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House Panel Reviews Cut to Physician Payments

February 15, 2002 - At a Feb.14 hearing before the House Energy and Commerce Subcommittee on Health, testimony submitted for the record by the AAMC and other physician and allied health provider witnesses stated that Congress must address the short term and long term problems associated with the current payment methodology known as the sustainable growth rate (SGR) used to update Medicare physician payments. Explaining the various aspects of the methodology's flaws, the witnesses suggested that unstable payments place Medicare beneficiary access to care in jeopardy. The provider witnesses and the AAMC statement urged Congress to halt the losses and replace the existing formula to ensure that payments adequately account for changes in the cost of providing services.

The SGR's flaws came clearly into view "when the Centers for Medicare and Medicaid Services (CMS) announced that the 2002 update to the Medicare physician payment would be negative 5.4 percent," last November, stated the AAMC testimony. The various provider witnesses - including representatives from the American Medical Association (AMA), the College of Surgeons (CAS), the Medical Group Management Association (MGMA), and the American College of Nurse Practitioners (ACNP) - cited consequences that were already occurring as a result of the 5.4 percent reduction.

Dr. Ted Lewers, of the AMA, suggested that the cut could result in physicians and non-physician practioners discontinuing care for new Medicare patients; opting out of the Medicare program; moving from being a participating to a non-participating Medicare provider; balance-billing patients; laying off administrative staff; relocating to an area with a smaller Medicare patient population; discontinuing certain low payment/ high cost Medicare services; limiting or discontinuing charity care; retiring early; partial or complete career change; or postponing or discontinuing necessary investments in new technology.

Legislation supported by the AAMC and the physician and allied health community, "The Physician Payment Act of 2001" (H.R. 3351/ S. 1707), would ameliorate the 5.4 percent reduction, setting the 2002 cut to the Medicare physician payment to minus 0.9 percent. The legislation has over 300 cosponsors in the House and 71 cosponsors in the Senate. The provider groups urged immediate committee action to pass the legislation quickly. The legislation's sponsors, Subcommittee Chairman Michael Bilirakis (R-Fla.) and Ranking Minority Member Sherrod Brown (D-Ohio), reiterated their commitment to fixing the methodology, despite the associated costs. In addition to the bioterrorism-related construction funding, the administration requested $977 million for basic and applied research In highlighting the SGR methodology's flaws, the provider groups referred to the Medicare Payment Advisory Committee (MedPAC)'s review of the SGR methodology and the MedPAC view that the two goals of the SGR system - updating payments to account for changes in the cost of providing services while simultaneously controlling spending for physician services by basing updates on achieving an expenditure target - are incompatible.

While MedPAC was not in attendance at the hearing, it has recommended replacing the SGR methodology because it fails to account adequately for changes in the cost of providing services, such as an increase in the regulatory burden of Medicare or other programs, such as HIPAA. In its March 2001 report, MedPAC first recommended that Congress replace the SGR system with an annual update based on inflation costs in physicians' practice costs, less an adjustment for multifactor productivity. Such a change means no longer tying the formula to the change in the gross domestic product (GDP) and changing inaccuracies related to the Medical Inflation Index (MEI).

CMS Administrator Tom Scully, whose testimony reviewed the history of the formula and described how the formula works, stated that he thought MedPAC's recommendation was "overly generous." He recommended that Congress determine an appropriate rate of growth for physician service expenditures and base any fixes upon the rate of growth. William J. Scanlon, director of health care issues at the General Accounting Office (GAO), who also reviewed the history of the SGR and spending on physician services, added that better and more timely data on access, would help Congress determine whether physician payments are accurate.

Medicare payments for physician services are based upon a fee schedule, under which services are given relative weights that reflect resource requirements (physician work effort, practice expense and professional liability insurance). The weights are adjusted for geographic differences in practice costs and then multiplied by a dollar amount, or conversion factor (CF) to determine payments for each service. The Sustainable Growth Rate System (SGR) calls for an update to the conversion factor annually and ties updates to a target determined by growth in the national economy, as well as changes in the number of beneficiaries and increases in the costs of services.

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