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Testimony Before the Senate Finance Committee on Medicare Payment of Physician Services

Alternatives to the SGR: MedPAC's Report to Congress

Today, MedPAC releases a new report that examines alternatives to the current SGR. The Senate Finance Committee asked AARP to respond to this report. As requested by Congress, MedPAC studied the implications of moving from a single, national SGR to five potential sub-national target systems that would be based on: geography, type of service, group practice, hospital medical staff, and outliers. We commend MedPAC for providing a thorough examination of each alternative's advantages and disadvantages.

From the beneficiary perspective, we believe the outlier option holds the most promise for higher quality at a lower cost to the Medicare program. One of the major advantages of the outlier approach is that it would allow the Medicare program and others to learn from those physicians who use fewer resources while maintaining a high level of quality. It is important to better understand the differences between inappropriate volume growth and appropriate growth (e.g., from technology changes that improve care for patients). This information could be used to identify best practices for the treatment of specified patients and conditions. An outlier policy could also promote individual physician accountability. It does not require a large scale restructuring of the existing physician marketplace and could be used to measure most physicians in the United States.

Similarly, as MedPAC notes, encouraging specific actions, such as care coordination or investment in information technology, may be more successful than varying reimbursement levels based on a physician's specialty, or region, or practice type.

MedPAC presents two alternative paths for Congress to consider for paying physicians in the Medicare program. The first path would be to repeal the SGR and pursue policy approaches for improving the value of the Medicare physician payment system. The second path would be to retain some type of expenditure target - applied to all Medicare providers, calculated at a geographic level.

Medicare's experience with the SGR has not proven to be successful and beneficiaries have borne the financial penalty in higher out-of-pocket-costs. As MedPAC noted, it is a flawed system that inappropriately influences clinical decisions about where and how many services are provided.

Clearly, the SGR has not been effective at controlling the volume of physician services. According to the Government Accountability Office, from 2000-2005, while Medicare physician fees rose by 4.5 percent, program spending on physician services grew by nearly 60 percent. On a per beneficiary basis, spending for physician services grew by approximately 45 percent.

Many experts have concluded that one of the SGR system's fundamental flaws is its assumption that physicians would act collectively - on a national level - to control the volume of service. MedPAC concluded in 2002 that, "if anything, an individual physician has an incentive to increase volume under such a system."

The SGR does not distinguish between those doctors who provide high quality care to beneficiaries and those who provide unnecessary services. In fact, physicians providing the most efficient care are penalized under Medicare's current payment system while a physician who orders more tests or performs more procedures than are indicated is paid more.

The volume performance standard, which was used to set Medicare fee updates from 1992-1997, was eliminated because of concerns about how it distorted payments for one service relative to another. It is not clear that a new form of expenditure target will be any better for beneficiaries or Medicare, and another administratively-complex formula could lead us down yet another time-consuming and failed path of unintended consequences. As MedPAC warns in its executive summary, "the risk that a formulaic expenditure target will fail and have unintended consequences is substantial."

For these reasons, the first path outlined by MedPAC may have more promise. AARP believes Congress and CMS should focus their efforts on redesigning the payment incentives to promote quality and encourage efficiency. Congress should not abandon its emphasis on controlling expenditures, but it should put its energy into finding strategies that encourage better, more efficient, and patient centered care.

There are a number of factors to consider. First, ultimately repealing the SGR would be quite costly. A transition to a value purchasing framework must not be financed at beneficiary expense. Therefore, some kind of transition may be necessary. Second, we need to make sure beneficiaries are protected from extraordinary out-of-pocket expenses as the Part B payment system is reformed.

One such protection would be a cap on Part B premium increases. Congress could stipulate that the Part B premium could only increase by a certain percentage, dollar amount, or a five-year average. While beneficiary premiums would still increase, the increases would be limited, and beneficiaries would be in a better position to plan their monthly expenses.

Another potential option is to limit total Part B out-of-pocket costs. Unlike many health insurance policies available to younger Americans, Medicare has no catastrophic limit for cost-sharing. Protecting sicker beneficiaries who are more vulnerable financially is critically important.

Third, elimination of the SGR cannot be viewed as carte blanche for physicians to maximize revenues through uncontrolled increases in the volume of services. The volume of unnecessary services in Medicare remains a problem - in terms of the quality of care provided, the added cost to beneficiaries, and the rate of growth in Medicare spending. A new physician payment system should be designed to encourage appropriate care and prevent unrestrained volume.

Congress cannot continue to avoid the current problem in the Part B payment system. The annual physician payment fixes Congress has enacted since 2003 have created an increasingly bigger hole which will become harder to climb out of as each year passes. We believe the time to act is now. AARP stands ready to work with Congress and the physician community to develop a workable solution.

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