MedPAC’s SGR Solution: Bad Medicine For A Chronic Problem

The Medicare Payment Advisory Commission (MedPAC) is the closest thing Congress has to adult supervision on important health policy questions. The Commission commands bipartisan respect both for its record of sound policy advice and for its leadership.

With its October recommendations, MedPac attempted to solve the sustainable growth rate (SGR) physician payment formula budget crisis by spreading its more than $300 billion cost beyond the physician community.  More than two-thirds of the burden would fall on hospitals, pharmaceutical and device manufacturers and, significantly, on Medicare beneficiaries themselves. Clearly MedPac’s intent was to widen the circle of pain.

However, a significant portion of the burden, over $100 billion, would still be borne by the physician community through 17 percent reductions in specialists’ fees and a ten-year freeze on primary care fees.    If implemented, MedPac’s policies will give rise to a festival of unintended consequences: weakening multi-specialty group practices (which rely upon specialist comp to cross-subsidize their primary care services); winding down private practice-based primary care medicine; accelerating the hospital roll-up of medical practices while widening hospitals’ losses on the practices they already own; and triggering a further wave of ill-timed cost shifting to private insurers.

The Flaws In MedPAC’s Proposal And Where They Would Lead

MedPac committed two regrettable policy errors in its SGR recommendations.  Of the two, the more grievous is assuming that the frozen primary care fee schedule will be even close to adequate to replace the current cadre of baby boom primary physicians.  Even with the proposed specialty fee cuts, primary care compensation will still be relatively unattractive.  Only trust funders or those married to investment bankers will be able to afford to practice primary care (unless they choose to work for hospitals who can afford to subsidize them).  The rest could take their entire careers to pay off their loans.  Primary care compensation needs to double (as Britain’s NHS did),  or the tens of millions of baby boomers entering the Medicare program in the coming fifteen years will have markedly inferior access to primary medicine compared to their parents.

The recommended across-the-board 17 percent cut in Medicare’s specialty fees will accelerate the exodus of practitioners from the 24/7 specialties like general surgery and cardiology already under way. It will also accelerate the present hospital feeding frenzy of specialty practice acquisitions, leaving hospitals the unhappy owners of most of the physician practices in their communities.  Though most Washington policymakers are blissfully unaware, the current wave of hospital practice acquisitions carries an unmistakable odor of economic exploitation and rent-seeking behavior.

In a shockingly short period of time, cardiology has returned to being a hospital-based specialty. With their formerly independent cardiologists, hospital managements all over the country were confronted with the following ugly choice:  “Would you like all our catheterization/stents and open heart referrals or none of them?”   To avoid losing their referrals, hospitals made cardiologists cushy salary guarantees extending out five to seven years at compensation levels far exceeding common sense, and, in some cases, violating Medicare’s fraud and abuse guidelines.

Under MedPac’s specialty fee scenario, the cardiology shakedown will spread to orthopedics, oncology, neurosurgery, etc, leaving hospitals saddled with a full complement of very expensive, 35 hour a week specialists.  The specialty payment cuts MedPac has recommended will also widen hospital losses for physicians whose practices they already own, further diminishing hospital cash flow just as reduced patient volumes and rising bad debts have compromised hospitals’ finances.

To offset their losses on acquired physician practices, hospitals will immediately mark up the specialists’ fees to Medicare’s hospital-based rates and put them on “eat what you kill” (e.g. RVU based production-driven) compensation plans, eliminating any potential Medicare program savings and perpetuating the “do more/make more” incentives of fee-for-service Medicare.  Hospitals with strong market positions will also pivot to aggressive rate demands upon their local private insurers to offset their physician practice losses.

The sad fact is:  the vast majority of hospitals do not know how to manage physician practices.  Managements seem to have learned or remembered little from the 1990’s physician practice acquisition fiasco. Most hospitals and systems lack the governance, political savvy, information technology infrastructure or capital to manage large collections of separate physician practices, which is what they presently own.  At the current pace of development, hospitals and systems could take a decade or more to create real, functioning, self-governing medical group practices capable of managing population health risk or meaningfully restraining health cost growth.

