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Statement to Ways and Means Subcommittee on Health: Replacing the SGR Methodology Used to Calculate the Medicare Physician Payment Update

Submitted to the House Ways and Means Commerce Committee
Subcommittee on Health
United States House of Representatives

February 28, 2002

The Association of American Medical Colleges (AAMC) is pleased to submit for the record testimony to the House Ways and Means Subcommittee on Health on the need to replace the Sustainable Growth Rate (SGR) methodology used to calculate the update for Medicare payments under the Physician Fee Schedule ("physician payment update"). The AAMC appreciates the Subcommittee's interest in this issue of great importance to both Medicare providers and Medicare beneficiaries. The AAMC supports replacement of the SGR with a methodology that assures adequate payments and stable updates for physicians who participate in Medicare. Appropriate and stable physician payments will ensure that Medicare beneficiaries have access to the complex and specialized care provided by academic physicians.

The AAMC represents the country's 125 accredited medical schools and nearly 400 major teaching hospitals and health systems, 90 academic/professional societies representing approximately 100,000 faculty members ("academic physicians"), and the nation's medical students and residents.

The Role of Academic Physicians
Academic physicians play a unique, multifaceted role within the physician community, as well as within the larger healthcare system. As experts in their particular fields of medicine, academic physicians provide patients and referring physicians with cutting-edge clinical expertise. Academic physicians also educate and train the medical students, residents, and other health professionals who will become the next generation of caregivers. In addition, many academic physicians conduct clinical research that generates more effective, efficient, and compassionate healthcare for all Americans-including aging Americans.

Because of their clinical expertise, access to innovative technologies within teaching hospitals, and participation in clinical research, academic physicians frequently provide inpatient and outpatient care for patients-including Medicare beneficiaries-with complex, multiple, or acute health problems that can not be managed elsewhere in the community.

Working together with their teaching hospital partners, academic physicians are vital to the delivery of essential medical services. Over three-quarters of AAMC's teaching hospital members (which account for just 6 percent of the nation's hospitals) deliver geriatric care (e.g., treatment for Parkinson's or Alzheimer's disease) and operate certified trauma centers in conjunction with academic physician partners.

In addition, faculty practices partner with AAMC's teaching hospital members to provide nearly 45 percent of the nation's hospital-based charity care. By comprising a significant segment of America's healthcare safety net, academic physicians and their teaching hospital partners assure healthcare access for the poor and underserved-including Medicare beneficiaries who are dually eligible for Medicaid or who are unable to pay for their care. In 1999, faculty practices provided an average of $12 million in charity care. According to Agency for Health Research and Quality (AHRQ) and AAMC analyses (using survey data collected by the Center for Studying Health System Change's Community Tracking Study Physician Survey), academic physicians spend more time providing charity care than physicians in all other settings. This is true both when time is measured in hours per month and as a percentage of total patient care time and medically related time.

Update Methodology (SGR)
The Balanced Budget Act of 1997 (BBA) established a formula to calculate the SGR- the "target growth rate" for Medicare spending on physician services-that would control overall Medicare spending while simultaneously accounting for changes in the cost of providing care. The AAMC is concerned that the SGR has not achieved an equitable balance between fiscal management of the Medicare program and the actual cost of caring for Medicare patients, including the cost of medical inflation. Various analyses have shown that, since implementation of the SGR, updates in physician payments have failed to rise in proportion with increases in input prices.

Additionally, as was the case this year, the SGR's link to the country's gross domestic product (GDP) is problematic and volatile. While payment updates in 2000 and 2001 were relatively large (5.4 percent and 4.5 percent respectively), the 2002 payment update of negative 5.4 percent is not only a dramatic decline, but also contrasts sharply with the previous two years.

