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Statement on Replacing the Sustainable Growth Rate (SGR) Methodology Used to Calculate the Update for Medicare Payments Under the Physician Fee Schedule

I am Albert Bothe, Jr., M.D., Executive Director, University of Chicago Faculty Practice Plan, Compliance Officer and Professor of Clinical Surgery, University of Chicago Medical School, and Medical Director, University of Chicago Health Plan. I am also a member of the Association of American Medical Colleges' (AAMC) Group on Faculty Practice Steering Committee and Chair of the Steering Committee's Subcommittee on Legislative and Regulatory Issues. The AAMC represents the nation's 125 accredited medical schools, nearly 400 major teaching hospitals and health systems, 91 professional and scientific societies, about 100,000 faculty members, and the nation's medical students and residents.

My comments today will focus on the need to replace the Sustainable Growth Rate (SGR) methodology used to calculate the update for Medicare payments under the Physician Fee Schedule ("physician payment update"). The AAMC appreciates the Council's interest in this issue of great importance to both Medicare providers and Medicare beneficiaries. The AAMC supports replacement of the SGR with a methodology that assures adequate payments and stable updates for physicians who participate in Medicare. Appropriate and stable physician payments will ensure that Medicare beneficiaries have access to the complex and specialized care provided by academic physicians.

The Role of Academic Physicians
Academic physicians play a unique, multifaceted role within the physician community, as well as within the larger healthcare system. As experts in their particular fields of medicine, academic physicians provide patients and referring physicians with cutting-edge clinical expertise. Academic physicians also educate and train the medical students, residents, and other health professionals who will become the next generation of caregivers. In addition, many academic physicians conduct clinical research that generates more effective, efficient, and compassionate healthcare for all Americans-including aging Americans.

Because of their clinical expertise, access to innovative technologies within teaching hospitals, and participation in clinical research, academic physicians frequently provide inpatient and outpatient care for patients-including Medicare beneficiaries-with complex, multiple, or acute health problems that can not be managed elsewhere in the community.

Working together with their teaching hospital partners, academic physicians are vital to the delivery of essential medical services to Medicare beneficiaries and other patients. Over three-quarters of AAMC's teaching hospital members (which account for just 6% of the nation's hospitals) deliver geriatric care (e.g., treatment for Parkinson's or Alzheimer's disease) and operate certified trauma centers in conjunction with academic physician partners.

In addition, faculty practices partner with AAMC's teaching hospital members to provide nearly 45% of the nation's hospital-based charity care. By comprising a significant segment of America's healthcare safety net, academic physicians and their teaching hospital partners assure healthcare access for the poor and underserved-including over 4.1 million Medicare beneficiaries who are dually eligible for Medicaid and those unable to pay for their care. In 1999, faculty practices provided an average of $12 million in charity care. According to Agency for Health Research and Quality (AHRQ) and AAMC analyses (using survey data collected by the Center for Studying Health System Change's Community Tracking Study Physician Survey), academic physicians spend more time providing charity care than physicians in all other settings. This is true both when time is measured in hours per month and as a percentage of total patient care time and medically related time.

Update Methodology (SGR)
The Balanced Budget Act of 1997 (BBA) established a formula to calculate the SGR- the "target growth rate" for Medicare spending on physician services-that would control overall Medicare spending while simultaneously accounting for changes in the cost of providing care. The AAMC is concerned that the SGR has not achieved an equitable balance between fiscal management of the Medicare program and the actual cost of caring for Medicare patients, including the cost of medical inflation. Various analyses have shown that, since implementation of the SGR, updates in physician payments have failed to rise in proportion to increases in input prices.

Additionally, as was the case this year, the SGR's link to the country's gross domestic product (GDP) is problematic and volatile. While payment updates in 2000 and 2001 were relatively large (5.4% and 4.5% respectively), the sudden economic downturn in 2002, helped drive a dramatic decline in the payment update. The minus 5.4% update for 2002 is not only a significant decline, but also contrasts sharply with the previous two years.

