10 March 2010

The Impact of the SGR

I was reading a white paper on health care cost savings written by the Center on Budget and Policy Priorities (cause that's just the way I roll) and the following passage jumped out at me:
In arguing that Medicare cuts never “stick,” critics point in particular to Congress’ repeated refusal to let the reductions in physician reimbursement rates under Medicare’s so-called “sustainable growth rate” (SGR) mechanism, which it enacted in 1997, take full effect. The SGR cuts, however, represented a badly designed measure that was not intended to produce large savings (the projected SGR savings represented less than five percent of total Medicare savings in the 1997 bill), but turned into a blunt instrument that would have produced cuts far in excess of what was anticipated and would have had harsh and indefensible effects. (Moreover, even though Congress did not allow the full cuts required under the SGR formula to take effect, it has still cut the physician reimbursement rate substantially — at its current level, the reimbursement rate in 2010 will be 17 percent below the rate for 2001, adjusted for inflation.) The SGR mechanism has little in common with most of the other provisions that Congress has enacted over the years to produce savings in Medicare and that have, in fact, taken effect. This distinction is important because most of the Medicare savings provisions in the House and Senate health reform bills are similar in nature to the types of Medicare provisions that Congress has enacted in the past that have taken effect — and they differ markedly from the blunt-instrument design of the SGR cut.
Emphasis added.  Full paper available here (PDF).

File that under "So what's news about that? Everybody knows that medicare rates have been flat for the last decade."  True, true.  I had just never bothered to go back and do the math and see how it all adjusted out for inflation.

While the declining Medicare reimbursement has been bad for Emergency Medicine, it's been catastrophic for primary care and other office-based cognitive practices.  For our business, overhead is fairly stable and small compared to overall revenue streams.  Typical ER practices pay 15-25% of revenue to fixed cost items like malpractice insurance, billing, and back-office operations, and the rest goes to provider payroll -- the only floating variable for private physician practices.  So declining reimbursement has its effect entirely on payroll.  But primary care practices face a totally different dynamic.  They have many fixed expenses in addition to those we bear: they pay rent, nurses and techs and secretaries, healthcare costs for their employees, equipment, scheduling software, etc etc.  The fixed costs portion of a typical office practice can be much higher, consuming 60-80% of gross revenue.  Worse, many of these "fixed costs" for primary care are not truly fixed, but increase annually consistent with inflation (or exceeding inflation, in the case of health insurance benefits for employees).

The result of the higher practice costs is that if you assume that an EM and Internal Medicine practice both see a volume of 20% medicare patients, and the cuts in medicare result in a 3% revenue decrease, the EM docs will see a 4% decrease in salary while the IM docs will see a 10% cut.  (Note that over the same period compensation would have needed to increase by 25% just to remain at baseline, due to inflation.)  Add to that the fact that practice expenses are steadily increasing, further eating into primary care compensation, and it's a wonder that there are any primary care doctors still in private practice at all.  It's become a non-viable business model.

I predict that if nothing else changes in the overall model of physician reimbursement (and HCR does not seem to promise very much, even if it passes) that within a decade there will be almost no independent primary care left in existence -- they will all have been subsumed into hospital-owned or group practices to serve as "loss leaders," existing solely to drive referrals to profit centers like surgical services and imaging facilities.

This is, by the way, Argument Number One against single payer.  Centralized payment schedules will inevitably decline, whether by accident (as in the case of the SGR) or due to budgetary pressures, or both. 


  1. I can compare this to my dad, the wheat farmer, and what he was told by an economics grad student. My dad still gets the same price per bushel of wheat that he did in the early & mid-1970's. What else in the world are we paying the same amount for that we did in 1973?

    Apparently, medical services.

  2. Interesting - both wheat support prices + healthcare both relied on govt to "fix" a problem the free market (supposedly) was not addressing. End result 30 years later is that both industries (ag + healthcare) look to govt to "fix" the problem they say the free market is not addressing.

    Isn't this the layman's definition of insanity?

  3. Beth, it's similar to electronics. The price for a transistor today is a small fraction of what it was in 1970. However, semiconductor makers are able to make many more than they could back same.

    Same with your dad. Price is the same, but a single person is able to produce more due to technology, and the yield from an acre of land is much higher.

  4. Centralized payment schedules will inevitably decline, whether by accident (as in the case of the SGR) or due to budgetary pressures, or both.

    It sounds more like a call to set the rate schedules at a more local level, and to do so in a negotiated process involving doctors and providers instead of simply having a committee decide it by fiat.


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