NEJM: SGR formula may be lose-lose situation

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After Congress yet again suspended the sustainable growth rate (SGR) formula for another six months, Henry J. Aaron, PhD, of the Brookings Institution in Washington, D.C., called the formula's target “unrealistic,” saying that favorable alternatives to the formula are lacking, but may arise from healthcare reform. In an editorial published July 29 in the New England Journal of Medicine, Aaron called into question the usefulness of the SGR formula that was first enacted in 1998 for the purpose of restricting physician fees.

While Aaron said the formula supposedly works to tie in annual Medicare fee growth to the rise in domestic product, Medicare case loads and practice costs, ultimately it ignores the increasing number of medical interventions.

“The SGR purports to control total spending on physician services, but it controls only prices, even though spending is the product of the price and the number and intensity of services,” said Aaron. “According to the formula, the more the number and intensity of services grow in one year, the more prices must be cut the next.”

Additionally, the way the formula was written requires any excess cumulative spending since 1998 to be repaid. “Thus, the implied price cuts can be large, and they grow if cuts are deferred,” he said.

This year, Congress did not cut fees, but instead suspended the SGR formula and increased fees by 2.2 percent. This notion was effective June 1.

Because budget projections are based on SGR fee cuts, this year Congress proposed suspending SGR cuts for 19 months, rather than enacting a permanent replacement for the SGR formula within the healthcare reform legislation.

Aaron said that while it may seem reasonable to fix the “flawed” formula, it may not be feasible. This in part is due to the fact that mending the formula would violate the Schultze law, which was created to prevent officials from doing "harm" to the system. If the formula was fixed or abandoned, fees would rise, as would deficits.

For example, Aaron said if the formula was tied into the Medicare Economic Index, the 10-year deficit would swell by $439 billion plus added interest on the debt.

Aaron said that provisions within the Patient Protection and Affordable Care Act could change how healthcare is paid for and in turn lead to the evaluation of how to improve care and reduce costs. Sections of the healthcare reform act aim to study and use bundled payments and provide feedback on the costs of physicians' services.

“The SGR formula is unlikely ever to be fully enforced. But the relentless and growing challenge of reducing federal budget deficits will make it increasingly difficult for Congress to abandon the formula entirely,” Aaron concluded.

“Until some plausible alternative comes along, the SGR will live on, even as its targets become increasingly unrealistic.”