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Medicare Physician Payment: It's Time for Real Reform


Medicare physician fees are scheduled to be reduced by 27.4 percent on January 1, unless Congress acts to override that reduction or eliminate the sustainable growth rate (SGR) mechanism that is used to determine the annual update. For nearly a decade, Congress has continued to "kick the can down the road" by temporarily overriding the physician fee cuts that were mandated by the SGR, rather than taking the difficult but necessary step of repealing and replacing the SGR.

In considering how to deal with Medicare physician payments, Congress faces a major dilemma:

  • Medicare spending is rising at a rate that threatens the program's continued ability to fulfill its mission and contributes the projected growth of federal spending; but
  • The SGR mechanism, which is intended to address that spending growth, produces annual reductions in physician fees that are equally difficult to accept, threatening to distort Medicare payment rates and hamper Medicare beneficiaries' access to care.

This dilemma arises from the underlying mismatch between the primary cause of rising Medicare spending, which is the volume and intensity of services provided, and the fact that the SGR can address rising spending only by reducing the fees that physicians receive for each service they provide.

Congress has been reluctant to let the increasingly larger cuts mandated by the SGR take effect, but has been equally reluctant to eliminate the mechanism that produces those cuts, for fear that it would cause an even steeper increase in Medicare spending. Indeed, the Congressional Budget Office (CBO) estimates that eliminating the SGR and replacing it even with a 10-year freeze in Medicare physician fees would cost upwards of $300 billion.

There are, however, strong arguments for replacing the SGR mechanism:

  • It reduces payment rates across-the-board—every service, every specialty, every geographic area—regardless of performance;
  • It maintains current incentives for each physician to increase the volume and intensity of services;
  • It does not address the undervaluation of primary care services in the physician fee schedule;
  • It has failed to control spending growth: in 2002, although physician fees were cut by 4.8 percent, physician spending per Medicare beneficiary rose by 5.2 percent, and from 2003 through 2005, although fees rose by only 1.4 to 1.5 percent each year, spending per beneficiary rose by almost 9 percent per year;
  • It has led to increasing gaps between Medicare and private payment rates;
  • It has undermined the credibility of the Medicare program with physicians; and
  • It does not provide incentives to improve the quality, appropriateness, or coordination of care.

To be sure, how much we pay physicians is a critically important issue. We currently spend 50 percent more of our economic resources on health care than any other country and, as the National Scorecard recently released by the Commonwealth Fund's Commission on a High Performance Health System indicates, we often don't receive care that is of concomitantly high quality. Further, there is increasing evidence that the high fees paid for physician services in the U.S. contribute significantly to the discrepancy between health spending in this country and the rest of the world. The large deficits the federal government is running, and is projected to run into the future, only underscore the need to address health spending now.

Yet to make the most appropriate decisions, it's critical to determine how to pay physicians—and other providers—so that the Medicare program gets the best care possible for its beneficiaries. And these issues do not just apply to Medicare: CBO analysis indicates that the major factor driving the long-term growth in federal health spending is rising health care costs per person, which applies throughout our system. High health care costs put pressure on state and local finances, inflate the costs of American businesses, and hinder households' efforts to stay afloat in the face of an economic downturn and rising health insurance premiums and out-of-pocket costs. We therefore must focus not only on federal health spending but also on the underlying cost of care—both public and private—throughout the health sector, or we risk dowsing the flames without really putting out the fire.

We get what we pay for in our health system: an emphasis on the volume of services and complex and high-cost procedures rather than patients' needs. We need to start paying for what we want by rewarding providers for more coordinated, effective, and efficient care. But it's hard to offer effective rewards for better care if the baseline is a 27 percent across-the-board cut in fees, which hits all physicians regardless of the appropriateness, effectiveness, or cost of the care they provide or its impact on the health of the patient.

What we need is more fundamental payment reform, including measures that:

  • Address the chronic underpayment for primary care services;
  • Establish accountable care organizations that focus on improving the quality and reducing the cost of patient care rather than producing more services; and
  • Encourage development of other innovations in payment, organization, and delivery that would move from fee-for-service payment to more comprehensive payment approaches, such as:
    • refining and expanding the patient-centered medical home and other models that enhance the role of primary care and encourage better coordination across providers and settings; and
    • bundled payments for acute and post-acute care episodes.

    The Affordable Care Act includes provisions that aim to achieve each of these goals, and the challenge falls to us to implement these reforms effectively to improve the performance of our health system.

    Merely offering alternative models of payment is not enough. We need to make sure that it is no longer rewarding to remain in an unfettered fee-for-service payment environment—and that alternative arrangements are sufficiently attractive. One approach would be to partially or fully exempt providers who participate in alternative models of health care organization, delivery, and financing from any payment cuts that are imposed as part of the response to the immediate need to reduce spending. At the same time, efforts must continue not just to cut fee-for-service payments but also to improve them, because it will take time to make the transition from the current system and because how we pay now will serve as the basis for what comes next.

    In changing how we pay for health care, we must recognize the diverse array of organizational models that make up the health care delivery system and the differences in the environments in which those organizations operate. To be successful, we must provide a variety of payment approaches that apply to different organizational structures, while creating requirements and rewards to help provider organizations evolve to meet the needs of their communities. This can be done by clarifying the outcomes we expect from the health system and aligning payments to reward the achievement of those outcomes, while remaining flexible about how they are to be achieved.

    The right incentives can encourage providers to work together, in formal organizations or in looser relationships, to take broader responsibility for the patients they treat and the resources they use—and to allow them to benefit from doing so. As organizational arrangements evolve, payment methods can be adjusted to encourage and reward increasing levels of accountability, with continuous development and improvement over time. But even over time, different payment approaches and organizational models may be required in different areas and different circumstances to accomplish the goals of health reform.

    This mix of reforms to how we pay, how our health system is organized, and how it delivers care is essential to address our burgeoning health care costs and improve the quality of that care over time. To accomplish this, we would repeal the SGR mechanism that has impeded attempts to rationalize Medicare payment; adjust payment rates to reflect the value of care and its contribution to better health and outcomes; develop, implement, and support alternative payment arrangements; and encourage movement away from unfettered fee-for-service. Immediate action is required, but that action must address both short-term needs and long-term goals, to produce better health, better care, and lower costs so access to affordable care is a reality for generations to come.

    Publication Details



    S. Guterman, Medicare Physician Payment: It's Time for Real Reform, The Commonwealth Fund Blog, November 2011.