Editor’s Note: This is the sixth post in a Health Affairs Blog series on Medicare physician compensation and the Sustainable Growth Rate mechanism. Paul Ginsburg, Robert Berenson, Mina Matin, Jay Crosson, and Frank Opelka have contributed earlier posts. The series will also feature a post by Gail Wilensky.

In January 2007 the 110th Congress convened with the Democrats newly in the majority. Among the most thorny, but less heralded, challenges was the Sustainable Growth Rate (SGR) formula in the Medicare physician fee schedule, commonly referred to as “the Doc Fix”. The outgoing Congress had passed the Tax Relief and Health Care Act (TRHCA), which held Medicare physician fees constant for 2007 but also provided that this action should not beneficially affect payment rates thereafter. As a result, the Congressional Budget Office (CBO) was projecting that the SGR mechanism would mandate a 10 percent cut in Medicare physician fees in 2008 and more cuts for years thereafter.

Congressional staff had hardly begun to unpack before meetings began on strategies for a new path forward on Medicare physician payment. Neither the president’s budget nor subsequent mid-February testimony from acting Centers for Medicare and Medicaid Services (CMS) administrator Leslie Norwalk offered solutions to the looming cuts. It was up to Congress to find the means to avert a multiyear series of draconian across-the-board reductions in Medicare payments to physicians.

In March the Medicare Payment Advisory Commission (MedPAC) released a special Report to the Congress: “Assessing Alternatives to the Sustainable Growth Rate System.” At a hearing on the report, MedPAC chair Glenn Hackbarth testified: “The SGR is widely considered to be flawed; it neither rewards physicians who restrain volume growth nor punishes those who prescribe unnecessary services. Some critics contend the SGR may actually stimulate volume growth.” Unfortunately, MedPAC was unable to recommend a specific alternative to the SGR, and the commission was deeply divided on whether the SGR should be replaced with an alternative expenditure target, or if expenditure targets on physician services should be eliminated altogether. 

MedPAC considered a number of alternatives to the SGR, including several options Congress directed the commission to investigate in the 2005 Deficit Reduction Act (DRA). In one example, CMS would establish separate expenditure targets for various physician specialties. Advocates for this approach hoped that it would promote medical specialty self-regulation and reward professional strategies to improve efficiency. There might also seem a certain equity in putting downward pressure on earnings for physician specialties with rapidly growing Medicare expenditures. The disadvantages to such specialty-specific expenditure targets were not trivial, however. CMS would need to carefully manage the process of specialty designation to prevent gaming. Furthermore, appropriate evolution in medical practice could be stifled (for example, increased use of intensivist physicians for critically ill patients), and specialties like emergency medicine might be penalized by shifts in how patients accessed health care. Finally, such specialty-focused expenditure targets would likely complicate efforts to develop cross-disciplinary collaboration in care for beneficiaries with multiple and complex diseases.  

An alternative consideration was to develop expenditure targets that varied by the type of service. Under direction from Congress, CMS could determine total spending either for specific procedures, for different bundles of services, or for different classes of services (such as evaluation/management services and imaging services). By comparing expenditures for each group of services relative to the target amount, payment adjustments could be made according to whether the expenditures on that service bundle were above or below target spending. This approach also had strong arguments in its favor. Policymakers have observed that rapid growth of services may signal overpricing of those services. By using multiple targets, CMS could shift resources toward underutilized services that might be of great value to beneficiaries (oft-cited examples were the decline in primary care services and the underuse of effective preventive and chronic illness care).

Target setting would be challenging, however, and different levels of aggregation of services would create different problems. Targets for specific services could create perverse incentives around the replacement of outdated technology with demonstrably better alternatives. CMS could make exceptions, but this could require determining medical appropriateness for many services, often with limited evidence (more on this problem later). Broadly aggregated service targets would create problems as well. For example, if imaging utilization continued to rise, reimbursement for interpretation of imaging studies would fall, even if practice patterns of clinicians, not radiologists, were the volume drivers. Among the many potential adverse consequences, highly valued services like mammography might become hopelessly unprofitable and thereby unavailable. Over time, the underlying principles of the resource-based relative value scale (RBRVS) would be eroded as actual payments for services were dominated by the target adjustment of the service category rather than the relative value unit (RVU), as was seen in the previous effort to develop service-specific expenditure targets under the volume performance standards (VPS) of the 1990s. 

