Discussion Points: Fixing Medicare's Payment Updating System
Medicare's Sustainable Growth Rate (SGR) is a target rate
of growth in spending on physician services. Payment updates
depend on whether actual growth exceeds or falls short of
the target rate. The Medicare Payment Advisory Commission
(MedPAC) has identified serious problems in the SGR system
and recommends significant improvements.
The Association of American Medical Colleges, the American
Medical Association and the national medical specialty societies
share MedPAC's concerns. Improving the SGR is a critical component
of efforts to ensure that the 85% of Medicare beneficiaries
enrolled in fee-for-service Medicare continue to receive the
benefits to which they are entitled. Physicians are concerned
that current SGR growth limits are so stringent that they
will have a chilling effect on the adoption of technological
and clinical innovations in medical practice.
 Administration of the current SGR system is also a problem.
HCFA did not revise the estimates used in the 1998 SGR when
data proved them erroneous, nor will it correct 1999 SGR errors
absent a directive from Congress. These errors have shortchanged
1999 payments by about $645 million. Under the SGR, future
payment levels could be highly volatile and fall well behind
cost inflation. This projected volatility in future updates
follows a decade of previous Medicare payment reductions,
as physician payment levels fell 10% behind inflation in medical
practice costs from 1991-97. The graph illustrates how payments
could be affected for a typical Medicare service: transurethral
resection of the prostate (TURP).
How the SGR Works
- The four factors that go into setting the target rate
are: (1) inflation; (2) Medicare fee-for-service enrollment;
(3) real (inflation-adjusted) per capita growth in U.S.
Gross Domestic Product (GDP); and (4) changes in spending
resulting from law and regulation.
- The SGR system was established by the Balanced Budget
Act of 1997, replacing the previous Medicare Volume Performance
Standards. The SGR is cumulative, so cumulative actual spending
is compared to cumulative target spending. Payment updates
are determined by: (1) inflation in medical practice costs
and (2) whether actual spending exceeds or falls short of
the target amount. Updates will be reduced to the extent
that actual spending exceeds the target, and will be increased
if actual spending is below target.
- Inflation is measured by the Medicare Economic Index,
or MEI. The law limits the payment update in any year from
being greater than MEI +3% or lower than MEI -7%. With
MEI generally increasing about 2% per year, an update of
MEI -7% would be a payment cut of about 5%.
GDP: The Utilization Growth Standard in the SGR
- The purpose of the SGR is to control utilization growth
by tying growth in utilization to payment updates. The system
is designed to hold annual utilization growth at or below
annual GDP growth. Although real per capita GDP growth has
varied from +6% to -3% over the last two decades, average
growth has been about 1.6% per year. Average annual utilization
growth was 3-to-4 times higher than GDP growth from 1981-1996.
- Physician services are the only component of Medicare
that is held to a rate of growth no higher than GDP.
The Congressional Budget Office has projected that per beneficiary
growth rates for outpatient hospital services and home health
services will be more than double growth in physician services.
Growth rates for inpatient hospital services, skilled nursing
facilities, and managed care plans have been projected to
be 18% to 76% higher than physician services.
Needed Improvements in the SGR
First, HCFA should adjust the 1998 SGR to reflect data on
actual GDP growth, and immediately update the 1999 Medicare
payment schedule to reflect the corrected SGR. Second, as
recommended by MedPAC, it is important that Congress enact
legislation this year to implement four SGR improvements:
- The SGR should be increased to allow for the costs
physicians incur in learning about medical innovations and
integrating them into practice. A major reason that
utilization is projected to grow faster than GDP is technological
advances in medical practice. The SGR must allow for these
advances. In addition, as more diagnostic and therapeutic
alternatives are developed that can be provided in physician
offices instead of inpatient sites, the SGR should allow
for their additional practice costs. Finally, MedPAC analyses
have found that changes in the characteristics of enrollees
in fee-for-service Medicare (i.e., growing proportions of
beneficiaries in older vs. younger age groups) are likely
to increase their service utilization rates. The SGR should
reflect these trends.
