Of all the ghosts that haunt the Medicare program, none has been noisier, scarier or rattled more chains than the Medicare Sustainable Growth Rate (SGR) problem.   SGR has required Congress to reset physician payment policy almost every year for the last decade to avoid gutting Medicare physician compensation, a recurring reminder of how difficult Medicare cost containment really is.  Uwe Reinhardt’s recent Economix post in the New York Times is an excellent primer on this problem. 

What follows is a proposed permanent solution:  writing off the SGR “debt” to the federal budget as “uncollectable” and demanding both sacrifice and reform from the physician community in exchange.

When Congress last seriously addressed the deficit in 1997, as part of the Balanced Budget Act, it imposed an economic cap on Medicare physician payments, limiting their growth to the growth in per capita wealth. Though physician cost increases were muted for the first two years post-BBA, the “imaging boom” was just entering an explosive upward phase, pushing Medicare physician costs skyward.  SGR also coincided with an explosion of physician self-referral, as physicians used referral to diagnostic or therapeutic services they owned to offset the declining real value of physician fees.  New technologies adopted since the cap, such as bariatric surgery and PET scanning, have added to the growing imbalance of actual Part B expenses vs. the SGR cap.

As a result of the widening gap between actual expenses and the SGR cap, a huge Medicare debt now exists to the federal budget, which increases with each Congressional postponement.  At the end of 2008, the Congressional Budget Office estimated that merely to substitute frozen fees for the prescribed SGR reduction would cost $318 billion over ten years (2010-2019).  To substitute fee increases equal to the Medical Inflation Index (MEI) would cost $439 billion, and to do that AND hold beneficiaries harmless from the resulting increases in their Part B premiums would cost $556 billion, more than half the eventual cost of health reform!

The SGR was a stupid macroeconomic solution to the Medicare cost problem, because it gave providers, large or small, no pathway to remediation.   Unlike DRGs (diagnosis related groups), which provided hospitals incentives to constrain the growth in Medicare expenses per admission, the SGR caps provided only penalties for “excessive growth” with no feedback loops or incentives for providers to change their behavior.  In Germany, which has similar macro-economic caps, they function as guidelines for state-level negotiations between “sickness funds” and physician organizations to allocate the fixed amount of available new funds for the coming year-a flexible mechanism by comparison.  The lack of dynamism and a translation mechanism to local physician communities were fatal flaws of the SGR approach.

Some realism is required to reach a solution.  The most important thing is to acknowledge that the accumulated fee cuts can never be implemented. The programmed reductions in whole or in part will lead to widespread physician abandonment of the Medicare program and its beneficiaries. Even letting physician fees rise at the MEI will not avert a catastrophic physician shortage in the next decade, as more than 30 million boomers enroll in Medicare and virtually the entire boomer generation of docs retires. The younger physicians replacing these workaholic docs want to work 35 hour weeks and make it to their kids’ soccer practices.  There’s no way to make the math work with the current payment rates, let along reduced rates.

The SGR “savings” are thus an accounting fiction, and misrepresent the actual deficit.  Like a portfolio of bad mortgages that will never be paid off, the SGR entry into our federal deficit ledger is simply illusory. It’s as if Congress levied a very unpopular and complex new tax but did not appropriate the funds to collect it, and booked the revenues as if they’d actually been collected.  Congress needs to write off the SGR debt as uncollectable — a monument to a failed physician payment policy — and devise a new strategy to fix the problem in front of us. We need to ask physicians to become active agents in cost management, as well as address the cost drivers that directly contribute to excessive Medicare costs.  And we need to demand some meaningful sacrifice from physicians in exchange for lifting the SGR Sword of Damocles from off their necks. 

Some suggestions:

1. Get Physicians Back into the Risk Assumption Business. 

One big problem with the Affordable Care Act was that it left the physician out of health reform. With the ACA (and HI TECH), Congress basically told physicians to become meaningful users of clinical IT, sell their practices (and all the accumulated baggage) to their local hospital, and color within the lines (e.g. follow evidence-based practice guidelines).   Physicians everywhere I’ve visited in the past nine months feel ignored and disempowered.  Physicians need to have a much stronger role in health reform’s cost management activities than becoming hospital employees.

Accountable Care Organizations are “managed care without the risk”, and they will accelerate both hospital market concentration and the disappearance of physicians into hospital employment. Rather than focusing on ACOs, we need to repurpose the $6 billion allocated in the Affordable Care Act for starting up CO-OP style health plans (that are unlikely to be used) to assist physician organizations, both at the state and local levels, to create new full-risk health plans or capitated independent practice associations.  These new plans can then contract through the Medicare Advantage program to cover Medicare beneficiaries, as well as compete for private insured business through the Health Exchanges. Successful examples of community-wide cost containment, such as those in Grand Junction Colorado, were founded on independent practice associations.  These organizations also dominate the toughest managed care markets in the United States, both northern and southern California.