MedPAC considered a number of other forms of expenditure targets to replace the SGR, such as reconfiguring the national target system, geographic area targets, targets directed to multispecialty groups or to hospital medical staffs, and payment reductions targeted to high-cost outlier physicians. Each alternative had its own advantages and difficulties, resulting in the commissioners’ inability to reach any consensus recommendation on an expenditure target to replace the SGR. In testimony, MedPAC chair Hackbarth emphasized broad commission agreement on four strategies relevant to SGR reform: (1) encouraging efficiency in the delivery of health care (including corrected “mispricing,” physician feedback on resource use, primary care/care coordination incentives, service bundling, and promoting comparative effectiveness information); (2) encouraging fiscal discipline in policy making; (3) increasing equity among regions and providers, and (4) offsetting the budget score. On the later point, MedPAC acknowledged Congressional Budget Office (CBO) estimates that eliminating the SGR would cost between $262 and $331 billion over ten years, but noted that MedPAC recommendations for financial neutrality for Medicare Advantage plans and reduced updates for other providers could yield much of the needed savings. 

Subsequent testimony at multiple hearings before the House Committees on Ways and Means and Energy and Commerce yielded a variety of suggestions, including a revised expenditure target (especially a rebalancing of primary care and specialty payments combined with elements of the previous multitarget VPS approach), corrections in “mispricing” of physician services, aggregation of physician fees into service bundles, “medical home” payments to reward integration and chronic care management, national efforts to measure and report physician practice patterns, and development of better scientific evidence on appropriate care.   

The CHAMP Act  

These insights were used by the Ways and Means and the Energy and Commerce Committees to develop the Children’s Health and Medicare Protection Act (HR 3162), passed 1 August 2007 by the House. While reported most prominently for its reforms of the State Children’s Health Insurance Program (SCHIP), the CHAMP Act presents new directions for reforming physician payment under the Medicare program, incorporating many of MedPAC’s recommendations to encourage efficiency in the delivery of health care. Although in the closing days of December the House and Senate passed the Medicare, Medicaid, and SCHIP Extension Act of 2007, providing a six month reprieve on the SGR-mandated fee cuts, the CHAMP Act presents the House framework for SGR reform.   

SGR Replaced With Six Expenditure Targets. The act would eliminate the SGR and replaces it with a system of separate conversion factors for six different service categories. The six categories consist of (1) primary care and preventive services; (2) other evaluation and management (E&M) services; (3) imaging services and diagnostic tests (other than clinical diagnostic laboratory tests); (4) major procedures; (5) anesthesia services; and (6) minor procedures/other physician services. Unlike in the VPS of the 1990s, primary care and preventive services are allowed to grow at an annual rate of 2.5 percent above gross domestic product (GDP). The other five categories are each allowed to grow at a rate consistent with the annual average percentage growth in real GDP.

In view of the favored status of primary care and preventive services, CHAMP gives CMS explicit guidance on their definition; these services include new and established patient office visits delivered by physicians whom the secretary of health and human services (HHS) determined to provide accessible, continuous, coordinated, and comprehensive care for Medicare beneficiaries. Emergency department visits and home visits are also included in this category. Preventive services include screening mammography, colorectal cancer screening, and others identified by the HHS secretary (but limited to recommendations of the U.S. Preventive Services Task Force). 

These six categories therefore represent a combination of two of the approaches to expenditure targets considered by MedPAC: specialty-specific expenditure targets and service category expenditure targets. While none of the categories would necessarily require CMS to track and manage physician certification (even the identification of comprehensive care physicians could potentially be determined through claims data), various categories of services are predominantly delivered by identifiable specialties (for example, family medicine, general internal medicine, general surgery, cardiothoracic surgery, and anesthesiology).

Note, however, that the “imaging” category in the CHAMP Act is not synonymous with “radiology.” Imaging in this provision is X-ray, ultrasound (including echocardiography), nuclear medicine (including positron emission tomography), magnetic resonance imaging, computed tomography, and fluoroscopy. It excludes diagnostic and screening mammography (since both were perceived as a part of preventive services). Also, the report language states that “the Secretary should evaluate the merit of including the professional component of imagining services {i.e. interpretation} to the minor procedures/other physician services category,” consistent with the treatment of the professional component of pathology services. Thus, the interpretation fees charged by radiologists need not be directly affected by the rapid growth in the high technical/facility charges for advanced imaging, increasingly owned by nonradiologist physicians. 

Despite the establishment of this system of six expenditure targets, the CHAMP Act would allow all physician fees to grow by 0.5 percent in both 2008 and 2009. This would give the HHS secretary time to establish the categories and physician specialty groups time to evaluate the likely trajectory of their fees. In the CHAMP Act, these changes in 2008 and 2009 are “paid for” by savings elsewhere in the Medicare program (largely reductions in Medicare Advantage payments), thus relieving the expenditure target system of the added burden of recouping these new costs. The physician fee schedule is also relieved of costs resulting from future growth in “incident to” services (such as Part B drugs), as well as national coverage determinations. Unfortunately, insufficient Medicare savings were available to absorb the $60 billion in “debt” accumulated under the SGR formula, so this “overhang” is distributed over all six service categories, to be repaid over the next decade.   

