Reality and unreality in new Congressional Medicare deal

Agreement is a good thing, but not a game-changing breakthrough

THIS WEEK, YOU can be confident that the US Senate will approve bipartisan legislation approved on March 26 in the House of Representatives by an overwhelming (392-37) bipartisan majority to repeal a long-standing feature of Medicare physician payment policy called the Sustainable Growth Rate, or SGR.

If you’ve never heard of SGR, you are among the 99 percent. Still, the SGR story has been fascinating and frustrating since it began as part of the 1997 Balanced Budget Act (BBA) agreed to by President Bill Clinton, House Speaker Newt Gingrich, and Senate Majority Leader Trent Lott. And as SGR begins its final exit, a host of good and not-so-good elements in the repeal legislation come into play.

What’s good and what’s not so good about this deal? Well, everything, depending on your point of view. Here are the leading candidates (and my grade):

  • Repealing SGR – very good
  • Refinancing the Children’s Health Insurance Program (CHIP) for two years – very good (excellent if it were for four years)
  • Authorizing $7.2 billion for community health centers and the National Health Service Corps – wonderful!
  • Replacing SGR with a more sensible set of physician payment quality incentives (that follow the logic of the ACA, believe it or not) – very good
  • Not paying for the $141 billion 10-year cost of SGR repeal to the federal Treasury – not so good though worthy of forgiveness this time

So, wow. Does this augur a new era of bipartisan Congressional cooperation on health policy? Nope. Let’s look at each of these in turn.

Repealing the Sustainable Growth Rate It was a smallish part of the 1997 BBA that included severe cuts to hospitals, home health care, and many other parts of Medicare in order to balance the federal budget by 2001 (which actually happened by 1999 – thanks to a fast growing economy and the BBA cuts). Physicians had to pay up too, demanded then-House Ways & Means Chair Bill Thomas, a California Republican, and SGR was the dumb solution.

Why dumb? It worked by giving physicians bonus payments when overall spending for physician services in Medicare came in under target, and whacking physician rates when they overshot the SGR target. Under this wacky plan, the only way a doc could prevent cuts to his payments was to up his or her volume of services provided – so the incentives were nuts. Overall, the BBA cuts were so much larger than projected, Congress twice in 1999 and 2000 restored some of the cuts, but not SGR because in those early days, SGR provided bonus payments because docs were coming in under target (not because they were doing anything to earn it, but because the overall economy was growing so fast, it was easy to come in below target). And when the formula went the other way beginning in 2002, it was because of a slowed economy, not anything docs were doing to influence the formula. Just dumb.

Congress let the first round of SGR cuts in 2002 take effect and took so much grief from docs that they learned the hard way never to do it again – and so 17 times since 2003 they have forestalled physician payment cuts; beginning in 2007, when new Democratic majorities in the House and Senate restored budget discipline rules known as “pay-go” (any law that increased spending had to be self-financed through spending cuts, tax hikes, or other savings over a 10-year budget window), the SGR “patches” got tougher to accomplish.

In 2009, Democrats promised the American Medical Association (AMA) that they would repeal SGR as part of the Affordable Care Act (ACA). But when the price tab came in from the Congressional Budget Office (CBO) at $210 billion over 10 years, Democrats cried “uncle” and left SGR repeal out. Since 2007 or so, leaders and rank-and-file members in both parties, House and Senate, have agreed that SGR should be repealed, and last year they finally came up with a new physician payment scheme that both sides liked. They just could not find the dough to finance repeal – now estimated at $140 billion because of the dramatic slowdown in Medicare spending over the past five years.

More on the replacement and how Congress agreed to pay for it at the end of this post, but first:

Refinancing the Children’s Health Insurance Program CHIP was the creation of my late boss, Sen. Edward Kennedy, Democrat of Massachusetts, and Sen. Orrin Hatch, Republican of Utah, as yet another part of the 1997 BBA, believe it or not! It periodically has to get reauthorized by Congress, the last time as part of the ACA that extended the program through 2019, though only with committed funding through 2015 – so it was scheduled to run out of money in this September. Leaders in both parties said they wanted to continue CHIP, though Senate and House Republicans, including Hatch, who now chairs the key Senate Finance Committee, stated they wanted changes to scale back the program. Advocates have been worried about CHIP for the past 12 months – many feared it would get mixed up in the lollapalooza this fall if the US Supreme Court eliminates ACA subsidies in federal health exchanges as part of the King v. Burwell suit.