2. Definitively Halt Physician Self Referral and Device Industry/Pharmaceutical “Bribes” to Physicians.  

The Stark Laws were a brave attempt to regulate physician conflict of interest in diagnostic imaging, radiation therapy, physical therapy, surgery and other lucrative activities. These laws were riddled with loopholes, such as the in office ancillary services exception (IOASE) vigorously defended by the American Medical Association.  Similarly, as recent Wall Street Journal articles (subscription required) have revealed, payments by device manufacturers for “consulting services” to high-utilizing surgeons and other procedure-oriented physicians such as cardiologists have continued to affect physician behavior. These thinly disguised bribes effectively block hospitals from standardizing their device purchases and using their purchasing power to bring down the cost of expensive devices and products whose use is physician influenced. Pharmaceutical companies have also used inappropriate incentives (speaking fees and consulting contracts) to reward high utilizers of their most expensive drugs.

The remedies in the ACA, public disclosure of equipment ownership and payments to physicians, are a laughing stock.  Industry payments to physicians and medical schools need to be markedly restricted by statute.  In addition, the loopholes in the Stark Law need dramatic tightening.  MedPac’s June 2010 Report to Congress contained some excellent options for tightening the Stark loopholes such as IOASE, which should be implemented.)  It’s time to get the PET scanners and MR machines out of physicians’ offices, and eliminate the much abused safe harbors for office based physical therapy and radiation therapy.

3. Reform Malpractice.

The most craven sellout in the Affordable Care Act was the failure to demand meaningful economic sacrifice from the plaintiffs’ bar, and to reduce the pressure on physicians to order unnecessary care to avoid medical liability.  There should be a pathway to alternate dispute resolution for medical malpractice incidents, and special malpractice courts to hear the cases that demand litigation.  Malpractice attorneys should have their own “relative value scale” compensation formula: a simple fixed fee schedule for various injuries, rather than the open-ended “incentive comp” model of contingency fees.  Finally, physicians who become “meaningful users” of clinical information technology should be eligible for a medical liability “safe harbor,” since they will be practicing safer, evidence-based medicine.  This safe harbor would be a much more compelling and long lasting inducement to information technology adoption than the cash payments created by the HI TECH Act.

4. “Right Size” Medicare Technical and Professional Payments.

The fact that physician professional fees have not grown at the pace of inflation has compelled physicians to see more patients for shorter periods of time and to test (and self-refer) aggressively to compensate for lost real income.  Even in relatively fortunate disciplines such as radiology and cardiology, fees for exercising physician clinical judgment have been dwarfed by technical fees — the fees designed to compensate for the cost of acquiring and operating equipment.  The fact that technical fees grew with equipment expenses and rewarded expensive scanning modalities sent the wrong signals both to vendors and practitioners.  There is no earthly justification for Americans paying five or ten times what other countries pay for imaging exams utilizing the exact same equipment, or for technical payments to exceed professional fees by four or five fold for the high tech exams. 

The drafters of the Affordable Care Act intended to begin addressing some of this disparity by cutting imaging technical fees and by modestly increasing (by 10 percent) evaluation and management fees for primary care physicians, as well as temporarily resetting Medicaid evaluation and management payments to Medicare rates.  Ironically, these latter increases expire before the huge Medicaid expansion contemplated by the ACA.  These increases are pathetically inadequate and will do nothing meaningful to halt the exodus from primary medical practice underway now

The ACA technical fees reductions should be sustained, and should be supplemented by reductions in hospital outpatient procedure payments (HOPSS); the money saved should be plowed into dramatic increases in Medicare’s “cognitive” professional fee payments to physicians.  These cognitive fee increases should not be restricted to primary care physicians, but should extended to diagnostic services (radiology, pathology, cardiology) to reward the exercise of clinical judgment.  However, these increases should be paid only to physicians who practice “evidence based medicine” where guidelines are available and who use intelligent physician order entry software that screens out clinically inappropriate services, or to physicians who agree to offer an enhanced product such as the “patient-centered medical home”. 

Obviously, each of these suggested remedies raises issues far too complex to address meaningfully in a blog posting. But they represent some non-incremental options for rethinking Medicare physician payment policy and moving beyond the SGR deadlock which the new Congress should consider.  The SGR has been a embarrassing policy failure, and it is time to bury it and move on to a more thoughtful and conservative payment regime for Medicare physician services.