We continue not to have had the policy conversation about whether it makes sense for the health system to be controlled by regional hospital monopolies. That would be the long-term structural consequence of the MedPac recommendations.  In a well-balanced health system, there is a dynamic tension between hospitals, physicians and health plans.  Medical practice is already the weakest of these three actors.  Building up multi-specialty group practice and encouraging more physician-sponsored managed care enterprises (health plans or Independent Practice Associations (IPAs)) would help right this imbalance, but those do not appear to be part of the policy agenda in Washington right now.  They were certainly not part of the Affordable Care Act.

A Way Forward

As previously argued, the SGR was a catastrophic policy mistake because there were no feedback loops or mechanisms to correct for overspending the caps.  To continue behaving as if the nation’s physicians somehow owe the Medicare program more than $100 billion only continues that mistake.  The money is spent, and insisting that a new generation of physicians burdened with $200 thousand medical school debts be required to pay it back out of their future earnings is both punitive and shortsighted.  The practical effect is to burden a new generation of physicians with the sins of their fathers, and to hasten the end of private medical practice.

There needs to be a political resolution of the SGR problem, in exchange for writing off the more than $300 billion in illusory Part B “savings” as a dead loss.  The reforms accompanying the writeoff should not be required to be “scorable” but rather should sensibly address the key inflation drivers in the present Medicare program. Cleaning up the conflicts of interests in high technology diagnosis and therapy; ending, not merely disclosing, payments to physicians by drug companies and device manufacturers; substantive malpractice reform; enabling organized medical practice to play a more substantial role in managing health costs (through IPAs or physician-sponsored health plans rather than the relatively flimsy mechanism of an accountable care organization); and markedly improving care organization for the sickest 5 percent of Medicare’s patients are all potential ingredients in this solution.

Jeff Goldsmith is president of Health Futures Inc. He is also the author of “The Long Baby Boom: An Optimistic Vision for a Graying Generation.” Health Futures specializes in corporate strategic planning and forecasting future health care trends.

This post first appeared at Health Affairs Blog on 11/16/2011. Copyright ©2010Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

16 replies »

  1. Carelessness of some doctors and lack of knowledge and experience are the major reasons to increase these type of risks. We should have to hire more experienced and well-trained doctors or physicians to improve our health care system in this city.

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  3. According to the MGMA, the median compensation for a primary care physician in 2010 was $202,392, and $356,885 for specialists. By contrast, according to the 2010 American Community Survey, per capita U.S. personal income in 2010 was $26,059.

    I will just say that you are going to have a hard time convincing the vast mass of the unemployed, the uninsured, and minimum wage workers that primary care physicians need to double their salaries.

    And how is coming out of school with $200,000 debt and making $150,000 to start different than graduating with $40,000 debt and making $30,000?

    Physicians are the gatekeepers to the health care system. That system is financially breaking our country. There is no more money for doctors, or for hospitals, pharmaceutical companies, or device manufacturers. The solution is not for the rest of us to pay physicians more.

    Instead, stop performing unnecessary procedures and writing unnecessary prescriptions, and start talking seriously to patients about diet and exercise and quitting smoking. We’re spending nearly twice what any other developed country is spending, with mixed results, at best.

  4. It’s not an individual budget. It’s a population budget. And in most models, whether episode based or time based (e.g. enrolled lives), there is risk adjustment to attempt to compensate for the level of sickness of the people you actually care for.

  5. Margalit –

    I don’t expect primary care doctors in individual or small group practices to accept financial risk. I expect hospitals, ACO’s and large multi-specialty groups to accept risk. Also, as I said previously, surgical procedures, many of which are scheduled well in advance, lend themselves to bundled payments. Hospitals should be able to accept risk for those, especially if the surgeons and anesthesiologists are salaried employees of the hospital.

    There is no reason why fee for service can’t continue to exist for small practices in parallel with capitated and bundled payment systems for hospitals and large physician groups. Indeed, as I understand it, many providers in the California market are paid on a capitated basis today and have been for years. Primary care accounts for a relatively small percentage of total physician fees so keeping the FFS model for those doctors who practice solo or in small groups should not have much impact on system costs. It’s hospital based care, both inpatient and outpatient, that accounts for most of the spending. Also, even the capitated and bundled payment models would probably not include the cost of prescription drugs that are filled at retail or by mail as opposed to those dispensed and administered in the hospital.

