CMS Gainsharing Demonstration

            The Centers for Medicare and Medicaid Services (CMS) announced its Physician-Hospital Collaboration Demonstration (PHCD) Project. This is a three year demonstration program designed to examine whether allowing hospitals to provide financial incentives for physicians to support better care can improve patient outcomes without increasing costs. The CMS Press Release is available in the CMS website in the CMS Press Release Archives at questionmedia=pressr.

Congressional Advisory Board Analyzes Physician Payment System Options

            The Supplemental Medical Insurance program (Part B of Medicare), which will cost about $158 billion in 2006, pays for physicians’ services, outpatient hospital services, durable medical equipment, physical therapy, and certain other outpatient services. About 38 percent of those expenditures are payments for services provided by physicians, which are based on a schedule of fees that specifies the amount to be paid for each type of service. Most of Medicare’s payment rates are simply adjusted each year for inflation — but not those for physician’s services. Those rates are governed by a complex formula — the Sustainable Growth Rate (SGR) mechanism — that, unless overridden by legislation, will reduce fees by about 4 percent or 5 percent annually for at least the next several years.

            Legislation has overridden the formula’s results in each of the past four years, and the prospect of future, year-after-year rate reductions raised the question of whether the SGR formula is a viable mechanism — and if not, what alternatives might be appropriate. This brief describes the SGR mechanism and presents the potential budgetary effects of several other approaches. Many of the possible alternatives would be costly. For example, overriding the formula with a 1 percent rate increase in 2007 would raise outlays by $6 billion over the next 10 years. Replacing the formula with an inflation index would cost more than $200 billion over the coming decade.

            The full report is available at