- Problems due to the inadequacy of GDP alone as a utilization
growth standard are compounded by the failure to correct
errors in HCFA's SGR estimates. Despite acknowledging
errors in its SGR estimates and stating in published notices
that they would be fixed, HCFA did not revise the 1998 SGR
or 1999 update to correct its errors. Medicare physician
payments have been shortchanged by about $645 million in
1999, and the 1999 SGR errors will likely be of even greater
magnitude. SGR projection errors should be revised when
actual data become available.
- Congress should reinstate the payment preview reports
from HCFA and MedPAC that had been required under the previous
payment updating system but were eliminated by the Balanced
Budget Act. Without these reports, the payment schedule
is effectively running on cruise control, and there is no
mechanism for Congress to get the information it needs to
anticipate and respond to potentially serious problems with
payment updates.
- Changes are needed to stabilize payment updates to
avoid potential disruptions in patient care.
Legislation to Improve the SGR: Key Elements
The AAMC, the AMA and national medical specialty societies
representing surgery, primary care, and all major sectors
of medicine support the following specific SGR provisions
as a means of implementing the improvements recommended by
MedPAC:
The utilization growth standard should be increased to
GDP + 2 from the current GDP + 0.
- This is consistent with the original recommendations of
MedPAC's predecessor, the Physician Payment Review Commission,
calling for an add-on to GDP of one or two percentage points,
as well as the 1995 Republican budget plan, which included
GDP + 2. GDP +2 will allow for a level of growth that is
less likely to stifle technological innovation in medicine.
- As a long-term approach, Congress should direct the Agency
for Health Care Policy and Research (AHCPR) to study the
contributions of technological advances, site-of-service
changes, and trends in beneficiary characteristics to spending
growth, with a report to MedPAC. MedPAC could be asked to
review and address these issues in its subsequent report
to Congress.
The physician community agrees with MedPAC's recommendation
that Congress stabilize the SGR system by moving it to a calendar
year system. Further stabilization could be achieved by narrowing
the upper and lower limits on payment updates and changing
from annual to 5-year average GDP growth.
- The current mismatch in measurement periods for the SGR
(fiscal year), updates (calendar year), and actual spending
(April-March) is a major reason for the projected volatility
in updates. Use of annual GDP growth also contributes to
this instability, as economic growth can fluctuate considerably
from year to year-use of a 5-year rolling average would
smooth out this fluctuation. Any remaining volatility would
be constrained by narrowing the range of possible updates
to MEI ± 2%, instead of MEI + 3% to -7%. Otherwise,
updates significantly above or below MEI could force disparities
between actual and allowed spending, leading to oscillation
in payments.
- Because MEI is usually about 2%, the narrower limits also
mean that the lowest possible payment update under the SGR
would be a freeze at current levels instead of a steep single-year
payment reduction. While a freeze would mean that payments
were falling relative to inflation, such an update is likely
to be less disruptive to the Medicare program than rolling
back payment levels would be.
To make the SGR more accurate and allow for congressional
action on updates if needed, HCFA should be required to: correct
projection errors based on actual data; use GDP estimates
developed independently; and provide quarterly spending data
and previews of future updates.
- HCFA should be directed to retrospectively correct projection
errors in the 1998 and 1999 SGR, and to correct errors for
the 2000 SGR and subsequent years as actual data become
available.
- HCFA currently contracts for its own estimates of per
capita GDP growth. It should instead be directed to use
estimates from the Congressional Budget Office and U.S.
Census Bureau.
- HCFA should be required to provide quarterly spending
data and an estimate of the next year's payment update to
MedPAC, Congress, and physician organizations by April 15
each year. MedPAC could then review the data and the update
preview, and provide comments and any appropriate recommendations
to Congress by June 30.
Implementation of SGR improvements should be designed
to minimize potential effects on updates from atypical claims
processing procedures due to the Y2K problem.
- With enactment this year of provisions effective in 2000,
a gap would be created in allowed spending from the end
of the current measurement period to the start of the new
calendar year system in January 2000. As the Balanced Budget
Act did for the time lag between the Volume Performance
Standard and SGR systems, allowed spending should be set
equal to actual spending for this period.
- Such an approach to the gap period means that, if a "spike"
in actual spending occurs in the last part of 1999 due to
accelerated claims processing and submission as January
1, 2000 approaches, it could not lead actual to exceed allowed
spending, with a resulting reduction in payment updates.
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