Weekly Washington Healthcare Update

August 24, 2012

Pardon Our Dust

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*Note: There will be no Weekly Washington Healthcare Update next week.

This Week:

1. Congress

House of Representatives


  • District Work Period

2. Administration

Centers for Medicare and Medicaid Services (CMS)

3. State Activities

4. Regulations Open for Comment

5. Reports

General Accountability Office (GAO)

Congressional Budget Office (CBO)

6. Special Report

1. Congress

House of Representatives

Oversight Chairman Questions IRS Authority

On Wednesday, Oversight and Government Reform Chairman Issa (R-CA) sent a letter to IRS Commission Douglas H. Shulman asking for written justification of a controversial IRS regulation issued in May. In question is a provision of the ACA stipulating that individuals are eligible for tax credits to offset the cost of purchasing health insurance through exchanges established by the states. Opponents of the law insist that individuals purchasing health insurance through exchanges established by the federal government are not eligible to receive the assistance, and that the IRS’s decision to issue a regulation stating that all individuals are eligible for the tax credit, regardless of whether the exchange they purchase insurance through is run by the state or federal government, represents an overreach of the agency’s authority.


District Work Period

2. Administration


CMS Announces Primary Care Initiative

Continuing to implement the ACA, CMS this week announced that 500 primary care practices in seven states, including Oregon, Ohio and New Jersey, will participate in the Comprehensive Primary Care initiative. Under the program, a multipayer initiative aiming to strengthen primary care by encouraging cooperation between public and private health care payers, participants will receive a $20 per month management fee per Medicare beneficiary to better coordinate services. CMS estimates that more than 300,000 Medicare beneficiaries will be served by more than 2,000 providers through the program.

3. State Activities

Missouri Judge Issues Restraining Order in Exchange Ballot Fight

On Tuesday, Judge Daniel Green issued a temporary restraining order against Missouri’s secretary of state, Robin Carnahan, to prevent her from finalizing the language of a ballot question on health insurance exchanges. Consistent with the politically charged atmosphere surrounding the Affordable Care Act (ACA), the state’s Republican Lt. Gov. Peter Kinder challenged Carnahan’s wording of the ballot question, claiming it’s biased in favor of establishing an exchange. Republicans in the state oppose establishment of an exchange. Currently the ballot reads, “Shall Missouri law be amended to deny individuals, families and small businesses the ability to access affordable health care plans through a state-based health benefit exchange unless authorized by statute, initiative or referendum or through an exchange operated by the federal government as required by the federal health care act?”

To view an update of individual state health insurance exchange activities, please see our State Health Insurance Exchange Progress Chart.

In Indiana, Gov. Daniels Requests/Receives Affordable Care Act Advice

Though he initially issued an executive order authorizing a state-based health insurance exchange, becoming the first Republican governor to do so, Gov. Mitch Daniels has asked for input on his decision from potential successors. Gubernatorial candidate Mike Pence sent a letter to Daniels on Tuesday imploring him to resist the urge to implement any provision of the ACA, citing political and fiscal uncertainty associated with the law.

4. Regulations Open for Comment

HHS Releases Final Rule for Stage 2 Meaningful Use for Electronic Health Records and the Final Rule for Standards and Capabilities for Electronic Health Records (EHR)

HHS released the final rule for Stage 2 Meaningful Use, a Medicare and/or Medicaid incentive program for eligible providers, hospitals and critical access hospitals if they meet certain benchmarks for the use of Electronic Health Records. In addition, it specifies payment penalties under Medicare for covered professional services and hospital services provided by eligible providers, hospitals or critical access hospitals for failing to demonstrate meaningful use of certified EHR technology. It can be found at the Office of the National Coordinator’s webpage www.healthit.gov

HHS also released the companion final rule specifying the certification criteria for the technical capabilities and related standards for a Certified Electronic Health Record under Medicare and Medicaid beginning in fiscal and calendar year 2014 reporting periods.

HHS Releases Electronic Funds Transfer (EFT) Rule

HHS released an interim final rule with comment period offering guidance on the operation of electronic health care transactions under HIPAA. The rule implements portions of Sec. 1104 of the Affordable Care Act (ACA), and it is expected to save $9 billion over the next 10 years “by reducing inefficient manual administrative processes for physician practices, hospitals, and health plans,” HHS said. Comments on the rule, which is scheduled to be published in the Aug. 10 Federal Register, are due Oct. 9.

FDA Proposes Unique Device Identifier (UDI) Rule

The FDA will accept comments on the proposed rule to implement a Unique Device Identifier system for medical devices distributed in the United States. Comments on the proposed rule will be accepted either electronically or written until Nov. 7, 2012.

CMS Proposes Policy and Payment Changes for OPPS and ASC Payment System

CMS will accept comments on the proposed rule until Sept. 4, 2012. A final rule is expected by Nov. 1, 2012. For more information on the CY 2013 proposals for the OPPS and the ASC payment system, please visit the Office of the Federal Register website.

