The long-awaited arrival of permanent SGR reform

Section 4503 of the Balanced Budget Act of 1997, enacted on Aug. 5, 1997, replaced the Medicare Volume Performance Standard (MVPS) with the sustainable growth rate (SGR) provision, a formulaic approach intended to restrain the growth of Medicare spending on physician services. The SGR formula incorporates medical inflation, the projected growth of per capita gross domestic product (GDP), projected growth in the number of Medicare beneficiaries, and changes in law or regulation.

In simple terms, the SGR is the way Medicare annually adjusts its Physician Fee Schedule (PFS), the reimbursement rates for services provided to Medicare beneficiaries.

The SGR requires Medicare each year to set a total budget for spending on physician services for the following year. If actual spending exceeds that budget, the Medicare conversion factor that is applied to more than 7,400 unique covered physician and therapy services in subsequent years is to be reduced so that over time, cumulative actual spending will not exceed cumulative budgeted (targeted) spending, with April 1, 1996, as the starting point for both.

In part due to the effective lobbying efforts of physicians, Congress has temporarily suspended application of the SGR by passing legislative overrides or “doc fixes” 17 times from 2003 to 2014. As a result, actual spending has exceeded budget every year during these years. Because the annual fee update must be adjusted not only for the prior year’s variance between budgeted and actual spending but also for the cumulative variance since 1996, the next proposed update would have reduced Medicare physician fees of 21.2 percent.

But following bipartisan and bicameral support of SGR reform proposals that emerged at the end of 2013 and again in 2014, on March 26 the House voted overwhelmingly—392-37, with support from 212 Republicans and 180 Democrats—to pass H.R. 2, The Medicare Access and CHIP Reauthorization Act of 2015.

As is common with legislation that concerns Medicare spending, H.R. 2 is a complex bill loaded with numerous program extensions and budgetary offsets. Most saliently, it prevents the imminent 21.2 percent reduction to the PFS, replacing it with five years of stable annual updates of 0.5 percent before a transition to a new payment methodology that will move Medicare away from the current largely volume-based system to one that rewards value.

Under the new system, each year during 2019 to 2024 Medicare will provide physicians a 5 percent bonus on the preceding year’s Medicare payments if certain percentages of the physician’s revenues are in Medicare alternative payment models (e.g., accountable care organizations), and then later, if higher percentages of the physician’s revenues are in Medicare or commercial ACOs.

Thus, the legislation could kill the proverbial two birds with one stone, replacing once and for all the unpopular SGR, while also supporting the Department of Health and Human Services’ push for fee for value in general and ACOs in particular. 

Just last night, the Senate passed its version of the bill, 98-2. The bill now moves to the President’s desk where, per a recent statement from the White House, President Barack Obama is expected to sign the permanent doc fix.

Ken Perez is vice president of healthcare policy at Omnicell, Inc.