Federal Panel Wants Reform of Medicare Pay Formula

The Medicare Payment Advisory Commission (MedPAC) again has urged Congress to fix the Medicare payment formula.

In testimony before the Subcommittee on Health, Energy, and Commerce, MedPAC Executive Director Mark E. Miller, Ph.D., told representatives to scrap the sustainable growth rate (SGR) component of the Medicare payment formula.

The SGR, is a projected rate of growth in Medicare expenditures calculated by taking into account medical inflation, projected growth in the domestic economy, projected growth in the number of beneficiaries in fee-for-service Medicare, and changes in law or regulation, among other factors. If actual expenditures exceed the SGr, as they have in the past several years, then the Centers for Medicare and Medicaid Services (CMS) is required to decrease doctor payments to offset the increase in volume for the next year.

APA, the American Medical Association, and MedPAC have repeatedly insisted that the SGR be scrapped and the payment formula be comprehensively revised.

“Medicare spending for physician services has been growing rapidly despite the restraint on fee increases since 2002,” Miller said.“ This rapid growth has created an ever-larger gap between target and actual spending. CMS estimates that by the end of 2006, actual spending will exceed allowed spending by more than $47 billion. To work off this excess... the SGR will call for annual updates of about negative 5 percent for nine consecutive years.”

Miller said the SGR is a national target but carries no incentive for individual physicians to control volume.

“The underlying assumption of an expenditure target approach, such as the SGR, is that [it] provides physicians a collective incentive to control the volume of services,” Miller told members of Congress.“ However, physicians do not respond to nationwide incentives. An efficient physician who reduces volume does not realize a proportional increase in payments. In fact, such a physician stands to lose twice, receiving lower income from both lower volume and the nationwide cut in fees. Not surprisingly, there is evidence that in such circumstances physicians have increased volume in response to fee cuts.

“Instead of relying on a formula, MedPAC recommends that updates should be considered each year to ensure that payments for physician services are adequate to maintain Medicare beneficiaries' access to care.”▪