9 Biggest Issues Surrounding the Medicare Sustainable Growth Rate

For many within healthcare, the sustainable growth rate is like a mosquito on a hot, muggy summer day. It's clearly flying around, waiting to suck the blood of anyone who fails to pay attention, and the longer you wait to put on mosquito repellent, the more you will suffer.

The SGR, which is the annual growth rate used to determine physician payments under Medicare, has been around since the Balanced Budget Act of 1997. Here, three different healthcare leaders give their take on some of the biggest issues that deal with the SGR and how the healthcare environment can find the right repellent for it.

1. Original intent.
Ken Perez, director of healthcare policy and senior vice president of marketing at MedeAnalytics, says the original purpose of the SGR when it was first made part of the Balanced Budget Act of 1997 was to restrain the growth of Medicare spending on physician services. From 1998 to 2002, the formula was actually followed, but eventually, due to Congressional overrides of the SGR, costs exceeded the budget.

"The SGR attempts to facilitate long-term fiscal accountability by requiring 'catch-up' reductions in subsequent years when actual spending exceeds budget, so that cumulative actual spending does not exceed cumulative budgeted spending," Mr. Perez says.

2. Today's problem. After nine straight years of Congressional extensions, physicians now face a 27.4 percent reduction to Medicare payments to make up for the higher-than-budgeted costs in past years. On Dec. 20, the Republican-led U.S. House of Representatives rejected the Senate's two-month extension of the payroll tax reduction bill, which included a two-month freeze of Medicare' physician fee schedule, but since then, the two chambers agreed to a temporary two-month solution. The House originally proposed a two-year "doc fix," which would have included a 1 percent increase in Medicare payments to physicians in each of the next two years. However, neither the House nor the Senate has offered a permanent solution or repeal of the SGR.

Jennifer Searfoss, executive director of Cardiology Advocacy Alliance, says Congress' "kick-the-can" attitude has led to today's potential tidal wave of payments cuts. She adds that temporary fixes are simply no longer feasible. "The biggest concern is that the longer you kick this can down the road, the more expensive a permanent fix becomes," Ms. Searfoss says. "A permanent fix is cost prohibitive, but we need to get to that permanent fix."

3. Technology costs. The SGR takes into account total healthcare spending, and if healthcare spending outpaces the rate of gross domestic product, then that's where reductions to physician payments come into play. Patrick Cobb, MD, a hematologist/oncologist and immediate past president of the Community Oncology Alliance, says there a few components of the SGR that inexplicably impact physician payments — one of the biggest being healthcare technology costs.

"We have a lot of new, expensive technologies since the SGR formula was put into place," Dr. Cobb says. "A lot of those things make people's lives better, but they're very expensive. We don't have any control over that, and the downside only goes to physicians. That's an inherently flawed system."

4. Drug costs. Another one of the SGR's components that impacts physician payments is the cost of drugs. The SGR takes into account the inflation of Medicare Part B drugs, such as chemotherapy drugs, and physicians do not decide the price of pharmaceuticals. "Physicians are at a detriment to the inflationary nature of drug costs in general," Ms. Searfoss says.

5. Primary care physicians versus specialists. Mr. Perez says the differing payments for primary care physicians and specialists also play a role. Because specialists are reimbursed at a higher rate than primary care physicians, some legislative proposals to rectify the SGR were more favorable to primary care physicians and less favorable to specialists. For example, in October, the Medicare Payment Advisory Commission proposed a repeal of the SGR. Its proposal would have frozen current payment levels for primary care physicians, and it would have reduced payments for specialists by 5.9 percent for three straight years followed by a freeze.

6. The SGR's broad brush. Dr. Cobb says the SGR was supposed to create a disincentive for physicians to do anything that might raise the overall cost of healthcare. However, regardless of whether physicians are staying within their means and are treating patients in an efficient manner, the SGR's proposed payment cuts affect any physician who sees Medicare patients. "It treats all physicians alike," Dr. Cobb says. "If you're a physician that's done a good job of keeping costs down, you get penalized just like everyone else. It's a pretty blunt instrument."

Ms. Searfoss adds that the SGR ignores the myriad other factors that are contributing to the country's skyrocketing healthcare costs. "Healthcare isn't just about Medicare," Ms. Searfoss says. "Healthcare is about what are patients and citizens are incentivized to do. Politically, there needs to be a culture change, not just a tax change. Everything should be on the table."

7. Short-term fix. It appears as though Congress will not initiate a full-scale restructuring or repeal of the SGR by the end of 2011 or going into the 2012 election year. Mr. Perez says freezing the physician fee schedule for one year would cost roughly $20 billion, and for two years, it would cost roughly $40 billion. However, even a short-term fix is not easy because Congress will still have to offset these costs by cutting other parts of Medicare, cutting other parts of healthcare (e.g., Medicaid) and/or cutting other parts of non-healthcare budgets (e.g., defense) — and this is assuming Congress remains adamant about not raising taxes on the upper tax bracket.

"And these cuts would be in addition to expected cuts, starting in 2013, coming out of the Budget Control Act's triggered sequestration plan, including a reduction to Medicare that is capped at 2 percent," Mr. Perez adds.

8. Long-term fix. The long-term fix is — as Mr. Perez terms it — "the elephant in the room." Replacing or repealing the SGR will cost in the neighborhood of $300 billion, and finding ways to offset that type of figure will be especially hard amidst the government's recent summer of deficit control and budget slashing.

Ms. Searfoss says the most prevalent solution is replacing the SGR with the Medicare Economic Index. The MEI limits annual physician fee increases to those regarding the costs of producing physician services, such as obtaining medical supplies, and increases in general earnings levels.

9. Credit rating risks. This past August, Standard & Poor's downgraded the U.S. long-term credit rating from AAA to AA-plus, the first time the United States ever had its debt downgraded. If the SGR is not settled in a reasonable amount of time, it could cause more negative credit ratings, which could hamper the country's economy even more. "Standard & Poor's said a further downgrade to AA would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period," Mr. Perez says.

Related Articles on the Sustainable Growth Rate:

Medicare "Doc Fix" Should Not Come at Hospitals' Expense, AHA Says

9% of Medical Groups Would Stop Treating Medicare Patients if Pay Cuts Go Through

President Obama's Deficit Plan: What Happens to the Sustainable Growth Rate?

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