So getting CHIP refunded for two years with zero legislative changes has made CHIP fans breathe a huge sigh of relief. Advocates, including key members of the Senate, were hoping for four years. It’s not going to happen and this deal is still a huge win. Kudos to House Minority Leader Nancy Pelosi for convincing House Speaker John Boehner to agree to this.

$7.2 billion in new funding for Federally Qualified Community Health Centers (FQHCs) and the National Health Service Corps (NHSC) Sen. Bernie Sanders, independent from Vermont, and Rep. Jim Clyburn, Democrat of South Carolina, were champions of a major funding increase for community health centers and the National Health Service Corps in the ACA of $12.5 billion in new dollars ($3 billion got swiped in 2011 as part of a Congressional budget deal). Community health centers are the heart and soul of our nation’s primary care system for the disadvantaged, and the health service corps pays medical debt for young new health professionals who agree to serve in medically underserved areas for several years. Again, bully for Nancy Pelosi for putting community health centers and the National Health Service Corps on her to-do list with Boehner. Fantastic!

Replacing SGR with a more sensible set of physician payment quality incentives I mentioned how dumb the SGR incentives were. The replacement incentives in the legislation – the Merit-Based Incentives Payment System (MIPS) – would provide rewards to physicians who accelerate moving away from fee-for-service payments that only reward the volume of services provided, and toward “alternative payment models” that reward quality and effectiveness over volume. Noteworthy, these are the same incentives that are part of the ACA’s essential DNA. Accountable care organizations, patient centered medical homes, hospital penalties for excess readmissions and medical errors, the quality bonus system in Medicare Advantage – they’re not all perfect, but they all move the system in a fundamentally different and smarter direction. And now the SGR repeal bill will accelerate this trend. Good news!

How did Congress pay the $140 billion tab? By not paying. This part causes legitimate concern. Rather than doing what their rules – pay-go – require, Congress is suspending them to pass this bill. The total cost is about $214 billion and Congress is only financing $73 billion of it, everything but the 10-year cost of SGR repeal, thus adding $140 billion to the federal deficit – both parties guilty as charged. The deficit hawks now are circling the Senate. Are they right? Not this time.

Bottom line: The SGR structure was bankrupt and took ridiculous time and attention from Congress every year that could be devoted to useful pursuits. The only stumbling block was how to pay for it – and this Congress just can’t find a bipartisan way to finance $140 billion.

Still, over the past five years, the projected cost of US health spending has gone down so much relative to what we anticipated in 2010, that the $140 billion actually is not large. If you don’t believe me, read this brand new report from the Urban Institute, out last week, documenting that US health spending between 2015 and 2019 will be $2.5 trillion(!) less than projected at the time of the ACA’s signing in March 2013. Yes, it’s not all because of ACA – but ACA is a part of that slowdown. If we had known then what we know now, including SGR repeal as part of the ACA would have been a no-brainer.

Let’s remember that the Congressional Budget Office in its health legislation projections over 40 years has a clear and consistent pattern of being wrong by overestimating costs and underestimating savings and revenues in major health laws. Odds are that the costs of SGR repeal will come in below projections. Let’s give ourselves a break and do the right thing.

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Finally, before we get too excited, passage of this legislation does not augur a new spirit of bipartisan cooperation. It’s recognizing political reality and stopping a budget farce. But it’s always easier to pass something when you don’t have to pay for it – and that’s the case here. It’s the right thing to do, and cheers to them for doing it. It’s not a new day.

John E. McDonough teaches at the Harvard TH Chan School of Public Health and is the author of Inside National Health Reform.