The Sustainable Growth Rate formula used to determine physician payments in Medicare has died, and not a tear was shed at the funeral. Because the SGR, as it was known, linked the growth in physician payments to the rate of growth in the economy, physicians were facing a 21% cut in Medicare fees in April if Congress did not intervene.
Unsurprisingly, physicians hated the prospects of such a drastic fee cut, and Congress couldn’t stomach it either. In a rare victory for reason, Congress avoided passing yet another temporary “doc fix” to delay implementation of the formula—as it had done repeatedly over the years—and instead repealed the SGR entirely.
Congress basked in glory at the demise of the SGR and the American Medical Association and other physician organizations led the applause. Before the celebration gets out of hand, however, it is worth recognizing what comes next.
The truth is that the problems the SGR was trying to fix remain, and a new wave of policies is already taking aim at them. The SGR is dead, but the pressure on physicians is not.
A Mushrooming Volume of Services
The SGR was a response to a real problem: Medicare spending was growing more rapidly than the federal government thought it could afford. To better control spending, Congress invented the SGR formula. If the volume of physicians’ services grew more rapidly than the economy, fees to physicians would increase less rapidly so that total Medicare spending would be controlled, regardless of what happened to medical practice.
The problem was that the volume of services mushroomed so rapidly that the required fee reductions were too drastic to implement. Once that became apparent, death of the SGR was inevitable (if slow).
But eliminating the SGR does not make the underlying problem go away. There remains an almost limitless array of services that physicians can offer. The constraint on medical care is not what is technologically possible but what we can afford. Volume control is the continuing quest of payers.
The difficulty with controlling volume is that increased service use is neither entirely good nor bad. Computed tomography scans are appropriate for some head trauma cases, but unnecessary in others. Same for stent insertion, cesarean deliveries, back surgery, chemotherapy, and any of the other treatments performed every day. Study after study has shown that the use of advanced medical care is haphazard: great in some patients, but overused.
New Strategies for Cost Control
The SGR failed, in part, because it was not targeted at the volume problem. Lowering fees as volume increases provides no incentives to reduce use. Thus, volume kept rising.
Even before the SGR was officially repealed, 2 different strategies were moving in to take its place. The first involves shifting more of the costs of health care to individuals, by enrolling people in insurance plans with higher cost-sharing. This strategy is most prominent in employer-based insurance, but it carries over to the health insurance exchanges created under the Affordable Care Act (ACA). Insurance policies with deductibles in the thousands of dollars were virtually nonexistent a decade ago but account for more than 20% of the privately insured today.
High cost-sharing reduces spending because patients seek less care. Studies show that the savings are about 5% to 14%. The difficulty is that patients are not the best judge of what they need. When put in high cost-sharing plans, people reduce not only services that are of questionable value but also services that are clearly appropriate, such as medications for chronic disease.
This cost-control strategy will put physicians in a tight spot. It will be increasingly common for a primary care physician to be punished financially if her patients with diabetes are not meeting blood sugar and cholesterol goals, even while those patients report that they cannot afford the medication she prescribed. Physicians will be rightly upset, but there may not be much they can do.
The second strategy is to increase use of alternative payment mechanisms, meaning alternatives to fee-for-service. The idea is that physicians currently do more than is needed because they are paid to do more. Eliminate a pay-for-volume system and physicians will practice less expensively. Alternative payment models include bundled episode payments, medical home payments for primary care, and accountable care organizations.
The payment reform strategy was pioneered in the private sector—Blue Cross Blue Shield of Massachusetts has a very successful program—and the public sector has run with it. The ACA created a host of alternative payment method demonstration projects. The secretary of the Department of Health and Human Services recently announced a goal that 50% of Medicare fees be paid through an alternative payment model by 2018. In addition, the law that repealed the SGR sets up a new value-based physician payment program that will start in 2019.
The early evidence from physicians paid on an alternative basis is encouraging: rates of spending increase are reduced without adverse effects on patients. But it is still early days, and the programs will undoubtedly need to evolve.
The New Era
When the SGR was repealed, physicians may have thought they were going back to the good old days of Medicare, before the SGR was introduced. But that is not in the cards. To paraphrase the old expression that “war is too important to be left to the generals,” health care payers have concluded that medicine is too important to be left to physicians alone.
Physicians may not like living under alternative payment systems or being judged on outcomes for patients who avoid necessary care because of cost-sharing. But they will have to accept these new realities. Over time, they may even come to embrace them. After all, what is the alternative?
About the author: David M. Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the Department of Economics and Kennedy School of Government at Harvard University and a member of the Institute of Medicine. He served on the Council of Economic Advisers and the National Economic Council during the Clinton Administration and was senior health care advisor to Barack Obama’s presidential campaign. He also was involved in the debate over the Massachusetts health reform legislation discussed here and is a Commissioner on the state’s Health Policy Commission. He is the author of the recently published The Quality Cure, and Your Money or Your Life(2004). He tweets at @cutler_econ.
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