Committee for a Responsible Federal Budget
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The Basics of the SGR Replacement Bill

Apr 2, 2015 | Health Care

The Sustainable Growth Rate (SGR) formula returned yesterday with 21 percent cuts to Medicare physician payments, although the actual effect won't be felt for a few weeks because of Medicare's ability to withhold payments for a period of time. Lawmakers have come up with a solution that is expected to be voted on when the Senate returns from recess, but it would add about $500 billion to debt by 2035. 

The legislation replaces the large and blunt SGR-prescribed cuts with 0.5 percent payment increases for five years before freezing payment growth through 2024 alongside a new, consolidated quality incentive program for Medicare physicians, called the Merit-Based Incentive Payment System (MIPS). In a budget-neutral manner, the MIPS program would reward or penalized physicians based on quality, resource use, meaningful use of electronic health records, and clinical practice improvement activities. Simultaneously, the bill would also provide payment incentives for physicians to utilize alternative payment models (APMs), such as Accountable Care Organizations (ACOs), that reward quality of care over quantity of care delivered. From 2019-2024, physicians earning a significant share of their revenue from models that involve risk of financial losses and have quality measurement would get a 5 percent bonus payment each year. Over the long run, physicians in APMs would also receive annual updates of 0.75 percent while non-APM professionals receive 0.25 percent updates.

This new system is estimated to cost $175 billion through 2025 by the Congressional Budget Office, but lawmakers are choosing only to offset the $35 billion amount by which this policy exceeds the cost of a permanent payment freeze. There is at least some hope, though, that the reformed physician payment system can begin to slow costs and improve quality of care in Medicare.

In addition, the bill extends several "health extenders" that are often included with doc fixes. Most of the extensions run through 2017, but two policies -- the Qualified Individual (QI) program, which provides Medicare premium assistance for certain low-income beneficiaries, and Transitional Medical Assistance (TMA), which allows low-income workers whose income rises to temporarily keep Medicaid eligibility -- get permanent extensions. These extenders cost $19 billion through 2025 and are fully offset.

Finally, the bill includes a two-year reauthorization of the Children's Health Insurance Program (CHIP) at a cost of $7 billion and $8 billion of funding for Community Health Centers, the National Health Service Corps, and Teaching Hospital Centers, both of which are offset.

The bill, in total, includes $70 billion of savings to offset part of the $210 billion of gross costs. The main offsetting policies are:

  • Further Means-Test Medicare Premiums: Most Part B and D beneficiaries pay premiums equal to 25 percent (25.5 percent for Part D) of the per-person gross spending in each Part. However, since 2007, for single beneficiaries making more than $85,000 and couples making more than $170,000, higher premiums are charged ranging from 35 percent of per-person costs to 80 percent. The income thresholds, which normally grow with inflation, have been frozen since 2010, but after 2019 will "snap back" to levels as if they had been growing with inflation the entire time. Starting in 2018, the SGR bill would increase premiums for singles with incomes between $133,500 and $214,000 (and twice that much for couples) while eliminating the snapback by having the thresholds grow with inflation only from their 2019 level. This policy saves $35 billion over ten years, notably less than the President's budget proposal that saves $63 billion over the same window.
  • Medigap Coverage Restriction: The SGR bill would prohibit Medigap from covering the Part B deductible ($147 in 2015) for new beneficiaries enrolling in Medicare starting in 2020. This policy would save only half a billion dollars through 2025 by encouraging more appropriate utilization of care, but it would tend to grow over time as more beneficiaries become subject to the policy. The policy would also save a small amount of money for Medicare beneficiaries, on average, because they would now spend less on Medigap premiums (which are notoriously expensive). This is a variant on a policy from the President's budget to add a 30 percent surcharge to Part B premiums for beneficiaries with first-dollar Medigap coverage, although the President's version would save an order of magnitude more over ten years.
  • Limit on Post-Acute Care Providers Payment Increase: The main enduring provider savings comes from a policy that would limit payment increases to post-acute care (PAC) providers to 1 percent in 2018. Although somewhat broad-based, this policy is in the spirit of recommendations from the Medicare Payment Advisory Commission (MedPAC) to reduce PAC payments or slow payment increases. It saves $15 billion over ten years.
  • Adjustment to Hospital Inpatient Payment Rates: The "doc fix" included with the fiscal cliff law contained a reduction in inpatient hospital payments for 2014-2017 to compensate for documentation and coding changes at hospitals that had resulted in overpayments during 2010-2012. Once these reductions end, hospitals will receive a 3.2 percent bump in payments between 2017 and 2018. The SGR bill replaces this bump with gradual 0.5 percent bumps over six years. This produces mostly temporary savings but also very small permanent savings since the total increase would be 0.2 percent lower than previously scheduled. In total, this saves $15 billion over ten years, but little thereafter.
  • Medicaid DSH Cuts: Medicaid Disproportionate Share Hospital (DSH) payments, which compensate hospitals that serve a relatively low-income population for uncompensated care, were cut in the Affordable Care Act as coverage was expanded, but only temporarily. Several doc fixes have extended these cuts, and the SGR bill does as well for one year from 2024 to 2025 while reducing the cuts in earlier years. As a result, the policy costs $6 billion through 2020 but saves $4 billion in total through 2025.
  • Levy on Tax-Delinquent Medicare Providers: For Medicare providers with delinquent tax debt, the SGR bill would allow the Treasury Secretary to collect the debt by applying a 100 percent levy on payments, up from 30 percent before. This policy would raise $600 million of revenue.