After seventeen years (eight months, 9 days…), over a dozen acts of Congress and innumerable reams of debate and conjecture about its fate, it’s time to say goodbye to the Medicare Sustainable Growth Rate (SGR) formula. As a proper wake, let’s take a moment to reflect on this enigma of health care economic theory. And then let’s not ever do it again.

A Brief History of the SGR

From 1980-1990, Medicare payments to doctors were based on charges. During that period, spending under the program on physician services inflated rapidly, growing at an annual rate of 13.4 percent. Congress took note and reformed the system in two key ways: (1) rates paid for services would be determined by the resources, or inputs, necessary to perform them; and (2) annual increases for services would be restricted based on the total volume of services delivered.

That was all well and good; in fact it makes a good bit of sense. And it worked. From 1992 to 1997, spending growth was fairly steady at one to two percent per year.

But then Congress doubled down. The heralded budget deal struck in 1997 by then-President Clinton and the Republican-controlled Congress included a refinement to the aspect of Medicare physician payment rates linked to volume growth, newly labeled the Sustainable Growth Rate (SGR) formula. That’s when the fun really began.

In very short, the SGR boosted payments when the growth rate of spending on physician services fell short of growth in the gross domestic product (GDP). Likewise, it cut payments when physician spending grew more rapidly than GDP. Prices, the number of Medicare beneficiaries, and changes in law were all accounted for, essentially leaving utilization rate as the only key factor driving the SGR algorithm.

Makes sense, right? The SGR seemed a nice little incentive for docs to rein in their prescribing pens and be more efficient, except that the incentive was spread across over a million physicians and related professionals, creating a classic collective action problem. No one much seemed to care, though, until 2002, when Medicare’s base payment rate for these services was cut by 4.8 percent. Suddenly, the flaws in the formula got everyone’s attention, including Congress’s.

For 2003 (and ever since), Congress passed a law to block the cuts generated by the SGR formula. At first, there was some faint hope that these intrusions would be temporary. The “doc fixes” were designed (and paid for) in a manner that allowed the SGR (and physician payment rates) to basically pick up where they had left off the year prior. So there was some hope that the trend of rapid increases in physician resource use would wane and the formula could once again prevail.

After a few years, however, it became clear that was never going to happen. And enacting doc fixes in that manner was expensive; it required Congress to pay for a portion of cuts anticipated in future years, not just the next one. So, in 2006, they took the SGR train completely off the rails. That year, in the Tax Relief and Health Care Act (TRHCA – which some dexterously refer to as “Trisha”), Congress enacted a doc fix that froze out-year SGR cuts in place, creating a “cliff” when that patch expired. If the cut in 2007 was going to be five percent, then the cut coming up in 2008 would be ten percent, and so on.

This achieved two things. First, it cut the cost of enacting doc fixes to a third or so of previous episodes. And, it made 100 percent clear that the SGR would never again actually dictate Medicare physician payment policy. (Full disclosure: Yours truly helped draft TRHCA 2006, and I thought – and think – it was a splendid idea.)

I’m going to skim past 2009-2010, when things got truly absurd. During that spell, Congress enacted a series of very short doc fixes in anticipation of what became the Affordable Care Act disposing of the issue for a longer period of time. Doctors will recall this time with a shiver.

But it’s important to note that, meanwhile, despite pretty modest annual increases to doc pay of zero to one percent or so over the course of Congress’s extended veto of the SGR, overall expenditures on physician services by and large kept increasing at their historical rate. Basically, doctors started doing more work to offset their stagnant wages in order to keep their income levels constant.

Was this a sign of the industriousness that carried them through med school and residency? Yes. Was it good for the health care system (and your health)? Maybe not. Was it a lesson we should take to heart as the next iteration of physician payment policy is instituted? Definitely.

The New Deal

So what has been conjured, then, as the solution to the failures of the doc fix era? Before we bury the SGR under spilled champagne, we should consider what Congress is actually replacing it with. Having spent several years engineering it, there’s a lot to unpack.

For all of our sakes, I’m going to pass for now on the so-called “extenders” and other appended policies, though I’ll return to them briefly in a bit, so we can focus on the parts that will govern physician payments going forward.

