Jill Abromowitz, Jennifer Bienenstock, and Christine Lee worked on this project collectively. Beginning with a desire to learn more about the Medicare program, the three members chose a problem that was narrow in scope, but broad in impact. Jill Abromowitz and Jennifer Bienenstock traveled to Washington D.C. in mid-March to conduct interviews with Noelia Duchovny of the Congressional Budget Office, Sandra Marks of the American Medical Association, and Jeanne Lambrew, who worked for the Clinton Administration during the formulation of the SGR during the Balanced Budget Act of 2007 and now works as a faculty member at George Washington University and as a fellow at the Center for American Progress. At the same time Christine Lee contacted Center for Medicare and Medicaid Services (CMS). Jill Abromowitz interviewed Glenn Hackbarth who is chair of the Medicare Payment Advisory Committee (MedPAC) by telephone on March 22nd. Upon returning to Smith College, the three members collectively interviewed Thomas Valuck by telephone from CMS on March 29th and April 3rd. After the completion of the interviews and background research, the members collectively regrouped to complete the analysis and the solution sections.

The Sustainable Growth Rate (SGR) is a fee schedule that is a significant component of the formula, which ultimately determines what physicians get paid. It was created during the Balanced Budget Act of 1997 to control how much Medicare spends on physician services. The spending target is determined by the average growth in the national economy, as measured by the GDP. When it was enacted in 1999, there were no noticeable flaws to the fee schedule. Since then, problems have been detected in the fee schedule. As a result of the way the SGR is calculated, each year the "true" cost of treating a patient becomes further removed from the level of reimbursement. This is bad for Medicare beneficiaries, policy makers, and physicians.

Beneficiaries are subjected to a continually increasing amount of tests in order for physicians to recoup payment; over-time the potential for encountering difficulty accessing care increases as payment cuts continue. Policy makers find solving the problem difficult because they are forced to decide between controlling for costs and providing the opportunity for their constituencies to access high quality care. The solutions seem costly and since this issue does not receive large media coverage, it is hard to gain support and justify the increased spending necessary to repeal the flawed formula. Finally, physicians have the wrong incentive structure in place because of this formula, which was supposed to make them act collectively. Their failure to do so has decreased their payment per service, making it more difficult for them to take on Medicare patients and to still run a viable practice.

To evaluate the problem and analyze potential solutions, we researched the history of Medicare, since understanding the complex political history and the eventual acceptance of an ideology is integral to why we must now fix the SGR. We then studied the intricacies of the SGR formula so that we could identify some of the problems inherent in the formula. Once aware of some of the problems with the formula, we determined the relevant policy actors and were able to interview a representative from the Congressional Budget Office (CBO), the American Medical Association (AMA), a participant in the formulation of the SGR during the Clinton Administration who is now a current scholar of health care at The Center for American Progress and a faculty member at The George Washington University. We also interviewed Glenn Hackbarth, chair of the Medical Payment Advisory Committee (MedPAC), and Thomas Valuck from the Center for Medicare Services (CMS). Each of these individuals provided valuable insight.

Our analysis identifies seven problems with the SGR including the following: the SGR calculation, incentives for physicians, volume, quality, access to care for Medicare beneficiaries, risk due to malpractice insurance, and the political environment.

Knowing the problems inherent within the SGR as well as the position of the three main policy actors (physicians, politicians in Congress, MedPAC), we devised a four-fold policy solution: 1. repeal the Sustainable Growth Rate; 2. institute pay for performance payment program; 3. malpractice reform; and 4. establish independent Medicare board.

These actions in combination should work to solve the problems inherent within the SGR as well as pacify the relevant policy actors. As a group, we recognize that this policy, like any other, will require compromises, some more difficult to make than others. Above all else, we believe that a solution needs to be made which maintains the viability of the Medicare program financially, politically, and widely among the general public so that elderly individuals will continue to receive high quality care.

Medicare, as an institution in the United States, has a long ideological and historical past. Even before the founding of Medicare in 1965, when President Johnson signed it into law, Medicare was deeply rooted in politics. In order to best understand the current day problem and policy of the Sustainable Growth Rate (SGR) it is first necessary to understand the political history of Medicare as well as present day Medicare policy issues that effect our nation’s elderly, health care workers, and hospitals.

Since its inception, the laws regarding Medicare have been revised many times to conform to the needs of the nation, as defined by policy makers and citizens of the United States. Making public health insurance part of the body of US law is often described as occurring in four stages: 1912-1920, 1927-1940, 1943-1950 and 1956-1965 (Corning Index). In each of these stages, an attempt was made to enact some form of public health insurance. In all of the earlier attempts, except the last one in 1965, the plan failed.

Public health insurance is based on the ideology that people in a given community should pool their resources to help those in need gain access to care. This idea of providing for the public good can be traced back to as early as ancient Greece, where society helped pay funeral costs (Corning Introduction 2). Ancient Greek societies also had provisions for publicly funded physician services. More recently, in 1798, the United States set up a Marine Hospital Service for seamen and made their employers contribute 20 cents per person. Additionally, in 1883 Germany enacted a compulsory health insurance program (Corning Introduction 2). There have been many innovations since the United States and German programs; however, the programs follow the ideology that caring for the citizens of a population is something that the Government should take part in, and help to facilitate. One of the programs after which the American system is based is the British system of social insurance that became law in 1911, 54 years before the American system was enacted.

In the early twentieth century, social welfare programs in the US were the responsibility of individual states and as a result, debates regarding public health insurance started at the state level. To start the movement and to create a demand for public health insurance on a state and national level, the American Association for Labor Legislation (AALL) was founded in 1906 at the University of Wisconsin. This group represented many different interest groups that were all concerned with social welfare (Corning Chapter 1 3).

AALL was instrumental in lobbying for national health insurance. Progress was made gathering public and legislative support from 1912 until 1917 when support began to fade. This failure was the result of several interacting factors, including opposition from the Wilson administration, special interests such as the pharmaceutical industry, labor unions ¹ and physicians as well as the perceived weakness of a socialist system, as a result of the Russian Revolution of 1917. The belief that, as the National Association of Manufacturers' Committee on Industrial Betterment states, "sickness is not a problem for the community as a whole" and that government health insurance was not "necessary, wise, or desirable" (Corning Chapter 1 7). Finally, it was believed, following the ideals of Jefferson, that good government is small government; therefore government should not involve itself in programs for social welfare.

During the 1920s few regulations concerning public health insurance were put into law; however, it was a very progressive time. Activists worked to persuade private philanthropic foundations to donate money for a study of the nation’s health. As a result of this effort, the Committee on the Costs of Medical Care was established in 1927. The CMCC’s goal was to "conduct the Nation's first comprehensive study of medical economics" (Corning Chapter 2 2). This committee produced a final report that did not recommend government health insurance, but instead recommended group payment for health care either through taxation, much like Medicare is funded today, or through private insurance or a combination of both.

In 1932, the United States fell into the Great Depression and public opinion began to favor the development of a bigger government: one that would provide a social safety net. As President Roosevelt said, "To these unfortunate citizens aid must be extended by Government--not as a matter of charity but as a matter of social duty (Corning Chapter 2 4)." He then introduced the New Deal, which included the passage of the Social Security Act.

When the federal government was first studying the effects of providing public medical coverage, the medical association was staunchly opposed to it because they represent physicians who did not want their services to come under the tight control and regulation of the United States government because, at the time, the practice of medicine was a very individualistic practice. Physicians were not even in favor of group practice (Corning Chapter 2 3). There was no organized lobby that was prepared to go up against the American Medical Association (AMA). In an attempt to strike a balance between those who wished to have medical insurance included in the Social Security Act and those who did not want it at all, the President established the Medical Advisory Committee (MAC). The MAC studied questions regarding Medicare, its costs, benefits and potential effects. The MAC then released a report that met with harsh reactions from the AMA. In the end, the President decided not to include health insurance in the Social Security Act of 1935.

After the passage of the Social Security Act, Roosevelt continued working towards a policy that would provide national public health insurance. He asked for the Medical Advisory Committee to issue a final report entitled "Risks to Economic Security Arising Out of Illness," and later developed an interdepartmental committee to work on the establishment of public health insurance. This committee conducted research and made recommendations (Corning Chapter 2 11) ² , in a written report that was followed by a 3-day national health conference in 1938.

