The Prospect of Permanent SGR Reform in 2015

Ken Perez
Ken Perez

Guest post by Ken Perez, vice president of healthcare policy, Omnicell.

In the wake of the U.S. 2014 midterm election, it’s natural to turn our eyes toward the future and begin to speculate about possible legislative developments, such as a permanent repeal of the sustainable growth rate (SGR), often referred to as a “doc fix.”

The SGR is a formulaic approach intended to restrain the growth of Medicare spending on physician services. The SGR requires Medicare each year to set a total budget for spending on physician services for the following year. If actual spending exceeds that budget, the Medicare conversion factor that is applied to more than 7,400 unique covered physician and therapy services in subsequent years is to be reduced so that over time, cumulative actual spending will not exceed cumulative budgeted (targeted) spending, with April 1, 1996, as the starting point for both.

In part because of the effective lobbying efforts of physicians, Congress has temporarily suspended application of the SGR by passing legislative overrides or doc fixes 17 times from 2003 to 2014. As a result, actual spending has exceeded budget every year during these years. Because the annual fee update must be adjusted not only for the prior year’s variance between budgeted and actual spending but also for the cumulative variance since 1996, the next proposed update, effective April 1, 2015, is a reduction in Medicare physician fees of 21.2 percent.

There are three reasons to be optimistic that a permanent doc fix will be passed in 2015.

Reason for optimism #1: It’s much cheaper than before.

Since 2012, the Congressional Budget Office (CBO) has released some 15 estimates of the 10-year cost of SGR fixes, usually assuming a freeze in rates (i.e., 0 percent annual updates to the physician fee schedule). These cost estimates have ranged from a low of $116.5 billion to a high of $376.6 billion. In August 2014, the CBO estimated that holding payment rates through 2024 at current levels would raise outlays by $131 billion, a figure near the low end of the range and relatively more affordable.

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‘Tis the Season for Speculation About Medicare Sustainable Growth Rate Reform

Ken Perez
Ken Perez

Guest post by Ken Perez.

This is the time of year for speculation regarding which teams will play in the various college football bowl games, but also, unfortunately, whether Congress will finally pass a permanent repeal of the unpopular Medicare Sustainable Growth Rate, which once again threatens to impose a sharp decrease to the physician fee schedule, reportedly 24.4 percent on Jan. 1, 2014.

Just as most every college football team had a sense of optimism when the season began, throughout the summer and fall it seemed like politicians on both sides of the aisle were, to switch metaphors, singing from the same hymnal, railing against the Medicare Sustainable Growth Rate and arguing for a permanent “doc fix.” And, of course, physician groups provided supportive background vocals.

But here’s the problem: A permanent solution will be costly, very costly. According to the latest estimate by the Congressional Budget Office (from May), freezing (i.e., holding flat) all Medicare physician rates for 10 years would cost $139 billion, and proposals that are more generous to physicians would obviously cost more. The Medicare Sustainable Growth Rate remains the elephant in the room of deficit reduction. As for temporary patches, I’ve seen ballpark estimates of $18 billion for a one-year doc fix and $36 billion for a two-year freezing of rates, but both of those solutions would simply “kick the can down the road” yet again.

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The Sequester: Analysis of Its Impact on Healthcare

Thanks to Ken Perez, senior vice president of marketing and director of healthcare policy at MedeAnalytics, for forwarding me the following very concise, yet detailed information about the sequester and its impact on healthcare from a white paper he drafted on the subject.

For those of you wanting to know more about how the sequestration came to be and the purpose for the reduction in spending over the next 10 years, Perez and MedeAnalytics do a great job describing the reasoning for it and its potential impact to the healthcare community in “The Sequester: Analysis of Its Impact on Healthcare.”

Thanks, Ken, for offering us a nonpartisan view of the sequester. We appreciate the objectivity to what’s become a very subjective debate. If after reviewing the following information and you have any questions or comments, leave them in the comment section. If they are for Perez, I’ll make sure he gets them and can respond.

Background of the Sequester

The Budget Control Act of 2011 (BCA) was the compromise legislative solution that enabled the United States to get through the debt crisis of the summer of 2011. The act was passed by the House of Representatives on Aug. 1, 2011, by a vote of 269-161, and by the Senate on the following day by a vote of 74-26. The BCA was signed into law by President Barack Obama on Aug. 2, 2011 as Public Law 112-25.

