MedPAC on Medicare Costs & Physicians' Fees

On Thursday, March 1, 2007, members of the Medicare Payment Advisory Commission (MedPAC) testified at the Subcommittee on Health, Committee on Energy & Commerce, of the U.S. House of Representatives. The testimony is reflected in MedPAC's publication, "Testimony: Assessing Alternatives to the Sustainable Growth Rate System" (PDF, 19 pages).

MedPAC advises Congress in a bi-partisan, multi-discipline, expert manner, on issues of Medicare spending. The mission of its 17 appointed members is described on MedPAC's home page:

The Medicare Payment Advisory Commission (MedPAC) is an independent federal body established by the Balanced Budget Act of 1997 (P.L. 105-33) to advise the U.S. Congress on issues affecting the Medicare program. The Commission's statutory mandate is quite broad: In addition to advising the Congress on payments to private health plans participating in Medicare and providers in Medicare's traditional fee-for-service program, MedPAC is also tasked with analyzing access to care, quality of care, and other issues affecting Medicare.

MedPAC seeks input from all sources, conducts studies, & reports twice annually to Congress on various Medicare program issues, as indicated by its list of publications (2000 to date) available online.

Presently, a priority issue for Medicare is the physician fee reimbursement formula. Medicare's spending for physicians' fees has increased (as indicated by the graph above). However, physicians assert that the fee allowances remain woefully insufficient, and that the expenditure limitations are not applied to all health care providers, just doctors.

The testimony by Glenn M. Hackbarth, J.D., Chairman of MedPAC, addressed this problem by explaining the system previously developed to address some costs, and then identifying the decision-point now faced by Congress.

He began by reviewing the "sustainable growth rate" (SGR) system under which Medicare has paid for physician services:

Medicare pays for physician services on a fee-for-service basis using a resource-based relative value scale. Each service is assigned a weight reflecting the resources needed to furnish it. Payment is determined by multiplying a service’s weight by a national physician payment rate, called the conversion factor.

Currently, as specified in statute, the annual update to the conversion factor is determined under the SGR, based on an expenditure target that is tied to growth in the gross domestic product (GDP). The SGR is widely considered to be flawed; it neither rewards physicians who restrain volume growth nor punishes those who prescribe unnecessary services. Some critics contend the SGR may actually stimulate volume growth. Other observers believe that, despite its flaws, the SGR has helped curb the increase in Medicare spending for physician services by alerting policymakers that spending is rising more rapidly than anticipated and constraining the ability of policymakers to increase fees.

Slowing the increase in Medicare outlays is important; indeed it is becoming urgent. Medicare’s rising costs, particularly when coupled with the projected growth in the number of beneficiaries, threaten to place a significant burden on taxpayers.

The Chairman identified MedPAC's charge from Congress regarding such "expenditure targets", and then described two alternatives:

The Deficit Reduction Act of 2005 (DRA) requires MedPAC to examine alternative mechanisms for establishing expenditure targets. We also considered ways to reconfigure the existing SGR to improve its performance. We have reviewed the pros and cons of the different alternatives and outlined two possible paths for the Congress to follow.

Significant disagreement exists within the Commission about the utility of expenditure targets. Moreover, the complexity of the issues makes it difficult to recommend any option with confidence. Absent careful development and significant investment, the risk that a formulaic expenditure target will fail and have unintended consequences is substantial.

Here are the two alternatives that the Commission offered to Congress:

• Repeal the SGR & develop an incentive system. -- "One path would repeal the SGR and not replace it with a new expenditure target. Instead, the Congress would accelerate development and adoption of approaches for improving incentives for physicians and other providers to furnish higher quality care at a lower cost. If it pursues this path, the Congress would need to make explicit decisions about how to update physician
  payments."
• Replace SGR with a new expenditure target system -- "A new expenditure target would not reduce the need, however, for a major investment in payment reform."

All Commissioners agreed that something must be done to improve Medicare's payment system:

[T]he Commission is united on this: Whether or not the Congress elects to retain some form of expenditure target, a major investment should be made in Medicare’s capability to develop, implement, and refine payment systems to change the inherent incentives in the fee-for-service system to reward quality and efficient use of resources while improving payment equity.

Payment system reform was the subject of separate testimony on March 1, 2007. See: "Testimony: Report to the Congress: Medicare Payment Policy" (PDF, 16 pages).

Payment is a crucial issue for physicians, for the Medicare system & its users, and therefore for Congress, according to the article "Medicare payment dilemma vexes Congress", by Larry Lipman, published by the Palm Beach Post (02/27/07).

Congress is facing a bleak choice this year: Cut payments to doctors and reduce Medicare beneficiaries' access to care, or let physician payments grow and raise beneficiaries' premiums and co-payments.

Lawmakers are looking for a third way out: revising Medicare's system of payment to doctors.

The Commission's suggestion for a new service payment system may be that third alternative.

This debate is conducted within a more pressing matter: President Bush's 2007-08 federal budget, which proposes cuts in Medicare programs. But the need for overall reform, not mere cuts in programs, is highlighted in "Bush's Proposed Health-Care Cuts Get Mixed Reviews --Some See Salvation, Others See Doom for Medicare and Medicaid", by Christopher Lee & Lori Montgomery, published February 11, 2007, in the Washington Post.

Such proposed budget cuts in Medicare are opposed by some of Pennsylvania's largest health care organizations, as reported in "Blue Cross warns of Medicare cuts", by Jerome L. Sherman, published February 28, 2007, in the Pittsburgh Post-Gazette.

Proposed cuts to a popular Medicare program would lead to sharp increases in costs for recipients, including many in Western Pennsylvania, Blue Cross and Blue Shield Association officials said yesterday.

Congress has already approved $13 billion in cuts for the Medicare Advantage program starting this year, and legislators are considering more reductions as they look to offset other spending priorities.

"Further cuts to the program would have absolutely disastrous consequences," said Alissa Fox, vice president of legislative and regulatory policy for the Blue Cross and Blue Shield Association. She warned of higher premiums, reduced benefits and fewer plans.

To follow this continuing debate, check the "Daily Reports" posted by the Kaiser Family Foundation, which focuses on American health issues.