In May 2012, U.S. Representatives Allyson Schwartz and Joe Heck introduced a bipartisan bill aimed at eliminating Medicare’s Sustainable Growth Rate (SGR), the payment system component long criticized for the uneven results it has produced in setting physician payment rates under Medicare.¹  The bill, The Medicare Physician Payment Innovation Act of 2012, proposes to repeal the SGR and stabilize the current system by using funds saved from reduced military spending in Afghanistan and Iraq.²  If passed, the bill would provide an initial five-year period of stability for physician payment rates, and would also require the Centers for Medicare and Medicaid Services (CMS) to develop at least four alternatives to the existing payment system by October 2016.³ Though the costs of eliminating the SGR are estimated to exceed $300 billion over the course of a decade, the bill’s sponsors claim this amount would be fully offset with the saved military funds, and there is widespread agreement that the SGR is flawed.⁴ In recent testimony before the Senate Finance Committee, four former CMS Administrators acknowledged that volume-driven reimbursement cannot achieve better results or changes in behavior, agreeing that both the SGR and the entire fee-for-service (FFS) payment system must be replaced.⁵

The SGR was created by the Balanced Budget Act of 1997 due to concerns that Medicare’s fee schedule alone would be insufficient to contain spending increases related to physician services.⁶ The system was designed to control healthcare spending in the aggregate, but it was never expected to save significantly on costs. Accordingly, the SGR model is viewed as fundamentally flawed because it uses payment rate reductions as a means to control the growth of spending on physician services without addressing the increasing volume or complexity of those services.⁷ When the SGR was initially enacted, the temporarily slower growth rate of physicians’ costs was expected to continue, and for several years, physician payment rates under the SGR system either matched or exceeded the growth in costs.⁸  However, beginning in 2002, the growth in physician costs returned to its historically higher rate, and under the SGR formula, significant cuts in physician payment rates resulted.⁹ Since 2003, Congress has passed bills on a nearly annual basis to prevent the significant SGR cuts from taking effect, but it has never acted to amend the formula underlying the SGR or the spending targets against which the formula is applied.¹⁰  On February 17, 2012, Congress again passed legislation to prevent scheduled payment cuts of 27.4 percent from going into effect, but with the SGR still in place, a reduction of 32 percent is scheduled to take effect on January 1, 2013.¹¹ 

The bill itself acknowledges that Congress must first act to prevent the January 2013 cuts from going into effect, and further provides for physician payment rates to increase by an annual rate of 0.5 percent for four consecutive years.¹²  In addition, primary care services fees would increase by an annual rate of 2.5 percent from 2014 through 2017.¹³  The bill also requires CMS to test, evaluate, and produce at least four new options for care and payment systems. Physicians who have transitioned to one of the “CMS-approved health care delivery models” by 2018 may experience stabilized payment rates,¹⁴ while payments to physicians still practicing under the existing Medicare FFS payment system would start being reduced by two percent in 2019, with a one percent increased reduction for each year thereafter through 2022.¹⁵ Physicians who are determined to be incapable of switching to an approved FFS-alternative may be eligible for an exemption from these cuts, but in any event, “payments in the straight [FFS] model will be permanently frozen at the 2022 levels.”¹⁶

While this is certainly not the first legislative attempt to restructure the current Medicare SGR payment system, the bill is being touted as a critical step towards stabilizing Medicare in the short-term, and effectively transforming the system over the long-term.¹⁷ The American College of Physicians, the American College of Cardiology, the Society for Hospital Medicine, and the American Academy of Family Physicians have supported the legislation, the latter of which praised the bill for both improving the environment for physicians currently in practice and for demonstrating to medical students that primary care is fundamental to a healthcare system’s quality and efficiency.¹⁸ The American Medical Association has publicized its support as well, although President Dr. Peter Carmel expressed the group’s concerns over how the bill may negatively impact physicians unable to transition to a new system.¹⁹  However, Carmel indicated the group’s willingness to work with legislators on this issue.²⁰

With widespread provider support and bipartisan sponsorship, the bill may pose the best chance at reforming the existing volume-driven payment system into one that rewards value instead.  However, the bill must first gain Congressional approval, and the uncertain fate of the Patient Protection and Affordable Care Act and the 2012 elections are each likely to shape the political climate it faces.