Committee for a Responsible Federal Budget

Yes, Fix the SGR, But Pay for It Too

Jun 21, 2011 | Health Care

The Sustainable Growth Rate (SGR), the formula which sets provider payments for physcians under Medicare and which was originally enacted in 1997, calls for an unrealistic 30 percent cut in provider payments in 2012 if Congress does not act. Of course, it has acted frequently in the past decade to override the payment cuts that SGR has mandated. POLITICO has an article today talking about the difficult but necessary task of "weaning" Congress off of the SGR formula for Medicare. The article discusses the numerous problems with SGR and why it is hard to reform.

As the article explains, the SGR sets expenditure targets for Medicare. If Medicare spending exceeds the target, physician payments are updated by the change in the Medicare Economic Index (MEI) minus seven percent. If Medicare spending is below the target, payments are updated by the MEI plus three percent. In the first few years, spending did actually come in under the targets, so physicians were able to get payment increases in those years. However, beginning about a decade ago, Medicare spending has exceeded its targets, leading to scheduled cuts in provider payments and Congressional action ("doc fixes") to prevent that from happening. However, doc fixes from 2003-2006 were designed to recoup the costs of the temporary fixes in later years, which only added to the size of the cuts mandated in later years. Starting in 2007, temporary fixes have simply had "cliffs" with huge cuts scheduled after the expiration of the doc fix.

The article points to the most recent MedPAC report to highlight the many flaws of SGR. First of all, the budgetary issues are enormous. Congressional doc fixes have been temporary, which hides the true cost of a permanent solution. The temporary nature of these fixes has led to considerable uncertainty among physicians; for example, there were five doc fixes enacted in 2010 alone. In addition, as the MedPAC report notes, the SGR does nothing to incentivize more efficient use of health care and, in fact, promotes greater use of services (arguably, some overuse). 

However, the article points out a budgetary issue with these payment system reforms: while an SGR fix would cost significant money, the savings from a payment system reform will not score and would take a long time to come about even if it restrains health care cost growth. CBO has produced a very helpful report on the SGR that has a number of options for fixing it that all cost a significant amount of money. A few of these options are presented in the table below. They also include an SGR reset at 2010 levels (wiping out all the past accumulated cuts) and the Fiscal Commission plan, which would have a freeze through 2013, a one percent cut in 2014, and a reinstatement of the SGR in 2015 with a reset at 2014 levels.

Cost of Various SGR Replacements (billions)
Option2012-2021 Cost
0% Annual Update (Pay Freeze)$298
1% Annual Update$342
Update with Medicare Economic Index$358
2% Annual Update$389
Fiscal Commission Plan Update$262
SGR Reset at 2010 Spending Levels$195

To us, the solution to this budgetary conundrum is still to pay for any future changes to the SGR. We have said that doc fixes should be paid for, and the same should go for payment system reforms that include an elimination of the SGR. If the reform helps to hold down cost growth, then that would be bonus deficit reduction on top of the offset SGR. We have a number of ideas to pay for the doc fix/SGR reform, and the Fiscal Commission also had some proposals, like increasing Part D drug rebates and reforming Medicare cost-sharing rules. Reforms to the SGR are important for the overall physician payment system and health care system, but they should be deficit-neutral.