Public support for the conference’s recommendations seemed broad. The conference accomplished three important things: it gave publicity for a national health program, forced organizations to take a position regarding the issues, and led to a meeting between the AMA and the Roosevelt Administration. Despite the positive indicators that change could be possible, Roosevelt decided not to include a national health program in the agenda for the next election.

In 1939, Roosevelt’s bill was brought to the floor by a Senator from New York, Robert Wagner, and was called the Wagner Bill. The AMA created the "National Physicians' Committee for the Extension of Medical Service" to lobby against the bill. Nevertheless, the Wagner Bill was debated. Unfortunately, later in 1939 Germany invaded Poland and attentions were diverted from domestic issues to international issues (Corning Chapter 2 15). The Wagner Bill never made it out of committee.

During the war, the government’s focus was mainly international; however, there were still proponents of national health insurance who were working toward making it domestic policy. In 1942, the Emergency Maternity and Infancy Care Act was passed in Congress to provide for emergency health services for the dependents of servicemen in the lower four pay grades. Many people thought that the passage of this act would help pave the way for the National Health Program.

On June 3, 1943, the Wagner-Murray-Dingell Bill was sent to Congress; however, with mounting opposition from the AMA and the pharmaceutical industry as well as the lack of presidential support, the bill did not make it out of committee. The bill was revised and resent to Congress in 1945, when Truman became president. Even with presidential support, the bill died in committee. The bill failed for many reasons including: the conservative nature of Congress, a delayed reaction to the governmental increase in taxes and regulation imposed during the war as well as a popular desire to move away from big government regulation.

In 1946, Senator Robert Taft of Ohio introduced the Taft-Smith Ball Bill, which authorized approximately $200 million in matching federal grants in order to subsidize private health insurance for the poor. The AMA unofficially supported the bill; however, the administration did not support it because they believed that $200 million was not sufficient, and that it would slow down the passage of a meaningful and effective act. This shows the early dedication of Congress to pass a sustainable and effective act that would best serve health care workers and patients.

President Truman was re-elected in 1948, and the AMA spent $4.5 million to "wage a ‘national education campaign’ against the Wagner-Murray-Dingell bill" (Corning Chapter 3 24). The AMA was successful, and in 1952 Truman did not discuss the National Health Program in his State of the Union Address and instead proposed a Commission on the Health Needs of the Nation to study the problem.

After Truman left office the notion that health coverage be limited to a subset of the population, began to gain popular support. In the fourth stage of the debate regarding a national health program, the focus was shifted to a concern for the growing elderly population of the United States. The Social Security Administration was worried that "the social security system failed to protect against the greatest single cause of economic dependency in old age--the high cost of medical care" (Corning Chapter 4 1).

With renewed energy and in many ways a new focus, numerous bills were brought before Congress in an attempt to make health coverage available to those unable to pay for medical care otherwise. As the 1960 session of Congress commenced, pressure for some congressional action on the health care issue intensified, resulting in significant behind the scenes negotiations and lobbying. The Mills Bill, later renamed the Kerr-Mills Bill, was the first piece of health care legislation to be signed into law by a vote of 91-2 on September 13th. This bill had the support of the House Ways and Means Committee as well as the AMA. After the passage of the Kerr-Mills bill, legislators continued to push for greater assistance believing that the bill did not go far enough. The AMA believed that the bill went far enough and pushed for its early implementation so that the results could be seen and the bill could be validated as a success, without the need to implement further changes (Corning Chapter 4 8).

In this fourth stage, more interest groups became involved in the struggle to implement Medicare. The American Hospital Association, the America’s Union Movement (AFL-CIO) as well as private insurance carriers started to push for stronger reform. With larger numbers of senior citizens unable to pay for their health care coverage, hospitals and private insurance companies were bearing a great burden (Corning Chapter 4 17). Reform was necessary, in the lobby’s opinion, if the medical system was going to survive. Despite the movement of some lobbies towards supporting Medicare reform, many lobbies such as the AMA were still opposed to its implementation.

Senator John F. Kennedy introduced the Forand Bill in 1957. This bill met with resistance as it was studied and debated. In the eight years between the introduction of the original bill and the eventual passage of Medicare, over 80 revisions, compromises, and alternatives were drafted. Ultimately, on July 27th and 28th of 1965, after reconciling 513 differences between the two chambers (Corning Chapter 4 23-24) Medicare was passed. This happened after many years of debate and compromise, and the timing of the passage had much to do with luck. The composition of the Ways and Means Committee had changed, allowing for two new Democratic vacancies: President Johnson had won re-election and there was a democratic majority in the House and the Senate.

From the onset of Medicare in 1965 until 1994, policy actors were in consensus regarding the philosophy, structure, and operation of Medicare. The consensus was mainly due to the popularity of the program, which forced conservative Republicans to accept its existence and at the same time forced liberal Democrats to accept the program’s existing benefits package and limitations. Consensus was also due to the fact that the Democrats held the majority of congressional seats from 1954, before the founding of Medicare, until the 1994 Congressional elections. In that year, Republicans won the majority of the House and Senate for the first time in forty years (Oberlander 1, 6).

From 1945-1970, policies were mainly expenditure driven, and the government regarded increasing health expenditures as a public policy achievement. This widespread support did little to control the open-ended costs of medical care. As the Government faced a stagnating economy beginning in the 1970s, the government was forced to turn to budget-driven health policies to contain the rising costs (Oberlander 5).

In the 1980s there were some changes to Medicare, especially in Part B ³ , which is the fee for service part of the Medicare program. By the middle of the decade, Medicare had become the largest single domestic program of the federal government, financed through general revenues, and it was growing at double-digit percentage rates. At the same time there were large deficits associated with the defense build-up and the Reagan tax cuts (Newhouse 2006, 1). Republicans were ideologically opposed to tax increases, even if the increases were for one of the nation’s most popular public programs (Oberlander 7). In order to contain the deficit, Congress tried to reform Medicare physician reimbursement, since it was growing so quickly. In 1989, Congress passed the Omnibus Budget and Reconciliation Act. This instituted two changes: it implemented a change in physician reimbursement, and it enacted a formula that would cap increases in spending on physician services ⁴ . Conservative Republican presidents, such as Ronald Reagan, joined congressional Democrats, who were in the majority, and recognized the need for cost containment, in adopting strong regulation of the federal payments for medical care in order to slow the rate of growth in expenditures for the program. With the fiscal pressures associated with the budget deficit, Democrats increased their support for a cost-containment policy (Oberlander 13).

1995 opened a new chapter for Medicare: it was the end of the consensus that had governed Medicare since being enacted into law, and began the period where there was a clashing visions of how Medicare and a national health insurance program should be operated. Some now believed that Medicare should transform from a health insurance program to a health insurance market. Republicans needed the savings collected form Medicare to balance the budget and allow their tax cuts to proceed. The Republicans used the Trust Fund Crisis, an argument that Medicare would run out of funding if something was not done, to sell Medicare reforms. Actuaries computed Medicare financing over 25 and 75 years, although this offered very little policy value given the enormous uncertainty of estimating so far in advance. In the calculations, the actuaries did not assume increases in payroll tax rates or the adoption of reforms, nor did they consider that no public program is fully financed so far in advance. This inaccurate data was used to politically sell the Trust Fund Crisis (Oberlander 10).

Republican Speaker of the House Newt Gingrich proposed drastic changes to the program. A debate with President Clinton and the Democrats ensued. Clinton vowed that he would veto any policy that would impair Medicare, and that he would not permit the Republican Party to kill the program. The Republican majority passed their Medicare Reform Bill in 1995, but President Clinton quickly vetoed the bill (Oberlander 11).

