Physician Fee Schedule Formula Change Would Cost $176 Billion Over 10 Years

Legislation under consideration in the House of Representatives to change the current formula for how physicians are reimbursed by Medicare would increase federal direct spending by $176 billion from 2014 to 2023, according to the Congressional Budget Office (CBO). The “Medicare Patient Access and Quality Improvement Act of 2013” (HR 2810) would replace the existing Sustainable Growth Rate (SGR) formula with a new system of determining physician reimbursement rates. Under the existing SGR formula, Medicare payment rates for physicians would be cut by 24 percent starting January 1, 2014.

History of SGR

The Balanced Budget Act of 1997 (P.L. 105-133) authorized the use of the SGR to determine the rate at which Medicare would pay physicians for their services. As the CBO explains, “payment rates are based on a measure of the resources required to provide a given service (measured in relative value units or RVUs), adjusted to account for geographical differences in input prices, and translated into a dollar amount by applying a ‘conversion factor.’ The SGR formula determines the annual update to the conversion factor.”

The SGR was supposed to balance increases in health care costs with other economic factors, however, health care costs began to increase at higher than expected rates. If implemented annually, the SGR formula would have dramatically decreased Medicare payments to physicians—which may have led physicians to stop accepting Medicare patients. Congress recognized this problem, and has annually voted to postpone the SGR increase for more than a decade. Had cuts gone into effect on January 1, 2013, for example, physicians would have seen a drastic 27 percent cut in payments. Instead, Congress extended current physician payment rates through December 31, 2013.

HR 2820

The legislation under consideration by the House would repeal the SGR and replace it with a five-year period of stable payments, beginning in 2014 and ending in 2018, with annual adjustments for inflation of 0.5 percent. This time period would allow stakeholders to develop and test quality measures and clinical practice improvement activities. Beginning in 2019, physicians would participate in a Physician Quality Reporting System (PQRS), which would set provider benchmarks for excellence in health care. Providers who meet or exceed benchmarks could receive an additional positive update of 1 percent; underperforming physicians could lose 1 percent. Alternatively, physicians could opt-out of the fee-for-service program and choose to engage in alternative payment models (APMs), which could include patient-centered medical homes, specialty models, and bundles or episodes of care, among other possibilities.

CBO Analysis

The CBO noted that the legislation would eliminate the cuts in physician payment rates that will occur under current law and instead set updates to payment rates for services on the physician fee schedule at 0.5 percent a year. The CBO estimates those automatic updates would increase direct spending by $63.5 billion through 2018, relative to the level of spending that CBO projects based on the payment rates under current law.

CBO said it estimates that the balance of additional spending starting in 2019 depends on which payment model physicians choose. While physicians are likely to choose the payment option that maximizes their payments, “there is significant uncertainty about the alternative payment arrangements that would be offered, how rates would be set, how many models would be adopted, how many providers would participate, how beneficiaries would be assigned, and other issues.”

The House Committee on Energy and Commerce previously approved the legislation on August 1. It was referred for further consideration to the House Judiciary Committee Subcommittee on the Constitution and Social Justice on September 13, 2013.