3-Month SGR Fix Proposed

With the end of the year fast-approaching and the looming prospect of a 24 percent cut to Medicare physician payments on January 1, the House of Representatives has introduced a bill to delay the Sustainable Growth Rate (SGR) mechanism through the end of March.

A 3-month delay will buy some time for the relevant committees to continue working on a much-needed permanent fix, while still maintaining a deadline for them to do so. The Senate Finance and House Ways & Means Committees appear to be near agreement on how to reform provider payments, but have yet to figure out how the added costs will be offset. The newest estimates from Friday put the cost of a 10-year payment freeze at $116.5 billion, and presumably the Finance/Ways & Means reform would cost a little bit more than that.

The 3-month delay bill would include the regular health extenders and temporarily patches the SGR by providing physicians a 0.5 percent payment update from 2013 through March 31, 2014. It would also delay the Affordable Care Act's reductions to Medicaid Disproportionate-Share Hospital allotments for two years to 2016, and extend them one year further through 2023 (currently they end in 2022). Altogether, CBO projects that the temporary delays will cost around $8.7 billion, and thus require that much in offsets.

The fact that the bill provides a 0.5 percent payment update instead of the usual flat freeze is likely due to a quirk in the SGR formula, which makes a short-term 0.5 percent payment increase slightly cheaper than a freeze over 10 years because the increase would then require larger cuts going forward once the patch expires. Unless lawmakers are planning to actually let the SGR hit soon – and they're not – the fact that a payment increase is cheaper is just an apparition and will actually make a permanent fix slightly more expensive (and if the short-term increase sets expectations going forward, future payment costs could increase significantly). According to CBO, while a one-year SGR fix with a 0.5 percent update costs $900 million less than a freeze ($18.7 billion over ten years compared to $19.6 billion), a permanent increase with 0.5 percent updates would cost nearly $20 billion more than a freeze ($136.1 billion for 0.5 percent updates versus $116.5 billion for a freeze). 

The bill would offset the added costs over 10 years by:

• Extending the Medicaid DSH payment reductions through 2023 ($4.3 billion);
• Introducing site-neutral payments for certain services performed in Long-term Care Hospitals ($2.6 billion); and
• Shifting some of the savings from the sequester's Medicare cuts from Fiscal Year (FY) 2024 into FY 2023 ($2.1 billion).

Equalizing payments for the same service between different sites of service is positive step forward, and has great potential to be extended more broadly in line with multiple MedPAC recommendations. The extension of DSH payment reductions produces real savings compared to current law, but lawmakers should eventually make it permanent.

The third policy, "realigning the Medicare sequester for fiscal year 2023," however, is a pure timing shift and gimmick. The sequester relief deal extended the Medicare sequester through 2023, but part of its savings actually occur in FY 2024 (due to the technicalities of the sequester, the 2 percent Medicare cut that counts toward 2023 actually occurs from February 1, 2023 through January 31, 2024). This SGR bill would simply shift $2.1 billion of this cut that was set to occur in FY 2024, and thus outside the 10-year CBO scoring window, into FY 2023.  Instead of applying a 2 percent sequester for the full year, the bill would impose a cut in provider payments of 2.9 percent for the first six months of the year and a cut of 1.11 percent for the second six months of the year. This produces zero actual savings. Consequently, the legislation would increase the deficit by $1.8 billion ($2.1 billion minus the $0.3 net savings in the 10-year budget window). 

This gimmick also potentially reduces the amount of savings from further extensions of the Medicare sequester, as Congress may find it difficult to reinstate a sequester of 2 percent after having allowed it to decrease to 1.11 percent.

A short-term "doc fix" to buy time for a permanent replacement is positive step forward, but lawmakers should work to ensure temporary fixes do not make a permanent fix more difficult and avoid gimmicks in such a deal.