Legislative Report: Another Temporary SGR Fix Is in the Wings

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The CMS Sustainable Growth Rate (SGR) is again the center of attention for the medical community. The State Children’s Health Insurance Program bill passed in December 2007 averted the last SGR-mandated cut by funding a 0.5% update for six months. We are, however, once again at the precipice of unprecedented, and arguably untenable, physician payment cuts. Without intervention, Medicare rates will go down 10.6% on July 1, 2008, and another 5% on January 1, 2009. The Medicare Trustee Report estimates that by 2016, the reductions will total 40%, if legislation is not enacted. Many in Congress want to tie any SGR alternative to a longer-term solution to fix the dire financial projections.
 
In 1992, the current fee-schedule approach used by Medicare replaced the prior system, which was based on physician charges. The current CMS schedule bases payments on measures of work needed to provide services, or RVUs. As originally drafted, the fee schedule was updated annually based on the Medical Economic Index and an adjustment factor, the Volume Performance Standard (VPS). In 1998, Congress replaced the VPS with a new mechanism, the SGR. The SGR was designed not only to control spending for physician services paid for under Part B of Medicare, but also to distribute risk. By aligning fee updates with spending, the SGR was to provide physicians with a collective incentive to control both the volume and intensity of physician services.
 
Current Methodology

Under the current methodology for compensation of physician services under Part B of Medicare, individual rates for the Medicare Physician Fee Schedule are derived from the product of the appropriate RVU and the conversion factor. The conversion factor is based on a complicated formula (for details, download PDF). The SGR is a key variable of the conversion factor. The specific purpose of the SGR is to bring actual expenditures in line with calculated targeted expenditures. A spending target for a given year is first established for all of Medicare Part B. This includes not only physician services, but additional items that are classed as incidental, such as laboratory testing, imaging services, and physician-administered drugs. The spending target for subsequent years is then adjusted up or down, depending on the difference between budgeted and realized expenditures for the previous years. Any deficit or surplus is also applied on a cumulative basis from year to year.
 
Especially for radiology, it is significant to note that rises in the rate and intensity of imaging, especially as they relate to self-referral, effectively cut reimbursement rates for all physicians who participate in Medicare.
 
After its initial introduction, there were annual SGR increases. In 2002, the conversion factor was reduced by 4.8 % due to the SGR formula. Since then, Congress has passed a series of stop-gap measures to address the SGR-mandated cuts. For example, the 2005 Deficit Reduction Act (DRA) averted a scheduled reduction. As radiologists are all too aware, the funding came from cuts in the imaging technical component. As a result, physician reimbursement rates under Medicare have essentially been flat since 2001. The series of legislative fixes funded the short-term avoidance of larger reductions, but did not address the cumulative deficit.
 
Many experts now consider the SGR concept to be inherently flawed. By including factors such as the gross domestic product and costs other than those directly related to professional services, the SGR creates inaccurate and insufficient reimbursement for physician services. The legislated concept of budget neutrality also requires any approval for reimbursement of new technology and techniques to be compensated for by cuts in other physician services. As Pam Kassing of the ACR Department of Economics and Health Policy explains, “Congress has overridden the use of the SGR formula for five years now, which is pretty much an admission that it is not a true reflection of how physician payments should be calculated, nor of actual costs to provide physician services.” The result is an unsustainable system, which is now under funded by as much as $150 billion.
 
At present, more than 90% of physicians participate in Medicare Part B. Indeed, some physicians argue that Medicare reimbursement is near the tipping point at which many providers, especially primary care, will consider opting out of the program. Sources considered neutral and credible by Congress