Fitch: Medicare SGR Replacement Reinforces Payment Models Shift

NEW YORK--(BUSINESS WIRE)-- The decision by Congress to repeal the unpopular Medicare sustainable growth rate (SGR) formula for physician payments has important implications for acute care hospitals and other types of healthcare providers, according to Fitch Ratings. The U.S. Senate passed a bill Tuesday reforming the SGR formula, which we believe removes a good degree of instability regarding payment. The bill was passed with an overwhelming majority in a 92-8 vote.

The SGR will be replaced with a new system that will eventually tie growth in physician payments to participation in value or incentive-based payment models, referred to as advanced payment models in the legislation.

Hospitals and health systems have recently stepped up efforts to improve financial alignment with physicians, and the change in the physician payment model reinforces the need to establish these strategic ties. Given the degree of control that physicians have over every patient care episode, Fitch believes that their engagement is critical to the success of hospitals under more advanced payment models like accountable care organizations.

Hospitals have been employing various strategies in the management of relationships with physicians. These strategies have varying levels of influence, but all of them impact the operating profile and financial structure to some degree. Fitch expects increasing use of joint ownership models between hospitals and physicians. This model is not new for industry but offers particular benefits in a world of evolving payment models. These arrangements require less capital investment than a full acquisition and benefit the hospital partner by ensuring the physician has economic skin in the game.

Successfully managing the shift to advanced payment models remains a risk for the entire healthcare industry, but it is occurring slowly, giving hospitals ample time to alter business models. However, SGR replacement reinforces the need for hospitals to have a strategy in place to address a shift away from the currently dominant fee-for-service payment model. Nevertheless, it is not likely to drastically accelerate the shift. While physicians will receive a 5% bonus for participation in advanced payment models under the SGR replacement starting in 2019, growth in payments is not directly tied to participation in these models until 2026.

Other implications of the SGR replacement bill for acute care hospitals, post-acute healthcare providers and health insurers include about a $35 billion contribution to $70 billion in cost savings to help pay for the $210 billion cost of the bill. This will mostly come from Medicare rate reductions starting in 2018. Acute care hospitals will benefit from a six-month delay in the implementation of the two-midnight rule, although Fitch believes the influence of that rule on patient volumes and hospital operations has largely washed through the system.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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