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Rebuilding the Medicare Update Formula

ASA supports reform and repeal of the Medicare sustainable growth rate (SGR) formula that has proven unworkable and unfair in limiting Medicare Part B expenditures. In its place, ASA favors the update mechanism previously recommended by the nonpartisan Medicare Payment Advisory Commission (MedPAC), by which reimbursement would be permitted to rise consistent with changes in the cost of delivery of care, for example, as measured by a Medicare Economic Index (MEI) or other payment system that accurately reflects increases in medical practice costs.

Recent pronouncements by the Medicare trustees confirm a bleak financial future for the program and confirm earlier projections that under the current SGR formula, physicians will face negative reimbursement adjustments averaging 5 percent per year well into the next decade. If a meltdown in Medicare beneficiary access to physician services is to be prevented, Congress must act to restructure or replace the flawed Medicare update formula.

For years Congress has been forced to intervene to stave off Medicare physician payment reductions mandated by the SGR. On July 15, 2008, H.R. 6331, the Medicare Improvements for Patients and Providers Act of 2008 became law, providing physicians with much-needed relief from SGR cuts. The legislation included a provision to replace a 10.1 percent cut that took affect July 1, 2008, with a 0.5 percent positive update through the end of 2008. Further, H.R. 6331 provides physicians with a 1.1 percent positive update in 2009 as opposed to a scheduled 15 percent cut. Congress must work to enact a permanent fix to the SGR formula and ensure that any change is fully funded.

Pending congressional repeal of the SGR formula, it is imperative that CMS correct certain existing features of the SGR formula which serve unfairly to penalize physicians for costs to the Medicare program unrelated to their services and to fairly account in target spending for all initiatives resulting in increased demand for physician services:

  • First, CMS has steadfastly declined to eliminate the cost of drugs from the SGR pool of “physician services,” notwithstanding the facts that drugs are not “services” and that CMS acknowledges its legal authority to remove them from the physician service pool. The effect of CMS’ inaction is to unfairly inflate the cost of physician services (with outpatient drug costs rising many times more rapidly than physician service costs), and thus ultimately to require physicians to absorb these costs in the context of decreased reimbursement.
  • Second, CMS has declined to include added physician services spending resulting from all national coverage decisions in the SGR target for physician spending — again requiring physicians to absorb the costs of these decisions in calculation of their annual updates under the Medicare Fee Schedule. CMS is required by law to calculate the impact of changes in law and regulations under the SGR, but to date, the agency has declined to acknowledge that many coverage changes constitute a “regulatory” change.
  • With respect to SGR target spending, CMS should account for increases that result both from legislation and also from coverage expansion for new procedures. All of these actions, directly or indirectly, will give rise to increased demand by beneficiaries for increased physician services and should be fully accounted for in the SGR target.

For further information, please contact Ronald Szabat, ASA Executive Vice President & General Counsel, or Manuel Bonilla, ASA Associate Director of Congressional and Political Affairs, at (202) 289-2222.

February 20, 2009