Doc Fix: Time to Start Over

Posted by Nolan Miller on Feb 22, 2012

Filed Under (Health Care)

Last week, Congress struck a deal to head off a pending 27 percent decrease in what Medicare pays to physicians.  Well, head it off until the end of the year.  Then we’ll be right back where we started from, except the amount of the pay cut will be even larger.

So, what’s it all about?  It all goes back to an attempt in the Balanced Budget Act of 1997 to slow the rate of growth in what Medicare pays to physicians.   Each year, Medicare decides how much to increase the fees it pays to physicians.  In order to reduce the rate of growth in these fees, the 1997 BBA instituted something called the Sustainable Growth Rate formula to help dictate what those increases should be.  In hindsight, the term has turned out to be quite ironic, since the growth rate it proposes has turned out to be anything but sustainable.  In fact, Congress often overrides the changes dictated by the SGR in what has become called a “doc fix.”

The SGR formula is too complicated to discuss, but it’s basic aim is to reduce the rate of Medicare spending on physicians.  Each year, Medicare projects what it thinks it will cost to care for recipients based on past behavior, inflation, and population growth.  If actual spending turns out to be close to this projection, physicians are rewarded by an increase in fees the following year.  On the other hand, if actual spending is too much above the projection, the SGR formula kicks in and lowers fees across the board in an attempt, over time, to bring actual spending back in line with projections.

As usually happens, in the early years the formula worked fine.  Medical expenditures were in line with expectations and docs got a small increase in fees.  However, in 2002, the SGR formula imposed a 5 percent cut in physician fees that was actually implemented.  Then, in 2003, when the SGR formula once again dictated a fee reduction, Congress stepped in and prevented the fee cut from happening.  This was the first Doc Fix.  Along with the Doc Fix, Congress included language that said that the SGR formula in future years should continue to be calculated as if Congress had not imposed the Doc Fix.

In subsequent years, actual expenditure continued to be high relative to projections, and Congress continued to override the SGR formula.  Since past Doc Fixes were not taken into account, each year the size of the adjustment to physician fees needed to bring payments in line with the original SGR formula has grown until now it has reached a whopping 27%.  And, every year it becomes clearer that if Congress wasn’t going to let physician fees decrease by 5% or 10%, they’re certainly not going to let them decrease by 27% or 35%.

So, what should we do about the Doc Fix?  The original intent of the SGR was a good one: slow down the rate of growth of healthcare spending. But, it is clear that the SGR approach doesn’t work.  At this point, physicians rightfully assume that eventually Congress will pass another Doc Fix, and they will continue to get paid higher rates than the SGR would dictate.  Consequently, the SGR formula has no power to persuade physicians to rein in spending.

Thus, I think the first step to is to reset the SGR.  Instead of sticking to the original formula, which requires a thirty percent reduction in physician fees, in the short run we should re-base the formula, so that next year maintaining the SGR would require a much smaller decrease in fees — on the order of a few percentage points — if physicians do not reduce overall spending on their own. This would restore the original intent of the SGR, applying pressure on providers to reduce overall spending.

Next, we need to rethink the way we approach the whole problem.  Even if Congress had the courage to enforce the payment reductions imposed by the SGR, the approach would still be fundamentally flawed because it creates a situation where it forces physicians to compete for an increasing share of an ever-shrinking pie.  If physicians know that the total amount of money available to physicians is fixed and they expect fees to be reduced as they are under the SGR, then a rational physician who wants to maintain income will have to respond by performing more procedures.  However, all physicians have this incentive, so we should expect all of them to deliver more services (some of which may not be as medically necessary), and this will force the SGR to lower physician fees even more.  The result is a vicious cycle that leads to more and more care being provided without substantially increasing patient outcomes.

While it is clear the SGR has to go, it is less clear what it should be replaced with.  However, the fundamental problem – that the SGR actually encourages more care – would be alleviated if we switched a greater share of provider compensation from payments for the quantity of services provided to payments for the quality of outcomes.