Committee for a Responsible Federal Budget

Energy and Commerce Dips Its Toe Into the SGR Pool

May 28, 2013 | Health Care

Today, the House Energy and Commerce Committee took a small step in the process to replace the Sustainable Growth Rate (SGR) formula -- Medicare's physician payment "system" -- with a more stable and efficient alternative by issuing draft legislation. Passed in 1997, the SGR formula is a backstop for Medicare spending which adjusts physician payments based on whether the program meets certain spending targets. However, those targets have consistently been missed for the past decade and the SGR's mandated cuts have grown to almost 25 percent for 2014. Temporary "doc fixes" have staved off cuts since 2003, which have only made them bigger over time, although the recent health care cost slowdown has reversed that trend slightly by requiring smaller cuts.

Permanently repealing the SGR and instead freezing physician payments is the "default" option to replacing the SGR, and CBO revised its estimate of such a policy down by about $100 billion this year, thus opening the door wider for a permanent fix. As it stands, a permanent freeze would cost roughly $140 billion over ten years (estimates of other replacement options are available here). While Energy and Commerce's draft legislation is silent on how to pay for their proposal, it takes the first step in replacing the SGR with a payment system that better takes into account quality metrics. The Committee is currently soliciting input on how to fill in some of the blanks of the policy, but broadly the measure would require the Secretary of Health and Human Services to develop a new payment system that better aligns payments away from the current quantity-driven system and towards a new model that encourages efficiency and quality. Other details, such as exactly when and how a transition to the new system would happen, still need to be filled in by members of the Committee. The Committee will have a hearing to discuss the legislation next Wednesday, June 5.

Although there are important details which still need to be worked out, the legislation is a good start and signals that Congress may finally be ready to address this long-standing budget dilemma. But the challenge, assuming the design of the new system will largely be left up to the HHS Secretary, will be the pay-fors. One way to make that factor easier would be to make the interim replacement schedule less costly than the standard payment freeze. This could involve targeted cuts or a broader small clawback of payments over the next few years. As for specific pay-fors, there are many health savings options to choose from. Since the SGR's original purpose -- however flawed the mechanism for achieving it was -- was to constrain unnecessary utilization, it may make sense to focus on replacement policies that do the same thing, whether through restraining federal spending on providers, beneficiaries, or both.

Overall, lawmakers should pass a fiscally responsible and permanent physician payment system this year. The moment has never been better to replace the SGR formula.