Since its March 2001 report, the Medicare Payment Advisory Commission (MedPAC) has consistently expressed similar concerns with the SGR and has called to replace the methodology. MedPAC has reiterated its concerns in its March 2002 report, criticizing the SGR for causing "large swings in updates from year to year that are unrelated to changes in the cost of furnishing physician services." The Commission recommends that Congress repeal the SGR and implement payment updates that are based on the projected change in input prices for the coming year, less an adjustment for overall growth in productivity.

The AAMC strongly endorses MedPAC's recommendation to eliminate the SGR methodology and supports a payment system that incorporates multi-factor productivity adjustments and a revised Medicare Economic Index (MEI) that reflects productivity offsets and costs such as increases in professional liability insurance premiums. The AAMC also supports a "default update" of MEI minus a 0.5% productivity adjustment which would eliminate the volatility associated with the current system.

The Impact of Stable and Adequate Physician Payments on Medicare Beneficiaries' Access to Care
Stable and adequate Medicare physician payments are critical to ensure that seniors have continued access to the professional services provided by academic physicians. Nearly one-sixth of all physicians providing Medicare services are academic physicians.

Medicare reimbursements to academic physicians total about $2.5 billion each year and represent up to one-third of faculty practice revenues. In light of the fact that faculty practice revenues, on average, represent about 35% of a medical school's total revenue, unstable Medicare payments could jeopardize beneficiary access to faculty professional services, as well as academic medicine's core missions of medical education, research, clinical services, and providing charity care.

Because faculty practices provide multispecialty and complex care for Medicare patients, the negative 5.4% payment update, when combined with recent changes in Relative Value Units (RVUs), will actually generate reductions in Medicare revenue that exceed negative 5.4%. A sample analysis of 24 faculty practices indicates that the overall Medicare revenue for these plans will decline by as much as 7.5%.

The table below illustrates the impact of the negative update and RVU changes on several Medicare-related clinical specialties. Note that while some specialties included in the analysis (but not listed below) will experience a less than 5.4% decline, no specialties will experience an increase in Medicare revenue under the 2002 payment schedule.

Since private payers often tie their reimbursement rates to those set by Medicare, reductions in Medicare payments will further increase the disparity between the costs of care and the rates at which payers reimburse for those costs. For example, one large faculty practice (nearly 900 physicians) anticipates a loss of $4.8 million in managed care reimbursement because the contracts are linked to the Medicare fee schedule. Note that this does not include Medicaid and Tricare, which would also be affected by cuts in the Medicare fee schedule.

The growing disparity between costs and reimbursement will make it increasingly difficult for medical schools and teaching hospitals to maintain their patient care, education, research, and community service missions. Because of their revenue losses, the practice described above is implementing a policy to limit appointments for indigent patients to no more than 10% of patient visits.

A Legislative Solution to the SGR Problem
Last fall, bipartisan, bicameral legislation, "The Medicare Physician Payment Fairness Act of 2001" (H.R. 3351/S. 1707), was introduced to provide short- and long-term relief from unstable Medicare physician payment updates. The bills provide short-term relief by reducing the cut to the Medicare physician payment update from minus 5.4% to minus 0.9% and long-term relief by directing MedPAC to develop a replacement for the SGR.

The AAMC strongly endorses these bills, and is pleased that a super majority in Congress has cosponsored the bill. The AAMC urges support for this legislation in order to ensure that the losses currently experienced by physicians are mitigated as quickly as possible.

In conclusion, Medicare beneficiaries rely on academic physicians and academic medical centers to provide high quality, innovative, and accessible healthcare. They also rely on academic physicians to develop the clinical advances and train the next generation of physicians that will assure high quality health care services and expertise for American seniors. Passage of H.R.3351/S. 1707 is a vital first step toward mitigating the losses currently experienced by all physicians. The AAMC looks forward to helping accomplish the second step-devising a long-term solution to replace the current SGR methodology and assure adequate and stable Medicare physician payment updates.