    For the sickest patients, case managers play an important role and can probably do more especially to ensure proper care coordination and follow-up as well as avoid unnecessary care.

  6. Barry,
    There are three issues I see with physicians accepting risk. First, small primary care practices are ill equipped to accept any risk due to their tiny panels, small revenues and small cash reserves. Second, if physicians accept risk, they will naturally try to minimize it by gravitating to less risky patients. Not necessary less sick patients, but those who typically don’t play along, don’t adhere to recommendations or don’t seek regular care, until it’s late in the game. will be avoided. Third, there will be enormous temptation, as there is now in MA plans, to make people look sicker than they really are to increase capitation amounts, which in itself is a form of over-treatment.

    I know you are concerned with patient induced over utilization, but I am still waiting to see any studies indicative of this being an actual problem.

  7. Margalit –

    I think a lot of healthcare, but not all, lends itself quite well to fixed or bundled prices. Surgical procedures like cardiac stents, CABG and hip replacements are done hundreds of thousands of times per year nationwide. There should be a well established protocol related to pre-admission testing, the procedure itself and the immediate recovery period along with follow-up visits with the surgeon. Rehab time can vary depending on the patient’s age and physical condition. There is always a chance of complications during surgery and infections afterward, but providers should be able to accept those risks and build a certain amount of them into their pricing.

    Chronic conditions like CHF, COPD, diabetes, etc. are likely to trigger hospital admissions that come through the ER. For many hospitals, half of their inpatient admissions come through the emergency room as opposed to being scheduled well in advance.

    At a recent conference, I listened to presentations by three publicly owned for profit hospital companies. One of them, with hospitals mainly in the southern U.S., told us that one-third of their inpatient admissions were paid based on DRG’s, one-third were on a per diem basis, and one-third were figured on a percentage of charges or, in effect, fee for service. If hospitals and doctors have to compete, in part, on patient satisfaction scores and all the key performance metrics are available to the public, I think it would be pretty hard to get away with skimping on care on a systemic basis as opposed to occasionally. I certainly don’t think patients and families should just be able to demand whatever care they think they want including unlimited rehab. Sometimes their expectations are unreasonable and, if they are, they shouldn’t be met unless patients are prepared to self-pay.

  8. I would agree that if we must operate this way, having primary care physicians manage the budget is preferable.
    However, conceptually, I don’t think health care lends itself very well to a fixed price model. I’d much rather have a times & materials approach with quality controls in place and milestone deliverables based on best practices and enough oversight to prevent abuse.

    The problem I have with risk, is that one way or the other, it will get offloaded to patients and mostly to the sickest ones, or the ones that cannot go outside the fixed budget.

  9. Jeff –

    I certainly agree that doctors should be the people who determine what care is necessary and what isn’t, hopefully, with knowledge of available evidence and what their respective specialty societies view as the standard of care. I want to see them backed up by safe harbor laws that protect them from lawsuits if they follow evidence based guidelines.

    That said, in theory anyway, hospitals should be in the best position to manage an ACO because they are most likely to have both the management infrastructure and the scale to take on financial risk inherent in bundled or capitated payments. There should also be transparency with respect to everything from infection rates to risk adjusted surgical outcomes to patient satisfaction scores along with actual contract reimbursement rates. If doctors are going to be the key decision makers as it relates to patient care, though, they probably also need to be employees of the hospital system instead of independent contractors with practice privileges.

    My understanding is that the most profitable part of hospital inpatient care is surgical procedures and, to a lesser extent, cancer treatment. Hospitals don’t make much money from trauma care, mental health services, childbirth, and low acuity medical (as opposed to surgical) admissions. Outpatient services have higher profit margins but the average price point per episode or service is much lower.