The intent of the BCA was to rein in long-term federal spending and raise the debt ceiling. To those ends, it put in motion $917 billion in cuts to discretionary spending (excluding Medicare) over 10 years and raised the debt ceiling by $900 billion.

In addition, the BCA created a 12-member Joint Committee of Congress (also known as the “Super Committee”) to produce proposed legislation that would reduce the deficit by at least $1.5 trillion over 10 years.

The act mandated a sequestration process (or sequester) that would be triggered if the Joint Committee was unable to agree upon a proposal with at least $1.2 trillion in spending cuts. Ultimately, to no one’s surprise, the Joint Committee failed to reach an agreement, and the sequestration process was triggered. Per the sequester: 1) The President could request a debt limit increase of up to $1.2 trillion; and 2) across-the-board cuts equal to the debt limit increase would apply to both mandatory and discretionary programs, with total reductions split equally between defense and non-defense functions.

The across-the-board spending cuts would be implemented from FY 2013 through FY 2021, a period of nine years, and apply to both mandatory and discretionary programs. The cut to Medicare would be capped at two percent and limited to cuts to provider payments.

Exempt from the cuts were Medicaid, welfare programs (e.g., food stamps), and other low-income subsidies, as well as Social Security, veterans’ benefits, civilian and military retirement, and net interest payments.

What would be the annual reduction by function of the sequester? Per Table 1, starting with the total reduction of $1.2 trillion to be applied over the nine-year period, a specified 18 percent for debt service savings is deducted, and then the result is divided by nine to arrive at the annual reduction of $109.3 billion for each year for FY 2013 through FY 2021. In every year, the annual reduction is split evenly between defense and non-defense functions, resulting in a $54.7 billion reduction for each function.

The Impact on Medicare of the Original Sequester

According to a September 2012 report from the Office of Management and Budget (OMB), the sequester would pare Medicare in FY 2013 by $11.8 billion, with the following distribution of the cuts:

The American Taxpayer Relief Act of 2012

In early January 2013, Congress averted the so-called “fiscal cliff” by passing the American Taxpayer Relief Act of 2012, Public Law 112-240, which, among many things, pushed out the implementation of the sequester until March 1, 2013, reducing the total cut for FY 2013 by $24 billion or 22 percent to $85.3 billion.

The Enactment of the Revised Sequester and Its Impact on Healthcare

Through March 1, 2013, President Obama and congressional leaders were unable to reach an agreement to avert the automatic spending cuts of the revised sequester.

According to the Congressional Budget Office and per Table 2, for FY 2013, the total cut of $85.3 billion includes $42.7 billion in cuts to defense, $9.9 billion in cuts to Medicare, and $32.8 billion in cuts to other non-defense programs.

Medicare accounts for 12 percent of the total cut and 23 percent of the nondefense portion. How might the $9.9 billion in cuts to Medicare be allocated? In the absence of further guidance from the OMB, a reasonable approach would be to apply the same proportions as the aforementioned September 2012 OMB report. This would yield the allocation reflected in Table 3, with Medicare Parts A and B sustaining the lion’s share of the cuts.

Medicare Part A could be cut by $4.9 billion, which could include an estimated $3.1 billion cut to the Hospital Inpatient Prospective Payment System (IPPS). This cut to the IPPS would translate into an estimated $0.9 million reduction in Medicare reimbursement for the average hospital.

Medicare Part B could be cut by $4.4 billion, which could include an estimated $1.7 billion cut to physician payments and a $0.7 billion cut to the Hospital Outpatient Prospective Payment System (OPPS).

According to the rule for sequestration, reductions in Medicare will begin in the month after the sequestration order is issued, i.e., April 2013, thereby delaying some of the effect on outlays until the ensuing fiscal year. Thus, for the federal government’s FY 2013, which ends September 30, 2013, the following could be the actual cuts:


The sequester clearly affects healthcare providers in FY 2013 in a material way. Unless it is repealed by Congress, the BCA — with its annual $109.3 billion sequester cuts for each of the next eight years — will raise the specter of two-percent funding reductions for hospitals and physicians on a yearly basis.

Because of the significance of healthcare to the federal budget and the nation’s economy, the broader philosophical and fiscal debate between the two political parties on what is the best way to reduce the deficit and engender economic growth will continue to impact the reimbursement rate-setting process.