CMS Issues Medicare Physician Fee Schedule Proposed Rule

CMS will accept comments on the proposed rule until Sept. 4, 2012. A final rule is expected by Nov. 1, 2012. For more information, please visit the Office of the Federal Register website.

CMS Proposes Changes to Medicare Home Health PPS for CY 2013

CMS will accept comments on the proposed rule until Sept. 4, 2012. The rule was published on July 13, 2012, in the Federal Register.

CMS Proposes Policy and Payment Rate Changes for End-Stage Renal Disease Facilities in 2013

CMS will accept comments on the proposed rule until Aug. 31, 2012. To read the proposed rule, please visit the Office of the Federal Register website.

5. Reports


Medicaid: States Reported Billions More in Supplemental Payments in Recent Years

According to a GAO report dated last month, states reported $32 billion in Medicaid supplemental payments during fiscal year 2010 This total consisted of $17.6 billion in Disproportionate Share Hospital (DSH) payments and $14.4 billion in non-DSH supplemental payments to hospitals and other providers. While there was a wide variance in the amount of total Medicaid assistance flowing to each state, DSH payments as a percentage of total state Medicaid spending were also highly variable from state to state. Though the exact amount of supplemental payments is unknown because state reporting was incomplete, CMS officials told GAO that they were taking steps to improve states’ reporting of non-DSH supplemental payments, including working with states to train staff on reporting of payments and on identifying and resolving reporting problems.


Updated Scoring of Medicare and Medicaid Costs

CBO issued a report this month documenting expected growth in Medicare and Medicaid spending as a percentage of Gross Domestic Product (GDP) over the next 10 years. Specifically, CBO predicts that Medicare spending will grow from 3.7 percent of the Gross Domestic Product next year to 4.3 percent in 2022, and Medicaid spending will increase from 1.7 percent of GDP in 2013 to 2.4 percent in 2022. Together with Social Security, the programs are expected to grow to 12.2 percent of GDP in 2022, or 55 percent of all federal spending. Health insurance subsidies from the ACA are expected to add $123 billion in federal spending, or 0.5 percent of GDP. 

6. Special Report

The Sustainable Growth Rate (SGR) Formula: Background and Issues for Congress

When it comes to Medicare’s reimbursement formula for physicians, Congress understands that the Sustainable Growth Rate (SGR) methodology has proven to be unworkable, necessitating repeated interventions by Congress in order to prevent increasingly dramatic cuts to physician reimbursements. Since October 2011, the Medicare Payment Advisory Commission (MedPAC) has called for a reform of the SGR formula. The cost of “fixing” the SGR is large and because Congress must find a way to pay for a solution, Congress has been able to provide only temporary relief. According to the Congressional Budget Office (CBO), a one-year freeze to physician payments (i.e., no reduction) would cost an estimated $11.1 billion in FY 2013 and $18.5 billion over 10 years (2013 to 2022), while a longer-term proposal to freeze physician payments over the next 10 years would cost about $273.3 billion.


Until 1992, Medicare reimbursed physicians under Part B (Physician Services) for services provided to the program’s beneficiaries based on “usual, customary, and reasonable” costs. In practice, that meant physicians would be paid the lowest of either the physician’s billed charge, the physician’s customary charge or the prevailing charge for that service in the community. However, the Omnibus Budget Reconciliation Act of 1989 (OBRA) provided for the establishment of the “Resource-Based Relative Value Scale” (RB-RVS), a system that attempted to measure the value of the services rendered by physicians in order to more appropriately reimburse them. While reimbursements per service could be contained by the RB-RVS system, there was no way to contain the volume of services and, as such, no overall program cost controls.

Ultimately the Sustainable Growth Rate (SGR) formula was incorporated into the payment formula as a means to control volume. Created by the Balanced Budget Act of 1997 (BBA), the SGR established a cumulative spending goal target on per capita Gross Domestic Product (GDP). Penalties (payment reductions) to physicians would be imposed when those goals are not met.

At first, the SGR appeared to be effective. However, increases in Part B expenditures in 2002 combined with slower economic growth resulted in Part B expenditures exceeding the targets. This necessitated a proportional decrease in physician reimbursements of 4.8 percent. Congress allowed that reduction to take place. However, every year after 2002, the formula has produced a negative adjustment in physician reimbursement and Congress has intervened to prevent the scheduled payment cut. Most recently, the Middle Class Tax Relief and Job Creation Act of 2012 prevented a roughly 27 percent reduction in physician payments through Dec. 31, 2012. However, absent legislative action, the scheduled 27 percent reduction will take effect in January 2013.

SGR Flaws and Historical Updates

Several flaws in the basic construction of the SGR have been cited as causing the malfunction. While the SGR did impose a cumulative spending target, which the RB-RVS lacked, SGR’s global cap on expenditures applies to all physicians and services uniformly. As a result, the formula cannot account for necessary changes in treatment patterns physicians engage in simply as a result of changing beneficiary needs. In other words, the formula does not distinguish between appropriate and inappropriate increases in physician spending. Similarly, by decoupling the individual behavior from the resultant update, the formula analogously creates a “tragedy of the commons” conflict, in which rational physicians acting in their own best interest result in the collective detriment. This phenomenon is exacerbated by the underlying fee-for-service reimbursement model, which incentivizes a higher volume of services.