Two years later in 1997, public attention was no longer concentrated on the viability of Medicare and Clinton did not veto a Medicare Reform Bill, allowing the direction of Medicare policy to be reversed. As part of the Balanced Budget Act (BBA) of 1997, Congress and the Clinton Administration agreed to a major overhaul of Medicare by introducing competition choice and market dynamics into the program. Within the BBA provisions, there were a series of Medicare reforms and substantial cuts in the rate of growth in Medicare spending over the next decade (Oberlander 13, 14 ). Congress wanted to increase Medicare savings from $82 billion to $140 billion, but the Clinton Administration negotiated the savings down to $115 Billion (Lambrew Interview). The 1997 BBA omitted or altered several key provisions that had been the focus of the Democratic party objections, which included: a limit on Medicare spending that transformed the program’s budgetary entitlement status and a fail-safe provision that triggered automatic spending cuts in the program and the mechanism for this is the SGR. Republicans saw the BBA as "moving the ball a great deal down the field towards their goal of a competitive market (Oberlander 12)."

When the BBA came into effect in 1997, there were no noticeable flaws in the physician payment schedule (SGR). It was not until 1999 when problems started to be detected. The Clinton Administration talked about the next generation of payment policy, but the bipartisan Commission of Medicare failed to issue a report in 1998 because the issue of a prescription drug plan came into political focus. Politicians would not support changes to Medicare without the addition of a prescription drug plan. With the 1999 drug benefit debate, the SGR fell on the backburner (Lambrew Interview).

When the 2000 presidential election came around, Medicare was a first-order issue. The Republican Party campaigned touting the improved finances of the program due to surging revenues from the growing economy and the greater than expected success of the 1997 regulatory reforms in slowing down Medicare spending. This was the beginning of the drug benefit debate (Oberlander 16).

As 2003 approached, the transformation discussed during the 2000 Presidential election had still not materialized. At the same time, the effects of the 1997 Medicare reforms were the opposite of what observers had anticipated. "Managed care plans abandoned Medicare or raised premiums while cutting covered benefits; beneficiary enrollment in Medicare HMOs stalled; and the expected diverse menu of private insurance options for Medicare beneficiaries never developed (Oberlander 13)." In July 2003, there was an unexpected breakthrough in the Senate, leading to the enactment of a Medicare drug bill with bipartisan support; the House of Representatives quickly followed by passing their own bill. The two presented different policies. The House bill would have transformed Medicare from a defined benefit to a defined contribution system, and it would have forced the traditional Medicare program to compete with private insurers on the basis of price. Alternatively, the Senate bill envisioned only incremental changes to Medicare’s existing structure. By 2003, President Bush enacted the Medicare Prescription Drug, Improvement and Modernization Act (MMA). This was a prescription drug benefit added to Medicare (Oberlander 16, 17) ⁵ .

From 2000 until present, many Medicare issues have been discussed and debated within the Bush Administration, Congress and lobbying organizations. Some issues, particularly Medicare Part D, for prescription drug coverage, have received much media attention and policy action; however, among informed policy actors there is an acknowledgement that the Sustainable Growth Rate (SGR) is one of the most eminent and least covered/understood issues, and must be addressed immediately both publicly and politically.

Moderating spending for physician services has been a major, long-term challenge for Medicare. The SGR system was originally designed to regulate Medicare spending for physician services (Dorman S78). Today, it is widely acknowledged that this system disconnects payment from the cost of producing services (Harrington 136). The SGR sets spending targets and adjusts physician fees based on how closely actual spending aligns with specified targets. If growth in volume and intensity is higher than the set rate of increase, spending will exceed the SGR target. The spending target is determined by the GDP. Thus, if growth in volume and intensity exceeds the GDP, fee updates are reduced (GAO 5).

When first conceived in 1966, Medicare reimbursed physicians by paying a usual, customary, and reasonable fee (Newhouse 2006, 1). Nearly seventy-five percent of Part B, fee for services, of Medicare accounts for physician services. By the mid-1980s, Part B of Medicare became the single largest domestic program of the Federal government financed from general revenues. Part B was also growing at an annual rate of 11.6 percent (See Figure 1) (GAO 5). The growth in spending was driven by increases in services physicians provided to each beneficiary, or volume, and increases in complexity and costliness of those services, or intensity (GAO 5).

Figure 1 - (GAO "Medicare Physician Payments" 2004)

The mid-1980s was a time of large deficits due to Reagan’s tax cuts and defense buildup. In order to contain the deficit, Congress began working on reforming Medicare reimbursement for physicians (Newhouse 2006, 1). The Omnibus Reconciliation Act of 1989 (OBRA 1989) reformed the traditional fee-for-service physician payment system (GAO 3). Congress included two important measures in the OBRA 1989 in order to establish a national fee schedule and a system to project spending targets. First, the Act implemented a change in relative fees, the Resource-Based Relative Value Scale (RBRVS), which was intended to increase fees for evaluation and management services and decrease them for procedures (Newhouse 2006, 2). Second, it enacted an explicit formula to cap increases in spending on physician services. Subsequently, the physician fee schedule and a system of spending growth targets, known as MVPS, became effective in 1992, which was later replaced with the SGR system. This formula attempted to moderate growth in the volume and intensity of services provided to beneficiaries.

Annual spending growth during the 1990s was far lower than the preceding 10 years, which is shown in Figure 2. Initially, the approach of adding spending targets to fee limits in the OBRA proved successful since it was able to limit the spending growth rate. From 1992 until 1999, the growth in the volume and intensity of physician services per Medicare beneficiary decreased. The average annual growth rate was only 1.1 percent, far lower than the 11.6 percent growth rate during the 1980s (Dorman S78). The average annual increase in Medicare spending from 1992 until 1999 was about 1 percent, lower than the period 1985 to 1991, before the passage of OBRA, where average annual growth in Medicare spending was 7 percent (GAO 6). The OBRA was successful in slowing the rate of growth in volume and intensity of Medicare Physician Services per Benefitiary; thereby, helping to control total spending on physician services.

Figure 2 - (GAO "Medicare Physician Payments" 2004)

The Physician Payment Review Commission reported in 1996 that, under MVPS, physician fees would fall over time unless there were continual declines in the volume and intensity of services provided (GAO 8). Concerns regarding the MVPS spending target system, where fee cuts would potentially impair access, led to the development of the current SGR system. The SGR was established in the Balanced Budget Act of 1997 (BBA), under the Clinton Administration, and was implemented in 1999 (Dorman S78). Under the SGR, Congress linked the increase in spending for physician services to the rate of growth of real GDP. This was used as a measure of the Medicare program’s ability to pay (Newhouse 2006, 3). Congress stipulated limits on the size of fee cuts to be allowed in any given year: fees could not increase 3 percentage points more than the MEI, which is the measure of changes in input prices, nor decrease 7 percentage points more than the MEI. Any changes exceeding these limits were to be restored in the following year (Newhouse 2006, 3).

The SGR is one component of the formula for calculating physician reimbursement. To understand how the SGR determines the physician fee schedule, it is necessary to examine the other components of the formula. Physician payments are based on the SGR fee schedule that bills for around 7000 different services. The fee schedule has three components: Relative Value Units (RVUs), Geographic Practice Cost Indexes (GPCIs), and the Conversion factor, which includes the Medicare Economic Index (MEI), the SGR, and the update adjustment factor (Greenbook 2004, 2-85). Our study is concerned with the SGR because it determines whether physician fees will be reduced or increased.

RVUs account for differences in the level of skill and the difficulty of conducting a specific test or operation. For example, the relative value unit for inserting an intracoronary stent is higher than the RVU for a general check up because the level of skill and risk is higher for the first procedure. RVUs are the sum of physician work, practice expenses, and malpractice costs. GPCIs account for geographic variations in the costs of practicing medicine. The conversion factor includes: the MEI, which measures inflation in the inputs needed to produce physician services; the SGR, which is a target for Medicare spending growth; and, the update adjustment factor which modifies the update, and brings spending in line with the SGR target (Greenbook 2004, 2-89). The conversion factor is updated each year according to a formula, which serves to restrain overall spending for physician’s services.

The Center for Medicare and Medicaid Services (CMS) utilizes a statutory formula to estimate the rate of increase in allowable physician spending. This rate then establishes the spending target for the next year (Dorman S79, CMS 1). Below is an illustration of how the statutory formula is calculated. First, GPCIs are adjusted for the three RVU components, which are added together to produce an indexed RVU for the service of a specified locality (Greenbook 2004, 2-88). Second, each RVU is adjusted for geographical differences in input costs. Third, the sum of these adjusted RVUs are multiplied by the conversion factor to determine physician service fees (MedPac 2003; Interview with Duchovny).

