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Pursuing a Permanent Payment Patch

By Emily Ethridge, CQ Staff

May 21, 2012 -- The medical industry is hoping this will be the year when Congress fixes, once and for all, the recurring problem of the formula that dictates how much Medicare reimburses physicians.

For almost a decade, Congress has overridden the reductions in payment rates dictated by the Sustainable Growth Rate, a 1997 formula designed to keep Medicare costs under control. But lawmakers have never come up with a way to handle the problem permanently. In the past few weeks, however, they have started to talk about possible solutions in a way they haven't before.

In the House, Pennsylvania Democrat Allyson Y. Schwartz and Nevada Republican Joe Heck introduced legislation to get rid of the SGR and begin a series of demonstration programs to develop new payment models that could replace it. "We stand on the precipice of being able to solve this problem once and for all," Heck says.

The Senate Finance Committee brought in four former Medicare chiefs on May 10 to brainstorm ideas for how to do away with the nagging payment-reimbursement issue. The top Republican on the panel, Utah's Orrin G. Hatch, said that despite the bipartisan support to repeal the formula, "a solution has eluded the Congress up to this particular point."

That can be blamed on two things. First, the Congressional Budget Office estimates the cost of repealing the formula at $316 billion over 10 years. Second—and this is where lawmakers are now focusing their attention—there is no consensus on how to replace the system.

The caution comes from remembering that the formula was put in place with the best of intentions. It was enacted as part of a balanced-budget proposal to help curb the growth rate of Medicare spending. The formula calls for automatic cuts in Medicare's reimbursement rates for providers when the growth rate of provider costs exceeds the growth rate of the economy.

Beginning in 2002, the formula has called for cuts. Congress allowed the first cuts to take place, but since then, lawmakers have given in to provider protests and blocked the reductions. Instead, they went for short-term payment patches known as the "doc fix." The current patch expires at the end of the year.

"What was intended by SGR was a good idea, but we blinked," said Oklahoma Republican Sen. Tom Coburn. "We tried the stick, and we don't have the guts to hold the stick."

Beyond Fee-for-Service

Lawmakers are again trying to figure out what could replace the formula. Many provider groups and experts agree that Medicare must replace the fee-for-service payment model, and that one system won't work for all types of physicians in all types of environments.

Finance Chairman Max Baucus asked the former Medicare directors to send him, by mid-June, short- and long-term suggestions on new ways to handle physician payments. The Montana Democrat said he felt that the consensus was to repeal the formula, put in place stable but temporary payment rates and then gradually move to new payment models.

That is the model promoted in the Schwartz-Heck legislation, which would set a five-year transition period during which physicians would get small rate increases and the Centers for Medicare and Medicaid Services would develop and test new payment models. By 2017, physicians could choose from at least four delivery and payment models identified by CMS.

One of those models could rely on bundled payments, a system suggested by Gail Wilensky, who directed Medicare from 1990 through 1992. Under that plan, Medicare would provide a single payment for a health incident rather than pay each care provider separately. That means doctors, hospitals and post-hospital treatment providers would all have an incentive to coordinate and provide the most efficient and best-quality care, with all sharing the potential savings.

Bruce Vladeck, who ran Medicare and Medicaid during the Clinton administration, warned that some bundled payment models wouldn't work in smaller communities with fewer providers and suggested looking at separate reimbursement systems in rural communities and those in urban areas.

Of course, there is still the matter of how to pay for any replacement. Schwartz and Heck's proposal would use the anticipated savings from winding down the wars in Iraq and Afghanistan to pay for the change. Although some Republicans have balked at that offset, the sponsors say it could win support in both parties.

If Congress continues with temporary fixes, however, instituting a replacement will only become harder. Every time it blocks the cuts, Congress increases the cost of getting rid of the formula, because Medicare savings have never been realized. That means that with every new fix, Congress must pay for the cost of the increased payment rates as well as make up for the missed savings and postponed rate reductions.

And whatever the ultimate solution is, it still needs to find savings within Medicare, the experts said.

"While the SGR system is flawed, some semblance of budgetary control ... needs to be returned," said Mark McClellan, who ran Medicare and Medicaid during the George W. Bush administration. "It's very clear at this point that we can't just do another patch."

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