquote s tools for making the rules we use to govern ourselves. Law, education and care for our elder and disabled members are others. Economics is used to understand societies\rquote exchange of goods and services, but it\rquote s not necessarily just about dollars. Ethics can therefore be said to be included in economic issues, particularly health care.

    The cost of the profit segment in each of the examples noted, at each level of production, creates additive real dollar costs. The cost when purchasing a Band-Aid includes a profit for each of its parts — the plastic, gauze, adhesive, packaging and marketing that are required to be paid by the Band-Aid company before it can sell its product and make its profit. Costs can be broken down further: for example, the source of the plastic, a byproduct of oil or another chemical industry, or the farmer growing the cotton. The profit portion is ubiquitous and multiplicative.

    Any single-payer system we know is paying all these profit costs, which continue to grow as medicine and its tools become more complex. Detailed economic analysis of the real cost of any given health care item, extracting the profit taken at each level, is complex, but a rough estimate would put it at a minimum of 30 percent of the current cost of health care.

    When Medicare benefits were initiated in 1965, President Johnson stated: “Since World War II, there has been an increasing awareness of the fact that the full value of Social Security would not be realized unless provision were made to deal with the problem of costs of illnesses among our older citizens. … Compassion and reason dictate that this logical extension of our proven Social Security system will supply the prudent, feasible and dignified way to free the aged from the fear of financial hardship in the event of illness.”

    We have come to another critical crossroads, this time concerning health care for all of our citizens. We need to establish something like a Health Board, analogous to the Social Security Board. This Health Board would require that all goods and services used for health care be derived from not-for-profit companies. This board would certify that only the actual costs, including salaries, research and development, and so on, are charged for any item. The Health Board legislation would exclude shareholder profit from any health care item or service. The savings for existing programs such as Medicare and Medicaid would be large. In fact, the amount saved would probably be more than enough to pay for the actual costs of care for the whole population.

    An argument against this concept of nonprofit production contends that no company would be interested in the development of new pharmaceuticals or technology without profit. Except where health care is involved, profit is certainly a legitimate goal, but it is hardly the only motive for our individual, corporate and social actions.

    Our corporate-oriented society has lost sight of this fact. The overwhelming majority of scientists I have known in my professional career pursue their work mainly because of their intrinsic curiosity, not because of economic profit. We invent new technologies and therapies because of our insatiable human drive to know, to understand and, indeed, to care for our fellow human beings.

    We must take the next socially responsible step to provide high-quality health care for all our citizens at an affordable price. The human cost of creating a profit at each step in health care is too expensive. The ethical cost is unacceptable if we are to survive and thrive as a society. A healthy population is more important than profit.

    Peter Glusker is a physician and adjunct clinical assistant professor in the department of neurosciences at Stanford University Medical Center in Palo Alto, Calif.

    National Catholic Reporter, September 21, 2007
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  8. L Ozeran Says:

    [Note to moderator: it is unfortunate that these posts read in reverse chronologic order; perhaps that can be changed to improve readability]

    I generally agree with Mr. Cavale’s comments, particularly his points emphasizing the disconnect between our socialist payment structure and our capitalist cost structure, and the need to pick one economic construct for both payment and cost.

    One statement is worth discussing further. If we choose the socialist structure, he suggests that physicians should “volunteer” with the knowledge of the system they are entering. There should be choice. Many are unaware that physicians may currently be seen as indentured servants by Medicare, limiting their ability to become “out of network” for Medicare.

    Here is one brief example. I disagree with providing unneeded non-public data to get a National Provider Identifier (NPI – I have been working with CMS for 9 months to get the NPI data collection form revised (still ongoing). To bill Medicare, I am being told that I must have an NPI, even though as a non-covered entity I am not required by HIPAA to have one. I support the *concept* of a universal identifier, but not this intrusive implementation which increases all physicians’ risk of personal identify theft. Until the NPI assignment process is fixed, I do not plan to obtain one. It appears that leaving the Medicare system is my only option. In order to leave the system, I must sign an affadavit stating that I will continue to bill Medicare for patients seen in an emergency according to their rules. I do not agree to do so.

    The NPI issue is not the primary point, it was simply the catalyst. Have physicians lost our liberty? Will Medicare insist that I must remain a Medicare provider because I refuse to agree to their rules? I am trying to leave Medicare explicitly because I disagree with their rules.