Other Measures To Rebalance The Medicare Fee Schedule. While the six “targets” have received the most attention from physician organizations, there are other provisions intended to further rebalance Medicare fees. An expert panel would be established to identify mispriced physician services, with specific attention to services that might have become overvalued under the methods for revising relative values currently used by CMS. Furthermore, for specific physician services growing 10 percent above the average for all physician expenditures, the HHS secretary is given authority to reduce the work RVU (after consultation with the aforementioned expert panel and consideration of evidence that might justify the rapid growth). Also, CMS could adjust payment rates for efficiency gains in the provision of newer procedures. The CHAMP Act also acknowledges MedPAC’s strong recommendation to consider the startling geographic variations in the use and growth of physician services; accordingly, physicians delivering services in counties in the lowest fifth percentile in per capita Medicare Parts A and B spending receive a 5 percent increase in their Medicare payments in 2009 and 2010.  

The Path To Physician Payment Reform. Beyond these various adjustments to Medicare fee-for-service payments, the CHAMP Act has other provisions that would prepare the way for more fundamental physician payment reform. The act directs CMS to develop and implement a system of feedback to individual physicians, measuring resource use on a per capita and per episode basis, and comparing physicians to their peers regionally as well as nationally. Such a data system could prove useful to CMS in a variety of ways, not only for the potential benefits of physician feedback itself, but also for understanding local and regional variations in care and for identifying outlier physicians. Furthermore, such information could be quite useful in future work on bundling of physician payments, a substantive interest of the CHAMP Act. Regarding bundling, the act also directs the Comptroller General (that is, the Government Accountability Office, or GAO) to conduct several relevant analyses, determining whether payments should be combined for services commonly furnished together and identifying additional procedures as candidates for global payments.

The CHAMP Act would also revise a small Medicare medical home demonstration in TRHCA, expanding it to a national pilot program involving all Medicare beneficiaries served by up to 500 medical practices. Through this demo, CMS would acquire several critical capabilities relevant to transforming the health care system, including (1) identifying practices serving populations at risk for health disparities; (2) identifying practices with basic medical home infrastructure; (3) identifying practices having and using health information technology (IT) to enhance care coordination; (4) risk-adjustment methods for determining the extent of patients’ need for medical home services; (5) quality measures for determining the extent of provision of needed services; and (6) appropriate payment models for medical home services.

Other provisions in the CHAMP Act are intended to address other problems in the Medicare system leading to excessive growth in physician services. To ameliorate some of the more problematic examples of physician-owned “side-business,” the act would require that imaging services paid by Medicare be provided in certified facilities, and it substantially increases the constraints on physician ownership of Medicare participating hospitals. A CHAMP Act provision with a longer time horizon but potentially even greater future savings is the investment in information on the relative effectiveness of different clinical services. The CBO has estimated that federal investments in comparative effectiveness research through the CHAMP Act could yield offsetting Medicare cost savings within ten years, and it projects substantially greater savings in private health care spending.


Although the Medicare, Medicaid, and SCHIP Extension Act of 2007 provided a brief reprieve, Congress must act in the next few months to prevent SGR-mandated cuts in Medicare physician payment. The House framework for SGR reform, the CHAMP Act, offers a big step along a path to comprehensive physician payment reform. It must be noted, however, that it is still only the first step. Despite the tens of billions of dollars that would be invested to address this problem, the act would allow 2010 physician fees to decrease by as much as 14 percent below 2009 levels. Assuming that history predicts future growth in services, under the CHAMP Act all six categories of physician services would suffer this decrement in 2010, with several categories at risk for additional negative updates for years to come. Furthermore, the conversion factor update is frozen at zero for all six categories beginning in 2013. Therefore, in the next few years, additional legislation would still be needed to address these deficiencies.

However, by the time that new legislation would be under debate, physicians and policymakers would have gained powerful insights through implementing the CHAMP Act. Professional and CMS responses to growth trends in different service categories, efforts to address mispricing and geographic inequities, bundled payment options, medical home investments, analysis of individual and regional practice patterns, curtailed physician entrepreneurism, improved information on clinical effectiveness —  all of these would provide a profoundly different context for the next steps on the path to reform. Hopefully, these insights would prove sufficient to guide a sustainable “Doc Fix.”

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