Figure 3 - (CBO, Duchovny Interview)

Figure 4 - (MedPac "Geographic Cost Indexes" 2003)

In the example above, $36.79 is the conversion factor. The SGR target included in the conversion factor serves as a restraint on aggregate spending. The annual adjustment factor, which is a component of the conversion factor, modifies the formula to account form variations from the target (Greenbook 2004, 2-89).

It should be noted that the SGR system was not designed to cap expenditures for physician services, but when spending exceeded the targets, subsequent fee cuts were to be established (Dorman S78). The SGR did not directly control changes in growth or intensity, but hoped that physicians would act collectively to provide appropriate care and limit unnecessary growth in volume and intensity. If fee cuts were to be required, then an explicit signal to Congress and physicians would be provided, signifying that volume or intensity of service was increasing at a higher rate than permitted or estimated.

During the late 1990s, a healthy economy, as reflected by the GDP, gave physicians considerable fee increases. However, when the economy slowed by mid-2000, volume of physician services started to increase (Newhouse 2006, 3). Thus, in 2002, the formula indicated that fees needed to be cut by the maximum 4.8 percent to align with target spending ⁶ . Growth in the volume of services has continued to exceed growth in the economy. As a result, the formula has continued to indicate fee cuts of over 4 percent. With the passage of the Consolidated Appropriations Resolution of 2003, CMS determined that it was authorized to readjust the target-spending rate starting with1998 and 1999. Because SGR targets are cumulative measures, these corrections resulted in an average 1.4 percent increase in physician fees for services for 2003 (GAO 13).

President Bush signed into law the Medicare Prescription Drug Improvement and Modernization Act (MMA) in 2003 as a modification to the Medicare program. The part of the MMA that concerns physician reimbursement is that it specified a formula to calculate the SGR. This formula is based on four factors: (1) the estimated percentage change in fees for physicians’ services; (2) the estimated change in the average number of Medicare fee-for-service beneficiaries; (3) the estimated 10-year average annual growth in real gross domestic product (GDP) per capita; and, (4) the estimated change in expenditures due to changes in law or regulations (CMS 1) ⁷ . MMA averted additional fee reductions projected for 2004 and 2005 by specifying an update to physician fees of no less than 1.5 percent for 2004 and 2005 (CMS 5). Figure 5 shows how actual spending for physician services exceeded target-spending limits through 2004. These MMA increases replaced SGR fee reductions of 4.5 percent in 2004 and an estimated 3.6 percent in 2005. Because MMA did not make corresponding revisions to SGR’s spending targets, the SGR required reduced fees beginning in 2006, to offset the additional spending caused by MMA’s fee increases. In addition, recent growth in volume and intensity, which has been larger than SGR targets allow, will further compound the problem of excess spending that needs to be recouped (GAO 14). In 2006, fee cuts were overturned by Congress. Despite the plan to reduce fees, as of 2006, Congress has again decided to freeze payment cuts for anther year.

Figure 5 - (MedPac "Review of CMS’s preliminary estimate of the physician update for 2006" 2005)

Because the SGR is cumulative, the sum of all physician fees for a given year are compared to physician spending since 1996 to determine whether the total spending on physician fees exceeds, equals, or falls short of established targets. Thus, the cumulative nature of the SGR means that if spending exceeds targets, then future fee schedules will be reduced to offset both the accumulated excess and to slow future growth (Dorman S79).

Physician fee cuts projected by Medicare Trustees are required under SGR’s system of cumulative spending targets to make up for excess spending in earlier years. MMA essentially added to the excess spending by specifying minimum fee updates for 2004 and 2005 without resetting the spending targets for those years. Physician fee cuts were therefore postponed rather than avoided (GAO 15).

Since the enactment of Medicare in 1965, the program has been one of the most popular domestic policies in the United States. Medicare is perpetuation of ideology that we have a responsibility to care for those members of our society who are in need. We should do this because it is the right and moral thing to do. Treatment improves the general welfare, which is a right that the founders stated that they would promote in the Preamble to the Constitution. Medicare not only benefits those who directly receive care, but also all citizens of the United States. Health care coverage is a public good, so that when one person receives care, it benefits many. For example, if one person prone to getting sick easily is treated early, they are less likely to spread contagious diseases to other members of society. Additionally, it if the elderly are treated it can relieve the growing burden on relatives and friends who may struggle financially and physically to care for the elderly.

We also care about equity. Elderly individuals are most likely to get sick and to live on a fixed income. As a society we care about their ability to have access and to obtain proper and high quality health care. It is difficult for elderly individuals to get health care coverage, because they often do not work and so are not covered by their employers and private insurance can be prohibitively expensive because they do not want to take on high risk candidates, such as the elderly. As the Social Security Administration stated, they were afraid that "the social security system failed to protect against the greatest single cause of economic dependency in old age--the high cost of medical care (Corning Chapter 4 1)."

Figure 6 - (MedPAC report)

Since 1965 it has been a right of every American age 64 or older, regardless of race, geography, ethnicity, gender, or economic status, to obtain high quality health care because of this program. In 2065 Americans are still going to want to receive high quality health care as they age. Thus, if the Sustainable Growth Rate is not fixed, this "right" to access and care may no longer exist.

Medicare today is in a crisis. According to MedPAC’s (Medicare Payment Advisory Commission) 2006 report to the Congress,

Health Care spending has been rising much more rapidly than growth in national income for many decades, and all indications suggest that it will continue to do so in the future. Analysts attribute this general trend to the interaction between broad use of new medical technologies and health insurance coverage, which keeps patients from facing the full cost of health care services. The continuation of this trend, combined with the retirement of the baby boomers and Medicare’s new prescription drug benefit, will lead the Medicare program to require an unprecedented share of federal financing (MedPAC report 3).

As the baby boomers begin to enter into the Medicare Program, the costs are projected to rise exponentially. At the same time, Gross Domestic Product (GDP) is not growing fast enough to compensate for the increase in health spending; thus, either the amount of GDP spent on health care will have to increase or the amount spent on health care per person will have to fall. To maintain Medicare as it is currently structured, policy makers would have to direct an unprecedented share of our nation’s resources to the program. There are projections that federal program spending in Medicare could grow from less than 3 percent of GDP today to upwards of 8 percent by 2036 (MedPAC report 17).

Figure 7 - (MedPAC report)

The SGR is a flawed fee schedule for Medicare part B payment to physicians. The SGR formula yields an expenditure target based on four inputs: input costs (Medicare Economic Index MEI), Fee for Service (FFS) enrollment, new laws and regulations, and the GDP. The problem is that the SGR is trying to hold spending artificially low (CBO interview).

The Sustainable Growth Rate, or as many refer to it, the "Unsustainable Growth Rate," which draws costs and payments further and further apart, therefore decreasing physician payment and therefore income. This may prevent the "best and brightest" who are interested in medicine from entering the field or from entering primary care or internal medicine. These specialties are hit the hardest by the fee schedule cut. When a doctor completes their residency they have an average debt accumulation of $119,000 of debt (CNN); therefore, they need a competitive salary relative to their schooling so that they choose medicine as a career and not an alternative that will allow them to pay back their debt faster, or not leave them in debt after schooling. This is a concern to us, because it may prevent many elderly Americans from getting the quality care that they need. If this policy remains unchanged, it has dire consequences for both Medicare beneficiaries and for physicians.

The SGR is a flawed system for physician payments because payments are unrelated to costs. Instead of increasing the payments to physicians each year it is cutting payments even as practice costs and inflation are rising. In Figure 8, the chart shows that from 2001-2007 physician costs are up 18 percent while Medicare payments are down 5 percent. According to the American Medical Association (AMA),

Medicare rates have already fallen well below the government’s own conservative measure of inflation in practice costs. Further, the 2006 Medicare Trustees report is expected to indicate that physician payment rates will be reduced by 34% from 2007-2015, beginning with a 5% cut that will take effect January 1, 2007.

