AAMC Summary and Analysis: Fixing the Medicare Fee Schedule Sustainable Growth Rate
Medicare's Sustainable Growth Rate (SGR) is a target rate
of growth in spending on physician services. Payment updates
depend on whether actual spending is above or below the target.
The Association of American Medical Colleges (AAMC), the American
Medical Association (AMA), national physician specialty societies,
and the Medicare Payment Advisory Commission (MedPAC) have
identified serious problems in the SGR system. The physician
community is recommending that the Congress fix these problems
either by:
- enacting legislation this year; or
- directing the Health Care Financing Administration (HCFA)
to fix the SGR through the regulatory process this fall.
The SGR applies only to physician services. Although Medicare
spending for physician services has stayed within these limits,
two factors-the Health Care Financing Administration's (HCFA)
failure to set the SGR correctly and flaws in the system's
design-will result in significant cuts in physician payments.
Indeed these cuts have already begun this year.
Four improvements must be included in either legislation
or regulation to fix the SGR:
- correct HCFA's projection errors and restore the $3 billion
SGR shortfall (as estimated by the AMA) due to these errors;
- enact all measures necessary to curtail volatility in
payment rates and avoid steep cuts in the future;
- increase the SGR to include physician costs due to adoption
of new technology; and
- require HCFA and MedPAC to provide advance information
and data on payment updates.
Each of these issues is described below:
Projection Errors
Two of the four factors that impact the SGR calculation are:
1) U.S. gross domestic product (GDP) growth; and 2) fee-for-service
enrollment growth. Because the target rate must be calculated
before the year begins, HCFA must project what GDP growth
will be and the number of new beneficiaries that will enroll
in the fee-for-service program, as opposed to the Medicare
managed care option. In 1997, HCFA wrote in a Notice of Proposed
Rule-making (NPRM) that the actual data for each year, once
available, might reveal errors in its estimates of as much
as 1%, or $400 million. HCFA also wrote that the differences
between its projections and actual data would be corrected
in future years. In fact, in just the first two years of the
SGR, errors in HCFA estimates have already shortchanged the
target by more than $3 billion.
To date, HCFA has not corrected its original SGR projection
errors. Compounding the problem, HCFA simultaneously projected
that Medicare managed care enrollment would increase 29% in
1999 despite the fact that many HMOs were abandoning Medicare
in 1999. The projected increase in managed care enrollment
served to decrease the anticipated utilization in the fee-for-service
program, upon which payment updates to the SGR are based.
This error led HCFA to project a negative SGR rate
for 1999.
Data now show that managed care enrollment has increased
only 11%, a fraction of HCFA's projection. This means that
physicians are caring for 1 million more patients in the
Medicare fee-for-service option than were forecast.
The combined 1998 and 1999 SGR errors are a serious problem.
The SGR is a cumulative (as opposed to annual) system, and
the cumulative SGR target is like a savings account for physician
services. HCFA's errors have left a $3 billion shortfall in
this account, which, if not restored, will either produce
unwarranted payment cuts or deficient payment increases. Congress
must act to assure that HCFA corrects the errors properly
and in a way that will assure the long-term integrity of the
SGR updates.
Physicians have faced a decade of payment cuts without a
decline in Medicare participation. Now, Congress must do its
part by insisting that payment updates be based on correct
SGR estimates.
Volatility of Updates
Further exacerbating the error problem, design flaws in the
SGR system will lead to extreme swings in payment rates. Updates
will alternate between steep increases and steep decreases,
with physicians virtually guaranteed periods of several consecutive
years with 5% payment cuts each year. It is inconceivable
that Congress intended to create such intense volatility in
Medicare payment rates, nor that Congress would condone such
steep annual cuts. The following measures must be enacted
to prevent the oscillation in updates and avoid disastrous
cuts:
- peg the range of possible updates to inflation by +/-
2%;
- synchronize the current mismatch in time periods into
a calendar year system; and
- reduce instability due to yearly GDP fluctuation by using
a 5-year average GDP growth.
Increase the Target above GDP to Allow for Appropriate Utilization
and Advances in Medical Technology
In addition to fixing the SGR, Congress also needs to increase
target growth to allow for appropriate utilization, as well
as innovations in medical technology and practice. The current
target limits annual growth in physician services to annual
GDP growth. Although recent GDP growth has been strong, history
shows that long-term growth in use of physician services will
exceed long-term GDP growth. A decline in GDP growth to normal
(or even negative) levels will not decrease health care needs.
At a minimum, the AAMC believes that the SGR should be increased
to GDP+2 percentage points. MedPAC's predecessor commission
had called for a one or two percentage point add-on to GDP
in the SGR, and the 1995 Republican budget plan set the SGR
at GDP+2. This add-on would allow a target level that is less
likely to constrain technological innovation than GDP alone.
The target should be increased to GDP+2 effective in 2003
unless MedPAC has recommended, and Congress has acted, on
different SGR modifications by then. Additional research
is needed to better quantify the effects of medical innovations
on utilization and costs. Physicians also face higher costs
as new diagnostic and therapeutic services are provided in
their offices rather than other facilities. In addition, MedPAC
analyses show that trends among Medicare's fee-for-service
enrollees (i.e., growing proportions of beneficiaries in older
vs. younger age groups) are likely to increase utilization.
Congress should direct the Agency for Healthcare Research
and Quality and MedPAC to study these issues, and ask that
MedPAC make recommendations to Congress by 2002 for increasing
target growth to allow for these costs.
Provide Timely Information on Forthcoming Payment Updates
The problems with the SGR system are made still worse by
the lack of timely, reliable information about payment updates.
The AAMC urges the Congress to require HCFA and MedPAC to
provide previews of forthcoming updates and share information
on quarterly expenditures and changes in projections, similar
to what was required prior to BBA enactment. Congress cannot
provide adequate oversight of the Medicare physician fee schedule
without these data, nor can it do this if HCFA continues to
ignore the BBA timelines.
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