In addition, the composition of the SGR formula bears as much responsibility for the overall level of spending on physician services as the treatment decisions of the doctors themselves. For example, until 2010, the SGR physician-administered drugs, which are covered under Part B, were calculated as part of physician expenditures for purposes of calculating the annual reimbursement update. In response to arguments that physicians have no control over drug costs, CMS removed these drugs from the formula’s calculation.

The level of payment reductions, or payment increases, to physicians that could be determined by the SGR in the long run is virtually unbounded, as evidenced by the looming 27 percent reduction currently scheduled to take effect next year. As a result, the SGR, unchecked, could schedule reductions in physician payment levels so severe that physicians would begin to exit the program. In this way, the SGR itself could represent a barrier to access for beneficiaries.

To shield physicians from the consequences of SGR’s flaws, Congress has repeatedly taken legislative action, even retroactively, to avert significant payment reductions that otherwise would have taken place. In fact, 16 bills have been enacted since 2002 to replace a scheduled negative update, with a payment adjustment ranging from a payment freeze to a 2.2 percent increase. Though these bills have imposed temporary “fixes” to physician payment rates, to date no legislation has been enacted to fix the underlying flaws in the SGR, or has effectively replaced it with a more adequate system. Congress has at times not enacted legislation in time to forestall the cuts. However, CMS has always held physician payments until Congress passed legislation. Thus, while there was a delay in payment, physicians did not receive cuts.

Issues for Congress

Attempts to fix the SGR have taken several forms. The first known as the “cliff option” postpones the scheduled cut. The “clawback” form increases payments or keeps them flat for a year or over a period of years.

The Congressional Budget Office recently estimated the budgetary impact over the 2013-2022 period of various alternative policies for modifying the payment rates that are scheduled to take effect under the SGR mechanism. While the scenarios laid out by CBO do not structurally alter the SGR, CBO’s estimates will factor heavily into any substantive debates over how best to reform or replace the SGR.

Another significant guide of congressional activity will be recommendations from the Medicare Payment Advisory Commission (MedPAC), an independent congressional agency. In October 2011, MedPAC issued specific recommendations to Congress concerning the SGR, as well as overall Medicare payment policies. Specifically, MedPAC recommended that Congress freeze the Medicare physician fee schedule reimbursement rates for primary care services for 10 years. In addition, MedPAC recommends a reduction in the nonprimary care (specialty) fee schedule reimbursements by 5.9 percent each year for three years, and to then freeze the rates at that level for seven additional years. Lastly, MedPAC believes Congress must offset more than $200 billion of the cost through a combination of other modifications to the Medicare program.

Current Legislation

Though a final solution still clearly eludes Congress, both the House and Senate have spent time in hearings exploring avenues to fix or replace the SGR. To that end, two pieces of legislation in the House have received attention recently. The first, H.R. 5707, the Medicare Physician Payment Innovation Act of 2012, introduced by Reps. Schwartz (D-PA) and Heck (R-NV), would permanently repeal the SGR, replacing the cuts ordered under that formula with positive updates for all physicians for the first four years. The bill would also create two separate service categories: primary care and other physician services. This provision represents an attempt to address problems arising from SGR’s current uniform treatment of physician services, and is consistent with MedPAC’s recommendations. However the bill would be offset using Overseas Contingency Operations funding, or savings resulting from the drawdown of troops in Iraq. Republicans have expressed a desire to use these funds for deficit reduction as opposed to offsets for new spending.

A competing proposal, introduced by Rep. Burgess (R-TX), would continue the current policy of simply replacing the scheduled payment reduction with a freeze for one year. Though Burgess supports a long-term solution, and as the Chairman of the Congressional Health Caucus has sponsored legislation in the past to accomplish just that, he has expressed concern that the timing of the SGR cut at the end of the year will get entangled in the larger debate over taxes and spending, expected to occur around the same time. His bill would effectively prevent the physician payment issue from becoming a bargaining chip in an unrelated debate.


The 15-year experiment with the SGR formula has taught some valuable lessons that will certainly factor into the next generation of Medicare payment policies. Should the next Congress decide to begin entitlement reform, how to control physician costs will be a central issue. In the short term Congress will have to deal with each scheduled cut on a piecemeal basis until it decides to tackle the flawed SGR formula and determine how to pay for the long-term fix.

If you have any questions, please contact Stephanie Kennan, Senior Vice President, or Brian Looser, Assistant Vice President, at McGuireWoods Consulting.

Founded in 1998, McGuireWoods Consulting LLC (MWC) is a full-service public affairs firm offering state and federal government relations, national/multistate strategies, infrastructure and economic development, strategic communications and grassroots issue management services. McGuireWoods Consulting is a subsidiary of the McGuireWoods LLP law firm and in 2010 was ranked in the Top 20 of The National Law Journal‘s “The Influence 50,” an annual report of the top public affairs firms in Washington, D.C.

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