On April 15, 2015, the U.S. Senate voted to repeal the Medicare Sustainable Growth Rate (SGR), making way for a $145 billion healthcare reform package.¹ President Obama signed the bill into law, April 16, 2015.² The overriding goal of this massive reform package is to discontinue the SGR physician payment formula and facilitate the implementation of innovative care models. The models are designed to improve quality of care and lower costs.

The SGR formula was passed into law as part of the Balanced Budget Act of 1997. The bill was designed to control physician spending. As early as 2003, the formula design came into question. From 2000 to 2012, physician services spending increased by 45 percent beyond the rate of inflation; during the same period of time, reimbursement rates have remained relatively static.³ Unfortunately, since that time, Congress has spent over $170 billion covering the shortfalls of the SGR formula.

The repeal will ensure five years of stable annual updates of 0.5 percent while transitioning to the new system. The 2019 rates will be maintained through 2025, to give providers time to apply for additional payment adjustments through the Merit-Based Incentive Payment System (MIPS). The new system will focus on rewarding high-performing providers⁴ and improving the quality of care for seniors. The table, Proposed Medicare SGR Pay Changes over the Next Decade, by Pathway, below highlights the specifics of the repeal.

Highlights of the SGR repeal and Medicare provider payment modernization

Paul Spitalnic, chief actuary in the Office of the Actuary in the Department of Health and Human Services, wrote a memorandum highlighting the estimated financial effects of the Medicare Access and CHIP Reauthorization Act of 2015 (H.R. 2). The major specifications of the Medicare provider payment provisions of this bill are as follows:

• For services paid under the physician fee schedule and furnished during calendar years 2016 through 2019, Medicare’s payment rates increase by 0.5 percent a year.

Payment rates for services on the physician fee schedule remain at the 2019 level through 2025; but, starting in 2019, the amounts that would be paid to an individual provider are subject to adjustment through one of two mechanisms, depending on whether the physician chooses to participate in an Alternative Payment Model (APM) program or the Merit-Based Incentive Payment System (MIPS). The legislation relies on ACOs and other alternative payment models (APMs) to incentivize provider transition to value-based care.⁵ To participate in APMs, a physician is required to be enrolled in an Medicare Shared Saving Program (MSSP) Accountable Care Organization (ACO).

For 2026 and subsequent years, there are two payment rates for services on the physician fee schedule. For providers paid through an APM program, payment rates increase each year by 0.75 percent. Payment rates for other providers increase each year by 0.25 percent.

• Providers who opt to participate in MIPS receive payments that are subject to positive and negative performance adjustments. The basic adjustments are designed to offset in the aggregate, so they will have no net effect on overall payments.
   
• From 2019 through 2024, providers receiving a substantial portion of their revenue from alternative payment models receive a lump-sum payment after each year equal to 5 percent of their Medicare payments for services reimbursed according to the physician fee schedule in the particular year. Providers with smaller amounts of revenue from APMs receive either no adjustment to their payments or the MIPS performance adjustment if they report measures and activities under that program.⁶

Conclusion

This new system focuses on rewarding high-performance providers, while supporting ACOs into 2025. One problematic component of this model is that during years of high inflation or when the cumulative effects of physician updates are not keeping up with physician cost, access to and quality of physicians’ services may diminish.⁷ Although the connection between payment and delivery reform and cost savings has not been definitively determined, the development of alternative payment models may be mechanisms which lower costs and improve health care. All health care organizations employing physicians should take note of these recent developments of reliance on ACOs and other APMs to incentivize provider transition to value-based care. If you have any questions regarding the application of the SGR repeal, please contact a member of Godfrey & Kahn's Health Care Team. 

Proposed Medicare SGR changes over the next decade, by pathway⁸

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¹ Medicare Access and CHIP Reauthorization Act of 2015, H.R.2, 114th Cong. (2015-2016).
²Office of Mgmt. & Budget, Exec. Office of the President, Statement of Administration Policy H.R.2 – Medicare Access and CHIP Reauthorization Act (Mar. 25, 2015), https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr2r_20150325.pdf.
³J.D. Reschovsky, L. Converse, and E.C. Rich, Solving the Sustainable Growth Rate Formula Conundrum Continues Step Toward Cost Savings and Care Improvement, Health Affairs, Mar. 2015.
⁴Not only physicians, but also physician assistants, nurse practitioners, clinical nurse specialists, and certified nurse anesthetists, are paid under the Medicare physician fee schedule; for purposes of this discussion, we refer to them as "providers."
⁵Source: Letter from American Medical Group Association to Speaker John Boehner (Jan. 9, 2015).
⁶Paul Spitalnic, Office of the Actuary, Ctrs. for Medicare & Medicaid Servs., Estimated Financial Effects of the Medicare Access and CHIP Reauthorization Act of 2015 (H.R. 2). (Apr. 9, 2015), CMS.gov/Research-Statistics-Data-and-Systems/Research/Actuarial Studies/2015-HR2.html.
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