    If a hospital system has a high local market share, especially in a less populated area, and pushes insurers too hard for ever higher rates, I think commercial insurers should push back by creating incentives for patients and families to go elsewhere within the region for comparable or better quality care, especially for the profitable surgical procedures. The insurer could pay for a car service each way as well as the cost of a hotel room, food and even a rental car for a family member or members along with a lower co-payment for the patient and still come out ahead financially. Many hospitals still think they can continue to push commercially insured rates up by 5%-7% per year for the next several years while their costs per adjusted admission are rising by 3% at most. That needs to change and soon. I think hospitals need to benchmark their costs against comparable hospitals in other countries. They should look especially hard at the number of employees of each type per licensed bed since wages and benefits are, by far, the most important cost driver.

  10. The policy question is: who decides if care is provided in an elegant and thoughtful manner, and that people only get the care they need. In “ObamaCare”, it’s a panel of experts in Washington. In “managed care”, it was a faceless and unaccountable “medical directorate” enforcing its guidelines through a bank of nurses sitting in Tucson. In a “delegated risk” model, its the doctors who take care of you who decide, at the population level, what best clinical practice is, and make sure that patients and families understand they are working for them. If we’re going to have a budget, I want it administered by the people who are morally responsible for my care.

    The issue of who bears the risk is non-trivial for this reason. The fallacy of the ACO is that you get to more conservative and thoughtful care with no-risk, where you’ve got the hospital sitting there at the table making sure they get their piece of the pie. Managing care with out the risk is like gin and tonic without the gin: it’s the risk, the fixed budget (for an episode of care or a condition) spread across a population that forces you to decide what’s really needed ornot.

  11. “While I do not see malpractice as a main inflation driver, anyone who works in the care system can see its effect as an enabler. I’d like to take the malpractice excuse off the table as physicians are encouraged to practice more conservative medicine.”

    Jeff –

    I couldn’t agree more. The lead article in the most recent (12/2011) issue of “Harvard Heart Letter” is titled “Angioplasty a day after a heart attack not worth it.” In 2006, the Occluded Artery Study (OAT) concluded that performing angioplasty delivered no tangible benefit to people who had a heart attack more than 24 hours earlier and who no longer had symptoms. Medical therapy was just as good if not better and, of course, far less expensive.

    At the population level, some people will have another heart attack within weeks or months whether they got a stent or just medical therapy. Even though most interventional cardiologists are well aware of the results of the OAT study, they often perceive the standard of care in their community or region to call for a stent and the patient may well expect one as well. If doctors knew that safe harbor protection from lawsuits for following such evidence based guidelines would give them absolute protection from lawsuits and they would not have to spend considerable time giving stressful depositions, they should be more willing to practice such evidence based medicine. Cases that are brought should be dismissed quickly while a loser pays rule, at least up to some reasonable limit on litigation costs, would also be helpful.

    Any substantive reforms aimed at reducing expensive and unnecessary utilization will require the cooperation of doctors who decisions drive most healthcare spending. Safe harbor protection from lawsuits for following evidence based guidelines, along with removing medical dispute resolution from juries in favor of expert panels or health courts could help to ensure that cooperation. Mere limits on malpractice awards won’t get the job done.

    Separately, I also agree that there is lots of room for improvement in managing the care of the sickest 5% of Medicare beneficiaries, especially the dual-eligibles whose care is often fragmented and uncoordinated now.

    Finally, to the extent that hospitals come to own and control much more of the care continuum, including the ownership of more physician practices, they will need to be able and willing to take on financial risk inherent in bundled or capitated payments and accept movement away from the fee for service payment model.

  12. “The ‘balance sheet role’ for PCP’s is in direct conflict with their ‘professional role’, which is to prevent illness and minimize disease sequelae. Until these roles are aligned, it will be difficult to create the necessary financial and professional metrics that encourage harmony between disease management and cost containment.”

    This is a dangerous game and if I am not mistaken, it has been played before with only two variables. Now we are trying to refine the game and introduce the outcomes variable, which should theoretically constrain things in favor of patients, but we are still left with increasingly conflicted physicians, particularly since cost control will eventually take the form of regulating the definition of acceptable quality (or acceptable value).

    And I honestly don’t understand the advantages of having physicians take risk. I understand bonuses, but can’t figure out what the benefits of taking risk are, for both physicians and patients (I get the payer part).

