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Emerging Consensus on Medicare Physician Payment Reform: A Golden Opportunity


Medicare is at the heart of two sharply partisan debates in Washington: the federal budget deficit and health care reform. But there are signs that on at least one important Medicare issue—physician payment reform—consensus is emerging.

Last month, Democratic and Republican leaders of the Senate Finance Committee and the House Ways and Means Committee released a discussion draft of a bill that outlines an approach that would reform the way that health care providers are paid by Medicare. This is just the latest indicator that agreement on important issue is within reach.

Today, Medicare physician fees are determined by a sustainable growth rate (SGR) formula, which adjusts the annual increase in fees based on the cumulative level of physician spending relative to the increase in the per-capita gross domestic product. For more than a decade, policymakers have called for repeal of the SGR, as the formula has mandated sharp cuts in Medicare physician fees that Congress has had to take action to avoid. These cuts raise concerns about maintaining beneficiaries’ access to care, they fail to address the underlying factors that drive Medicare spending growth, and they lack—and even detract from—incentives to improve quality, appropriateness, or coordination of care.

The new House proposal “would permanently repeal the SGR and reform Medicare’s fee-for-service payment system through greater focus on value over volume, and encourage participation in alternative payment models.” It would maintain the current base level of Medicare physician fees for 10 years, with additional payments based on performance on measures of quality, resource use, and clinical practice improvement. Performance payment would rise over time to at least 10 percent of total payment. And providers would receive a modest increase in their base fees after the initial 10-year period, with those participating in alternative payment models receiving a larger increase.

The high cost of repeal, however, has traditionally been a major impediment to eliminating the SGR. However, the projections of both overall and Medicare spending have decreased markedly this year. As a result, the Congressional Budget Office’s latest estimate is that it would cost $139 billion over 10 years to replace the SGR formula—just about half their estimate from a year before. This lower estimate provides greater opportunity to replace the existing payment formula with an approach that promotes high-quality and efficient health care.

With the potential cost of repeal dramatically reduced, momentum for change has been building. In late 2012 and early 2013, several prominent and diverse groups of policymakers, analysts, and stakeholders released broad sets of recommendations on reducing health spending growth by improving health system performance, all of which included repeal of the SGR and its replacement by payment systems that encourage and support high-value health care.

As noted, Congress seems to be moving toward consensus on this issue as well. In addition to the Finance Committee’s release, in July 2013, the House Energy and Commerce Committee unanimously passed the Medicare Patient Access and Quality Improvement Act of 2013, which would replace the SGR with new payment systems to be phased in over several years.

What’s striking about all of these proposals is the fact that there’s so much agreement among them. All of them would repeal the SGR; all would shift the basis of Medicare payment from a fee-for-service approach that rewards volume and intensity to one that emphasizes quality, effectiveness, and efficiency; and all would encourage provider participation in alternative payment models consistent with more coordinated care and improved outcomes. Of course, there are a number of details to be reconciled, but the proposals are close enough to make this achievable.

A more challenging issue is finding and agreeing on savings to offset the projected cost of replacing the sharp cuts in physician fees produced by the SGR formula with reasonable, performance-based payment that would preserve access to care for Medicare beneficiaries and improve the care they receive. But the experience of the past decade indicates that failing to deal with the SGR does not save money in the long run—and it wastes the opportunity to rationalize how Medicare spends almost $70 billion a year in physician payments.

In fact, the payment and delivery system reforms in these proposals have great potential for both savings and health care improvement. The Commonwealth Fund’s Commission on a High Performance Health System, for example, estimated that the broad payment reforms it recommended could produce Medicare savings that could more than offset the cost of repealing the SGR.1 If complementary policies were adopted by public and private payers, substantial savings could accrue not only to the federal government, but also to state and local governments, private employers, and households.2

The consensus is indeed emerging: A variety of major stakeholders and all the committees of jurisdiction have proposed compatible approaches that would both improve Medicare and provide a basis for broader payment and delivery system reform. In the end, aligning payment with system goals is the best and most reliable way to stabilize federal health spending and provide a basis for systemwide improvement. With Medicare spending of $600 billion in 2013—and total health spending of almost $3 trillion this year and more than $40 trillion over the next decade—we owe it to ourselves to see that it is well-spent.



1 D. Blumenthal, “Stabilizing and Strengthening Medicare in the Context of Broader Health Reform,” Testimony before the U.S. Senate Special Committee on Aging, hearing on “Strengthening Medicare for Today and Tomorrow—Controlling Costs and Improving Care,” Feb. 27, 2013; S. Guterman, M. A. Zezza, and C. Schoen, Paying for Value: Replacing Medicare’s Sustainable Growth Rate Formula with Incentives to Improve Care (New York: The Commonwealth Fund, March 2013).
2 Guterman, Zezza, and Schoen,
Paying for Value, 2013.

Publication Details



S. Guterman, Emerging Consensus on Medicare Physician Payment Reform: A Golden Opportunity, The Commonwealth Fund Blog, November 2013.