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Who's Afraid of the Big, Bad Sustainable Growth Rate? | Commentary

With the year drawing to a close, lawmakers, lobbyists and everyone in between were once again scrambling to finish last-minute priorities, including the recently passed bipartisan budget deal. As part of the budget, lawmakers crafted a temporary fix to avoid a catastrophic 24 percent reduction in Medicare’s physician fees. Why was this necessary? The culprit is Medicare’s sustainable growth rate.

The SGR formula is designed to control Medicare spending by calculating target growth rates for physician reimbursements. If expenses in the previous year exceed the target, then reimbursement rates are reduced for the next year. Each year that rates were slated to fall, Congress’ annual “doc fix” has overridden the cuts and provided a small increase in physicians’ fees each year — ensuring that Medicare beneficiaries’ access to providers remains relatively strong. The budget deal was no different and simply kicked the can down the road.

This year was poised to be different. Rather than waiting until the last minute, a full SGR replacement option was proposed by late July. The proposal, from the Senate Finance and House Ways and Means committees, would have replaced the SGR with a 0.5 percent increase annually through 2019, at which point increases in physician fees would be tied to performance metrics.

More recently, the two committees passed their own versions of the SGR reform bill. The Senate bill holds rates flat through 2023, and the House bill provides an increase through 2016. Both bills include quality adjustments for future rates. Were these bills marked up before the government shutdown and before the Obamacare rollout, perhaps the permanent SGR fix would be further along.

The certainty from any of these bills for physicians (and by association, for Medicare beneficiaries) is immeasurable — more importantly, it would have removed a critical issue from year-after-year bargaining.

The bills were too little too late, and 2013 ended with another temporary “un-fix.” This shouldn’t be surprising. Reforming Medicare’s physician fee schedule isn’t as sexy as defunding Obamacare or finding someone to blame for the government shutdown. Moreover, with an ever tighter budget, and the cost of completely repealing the SGR coming in between $116.5 billion and $153.2 billion over 10 years, policymakers are understandably cautious about increasing spending. (This spending is illusory, however, because Congress would be overriding future payment cuts anyway.)

But there’s something that legislators are missing when it comes to fixing the SGR. The SGR is a political mechanism unrelated to economic reality and causes more problems with uncertainty than any benefits it creates in restraining Medicare spending. Fortunately, only traditional (fee-for-service, or FFS) Medicare relies on the SGR. The other half of the Medicare program is Medicare Advantage, which lets beneficiaries receive coverage through private plans. Insurers in MA don’t have to deal with the politics of the SGR because they establish their own fee schedules. (But MA plans are tangentially affected by SGR because their benchmark rates are partly determined by the SGR.)

One solution to the SGR debacle, then, is to expand MA by converting Medicare into premium support, requiring that FFS compete with MA plans. Payments would be determined through competitive bidding, ensuring that enrollees choose the most cost-effective plans. Because MA plans tend to bid lower than what FFS costs, MA plans would likely capture the majority of enrollment. As an ever-larger share of people enrolled in MA (because it is less expensive and because outcomes are significantly better for MA beneficiaries), the SGR would become less relevant. While some beneficiaries would remain in FFS, the SGR could become unnecessary if FFS rates were based on MA rates.

The question is how to get it done.

An SGR repeal bill should be separate from budget negotiations. There is bipartisan agreement that the SGR is a relic, which means less horse trading to get a permanent fix passed.

Premium support, on the other hand, will have to be a bargaining chip in the budget. Democrats will be wary of such a proposal, so Republicans must package it well. While naysayers might argue that premium support is dead in the water after the 2012 elections, high satisfaction rates and better outcomes in MA make it an easy political sell. And if private sector competition is good enough for Obamacare (and for Medicare Part D), why not for all of Medicare?

The advantage of premium support is that it kills several birds with one stone. The uncertainty of physician payment cuts becomes irrelevant, a larger share of the Medicare population is transitioned into higher-quality insurance coverage, and we spend less money on the Medicare program — as much as $275 billion less. What’s not to like?

Yevgeniy Feyman is a fellow at the Manhattan Institute’s Center for Medical Progress.

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