V I E W P O I N T

Improving Practitioner Reimbursement Under Medicare

Since 1998, the Sustainable Growth Rate (SGR) formula has been used by Medicare to determine procedure fees for physicians and other practitioners under the Part B program. There is widespread agreement that this system is inadequate and needs to be replaced, but no major approach has yet gained enough support to persuade Congress to act on the issue. Support is building, however, for a number of proposed improvements, and Congress's desire to intervene in the rate setting process for Medicare practitioners will provide opportunities to pursue these proposals. It is crucial that measures to enhance cost-efficiency and quality be included in any restructuring of the payment system - to slow excess cost growth in the Medicare program, protect the economic security of seniors, and ensure that Medicare is purchasing the best services available.

Pressures to Change the Sustainable Growth Rate System

Established by the Balanced Budget Act of 1997, the SGR system was designed to control spending under Medicare Part B by creating expenditure targets that are intended to grow at a sustainable rate. From year to year, aggregate expenditure targets are increased by a formula that takes into account inflation in practice costs, changes in enrollment in fee-for-service Medicare, and changes in spending due to laws and regulations. The formula also includes an allowance for growth beyond these factors based on growth in per capita gross domestic product (GDP). On an annual basis, the Centers for Medicare and Medicaid Services (CMS) uses the SGR formula to update the Medicare Physician Fee Schedule. When expenditures have exceeded the targets set for prior years, the SGR requires that fees be adjusted downward to compensate. If spending is kept below the targets, fees are allowed to rise.

The formula does not, however, factor in increased expenditures resulting from the increase in the volume and intensity of services provided. It was hoped that the existence of a global target for growth would lead medical specialty societies and academic researchers to develop new ways to limit cost growth, but no such innovation has been implemented on the scale necessary to significantly slow spending throughout the program. Furthermore, the fee-for-service nature of the reimbursement policy, where practitioners are paid per procedure, incentivizes volume growth.

Since 2001, growth in services volume and intensity has contributed significantly to costs that exceeded targets. In 2002, practitioner fees were cut by 4.8 percent as a result of cost growth, and the SGR formula has called for annual cuts every year since. Congress has prevented all of these cuts, however, passing legislation to block reductions in 2003, 2005, 2006, and 2008.

While there is wide consensus that the SGR system needs to be replaced, no one proposal has gained enough support to win approval by Congress. Seeking viable proposals, Congress charged the Medicare Payment Advisory Commission (MedPAC) with generating alternative plans for revising the payment methodology. Early in 2007, MedPAC issued a report exploring approaches such as the use of split targets focused on regions, types of services, or medical specialties. In August 2007, the House passed the Children's Health and Medicare Protection (CHAMP) Act (H.R. 3162), which contains major revisions to the fee update mechanism that reflect some of these MedPAC proposals. Six separate target growth rates would be established by the bill for separate categories of services. One category of services, primary and preventive care, deemed particularly undervalued in the current system, would receive an initial 2.5 percent increase. Going forward, a separate formula would be employed for each category. To date, however, no bill to revamp the practitioner payment system has succeeded in both chambers of Congress.

Impact on Beneficiary Premiums

By law, beneficiaries are required to cover 25 percent of the costs of Part B services, through their deductible and the premiums set by CMS. In 2008, the Medicare trustees projected that the standard Part B premium would increase 31 percent, from $96.40 a month in 2009 to $126.40 a month in 2017. Similarly, the deductible is projected to increase by about 32 percent over the same period. The trustees noted that these projections are unrealistically low, however, since they were required to base their calculations on the assumption that current law would not change, and Congress was likely to incur substantial new costs by overriding the SGR again. In addition, they estimated that Medicare outpatient and prescription drug out-of-pocket costs will consume about 40 percent of the average Social Security benefit by 2030. The program should protect the economic security of seniors by employing cost-containment strategies that also enhance the quality of care.

Opportunities to Enhance Cost-Efficiency and Quality

A number of promising approaches to revising the Part B reimbursement system for practitioners have captured the attention of policy makers. Potential new policies to contain costs and enhance the quality of healthcare have arisen in recent Congressional legislation and reports by the Congressional Budget Office, MedPAC, and healthcare think tanks:

• Pay-for-performance/value-based purchasing. Medicare has begun to offer bonus payments to practitioners who report on approved quality measures under its Physician Quality Reporting Initiative. Effective quality measures can improve patient care by providing feedback to providers, and improved performance can be incentivized by tying bonus payments or financial sanctions to these measures. In linking payment to quality, value-based purchasing can play an important role in translating comparative effectiveness research and evidence-based guidelines into clinical practice.

• Incentivizing primary care and prevention services. There is mounting evidence that enhancing the role of primary care and prevention services improves outcomes and reduces costs. In particular, these services have proven important in providing optimal treatment for costly chronic care conditions. Ironically, the growing understanding of the value of these services has corresponded with an alarming trend in practitioners leaving primary care and persistent hesitation in funding preventive services. There is growing consensus that enhancing reimbursement for these services should be a priority in health system reform efforts.

• Reimburse for medical home services. The "medical home" model of care is designed to improve care coordination and facilitate the application of evidence-based clinical guidelines. In this model, a beneficiary would choose one outpatient physician to play a central role in coordinating care among all of the providers the person sees. This physician receives additional payment to compensate for the coordination work. The best versions of this model require 24-hour patient communication, rapid access, and the use of HIT for clinical decision support. This model holds promise in improving the continuity of care in fragmented service systems and in promoting patient adherence with treatment regimens. Supporting this model is also seen as one way of helping to ensure that there is an adequate supply of primary care practitioners.

• Authorize payment for geriatric assessments and coordination of care services. Medicare coverage of geriatric assessments and coordination of care for people with multiple chronic conditions (including dementia) by qualified practitioners will help ensure that beneficiaries have access to a full range of medical and social services appropriate to their care. Covering these services has the potential to improve the quality of outpatient care and reduce costly hospitalizations.

• Bundled payments for hospitals and outpatient providers. Rather than paying practitioners for the successful completion of an episode of care, the current fee-for-service payment system pays providers for each and every procedure a patient receives. Perversely, under this system, providers can do better financially if patients take longer to get well. Analysts have pointed to the example of patients leaving the hospital after cardiac care, treatment that requires intensive follow-up outpatient care. In these cases, hospitals actually make more money if a patient is readmitted, and outpatient providers also gain if a patient's recovery is drawn out. Fee-for-service reimbursement creates an incentive for practitioners to provide more services as opposed to the most appropriate and cost-effective services. A bundled payment - one calculated to cover cost-efficient delivery of all of the procedures that are typically needed to treat an episode of illness - reverses this incentive. Bridging the hospital and outpatient settings and paying each provider on the basis of the successful provision of services throughout the episode of care has strong promise in reducing costs and improving quality.

NATIONAL COMMITTEE POSITION

While many approaches to payment reform enjoy the support of the powerful medical community, provider organizations have mounted well-financed lobbying efforts with the aim of ensuring that new quality and cost-efficiency requirements are not stringent. The National Committee will pursue efforts to improve Medicare by advocating for reimbursement policies that meet important criteria:

• Payment policies must be designed to avoid inordinate increases in beneficiary cost sharing.

• Payment policies should incentivize the provision of high quality, cost-efficient care. Quality measurement should be linked to bonuses/sanctions, and performance data should be shared with consumers. Quality measures should relate directly to improved patient care.

• Provider reimbursement should be sufficient to ensure beneficiary access to a full range of medical services. Inflation in the costs of medical services inputs should be taken into account.

Government Relations and Policy, December 2008

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