These payment cuts are coming at the same time as volume, as defined by number of services provided per person, is increasing at unprecedented levels while physician costs are skyrocketing. Additionally, Figure 9 shows that cuts are not affecting all aspects of Medicare equally, as payment cuts are far more severe for physicians than for Hospitals or Nursing homes.

Figure 8 - (AMA Handout)

Figure 9 - (AMA Handout)

With the cuts in payment, there is fear that physicians will choose to see patients that are privately insured rather than accept patients from Medicare. A MedPAC survey found that, "In 2005, 25 percent of Medicare patients looking for a new primary care physician had some problem finding one and that a growing number had a ‘big problem’." The survey concluded, "Some beneficiaries may be experiencing more difficulty accessing primary care physicians in recent years and to a greater degree than privately insured individuals." If Medicare beneficiaries cannot access physicians then Medicare is not fulfilling its promise. An AMA Member Connect survey (Figure 10) found that access has already deteriorated and as additional cuts are incurred it will continue to deteriorate. More than 8,000 physicians responded to the survey, of which 65 percent said more Medicare patients in their community were being treated in the emergency room rather than physicians’ offices and 60 percent said more patients are putting off needed care. If the 2007 payment cuts that are projected occur, 45 percent answered that they would either decrease or stop accepting new Medicare patients in 2007 (AMA Medicare physician payment: The facts).

Figure 10 - (AMA Handout: The Facts)

This access to care does not only affect Medicare beneficiaries since TRICARE, which provides health insurance for military families and retirees, ties its payment rates to Medicare’s. Many states Medicaid programs also tie payment rates to the flawed Medicare fee schedule. "Medicare fees averaged 83 percent of private insurer rates in 2004, up from 81 percent in 2003. Within a market area and for a given service, the difference between Medicare and private fees may vary substantially." ⁸ Even some private insurers use the Medicare fee schedule as a benchmark. As payment cuts continue, beneficiaries will have difficulty locating physicians who will accept their insurance.

As payments to physicians are cut, many physicians may change their behaviors to compensate for the lost income by increasing volume. Not only does this include physicians seeing fewer Medicare beneficiaries, but also there are expectations that this may also include early retirement, changing professions, and changing specialties. It is also affecting the viability of private practice . ⁹

As the baby boomers age and people continue to live longer, there will only be an increased need for physicians and medical services. If the physician payment schedule is not revised then there may be dire consequences for both physicians and beneficiaries. The time to revise the SGR is now; the longer we wait the larger the problem becomes.

The SGR is a specific yet complicated problem within Medicare. While it primarily affects physicians’ payment, it has broad reaching implications for Medicare beneficiaries in terms of access and quality of care. This is an issue that is important to Medicare beneficiaries, health care workers, the American general public, and political actors. Over time, this problem has and will continue to get worse. In this analysis we will examine the goals of an effective policy to remedy the situation caused by the SGR, the problems that exist because of it, the relevant policy actors and their stance on issues, policy actions that have been suggested as well as our own preferred solution. This analysis will propose both a short and long term solution for this problem, as we acknowledge that political circumstances will make it hard for any successful long term policy to be enacted prior to the 2006 congressional elections.

PROBLEMS

SGR Calculation, Incentives, Volume, Quality, Access, Malpractice/Risk, Political Environment

The Sustainable Growth Rate (SGR) is problematic because of the flawed calculations and the incentives that they create. The flawed calculations appear to save the government and taxpayers’ money, which would be beneficial, yet this cost containment mechanism does not adequately serve the needs of Medicare beneficiaries, physicians and the general public.

By implementing policy that contains costs and decreases physician payment annually, despite increases in the cost of treatment, creates a disincentive for physicians to treat Medicare patients. There are also other negative incentives created, most noticeably, an increase in volume, as measured by services per person. As reported by MedPAC,

Across all services volume (as a function of both service units and intensity) grew 6.2 percent per beneficiary. …per capita volume for imaging, test, and non-major procedures grew the most. From 2003 to 2004, the imaging volume growth rate, per beneficiary, was 11.0 percent. (MedPAC 81)

Figure 11 - (MedPAC Analysis of Health Care Information System 1999-2004, from CMS)

One of the primary goals of the SGR was to decrease volume. When policy makers created the SGR, it was believed that physicians could act collectively. If as a group, doctors provided more than the targeted number of services in a given year, then their payments per service were cut, regardless of what specialty or geographic region the volume increase occurred in. Since its inception, it has been shown that doctors do not respond to collective incentives. This is shown by the drastic increases in volume that ultimately results in lowering the payment for each service for the following year. In order to compensate for decreases in the fee per service, there is evidence that an incentive has been created to increase volume. This can be seen through an increase in imaging and other, often extraneous, tests. If they were acting collectively we would expect doctors to control volume to keep payments per service high.

Additionally, cuts in payment can lead to changes in patient selection making it more difficult for Medicare patients, for whom the physician is compensated at only 83% of private insurers (MedPAC 92, See Figure 12), to locate physicians. Michael D. Maves, MD, MBA states, as a result of a physician study, that "more than a third of physicians (38%) plan to decrease the number of new Medicare patients they accept; a majority of physicians (53%) will be less likely to participate in a Medicare Advantage plan and one-third of physicians (34%) plan to discontinue nursing home visits if payments are cut" (Maves 2).

Figure 12 - (MedPAC handout)

There is already a shortage in many physicians specialties, according to the AMA, which leads to further difficulty in access, made worse by lower compensation rates. With shortages in physician specialties already existing, the fee differentials created by the SGR calculation, and the formula as a whole, especially Relative Value Units (RVU), may be influencing the specialty decision of doctors. Thereby, worsening the shortage, especially in areas such as primary care and internal medicine, where there are fewer opportunities to increase volume and the services provided are considered to be of average difficulty and are therefore compensated at a lower rate than many specialists who can perform similar tasks (Duchovny Interview).

Medicare beneficiaries are often high-risk patients as a result of their age, the diseases that they contract and their body’s ability to heal. Over time, malpractice lawsuits have increased in quantity, as can be seen in Figure 13, and as a result, physicians have to pay a large malpractice insurance fee, which is accounted for in the RVU and the GPCI (MedPAC 94). This is raising Medicare costs even higher. Hopefully, a future policy will decrease the costs of malpractice insurance so that these exponentially growing costs no longer continue to grow at the same rate.

Figure 13 - (cbo.gov)

We are also concerned that the SGR does not take into account quality. It is important that Medicare beneficiaries receive equal care to those with private insurance, and there is no mechanism in place to ensure that this is achieved. It is necessary to enact some form of legislation to ensure that patients are receiving the correct tests and the correct treatment for their problems.

GOALS

Efficiency/Volume control, Equality-access, Quality, Sustainability, Popularity/acceptance

To develop an optimal policy solution to the SGR, we hope to address several key issues. First we hope to achieve efficiency. Efficiency in terms of medical care and treatment can be defined in many ways. For the purpose of this paper and analysis, following the recommendations of the CBO and the AMA (Dukovny and Marks Interview), we will define efficiency in terms of volume control. This means that it is efficient to have a patient treated with the fewest number of procedures or tests. It is most efficient to treat the patient correctly the first time they require treatment and for patients to have access to preventative care. We acknowledge that this could increase volume in the short run; however, it is often less expensive to treat conditions that are detected early. Preventative care will contain long run costs by minimizing the need for expensive and risky procedures and treatment.

Second, we want there to be equality of access. It is important that Medicare recipients have the same opportunity and level of success when trying to receive an appointment or change physicians as those individuals who have private insurance coverage. Third, we are concerned with quality of care, measured not by outcomes alone, but by the procedures used to treat patients and the protocol followed. Fourth, the solution to the problem must be sustainable, not only for the SGR, but of the inability of Medicare to control costs and volume. A system is needed that can sustain substantial increases in the number of beneficiaries, contain costs and be politically viable in the long run. Finally, this solution must have popular support from physicians and policy actors. As history shows us, ¹⁰ policy that is enacted without the support of the AMA, is not successful policy because the resistance it meets from this powerful lobby, is too great. Policy actors and the general public must also support changes because any policy may mean increases in cost over time and for a politician to vote affirmatively for any change presented, there must be support from a majority of his or her constituents.

