Committee for a Responsible Federal Budget

SGR Bill a Good Start but More Can Be Done for Less

The Congressional Budget Office, on Friday, estimated that the Energy & Commerce Committee’s (E&C) bill to permanently replace the flawed Sustainable Growth Rate (SGR) formula is expected to cost $175.5 billion from 2014-2023, $36 billion higher than the cost of a permanent freeze in Medicare physician payments.

Congress must address the SGR by year’s end to avoid a 24 percent automatic cut in physician payments – and there has been increased interest this year in a permanent fix to take advantage of the unusually low costs in light of the recent slowdown in health care cost growth.

As we’ve said before, we are glad to see Congress working proactively to enact a long-term fix, rather than the usual temporary patch. Critically, the E&C bill seeks to use this opportunity to incentivize higher quality, more coordinated care through quality-measurement and the development of “alternative payment models,” and Congress has committed to find offsets for any SGR replacement. (You can read a full description of E&C’s proposal here).

Medicare's Payments to Physicians: Budgetary Impact of SGR Replacements (billions, per fiscal year)

  2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2023
Frozen Through 2023 $8.6 $13.4 $13 $12.7 $12.7 $13.8 $15 $15.8 $16.9 $17.2 $139.1
1% Annual Update $8.8 $14.3 $14.6 $14.9 $15.6 $17.6 $19.8 $21.8 $24.4 $25.9 $177.7
E&C Bill $9.0 $13.5 $13.5 $13.5 $14 $16.5 $19.5 $22.0 $25.5 $28.5 $175.5

Source: CBO

However, while the aims of the bill to encourage higher-quality care and desire to find offsets are commendable, the plan could be improved to do more to control long-term health spending and provide stronger incentives for providers to move away from fee-for-service (FFS) reimbursement. The administration, for example, has called for SGR reform at the cost of a pay freeze ($139 billion over 10 years). Proposals from the Simpson-Bowles Fiscal Commission and MedPAC were estimated to cost roughly 10 and 33 percent less, respectively, than a freeze.  And by extending penalties to all Medicare providers (not just physicians) who don’t join a more organized delivery model, the Bipartisan Policy Center’s SGR replacement is likely able to more than pay for itself. By comparison, the E&C bill costs 26 percent more than a freeze – including 66 percent more in 2023.

The relatively high expense in 2023 indicates that while costs are only moderately higher than those of a freeze this decade, costs could be substantially higher thereafter. Moreover, even if the costs of the E&C bill are offset, the more health care savings that are used in this process, the less we’ll have for much-needed debt-reduction.

The key features that sets these more cost-effective recommendations apart is that they rely more heavily on sticks, rather than predominantly on carrots, and rely less heavily on physicians to set their own payment rates. MedPAC’s proposal, for instance, would actually reduce physician payments for services other than primary care by about 3 percent annually for 3 years, while freezing primary care payments. BPC’s recommendation would reserve payment updates only for providers (including hospitals and post-acute facilities) who join or contract with an enhanced, enrollment-based version of Accountable Care Organizations (ACOs). And the Fiscal Commission would demand that an improved payment system save at least as much as a rebased SGR.

A recent report from the Moment of Truth Project and the National Coalition on Health Care, Achieving Real Savings through Better Care, which focuses on the potential of delivery and payment system reforms to control costs, can serve as a guide to both formulating an SGR replacement and offsets (and even more offset ideas can be found here). The report recommends “policymakers consider policy changes that create similar incentives encouraging coordinated care for all providers rather than just physicians … reimbursed through the physician fee schedule.” To move large numbers of providers away from the status quo of fee-for-service reimbursement, strong incentives, including penalties for lower quality, less coordinated care, will be needed. A bill could also benefit from a more precise definition of what will qualify as an “alternative payment model.”

By focusing on incentives to deliver higher-quality, higher-value care, the E&C reform proposal is an encouraging start. It includes important penalties for the substandard provision of care in addition to bonuses for high-quality care, but continuing efforts could draw lessons from other, more cost-effective approaches. But regardless of the form that a potential SGR replacement takes, Congress must soon turn its attention to the more contentious task of finding offsets.