Late last month, the House of Representatives passed H.R. 2, which would provide a permanent end to the sustainable growth rate formula that has been used to set Medicare payments to physicians since 1998. The Senate is expected to approve the House version when it returns next week, and President Obama has indicated he will sign it into law.

Permanently replacing the Sustainable Growth Rate has been a priority for the American Medical Association — and most other health care trade groups — for years. Since 2003, it has been set aside by Congress 17 times in favor of temporary patches that paid physicians more than what they’d get under the formula. There have been two central arguments for doing away with the SGR:

  • Accuracy: The formula inaccurately calculates the costs associated with delivering services to seniors.
  • Access: Cuts to physician pay per the SGR formula prompt physicians to restrict or eliminate access to seniors who seek visits and treatments.

So is H.R. 2 the solution? On face value, physicians will see positives:

  • It replaces the SGR permanently.
  • It provides certainty to physicians about how they’ll be paid by Medicare going forward.
  • It streamlines requirements for a variety of quality reporting programs.

But on closer inspection, it has two significant implications for hospitals and health systems and their affiliated physicians:

  • Accelerating the replacement of Medicare’s fee-for-service payments to physicians with risk-based alternatives. H.R. 2 does this in two ways: It awards bonuses to physicians who have at least 25 percent of practice revenue tied to alternative payment programs such as accountable care organizations or bundled payments, and it restricts MediGap coverage for some seniors in Medicare’s fee-for-service program, which is likely to push many into Medicare Advantage plans. Essentially, H.R. 2 doubles down on Medicare’s recently announced plan to link physician payments to expansion of alternative payment programs. As private insurers and large employers piggyback Medicare’s push to new payment models, physicians can expect fee for service to be a vestige of the past. Implication: Hospital participation in patient-centered medical homes, bundled payment and accountable care organizations as partners with their physicians is a business imperative. If a hospital is not active in these pursuits, nonemployed physicians might find business partners with capital, expertise and infrastructure elsewhere.
  • Increasing Medicare payments to physicians by 0.5 percent per year through 2019 is hardly enough to offset medical inflation, regulatory compliance requirements in the Affordable Care Act, IT costs for meaningful use and ICD-10 implementation. Operating a medical practice is complicated and costly. It’s a service industry where customer expectations matter and pricing hasn’t until consumers, plans and employers started pushing for transparency. It’s complicated. Clinical documentation is table stakes for getting paid and avoiding penalties and the new ICD-10 coding requirement is not likely to be delayed, much to physician chagrin. Contracting with payers is ongoing and their terms and conditions change constantly. The fuss over alternative payments a la accountable care and bundled payments linked to better care coordination is a sea change most embrace with healthy skepticism. The complexity of running a medical practice in tandem with the acceleration of alternative payment programs means higher operating costs for practitioners. For most physicians, an annual bump of 0.5 percent will not be enough. Implication for hospitals: These additional operating costs will require hospitals to develop more sophisticated ways to manage the medical practices they own and support independent practices with whom affiliation is necessary. That might mean deferring capital from other projects to invest in better systems and personnel to assist these practices.

So, IF the Senate passes H.R. 2 and the president signs it into law next week as most expect, the economic reality for physicians and the hospitals and health systems with whom they are affiliated is clear: Medicare is rallying support to accelerate the transition from fee for service to alternative payments and not backing down on deadlines for ICD-10 and meaningful use. Managing physician services efficiently and appropriately and accelerating efforts to participate in shared risk arrangements with Medicare and private payers will be the critical factors for a hospital or health system’s success.

The SGR fix has huge implications for hospitals and health systems. It’s not just about replacing an unpopular physician compensation formula; it’s about raising the stakes for clinically integrated networks of physicians, allied health professionals and their business partners to take on payer-sponsored risk. If hospitals and health systems are not equipped to provide that support as a capable business partner, physicians will look elsewhere. They have no choice.

That’s what the SGR fix means for hospitals and health systems.

Paul H. Keckley, Ph.D., a health economist and expert on U.S. health reform, is managing director at the Navigant Center for Healthcare Research and Policy Analysis. His H&HN Daily column appears the first Monday of every month. He is a member of Health Forum's Speakers Express. For speaking opportunities, contact David Parlin.