POLICY ACTORS

There are several policy actors who have direct stakes in the revision of the SGR. Among the relevant and active policy participants are the AMA, MedPAC, and legislative representatives in Congress. The largest group of people to be affected by a revision in the long run will be Medicare recipients; however, this is an issue that the media has not covered broadly and therefore is escaping the attention of many Medicare beneficiaries who are concerned with other Medicare issues such as Part D, for prescription drugs. Additionally, the American taxpayer is greatly affected by the changes in Medicare policy, especially as a larger number of people in the US population will be over 64 than are currently over 64. As one can see from the graphs below, the population of people from ages 64 to 85+ accounted for approximately 30.5 million people whereas in 2050 they will account for 111 million people.

Figure 14 - (US Census Bureau, International Data Base)

Physician services are among the most important and fastest growing input in the Medicare system. Over time, the utilization of physician services has increased, thereby, increasing volume and increasing costs. In a world where resources are limited, this is a problem for all participants in Medicare. It is not feasible for costs to continue to grow unrestrained; however, it also not feasible for costs to be artificially constrained. For many years, the AMA has been lobbying Congress to stop the cost cutting mechanism of the SGR, and every year since 2004 Congress votes to suppress the physician pay decrease. The AMA would like to implement a long-term solution instead of short-term fixes.

First, the AMA would like to see a change in how the cost of eradicating the SGR is calculated. Currently, prescription drugs required by patients are included into the calculation of volume and show that physicians are more expensive than their fees actually are. They believe that by removing physician prescribed drugs from the calculation, it will make the cost of eradicating the SGR less prohibitive.

Between the SGR’s 1996 base year and 2004, the number of drugs included in the SGR pool rose from 363 to 445. Spending on physician administered drugs over the same time period rose from $1.8 billion to $8.6 billion, an increase of 358% per beneficiary compared to an increase of only 61% per beneficiary for actual physicians’ services. As a result, drugs have consumed an ever-increasing share of SGR dollars and have gone from 3.7% of the total in 1996 to 9.8% in 2004 (Maves 5).

This is seen by the CBO calculations in Figure 15.

Figure 15 - (CBO Handout)

Second, the AMA wants physician payment levels to increase to a level that reflects the changing costs of operating a practice. Ideally, the AMA would most prefer payments to be directly tied to the Medicare Economic Index (MEI) as measured by the "true" cost of practicing medicine, which is calculated by CMS. Another alternative that physicians are in favor of is an optional system of pay for performance. Pay for performance is a system where physicians are rewarded monetarily for high quality services. Episodes of care can be established to determine what constitutes high quality, looking both at the procedure and the outcome. Physicians then electronically submit information on form regarding the steps they took to treat a patient and the outcome. At the end of a period of time, usually a year, physicians who are determined to have provided high quality care will receive a monetary reward, usually as a percentage of their annual income. The monetary reward can also just be a fixed bonus. This system is advantageous because it creates incentives for physicians to treat the patient appropriately the first time without administering extraneous tests thereby limiting volume growth. Additionally, it encourages greater attention to continuing education so that the physician is performing at their optimal level. For physicians to accept pay for performance, it must be a replacement, not a policy to be added to the SGR. In our interview with Sandy Marks, representative from the AMA, it was made clear that the AMA is concerned with calculations of volume, because not all volume growth is bad. If there are more preventative treatments and early detection, then volume should increase. Often, preventative care detects problems that need to be treated, resulting in increased volume. This is good, because problems caught earlier in the process almost always are less expensive than problems caught when they are more advanced, especially when it requires an emergency room visit. Additionally, the more advanced the problem, the greater the need for a specialist, which is more expensive for a similar procedure (Duchovny Interview).

Third, doctors understand that Medicare needs to control costs if it is to remain a viable system. Yet, they argue that reimbursement for services must be equitable and fair for the level of risk they are assuming and the time they invest initially to develop the skills they have. One potential way to control costs would be to decrease the cost of malpractice or strengthen laws that could protect physicians. This would control volume, because doctors would not need to rule out every possibility if they are fairly certain that they know the correct diagnosis. If one were to control the cost of malpractice, then they would both decrease the cost of physician care by decreasing an input into a physician’s practice and by controlling volume by encouraging the elimination of extraneous testing.

The AMA is concerned with equity for their patients and themselves. They are concerned with creating a viable long run solution and ensuring that medicine does not become "cookbook" medicine, where a doctor cannot practice the "art" of medicine.

Well versed in the political arena, the AMA acknowledges that no long-term solution can be achieved before the 2006 elections, so they hope that physician fee cuts are held off for the 2007 congressional session, and then policy actors would work together to amend the SGR permanently.

Another policy actor is MedPAC, a non-partisan congressional organization. It was founded to examine the problems inherent in Medicare and the SGR. In the literature and reports published by MedPAC, they are concerned with efficiency as measured by volume. MedPAC wants to make certain that costs are contained, and the members of MedPAC believe that this can be achieved by controlling volume. MedPAC is also concerned with the quality and equity of care, in terms of access, process and outcome for Medicare recipients.

One question MedPAC struggles with is how to control volume in order to control costs. The government cannot cap the volume, meaning that only a specific number of services are allowed, because that would be unethical to deny treatment. Therefore, they need the government to create incentives that make physicians control volume themselves. The first step is to make sure that incentives are not based on collective incentives because as one can see with the SGR, physicians do not operate on collective incentives. MedPAC has suggested that one way to make physicians act collectively is by narrowing the group of physicians who affect each others payments based on volume either through separating specialty groups or geographical areas. One example would be to group all cardiologists together, this being a group that communicates frequently through an association and have similar services that they perform, and the smaller groups would have greater information regarding other physicians’ behavior and more incentive to control their own volume.

Like the AMA, MedPAC sees pay for performance as a way that could potentially control volume and costs. However, MedPAC believes that pay for performance can work within the context of the SGR as it stands now. They believe that implementing pay for performance will decrease volume, or at least eliminate bad growth, as explained by the AMA. This volume control would stop the annual increases causing the SGR formula to not reduce physician payment as much as is currently happening. Also, physicians would be compensated more than the SGR specifies because they would earn money as a result of providing quality care.

Since MedPAC believes that pay for performance may be a potential solution for controlling costs, the next necessary step is figuring out how to measure high quality care. The CMS is currently studying implementation for pay for performance. There are three studies underway. All three studies are scheduled to last three years. The first study, The Physician Group Practice Demonstration (PGPD) is for large practices of over 200 physicians (such as the Mayo Clinic). It is looking at how aligning the interests of a large group works to control for volume and quality. The second study is the MMA section 649 Demonstration. This study looks at small and medium sized practices for the same result. The third study is a voluntary program called the Physician Voluntary Reporting Program (PVRP). This voluntary program is to report various quality data along with payment claims through assigning G Codes (quality measures) to each service rendered. PVRP will allow CMS to better learn about quality and cost aspects for pay-for-performance. All three of these programs are to inform CMS about various aspects so that a pay-for-performance policy can be properly implemented.

Currently, pay for performance is being implemented in hospitals; they are testing mechanisms for collecting information that will be accessible to both rural and urban doctors. According to CMS, much progress is being made on the implementation of pay for performance and the three-year studies are emitting much valuable data regarding future progress.

Congress is an important policy actor in that the members of Congress have the power to alter or eradicate the SGR and to implement the changes necessary. More than anything, members of Congress do not have ideas for change, but they are able to evaluate possible changes with attention to what is best for themselves and their constituencies. There are several contentions regarding the SGR within Congress.

Congress recognizes the SGR and the rising cost of health insurance and medical coverage to be a problem that must be dealt with. Nevertheless, there are some political reasons why Congress may choose not to act on revising or eradicating the SGR.

First, the AMA is a powerful and wealthy lobby. There may be some incentive for Congress to allow the AMA to focus its lobbying efforts on the SGR because while they are still focused on this issue, they are unable to focus on other potential issues. Second, when a congressperson looks at the costs (See Figure 15 above) as calculated by the CBO, it appears extremely costly to change the SGR because of the way the CBO calculates changes in policy. In order to calculate how much it would cost to eradicate the SGR, the CBO calculates not only the expected increases in physician payment over time, but also includes the loss of the money that the government would have saved if the SGR had been reducing physician payment over time in accordance with the adjustment the SGR requires. The CBO calculates the costs this way because they are required to calculate costs from existing policies, not from a neutral vantage point. This method of calculation estimates that it would cost over $100 billion to fix the SGR (Hackbarth interview). It is politically undesirable to enact a policy that appears to be very costly and appears to be allocating more limited resources towards an already privileged group, physicians.

