Replacing the Broken Medicare Physician Payment Formula: At What Cost for People with Medicare?

Overview

The current Medicare physician payment formula, known as the "Sustainable Growth Rate" (SGR), was designed to control the growth in aggregate Medicare expenditures for physicians' services.[1]    If implemented as intended under the law, the SGR would lead to significant cuts to physician payment (for example, if the SGR were to go into effect in 2014, physicians would face a payment cut of over 20%).  However, almost every year since SGR was supposed to result in cuts, Congress has temporarily prevented these cuts from going into effect by passing short-term fixes that delay SGR implementation.    Extension of a number of important Medicare and Medicaid provisions known as "extenders," such as the Qualified Individual (QI) program and the Exceptions process to the Medicare therapy caps, have traditionally accompanied these short-term SGR fixes.

Last week, Congress took a significant step towards repealing and replacing the flawed Medicare physician payment formula.  Three Congressional committees have now approved legislation that would permanently repeal the SGR.  It is expected that these proposals will reach the floors of the House and Senate in early 2014.  How the replacement policy will be paid for, a cost likely well in excess of $120 billion over 10 years, remains unclear.  Also unclear is whether such policy will ultimately include the important "extenders."

As part of a broader budget agreement, Congress has passed a temporary three-month patch to the SGR which prevents immediate cuts to physician payment starting in January 2014.  This short-term SGR patch gives Congress time to explore how a permanent SGR repeal and replacement legislative package, with our without extenders, will be paid for.   As noted below, beneficiary advocates should pay very close attention to this "pay-for" discussion since it is very likely policymakers will look to proposals that would shift additional costs to beneficiaries in order to pay physicians.

Congressional Action

On December 12, 2013, in the first step of a longer legislative process, both the Senate Finance Committee (SFC) and the House Ways and Means (W&M) Committee approved legislation to replace the Medicare physician payment formula (note that the House Energy & Commerce (E&C) Committee passed an SGR bill in July 2013).[2] Both proposals are similar in the way they would move Medicare physician payment towards a more value-based payment system.  The SFC bill does not include a payment increase over 10 years, but rather allows for bonus payments based upon certain quality measures.  The W&M bill provides for payment increases.   Below is a brief discussion of a few of the provisions in these SGR repeal and replacement bills.

Extenders

A number of important programs have typically accompanied annual short-term SGR fixes, including the Qualified Individual (QI) program and the exception process to Medicare outpatient therapy caps.   While the W&M bill does not address these extenders, the SFC bill does.

• QI (Qualified Individual)

The QI program pays the Medicare Part B premium for enrolled individuals between 120% and 135% of the Federal Poverty Level (FPL).  The SFC bill proposes to extend QI only temporarily, through 2018.  Beneficiary advocacy groups are deeply disappointed that QI is not made permanent in this bill. If the SGR is replaced, the QI program will lose its normal vehicle for being extended, which will diminish its chances of being made permanent or further extended on its own.  Advocates hope that as the legislative process continues, QI will be made permanent.[3]

• Repeal of Therapy Caps

Under current law, there are two annual per beneficiary payment caps for all Medicare-covered outpatient therapy services, one for physical therapy services and speech-language pathology services, the other for occupational therapy services, each set at $1,900.  In addition to the caps, a manual medical review process occurs when a higher threshold of $3,700 is reached.  There is currently a burdensome exceptions process to the caps.[4]  The SFC bill would repeal the caps and replace them with a new medical review program including prior authorization.  According to the Description of the Chairman's Mark:

The therapy cap would be repealed upon enactment. The $3,700 threshold would be extended for one year, through the end of 2014, after which it would be repealed. Beginning    January 1, 2015, a new medical review program for outpatient therapy services would be established for therapy for therapy providers … The Secretary would identify the services for medical review, using appropriate factors" such as outlier billing patterns, newly enrolled providers and "services furnished to treat a type of medical condition."[5]

While the Center is very supportive of repealing the therapy caps[6], we are concerned that the use of focused medical review or prior authorization based upon particular medical conditions could, depending upon how it is structured, create access to care problems for individuals and run contrary to the Jimmo v. Sebelius settlement the Center and Vermont Legal Aid reached with the Department of Health and Human Services (HHS).  The court approved settlement confirms a maintenance standard for skilled nursing facilities, home health care, and outpatient therapy, dispelling the myth that Medicare will pay for care and services only if a beneficiary is likely to "improve."[7]   If this therapy cap repeal policy moves forward, we hope that such concerns are addressed.

Additional Provisions

There are a number of other Medicare and Medicaid-related provisions in both the W&M and the SFC bills that advocates should review carefully.  For example, the SFC bill includes provisions affecting Medicare Advantage Special Needs Plans (SNPs), low-income program outreach and quality measures, among others, and the W&M bill proposes a "Medicare Non-Participating Physicians Demonstration Project" that warrants scrutiny.[8]  In addition, other provisions may be added to the overall SGR package as the legislative process continues. 

Next Steps: The "Pay-For" Discussion and the Danger to People with Medicare

As noted above, as part of a broader budget deal that funds the federal government through September 2015, Congress passed a three-month SGR patch (meaning the cuts would go into effect April  rather than January 2014), which includes the extenders referenced above.   In order for any SGR repeal and replacement package to proceed, debate must move to the floor of both chambers.  SGR may be taken up on its own or as part of a debt ceiling deal (the nation's debt ceiling will have to be addressed sometime around March 2014).  The discussion now turns to how SGR replacement will be paid for.  

One of the reasons Congress is trying to tackle SGR now is that the price tag of fixing it is projected to be much lower than it has been in recent years.  The most recent cost estimate from the Congressional Budget Office (CBO) for repealing and replacing the SGR is $116.5 billion over 10 years, not including the cost of extenders or increases in physician payment.[9]   Congress will look for new revenue or  savings in order to offset this cost.

Many advocates would like to see SGR permanently fixed  but are very concerned about how it might be paid for, how transparent a debate about pay-fors will be, and how quickly legislation might move.   Some policymakers, think tanks, and other outside groups have suggested that SGR be paid for by Medicare beneficiaries through cost shifting proposals such as increased deductibles, coinsurance or copayments, further income-relating (means testing) Medicare premiums, limiting first-dollar Medigap coverage or adding cost-sharing to the home health benefit.

The Center, along with other beneficiary organizations, rejects these approaches to paying for an SGR fix.  We endorse principles surrounding SGR reform articulated by the Leadership Council of Aging Organizations (LCAO)[10], of which the Center is a member, including:

• Protecting people with Medicare from cost-shifting – Half of all Medicare beneficiaries live on annual incomes of $22,500 and already contribute a substantial portion of their income towards health care; we urge policymakers to reject pay-fors that shift costs to people with Medicare; and
• Extending a permanent fix to critical programs – The QI program should be made permanent and the Medicare therapy caps should be repealed (or, at a minimum, the exceptions process should be made permanent).

Instead of increasing out-of-pocket burdens for people with Medicare, we advocate sensible offsets such as prescription drug rebates for low-income Medicare beneficiaries – a policy that could, by itself, pay for most, if not all, of an SGR replacement package.[11]

Conclusion

The SGR is a broken payment formula that should be fixed.  Annual short-term patches for SGR and the extenders create needless uncertainly for both Medicare providers and beneficiaries.   As Congress moves towards discussing how to pay for fixing the SGR, though, people with Medicare should not be targeted to shoulder the burden for physician payment.   We need to ensure that in fixing SGR, the cure is not worse than the disease.