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Cost of Overhauling Physician Payment System Substantial, Aides Say

By Drew Armstrong, CQ Staff

February 13, 2007 -- Lawmakers ready to overhaul the way Medicare pays physicians are starting to understand exactly how much it will cost to fix the sustainable growth rate, or SGR, a major priority for Congress later this year.

According to House and Senate aides and lobbyists, the cost of changing the formula ranges from $4.2 billion at the low end to as much as $252.2 billion for a top-to-bottom overhaul of the formula.

The aides' estimates on SGR costs came during a Tuesday session of the National Health Policy Conference. There, Sen. Max Baucus, D-Mont., laid out several health policy priorities for the year, giving particular mind to the State Children's Health Insurance Program (SCHIP). Lawmakers from both parties have said that reauthorizing the program will be a priority this year, in addition to dealing with physician payments.

On the physician payment issue, at least, they will have some help.

In early March, the Medicare Payment Advisory Commission (MedPAC) will issue a report to Congress with suggestions to change the SGR. Since 2001, the formula has mandated cuts to Medicare physician pay rates, handing lawmakers what often turns into a last-minute scramble to find dollars and postpone the cuts.

The MedPAC report will be the "kickoff" for debate, according to a House Democratic aide, offering lawmakers a number of policy proposals to consider.

Last year, as they have several times in the past, lawmakers passed a short-term patch to stave off the cuts. But in doing so, they left the 110th Congress with an even larger cut scheduled for the beginning of 2008. While MedPAC likely will offer some solutions, the House Democratic aide said the report was not a guaranteed cure-all.

"We're hoping that they have the magic bullet to help us get that," the aide said, but added, "I quite frankly doubt it's going to be all that magic."

The cost to change the formula completely would be substantial, and even avoiding the cuts for another year carries a heavy price tag. A scenario that would stop physician payment cuts for one year but not increase payment rates would cost $28 billion over 10 years. To freeze updates for the next 10 years would cost $170.8 billion, and even more if lawmakers inserted a clause to keep beneficiaries' share of premiums stable.

Two even more expensive options include offering a 1 percent payment update through 2017, or tying the payment rates to the Medicare Economic Index, which tracks the increasing cost of providing care. The 1 percent increase would cost $208.9 billion, while tying payment rates to the economic index would cost $252.2 billion. Under House Democrats' budget-minded "pay as you go" rules, it might be difficult to find that kind of money.

The SGR was initially designed by lawmakers as part of the 1997 Balanced Budget Act (PL 105-33) as a way of keeping Medicare's costs in line and restricting the growth of physician services by limiting payment increases. The formula relies on growth in the gross domestic product, or total amount of U.S. economic activity, to help establish a yearly target for growth in Medicare payments to doctors. When overall spending exceeds the target, payments must be reduced in following years to produce savings equal to the excess amount. After several early years of substantial payment growth, the formula's cost-control mechanisms kicked in and began mandating cuts to physician pay.

On top of tackling the physician payment issue, Democrats also will need to find money to reauthorize SCHIP, though the amount is not quite as large.

Baucus reiterated that it would take $15 billion in additional dollars over the next five years to maintain current levels of coverage. To enroll all eligible children—many of whom are not signed up for SCHIP—it would likely cost billions more. Baucus said the Senate Finance Committee will mark up an SCHIP bill later this spring.

The Bush administration proposed $5 billion dollars in additional SCHIP funds as part of its fiscal 2008 budget proposal, which Democrats say is not nearly enough. The administration proposal would end new eligibility for some of the relatively wealthier enrollees and all adults that are covered by the program, slowly decreasing its total number enrollees from 4.7 million to 4.3 million.

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