Additionally, the SGR is not currently a well-known issue, so it is easy for Congress to ignore the issue. Although, according to our research and the people who we interviewed, the SGR has the potential to harm patients, both in terms of equity of care, quality of services, and access to physician services, without the general public being made aware of the threat to their health and the health of the elderly citizens of this country, revision or elimination of the SGR is unpopular because the general public and their representatives look at the other ways in which the funds to change the SGR could be spend. These alternatives may include:

• Alternative uses for the money being paid to physicians
• Less expensive ways to control volume, while decreasing physician pay
• More politically popular alternative policy measures

Because of the political popularity of the alternative programs, and the relative obscurity of the SGR, it is often in Congress’ best interest to look towards short run solutions. In order for Congress to move away from short-term solutions to the SGR thereby, pushing the problem off to the next Congress or next Administration, the ramifications of the SGR for people over 64, and the harm that their poor health can have on society as a whole, must be recognized and internalized by society.

In the current Congress, changing this policy will be especially difficult because you cannot change the SGR without finding a way to fund the changes. This would most probably mean raising taxes, so that extra revenue is generated. The current Congress is extremely against taxation. As can be seen from the congressional response to Hurricane Katrina, when the public most likely would have supported an increase in taxes to help victims of Katrina through the Emergency Fund, the members of Congress did not raise taxes. Without an increase in taxation, ¹¹ it will be difficult to fund changes in the SGR unless there is another way to control costs without artificially deflating physician payment.

The Sustainable Growth Rate is accepted to be a problem for many reasons since it not only failed to control costs and monitor quality, but it also creates the wrong incentives for physicians. Although the fee schedule has been accepted as a problem, there is still uncertainty regarding what solution would be optimal and what solution can feasibly be passed through Congress and signed by the President. 2006 is an election year for congress and this means that the main focus of the 2006 congressional session will be focused on re-election and not passing any major, new, Medicare legislation. Thus, Medicare physician payment reform will most likely not be a hot topic during this term. In fact, most analysts believe that the best that can be hoped for is a freeze on cuts equivalent to what happened in 2004, 2005, and 2006. There is little prospect that anything more will be accomplished until the 2007 session (Hackbarth Interview, Marks Interview). All the policy suggestions assume that there will be a freeze on cuts in 2006 and the suggestions in this analysis are for the 2007 session.

Through this policy project we have identified seven problems with the SGR including the following: the SGR calculation, incentives for physicians, volume, quality, access to care for Medicare beneficiaries, risk because of malpractice insurance, and the political environment. There is no, one, optimal solution. All solutions have their downsides, but in choosing one we tried to find one that would benefit the most players while paying attention to the cost of the policy. Every policy will require compromise from all parties involved.

Many solutions have been suggested from various sources. Some of these solutions are stand alone whiles others can be accepted in a bundle. Policy possibilities have run the gamut from doing nothing and letting the cuts occur to tying the physician fee schedule directly to the MEI. Policy suggestions include the following possibilities:

• Leaving the SGR as it is and do nothing
• Repealing the SGR and keep payments tied to the MEI
• Removing physician administered drugs from the calculation of the SGR and then repealing the SGR
• Making Medicare run by its own independent board
• Regionalizing the SGR
• Dividing the SGR by specialty group
• Allowing for independent quality assessment with large groups (greater than 200 physicians). Similar to the CMS study.
• Developing a pay for performance policy within the framework of the SGR to use quality and efficiency measures to stay within the SGR baseline
• Developing a pay for performance policy to rid or adjust for the SGR
• Allowing malpractice reform to lower physician costs and Medicare reimbursements through minimizing risks to physicians.

In analyzing these different policies, we have come to understand the pros and cons of each solution. Our policy recommendation is a mix of the afore mentioned solutions. We hope to provide a solution that is long-term, equitable, and will be acceptable for all involved. Medicare beneficiaries want to have fair access to care that is efficient and of high quality. Physicians want fair reimbursement for the services that they perform, and policy makers want an alternative that is equitable and contains costs.

There are four recommendations that our policy group believes to be necessary and they must be enacted as a bundle. First, the SGR should be repealed and no, new cost containing mechanism should be enacted. Instead, incentives for physicians and patients should be created. Second, a pay for performance scheme should be created. Third, congress should act to reduce the cost of malpractice insurance by mandating specific quality recommendations and procedures to protect patients and physicians. Finally, an independent board should be established to monitor the quality and efficiency of the policies suggested above and makes recommendations for further alterations.

We recommend that the SGR get repealed in its entirety. Putting a band-aid over a wound might cover the problem temporarily, but it does not heal the wound. Putting a pay for performance program to work along side the SGR to control for volume and quality (essentially costs) as what CMS advocates, only works as a temporary fix. It covers up the wound, but it is a short-sited fix because it does not get to the underlying problem that the SGR is tied to measures that keep payments artificially low. Repealing the SGR will be a difficult task politically, although it is still necessary.

Allowing the SGR to be repealed and then tying payments directly to the MEI is flawed as well. Permitting this does not encourage physicians to control for volume nor does it place any standards on quality. It does not reward physicians for efficiency and quality. All of the major players have brought the idea of a pay for performance program to the table. The term pay for performance means something completely different to every player. CMS sees a pay for performance program working concurrently with the SGR. The AMA sees it as a program that is a benefit scheme to encourage physicians to control for volume and quality and do not see it as mandatory.

We as policy makers see pay for performance as a means to control volume while encouraging high quality care. A mechanism like pay for performance can be seen as either a positive benefit scheme or a negative punishment scheme. For example, one way that it can both protect patients and control costs is by implementing a "never ever" clause. This means that if a physician engages in behavior that should never occur, they will not be reimbursed at all for their services. For example, leaving a sponge in a patient’s leg is never acceptable, and will result in not being paid. This controls costs and creates incentives for physicians to act responsibly and pay attention to details. This appeases members of Congress and MedPAC because of its potential for cost containment and high quality patient care. Physicians would also be in favor of pay for performance because it allows them to be rewarded for their services without limiting their ability to care for patients because of reduced fees.

More specifically the structure for pay for performance will reward quality and efficiency by establishing a set of guidelines for high quality, efficient care. Physicians will have recommended procedures to follow for different ailments to encourage that each patient gets the correct treatment. Physicians will then be rewarded for following proper procedures through either an end of the year bonus or through an increase in payment as a percentage of each service rendered. There will be flexibility in terms of procedure, but physician participation will be mandatory. The pay for performance data will be monitored by CMS, who is already working to develop a system. Physician’s base payments will not be cut if they do not reach high quality measures, they will just not receive the bonuses attached to the program.

Physician base payment must represent the "true" cost of practicing medicine. Base payments cannot under or over-compensate physicians. Over-compensating base pay will discourage physicians from attempting to meet quality standards. Under-compensating base pay will not be popular among physicians and may contribute to access problems for Medicare beneficiaries.

The pay for performance program must be patient-centered and link evidence-based performance measures with financial incentives. If a physician follows the correct procedure then that physician should receive compensation that reflects the quality of care. This will also encourage volume control. If there are evidence-based performance measures than there will be a set protocol for what tests and procedures should be ordered. This will encourage physicians to more efficiently use tests such as imaging.

Volume growth can be good or bad. It is important to distinguish between the two when discussing cost and making recommendations because while we hope to contain unnecessary volume increases, we do not want to limit volume growth as a result of preventative care or an increase in the number of Medicare beneficiaries. Good volume growth benefits patients, and in the long run, will help to contain costs.

The highest performing physicians should be compensated the most. This direct financial incentive will encourage physicians to internalize their own performance. This policy will appease physicians because if they perform well then they will be compensated accordingly. Individual physicians will not be punished for the poor quality of their colleagues. Additionally, it will help patients in locating a high quality physician because pay for performance makes information on success and compliance available.

