SGR Discussion Draft Coming Together

The Senate Finance and House Ways & Means Committees, last week, released a bipartisan, bicameral discussion draft of a proposal to permanently replace Medicare’s sustainable growth rate (SGR) formula, which is set to cut physician payments by nearly 25 percent next year. The new system would instead freeze physician payments through 2023, but also create a performance-based incentive payment program beginning in 2017 and provide additional bonus payments to health care professionals who join Alternative Payment Models (APMs) that take two-sided financial risk subject to quality metrics, such as some forms of Accountable Care Organizations (ACOs). The 10-year budget cost of the proposal is unclear, though it would likely be slightly above the $140 billion cost of a 10-year payment freeze.

The proposed framework primarily consists of 5 substantial delivery and payment system reforms:

1) SGR Repeal and Annual Update (Cost = $139 billion)

The proposal would permanently repeal the SGR mechanism and freeze base payment updates through 2023 (before any other bonuses or penalties). After 2023, health care professionals (including individual physicians, physician assistants, nurse practitioners, and clinical nurse specialists) participating in an advanced APM(s) would receive annual updates of 2 percent, while all others would receive annual updates of 1 percent. Beginning payment updates after the 10-year Congressional Budget Office (CBO) budget window will help to minimize the cost that must be offset through pay-as-you-go (PAYGO) rules, but lawmakers should be cognizant of the effects of policies over a longer-term horizon when our debt problems will become more severe. Offsetting policies, therefore, should be chosen with an emphasis on those with effects that grow over time.

2) Value-Based Performance (VBP) Payment Program (Cost ≈ $10 billion)

The plan would introduce a new, single budget-neutral program – the Value-Based Performance (VBP) Payment Programs – in 2017 to adjust Medicare payments to professionals based on performance, in place of three penalty programs currently in law. At the end of 2016, the proposal would sunset penalties based on the Physician Quality Reporting System (PQRS) and “meaningful use” of Electronic Health Record (EHR) technology, and the budget-neutral Value-Based Payment Modifier (VBM). The roughly $10 billion, according to the Committees’ estimate, that these would have saved would instead be added to the base off which the budget-neutral VBP adjustments would be made, therefore increasing the cost of the proposal.

The VBP program would adjust payments based on a composite score developed according to success on 1) quality; 2) resource use; 3) clinical practice improvement activities; and 4) EHR meaningful use. Professionals would be given the option to have their quality performance judged at the group level.

The VBP program would apply to: physicians beginning with payment year 2017; physician assistants, nurse practitioners, and clinical nurse specialists beginning with payment year 2018; and all others paid under the physician fee schedule (as the Secretary determines appropriate) beginning with payment year 2019.

3) Encouraging Alternative Payments Models (Savings/Cost = Unknown)

In order to further foster the formation of Alternative Payment Models, such as ACOs, starting in 2016, professionals who earn a significant share of their revenues from an APM(s) that involves two-sided financial risk and meets quality standards would receive a 5 percent bonus payment each year through 2021. The revenues thresholds to receive the bonus payment would increase every two years until 2020, at which point professionals would have to 1) receive at least 75 percent of their Medicare revenue through an advanced APM or 2) receive at least 75 percent of their total, all-payer revenue through an advanced APM, including at least 25 percent of their Medicare revenue. Any professional qualifying for the bonus would be excluded from the VBP payment adjustment program.

The budgetary effect of this incentive program is unclear. On the one hand, the 5 percent bonus payments will cost money, although they do stop after 2021, which should depress the added cost in the second decade. If APMs are able to provide quality care for less money, however, the government would share in those savings and be partially protected against losses since the APMs must take two-sided risk.

Tying the incentives to an APM’s penetration system-wide may also generate additional federal savings if such models are able to offer lower cost health plans on exchanges and in the employer market. It also shouldn’t be overlooked that APMs have the potential to greatly improve the quality and coordination of care, even if the cost savings aren’t as significant as we hope (which is what occurred in the first year of the Pioneer ACO program).

Importantly, though, many details are still unclear from the discussion draft, which are critical to estimating this element’s budgetary effects. How exactly will the shared savings/losses be structured? Will there be a path to partial and/or full capitation? How will the benchmark payment rate be determined? Will APMs be given any tools to steer care to more efficient providers? What level of beneficiary engagement will there be?

4) New Payment Code for Chronic Care Management (Savings/Cost = Unknown)

The proposal would establish one or more payment codes for complex chronic care management services, beginning in 2015, similar to a rule that was recently proposed by the Centers for Medicare and Medicaid Services (CMS). Payments for these new codes could be made to professionals practicing in a patient-centered medical home or “comparable specialty practice.”

5) Reform the Relative Value Scale Update Committee (RUC) Process (Savings = Unknown)

In the wake of negative media attention this year, the Committees’ proposal would begin to reform the opaque AMA/Specialty Society RUC process and establish checks against its findings.

First, it would set targets starting in 2016 for identifying and revaluing misvalued services in a budget-neutral manner, allow for the collection of additional information to better determine the value of services under the physician fee schedule, and also task the Government Accountability Office (GAO) to study the RUC process. It would also “direct the Secretary to ensure that the global payment for the work component of surgical procedures accurately reflects the average number/type of visits following surgery,” which should produce modest budget savings.

Next Steps

This discussion draft is an important step on the path to finally replacing the flawed SGR formula with a long-term fix that focuses on paying for value and quality, rather than volume, of care. Over the long term, this proposal’s aim to move reimbursement away from fee-for-service can be an integral part of bending the health care cost curve, which is essential to reining in our debt.

Comments on the draft are due to the committees by November 12, after which they would release a more detailed proposal.

As the committees’ consider ways to improve the bill, they should weigh whether the final bill provides strong enough incentives for providers to form and participate in APMs and how best to structure incentives to produce improvements in quality and efficiency of care. Given that the current discussion draft would begin positive payment updates after the ten-year budget window, lawmakers may want to condition those updates on the APMs, chronic care management, and other delivery system reforms achieving certain benchmarks for cost savings.

As the SGR replacement continues to take shape, lawmakers must soon also turn to the more politically difficult task of crafting reforms to offset the added costs. First and foremost, they must avoid using gimmicks such as counting savings from the in progress war drawdown or timing gimmicks such as the “pension smoothing” provision that was considered in the recent government funding debate.

Thankfully, numerous bipartisan health reform proposals have been put forth over the past few years, from the Simpson-Bowles Bipartisan Path Forward, to the Bipartisan Policy Center, to the National Coalition on Health Care, to a recent collaboration between the National Coalition on Health Care and the Moment of Truth Project. Lawmakers should ideally focus on structural reforms that improve incentives and have the potential to “bend the cost curve.”