  9. Arvind Cavale Says:

    Very persuasive points made here. But after all is said and done, this is still a method of price-fixing, whether by the government or private insurers. The country and Congress must decide if healthcare can remain a viable profession andindustry or it has to be converted into a military-style servce. Costs can be controlled if it is a military-style service, so only those who volunteer to join with full knowledge of its potential perils, can provide these services. This is not a realistic possibility. On the other hand, health care can be converted to a true freemarket business where contracts can be negotiated fairly, physicians can collectively negotiate rates bates on realistic cost structures, where efficiency and outcomes will matter, and poorly performing entities will be eliminated by natural deselection. The current method of price-fixing accomplishes neither objectives. In my opinion, this method of price-fixing equates the worth of all physicians without any consideration of the value of services provided. The only interim solution, in my opinion, would be if all physicians would get “out of network” with all insurance entities, including Medicare, with the beneficiaries being responsible for how they allocate available resources. Another fallacy of current thinking is – even when some physicians truly practice frugal medicine, how does it benefit anyone if an overwhelming majority overutilise resources? Unfortunately, the penalty is applied collectively to all physicians. So what is the incentive to keep costs in mind?

    I have always wondered why the SGR targets physicians exclusively for yearly cuts. Why do hospitals, nursing homes, DME providers, etc. not come under the same formula, if the same finite Medicare dollars have to be divided among all these providers?

    And finally, I still cannot understand why Medicare and other insurers cannot get into a 21st century way of thinking. Modern practice cannot be sustained in the traditional “episodic care model”, especially for the ever-increasing array of chronic diseases, such as diabetes. There are well-documented methods of providing cost-effective and highly clinically effective care for chronic diseases by utilising technology and providing non face-face, “continuous care”. This will involve paying smaller amounts for ongoing care, which usually prevents “episodes” of emergency care, thereby saving the entire system vast amounts of money. This not only encourages patients to be more direclty involved in their own care but also allows for minimizing loss of productive work time needed for conventional office visits. I hope the Center for HSC picks up this challenge.

  10. L Ozeran Says:

    Our government has taken something relatively simple, provide payment for medical services, and made it unreasonably complicated and financially unsustainable. There is much of value in Mr. Ginsburg’s comments, but the basic problem with the SGR is that it is a socialist construct for payments (in order to ration care for the elderly) built on top of a healthcare industry cost structure which is capitalist. This is unsustainable.

    One point is worth emphasizing in regards to private insurer payments. As the oligopoly of insurers has contracted and anti-trust rules preclude providers from negotiating with the insurers as group, the insurers have used the physicians’ fear of possibly being unable to pay their bills (if they withdraw from a plan contract) to force non-negotiable contracts with ever smaller payments (and increasing administrative burdens). It is worth noting that some contracts are indeed tied to Medicare rates, some a percentage above Medicare rates and some 95% of Medicare rates or below.

    Of the bullet items, I don’t think the first two would be beneficial. Perhaps looking at the constellation of Medicare payments there are some which pay better than others on an hourly basis, however, *none* would be considered “overly profitable”. Paying for “care management” simply creates another layer of bureaucracy, effectively removing more dollars from the system. Care management is what physicians generally do now. There are some circumstances where there are so many physicians treating a patient that responsibility is unclear, but this is much more a communication issue than it is a payment issue.

    The third item is important. There may not be enough incentive for patients in the system. More importantly, perhaps, there is no disincentive for families, friends and caregivers to request unnecessary care or treatment which offers limited value. Factors outside of healthcare make it difficult for physicians to appropriately provide less care when that course is warranted. Since we spend approximately 20% of our budget in the last 30 days of life, it might make sense to focus on how we can ethically and appropriately reduce that number. Education about futility and the inevitability of death combined with appropriate financial incentives might help significantly.

    The last bullet, I believe is the most important. Data about effectiveness is sorely lacking in the medical literature when it comes to cost. Sure, we have good data that aromatase inhibitors are more effective breast cancer fighters than tamoxifen. We have precious little data on how much more we spend to gain that advantage. Is Tamoxifen 85% as good as the best drugs but only 25% of the price? Do we care? We ought to care if we want to make policy decisions which optimize our limited healthcare resources.

    With knowledge about cost effectiveness we could ensure that the most cost effective therapies were widely available. Perhaps the least cost effective therapies would still be obtained by individuals who choose to spend their own money, rather than our communal money, on their costly or low benefit treatment choices. This point may sound harsh to some, but why do we permit individuals to choose least cost-effective therapies now which limit our ability to provide more, cheaper care that saves more lives? I hope that we would choose to save more lives at lower cost once we have the data.

    Ultimately, we will only spend what we choose to spend on healthcare. The budget is a fixed amount. Rationing tends to occur when demand is unlimited but resources are limited. Currently we have irrational rationing of Medicare resources. We simply cap spending and let the randomness in the system determine who gets services. We must move to more rational rationing and decide how we best distribute that budget more fairly among the patients so that each receives a comparable level of service from the system.

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