At the end of 2011, physicians across the country were startled to read headlines that unless Congress took action, all physician fees under Medicare would be cut by over 25 percent. Some naturally concluded this was a by-product of the Affordable Care Act (a.k.a., “healthcare reform”) that Congress passed and the president signed in 2010. Others wondered if this was at all connected to the so-called “Super Committee” this fall, consisting of House and Senate members from both parties who attempted to iron out a package of $1.2 trillion in cuts to the federal budget.
In fact, it’s neither. Instead, it’s the result of a badly broken formula called the Medicare Sustainable Growth Rate (SGR).
The SGR became law as part of the Balanced Budget Act of 1997. The formula attempted to restrain the growth in healthcare costs by comparing the growth in cost per beneficiary under Medicare to the growth of the economy. If the growth of Medicare costs exceeded the growth of the economy, an automatic cut to physician fees across the board would bring the two in line.
This formula made some sense in the late 1990s, when the year to year growth of healthcare costs had begun to slow at the same time as the economy was booming. But in the decade that followed, as healthcare costs skyrocketed while the economy more or less remained flat before plunging into a recession, the flaw in the methodology became clear.
During that decade, Congress passed a number of extensions to prevent the SGR cut from taking place for that year and reimbursement rates remained the same. They usually did so without bothering to balance the budget impact by cutting the funding for other programs or creating new taxes equivalent to the amount of money Medicare would save if they allowed the cuts to go through. However, since they didn’t fix the underlying formula permanently, the size of the potential cut ballooned in size. By the end of 2011, it would be a 27.4 percent cut to all physician fees to satisfy the requirements of the SGR.
Many pushed Congress to permanently fix the SGR as part of the Affordable Care Act, but that did not make it into the final law over concerns of what it would cost. Beginning last year, Republican members of the House and Senate began insisting for the first time that any delay in implementing the SGR be fully “paid for”—that there be cuts or new revenue equivalent to the money they would save by allowing the cut to happen. This has made it much more difficult to reach an agreement to postpone the cut, and on multiple occasions has gone right up to the deadline of the previous extension without a deal in hand. At the time that we write this, Congress is again struggling with finding a package of cuts and new revenue that both sides will agree to in order to delay the SGR, as well as extend unemployment benefits and the payroll tax holiday that was instituted in 2010. In short, it’s political gridlock at its finest.
Bottom line: It’s neither healthcare reform, nor the budget “Super Committee” that is responsible for the ongoing threat to cut physician fees under Medicare. It’s a broken funding formula from the 1990s that with luck and lobbying will once again not be enforced in 2012.