By STEVEN FINDLAY

The U.S. Senate has an opportunity next week to hammer the final nail in the coffin of the failed “sustainable growth rate” (SGR) formula for Medicare physician payment.  At the same time, it can move the U.S. closer to a system that pays doctors for the quality of care they deliver, not the quantity.

Bear in mind that Medicare pays about a third of the tab each year for all physician services in the U.S.

For those who have not been following this issue (and I don’t blame you, it’s convoluted, even tortuous), here’s a quick recap:

The House in a rare bipartisan vote (392-37) voted on Thursday, March 26 to repeal the SGR formula, which has been in place since 1998.  The formula, part of the Balanced Budget Act of 1997, was intended to constrain Medicare spending by pegging annual physician fee updates to a target based on the growth in overall physician spending and the gross domestic product.

The formula never worked.  I’ll spare you the details on that.  Suffice is to say that the disparities between the growth in physician costs and GDP over the period 2002-2013 were such that reducing physician fees each year by the amount the formula dictated were—well, let’s just say they were very politically distasteful. 

Notably, in 1999, 2000, and 2001, the formula led to physician payment increases.  In 2002, however, it yielded a 5% reduction in fees.  After that, the American Medical Association (AMA) and every other physician lobby group each year expended great energy and millions of dollars to prevent the formula’s dictate to lower fees.

As a result, since 2003, Congress has overridden the fee adjustment in a sequence of 17 “doc fixes,” most lasting a year.  Instead, lawmakers have either frozen fees or granted a small fee increase each year, ranging up to 2.2%. (The AMA claims that, adjusted for inflation, the SGR has resulted in a 17% decrease in fees between 1998 and 2014.)  Because of the way the SGR provision is written, however, the overrides result in a cumulative build-up of fee adjustments.

In 2015, that stands at a whopping 21.2% reduction.  And it took effect on April 1.   The Senate, poised to take its 2-week Easter/Spring break starting March 27, failed to act in time.  The Centers for Medicare and Medicaid Services (CMS) said on April 3 it would stall payments that include the draconian adjustment until April 15.  Thus, the Senate has two days to act when it returns on April 13.  President Obama supports SGR repeal and has indicated he will sign “a good bipartisan bill.”

A confluence of events—and doc fix fatigue, at long last—propelled the House to pass the repeal bill.  The main technical impetus is that the budget wizards in Congress say the amount they will formally have to add to the 10-year budget deficit if the slate is wiped clean on the SGR fee adjustment has declined in recent years, but will only rise in the foreseeable future.   That amount is now around $140 to $175 billion.  But further, prompted by House leaders, CBO is now scoring SGR repeal against a more realistic scenario—that is, that Congress will keep passing doc fixes, as they did for 12 years.  So, in the March 25, 2015 score of the House SGR bill, CBO said the repeal will cost $0.9 billion less than freezing physician payments from 2015-2025.

In addition, this year the SGR fix is combined with a 2-year reauthorization of the Children’s Health Insurance Program (CHIP), which covers 7 million low-income children and has strong bipartisan support.  The bill also now includes $7.2 billion in new funding for community health centers.

And, significantly, House leaders have embraced reforms the bill makes in how Medicare will pay doctors going forward.  (See below.)  That’s despite the fact that some of those reforms are now intimately linked to implementation of the Affordable Care Act (ACA), which the Republican-controlled House has voted over 50 times to repeal.

The conventional wisdom is that the Senate will pass an SGR-CHIP bill that is very close to the House version for these reasons: (a) the April 15 deadline leaves little time for wrangling with versions that differ significantly; (b) the House’s vote was strong and bipartisan; (c) the bill has elements that please both Democrats and Republicans; and (d) Obama has endorsed repeal and signaled he wants to sign a bill.  All parties would then get to declare victory and say they took a step towards Medicare stability.

But there are still land mines in the Senate:

• Some Democrats, such as Ron Wyden (Oregon), want a 4-year re-authorization of CHIP, not 2 years.

• Some Republicans want the bill to be totally paid for and not add at all to the federal budget deficit.  CBO has scored the House bill (all components) at a 10-year cost of $214 billion, with $141 billion of that added to the deficit and the rest paid for through reductions in payments to providers and higher monthly premiums for high-income Medicare beneficiaries.  (Worth noting: the latest Republican budget blue prints in the House and Senate call for upwards of $5 trillion in reduced federal sending over the next decade with much of that coming from cuts in healthcare programs, and—you guessed it—repeal of the ACA.)

• AARP and other senior groups don’t much like the higher premiums for Medicare beneficiaries.

If things fall apart over these or other issues, one possible scenario is an 18th short term fix—a few months, perhaps—while compromises and details get hammered out between the House and Senate.

By the way, in case you were wondering, here’s what the House bill specifies on physician payment:  zero increase for January 2015 through June 2015; 0.5% per year increase from July 2015 through 2019; and zero increase for 2020 through 2025.  From 2020 on, though, things get complex because they are grounded in the new payment system that would replace SGR.

That payment system is called the “Merit-based Incentive Payment System” or MIPS.   MIPS builds on but also modifies and expands a batch of current  Medicare payment initiatives.  Those initiatives aim to move Medicare, steadily, from being primarily a fee-for-service payer to a “value-based” payer—with payments to doctors pegged increasingly to quality of care and actual outcomes.

This is, of course, the large-scale direction things are moving in the health system as a whole, with growing public and private payer momentum.

Overall, MIPS moves things in the right direction.  But there are some problems and gaps—one being that MIPS probably preserves too much of the existing fee-for-service system.

A second installment of this blog will discuss those issues, the altered Medicare physician payment landscape, and implementation challenges—if, that is, the Senate passes the SGR-CHIP legislation next week, as it should, and President Obama signs it.

Steven Findlay is an independent journalist and editor who covers medicine and healthcare policy and technology.