Quality measures need to focus on procedure and not solely on outcome. Even the highest performing physician cannot guarantee a positive outcome, thus fully judging quality based on end results would not be beneficial. Patients can react poorly to a given procedure even though it was performed correctly with the highest level of care. It is in the patient’s best interest to have a physician who is skilled at procedures and is not dissuaded from challenging patients for fear of not reaching quality standards. This leads to the third policy suggestion.

Congress should act to reduce the cost of malpractice insurance by mandating specific quality recommendations and procedures to protect patients and physicians. Malpractice lawsuits have increased exponentially in recent years. As a result, the cost of malpractice insurance has increased proportionately. Since physician reimbursement must compensate for the cost of practicing medicine, the cost of insurance has increased the input costs of practicing. These costs are reflected in the RVU and GPCI calculations. Malpractice insurance exists to protect and compensate patients from medical wrongdoing. With the implementation of pay for performance, standards will be established and there will be more accountability for physicians. They will have guidelines to assist them in diagnosis and treatment, eliminating frivolous testing and unnecessary procedures. Malpractice insurance will still be necessary; however, patient protection will be increased by pay for performance measures and in extreme cases, legal action will still be available.

Since a pay for performance program will put quality measures in place, it will be possible to better protect physicians from malpractice lawsuits by demonstrating standard episodes of care. Of course some malpractice reform must take place. Making it more difficult to file a malpractice lawsuit will lower malpractice insurance costs, which will lower input costs, and will therefore help to contain costs for the entire Medicare program. This would appease the physicians because it would lower their malpractice insurance costs. However, this may be difficult to pass in Congress because historically Democrats have been against malpractice reform. Never the less this may be a compromise the Democrats are willing to accept because every policy requires compromise. They would be gaining in terms of improving access for the elderly, who are otherwise unable to pay, which is politically advantageous. They would also be helping to insure the prolonged viability of the Medicare program, which in general Democrats support (Lambrew Interview).

The last part of the policy solution is the establishment of an independent Medicare board. An independent board should be established to monitor the quality and efficiency of the policies suggested above and makes recommendations for further alterations. The board should consist of members of MedPAC, CMS, representative members from the House and Senate, as well as physicians representing the myriad of physician specialty groups. The group will be responsible for developing standard episodes of care as well as developing a mechanism to measure efficiency. This board will control and monitor the pay for performance program. It is necessary that this board be independent from the influences of one special interest group. We neither want concern over costs to compromise quality care, nor do we want the physician lobby for increasing fees to be the dominating concern of the board. By making individuals who represent different interests work together, it may take longer to respond to changes in either direction; however, we believe that we will be able to strike a more equitable focus on both cost and quality of care. It is important that every stakeholder have fair representation in this board. The only way for the above mentioned policy solutions to pass is by allowing this board to take in all of the special interests concerns, through fair representation of all parties.

The board will serve as a way to insure that the transition from the SGR to a pay for performance policy is smooth. It will use the information learned from the CMS studies to better transition. In order to determine the efficiency of this system, the board will be able to use the data collected from the pay for performance policy to evaluate changes in volume as well as changes in volume and quality of care analyzing both the process and outcome. From this information the board will be able to modify incentives and standards annually. Since members of Congress, MedPAC, and CMS will be sitting on this board, there will be apt attention to changes in cost over time.

This paper has established that all relevant policy actors, Congress, AMA, and MedPAC, accept the Sustainable Growth Rate system does not provide the correct incentives to contain costs either through controlling for volume, or encouraging physicians to see Medicare beneficiaries through the extreme cuts to payments that it requires annually. The short-term fixes that have occurred in 2004, 2005, and 2006 cannot be turned into a long-term solution.

Our solution tries to take into account the problems that have been identified within the SGR as well as the concerns of all policy actors. The goals of each are fairly similar with the underlying desire to provide high quality care, ensure access, and allow for the long-term viability of the Medicare program.

The recommendation of this group is four-fold.

1. Repeal the Sustainable Growth Rate
   
2. Institute pay for performance payment program
   
3. Malpractice reform
   
4. Establish independent Medicare board
   

These actions in combination should work to solve the problems inherent within the SGR as well as pacify the relevant policy actors. As a group, we recognize this policy like any other will require compromises, some more difficult to make than others. Above all else, we believe that a solution needs to be made which maintains the viability of the Medicare program financially, politically, and widely among the general public so that Medicare beneficiaries will continue to receive high quality care.

[ You will need the free Adobe Acrobat Reader to view the PDF documents below.]

American Medical Association. "Costs versus Payments." March 2006.

American Medical Association. "Clinical Quality Improvement." March 2006.

American Medical Association. "Medicare Physician Payment: Q & A." March 2006.

American Medical Association. "Medicare Physician Payment: The Facts." March 2006.

American Medical Association. "Member Connect: Physicians’ reactions to the projected Medicare payment cuts." March 2006.

American Medical Association. "Payment Cuts by State." March 2006.

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Cady, Duane M. "Statement of the American Medical Association to the Subcommittee on Health Committee on Energy and Commerce U.S. House of Representatives." November 17, 2005.

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Dorman, Todd. "Unsustainable Growth Rate: Physician Perspective." Critical Care Medicine. Vol. 34, No. 3. March 2006.

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1. Labor Unions in the United States were against the formation of a public health insurance program, because in the early 20th century there was a strong distain for the system of socialism and to many labor union members and representatives, a public health insurance programs felt like a pull towards the socialist system. Additionally, as reported by Corning, Samuel Grompers was a strong opponent of Government health insurance because he though that it was “ threat to the prerogatives and influence of the labor movement, and he campaigned vigorously against it, despite a growing groundswell of support within his unions. (Corning Chapter 1 7). [ Back to text ]

2. (1) Expansion of the maternal and child health and public health programs included in the original Social Security Act; (2) Federal grants-in-aid for hospital construction; (3) grants to the States for direct medical care programs for two categories of citizens, those on public assistance rolls and those who were "medically indigent" (ordinarily self-sufficient but unable to meet the additional burden of paying for medical care--an estimated one-third of the population); (4) grants to the States to encourage (but not compel) the establishment of statewide health insurance programs financed either through general revenues or through social insurance taxes; and (5) Federal initiative to provide cash payments for disability due to illness. [ Back to text ]

3. Around 75 percent of Part B expenditures is for physician services (Newhouse 2006, 1). [ Back to text ]

4. The basis of the formula was that it “set the increase in unit price (fees) inversely proportional to the past increase in the quantity of services such that spending would be at a desired level (Newhouse 2006, 2) [ Back to text ]

5. The MMA was pushed hard by the Bush administration and some moderate Democrats who saw it as the best way to give seniors the drug benefit they desire, without breaking the bank or engineering a government take-over of the drug industry (Cohen). For more information on the MMA and other current Medicare policy, please refer to Appendix A. [ Back to text ]

6. The MEI increase was 2.2 percent, thus the 4.8 percent was the maximum cut allowed by the 7 percentage point limit. [ Back to text ]

7. For more information about calculating RVUs, GPCI, and the converstion factor, please refer to the 2004 Greenbook, p. 88-93 http://waysandmeans.house.gov/media/pdf/greenbook2003/SECTION2.pdf. Also, please consult 2006 MedPac 2006 Physician Update report http://www.medpac.gov/publications/congressional_reports/June05_ch9.pdf. [ Back to text ]

8. Report to Congress: Medicare Payment Policy, p.92. [ Back to text ]

9. "In the long run, all patients — especially baby boomers — may find it more difficult to find a physician. The congressionally-created Council of Graduate Medical Education is already predicting a shortage of 85,000 physicians by 2020, and multi-year cuts in Medicare are nearly certain to exacerbate this shortage by making medicine a less attractive career and encouraging retirements among the 35 percent of physicians who are 55 or older" (AMA, March 2006, 2) [ Back to text ]

10. See background [ Back to text ]

11. The issue of taxation is part of a larger problem within Medicare that younger generations pay for the generation that is currently receiving benefits. It is a pay as you go system, instead of a system with a surplus and one that has a direct benefit for the individual. We recognize this as an important problem within Medicare, but can unfortunately not address this problem within the scope of this paper. [ Back to text ]