Across the Board Cuts to Medicare are Not the Answer

February 1, 2012
By Jenny Li Fowler

The Centers for Medicaid and Medicare Services recently announced a scheduled cut in physician fees for 2012 using a sustainable growth rate (SGR) formula, which determines annual adjustments to payments for services. The SGR formula was implemented in 1998 to curb the growth in expenditures on physicians' services.

In a new paper, “The Sources of the SGR ‘Hole’,” published in the New England Journal of Medicine, Amitabh Chandra, professor of public policy along with Ali Alhassani M.Sc. and Michael E. Chernew Ph.D. both of Harvard Medical School, warn against this method. They argue fee cuts applied evenly across all states, specialties and services hardly provide a fair solution.

“Some health care providers will receive cuts in pay despite the fact that they contributed little to the increases in the volume of services delivered that resulted in the SGR-dictated cuts,” write the authors.

“Different states or physicians contribute to cost-growth, but even the ones that did not contribute to cost growth get their fees cut. The SGR does this, as does what Congress is currently proposing with Medicare fee-cuts,” said Chandra.

To illustrate, states that have contributed the most to digging the SGR hole were large states with spending growth that exceeded target spending, like New York, Florida, and Texas. Florida, for example, overshot its estimated per capita SGR target by 80 percent. But when Medicare fees are cut, they are cut equally in states that contributed to the fiscal mess, like New York, Florida and Texas, but also in states whose providers were fiscally responsible (like California and Massachusetts). Similarly, specialties like radiation oncology grew much more rapidly than spending on thoracic surgery or anesthesiology, but the blunt formula for fee-cuts would hit all specialties equally.

The authors argue that an alternative form of reimbursement is crucial. “We believe it is imperative that a post-SGR payment system encourage the creation of organizational structures that can accept global payments, or payments bundled by episode of care,” write the authors. They believe that such a payment system would “give providers and physicians incentives to capture gains from eliminating lower-value therapies and delivering higher-value health care.”

Amitabh Chandra is an economist and a Professor of Public Policy at Harvard Kennedy School. His research focuses on productivity and cost-growth in healthcare and racial disparities in healthcare.

Amitahb Chandra headshot

Amitabh Chandra, professor of public policy

“Different states or physicians contribute to cost-growth, but even the ones that did not contribute to cost growth get their fees cut," said Chandra.

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