First and probably most importantly, the formulaic approach to setting base payment rates is gone, replaced with automatic increases for all doctors from 2015 through 2019. For six years after that, in what I’d like to style the Liminal Phase, no automatic increases will be provided and doctors’ respective rates will be altered based on their performance under a Merit-Based Payment Incentive System (MIPS).

The MIPS is basically a consolidation of three pay-for-performance programs already underway and the addition of another. To bring back the weight of historical context, one of those preexisting programs, the Physician Quality Reporting System (PQRS), was created by our friend “Trisha” in 2006. Current penalties under these programs are repealed, though, and the new incentive structure would be budget neutral. For every doctor that makes more from the MIPS, there will be one who makes less. A true zero sum game, if you will.

Assessments will be based on four categories of metrics: (1) quality; (2) resource use (or efficiency); (3) meaningful use of electronic health records (sound familiar?); and (4) clinical practice improvement activities. The poorest performing doctors, determined by their composite score drawn from relevant aspects of all four categories, will see their payments cut by up to nine (nine!) percent.

Here’s a curious thing: In lieu of the existing mandate that quality measures be endorsed by the National Quality Forum (NQF) or the like, the Centers for Medicare and Medicaid Services (CMS) itself must pursue publication of “evidence-based” measures in a peer-reviewed journal. NQF’s multi-stakeholder process for endorsing measures can be lengthy, for sure, but the mandate that they be submitted for publication (though not necessarily published) is a debatable substitute for gaining meaningful clinical and consumer support.

Futurists all, Congress here would also set payments for the years 2026 and beyond. Then, the degree to which an individual doctor’s pay is increased will be dictated by their participation in so-called Advance Payment Models (APMs). Right now, that means accountable care organizations (ACOs), medical homes, bundled payment models, and the like. What that’s going to mean in 2026, I can’t say. What I can say is, god willing, I won’t be writing about it by then.

Accommodations are made for doctors practicing in rural areas or in specialties that may not appear ripe for an APM approach. There is a significant front-loading of incentives too, intended to urge docs to get in the game and to cover some of their start-up costs. From 2019-2025, physicians participating in an APM will get paid five percent more than their peers.

It is also worth noting that additional funding is allocated for quality measure development, with a plan for this effort due from CMS by May 1, 2016, and annual progress reports thereafter. The SGR deal also codifies the recent institution of Medicare payment for chronic care management activities – the “behind the scenes” work that physicians must do to take care of patients with ongoing health needs. Historically, the fee-for-service payment system did not account for these important strategies.

Another aspect of the bill that swims with the recent tide of CMS activity is the requirement that the agency publish information regarding physician payments and resource utilization. This type of information was recently published stand-alone (causing a bit of a stir) but must be integrated into the Physician Compare website by 2016. Additional distribution of de-identified Medicare claims data is also permitted to enhance quality improvement and related activities.

There are some additional important provisions, including fairly robust reform of Medicare audits and other program integrity activities, but we’ll defer those items to another day. Here we’ve covered the most significant provisions governing physician payments themselves.

What’s Left for Us to Talk About?

This is a bittersweet time for us health policy wonks (not to mention lobbyists, consultants, economists, complainers of all stripes, etc. etc.). One of our darling sources of conversation is gone. What are we to do with ourselves?

Ah yes, I faintly recall this minor piece of health care law that – for some – starts with an “O” and its end rhymes with “bear.” I don’t think we’re done with that one yet. But even in this SGR repeal act there are dozens of policies that are not addressed permanently. In fact, SGR repeal and a small handful of other items are the only policies fully dispensed with. For all the rest, the debate about their long-term fate begins right about now.

You can view the litany of extenders included in the package here, but the main thing you need to know is that virtually all of them are only maintained through fiscal or calendar year 2017, which means they expire on September 30 or December 31 of that year. That includes disposition of the Children’s Health Insurance Program (CHIP), so expect a fairly robust Medicare, Medicaid and CHIP package to move mid-2017.

One item is kicked down the road for only a meager six months: the delay of enforcement of the so-called Two-Midnight Rule. In response to some ambiguity regarding classification of short-term inpatient stays, CMS generated this bright line rule that has proven remarkable in its ability to satisfy no one. Stakeholders have not yet been able to develop a unified alternative, though, so this area could be ripe for debate through the summer.

With this, King v. Burwell, a new President in the offing, and that 2017 omnibus package coming due, I think there will be plenty to keep the health policy community busy for the foreseeable future.