  13. Jeff, I agree with your premise that [ it is unlikely ] ” the frozen primary care fee schedule will be even close to adequate to replace the current cadre of baby boom primary physicians”.
    What’s more, in addition to unattractive compensations, this SGR formula does an equal amount of damage to the primary care doc’s level of satisfaction as a skilled and professional clinician. Because the SGR formula continues to re-enforce a ‘do-more’ mindset for hospitals and specialists, the primary care physicians is once again given the unfortunate role (at least when viewed solely as a paid resource on the balance sheet of the health system) of merely providing the necessary feeder population of patients needed to fill the proceduralists schedule.
    The ‘balance sheet role’ for PCP’s is in direct conflict with their ‘professional role’, which is to prevent illness and minimize disease sequelae. Until these roles are aligned, it will be difficult to create the necessary financial and professional metrics that encourage harmony between disease management and cost containment. ACO’s are perhaps a good start, but with the DNA of a health system still genetically predisposed to driving volume and utilization, it will likely take ‘decades’ for an outcomes based formula to pan out, it ever.
    With primary care owning healthcare’s ‘professional role’ of preventing illness and minimizing disease complications, it is time the reform leaders get serious about investing in this specialty and begin leveraging their skills for that very purpose. This MedPac SGR formula does nothing to enable that goal.

  14. We need physicians to organize to bear more risk. In my January Health Affairs article on alternatives to the ACO, I argued that health plans (and through Medicare Advantage, Medicare as well) should become market makers in clinical solutions, and encourage physicians (in single specialty or multi-specialty groups) to provide those clinical solutions for a fixed price adjusted for severity.

    The approach is conceptually similar to that proposed by both Reggie Herzlinger and Michael Porter, people with whom I’m not usually in agreement. I also see specialists and primary care physicians taking risk for managing the chronically ill, for whom interventions are not going to change the course of their illness. It is subpopulation, not population, risk.
    The most effective subpopulation risk managers we have right now are the special needs plans (SNP’s) who work inside of Medicare Advantage- plans like SCAN and CareMore in LA.

    In a delegated risk model, specialists make more money by liquidating hospital cost, steering patients to less expensive imaging and surgical providers and managing down episode expense. Only they can do that. Hospitals can’t do it and, for the sicker patients, primary care physicians cannot do it either. Hospitals are not going to commit wholeheartedly to reducing their own utilization, as the ACO suggests they will, particularly if the rewards are as diffuse and contingent as they are in the old or new ACO regs.

    While I do not see malpractice as a main inflation driver, anyone who works in the care system can see its effect as an enabler. I’d like to take the malpractice excuse off the table as physicians are encouraged to practice more conservative medicine.

  15. I think Jeff that the recommendations are a bit worse than you describe. The freeze carve out is only for certain E&M codes and does not include routine procedures that PCPs do in their practice. This means that primary care docs will also see their Medicare reimbursements decline to a certain degree.

    Although MedPac is recommending research into over-priced and ineffective services, it seems that the cuts should occur across the board before any data can be collected and analyzed, which is a bit peculiar.

  16. I agree that setting up the SGR without an enforceable feedback loop was a huge mistake (no doubt lobbyists can take credit for inserting it). But I think it would be an equally huge mistake to double primary care pay. English primary care income is only now roughly equivalent to that in the US, after doubling. So now we need to double again what we pay in the US? It’s absurd.

    And then you criticize the recommendation to cut specialist pay. I suppose next we can’t control hospital income, because then poorly run hospitals will go under. I don’t endorse the MedPAC solution, but if you don’t acknowledge that our unit cost for care is twice as high in the US as other countries pretty much across the board, you will keep solving problems on the margins but never bring US expenditures in line with the rest of the developed world.

    Of the solutions you identify, there is no evidence I’ve seen that malpractice reform reduces costs. Disclosure is good but will make a small dent of one or two points at most to total costs. Having organized medical practice play a more substantive role in managing costs is great, but that isn’t incompatible with the pay freeze for specialists that you decry. In fact, if it is done right it will result in the same outcome. How do specialists not take home less money at the end of the day if we are to lower American health care costs (vs trend)? And if they make less, they won’t cross-subsidize primary care as much in multi specialty practices, and the contracts hospitals have with them will still be a burden 2-5 years out.