In its March 2001 report, the Medicare Payment Advisory Commission (MedPAC) identified similar concerns with the SGR and unanimously called to replace the methodology, stating that it "neither adequately accounts for changes in cost nor controls total spending." MedPAC members reiterated their concerns at their January 2002 meeting and announced in their January 16 - 17 Meeting Brief that their March 2002 report will recommend "replacing the SGR system, updating payments for 2003, accounting for productivity growth outside the MEI, and revising the productivity adjustment . . . ." The AAMC strongly supports MedPAC's conclusion regarding the need to develop a new update methodology that produces stable and adequate payments for physicians.

The Impact of Stable and Adequate Physician Payments on Medicare Beneficiaries' Access to Care
Stable and adequate Medicare physician payments are critical to ensure that seniors have continued access to the professional services provided by academic physicians. Nearly one-sixth of all physicians providing Medicare services are academic physicians. Medicare reimbursements to academic physicians total about $2.5 billion each year and represent up to one-third of faculty practice revenues. In light of the fact that faculty practice revenues, on average, represent about 35 percent of a medical school's total revenue, unstable Medicare payments could jeopardize beneficiary access to faculty professional services, as well as academic medicine's core missions of medical education, research, clinical services, and providing charity care.

A sample analysis of the impact of the 2002 Medicare fee schedule on faculty practice plans identified that a vast majority of faculty practices will lose more than minus 5.4 percent of Medicare revenue. In fact, Medicare revenue for some plans will decline by as much as 7.5 percent. Because faculty practices provide multispecialty and complex care for Medicare patients, the negative payment update, when combined with recent changes in Relative Value Units (RVUs)¹ , will drive payment reductions that exceed minus 5.4 percent in many Medicare-related clinical specialties (as illustrated in the table below). It is important to note that while some specialties included in the analysis will experience less than 5.4 percent decline, no specialties will experience an increase in Medicare revenue under the 2002 payment schedule.

Medicare Payment Forecast Analysis
Impact of Change in 2002 Conversion Factor and RVU Values
Across Faculty Practice Plans

Source: University HeatlhSystem Consortium (UHC)/AAMC Faculty Practice Solutions Center

Since private payers often tie their reimbursement rates to those set by Medicare, reductions in Medicare payments will further increase the disparity between the costs of care and the rates at which payers reimburse for those costs. For example, one large faculty practice (nearly 900 physicians) anticipates a loss of $4.8 million in managed care reimbursement because the contracts are linked to the Medicare fee schedule. Note that this does not include Medicaid and Tricare, which would also be affected by cuts in the Medicare fee schedule.

The growing disparity between costs and reimbursement will make it increasingly difficult for medical schools and teaching hospitals to maintain their patient care, education, research, and community service missions. Because of their revenue losses, the practice described above is implementing a policy to limit its appointments for indigent patients to no more than 10 percent of patient visits.

A Legislative Solution to the SGR Problem
Last fall, bipartisan, bicameral legislation, "The Medicare Physician Payment Fairness Act of 2001" (H.R. 3351/S. 1707), was introduced to provide short- and long-term relief from unstable Medicare physician payment updates. The bills provide short-term relief by reducing the cut to the Medicare physician payment update from minus 5.4 percent to minus 0.9 percent and long-term relief by directing MedPAC to develop a replacement for the SGR.

The AAMC strongly endorses these bills, and is pleased that a majority of Representatives and Senators have cosponsored the bill. The AAMC urges the Subcommittee to support this legislation and ensure that the losses currently experienced by physicians are mitigated as quickly as possible.

In conclusion, Medicare beneficiaries rely on academic physicians and academic medical centers to provide high quality, innovative, and accessible healthcare. They also rely on academic physicians to develop the clinical advances and train the new generation of physicians that will assure a high quality of life for all American seniors. Passage of H.R.3351/S. 1707 is a vital first step toward mitigating the losses currently experienced by all physicians. The AAMC looks forward to working with Subcommittee members in accomplishing the second step-devising a long-term solution to replace the current SGR methodology and assure adequate and stable Medicare physician payment updates.

1 - Currently, payment for services determined under the Medicare Physician Fee Schedule is the result of several factors. One of these is a nationally uniform "relative value" for each service that includes weights for Physician work, practice expenses, and professional liability insurance components. [Back]