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What Are the Options for Solving the Sustainable Growth Rate (SGR) Problem?
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The Sustainable Growth Rate (SGR) formula was passed in the Balanced Budget Act of 1997 in an attempt to slow the growth of Medicare spending by tying Medicare reimbursements to U.S. economic output. But the formula, which tried to keep health care spending from growing faster than the economy, was flawed, and Congress has been passing short-term legislative patches since 2003 to prevent the formula from going into effect and severely cutting physician payments.

There have been proposals and one piece of legislation to repeal and replace the SGR. The Medicare Payment Advisory Commission (MedPAC), the 17-member independent Congressional agency that advises Congress on issues facing the Medicare program, offers what might be the most detailed plan for replacing the formula.

In October 2011, MedPAC sent a letter to the chairmen and ranking members of Medicare-related Congressional committees arguing that the SGR should be repealed and replaced. The commission said that the formula is creating instability in the Medicare program for providers and beneficiaries, and has failed to reduce the number of tests and procedures ordered by physicians. Additionally, they said that health care professionals not in fields that are easily able to increase volume were disproportionately burdened. The cost of ignoring the SGR keeps getting more expensive: It would cost nearly $245 billion to freeze physician payments at 2012 rates, according to a Congressional Budget Office report.

MedPAC recommends replacing the SGR with a 10-year plan that it says would start bringing physician pay in line with the cost of actual care.

First, they recommend freezing primary care physician payment rates for the 10-year period. These would be frozen because MedPAC’s research suggests that a lack of primary care physicians is the greatest threat to health care access in the coming years. Payments for other medical specialties would be reduced in the fee schedule’s conversion factor the first three years, and then frozen in the conversion factor in subsequent years. This would decrease payments by 5.9 percent for most services, but the increase in the volume of beneficiary enrollment and the services used by beneficiaries would still lead to increased annual Medicare spending.

The second leg of the group’s proposal would collect data from providers that would help the government bring payments in line with actual costs of care. They urged Congress to direct the Secretary of the Department of Health and Human Services (HHS) to regularly collect data from efficient physician practices so as to establish more accurate spending values, with the initial round of data collecting completed within three years.

The third part asks the secretary to identify overpriced fee-schedule services and then to reduce their value accordingly. These budget-neutral reductions would aim for an annual numeric goal of shaving at least 1 percent off of fee-schedule spending, starting in 2015.

The fourth and final recommendation asks Congress to direct the secretary to increase opportunities for partaking in shared savings programs with physicians and health professionals who join or lead Accountable Care Organizations.

MedPAC’s proposal has been strongly opposed by industry lobbying groups such as the American Medical Association (AMA).

In a letter to the Senate Committee on Finance, the AMA and 110 other medical societies outlined their own proposal for an SGR alternative. It calls for a repeal of the formula, investments in physician infrastructure and payment updates that accurately reflect the cost of service.

Meanwhile, many physician lobbying groups, including the American Academy of Family Physicians, supported the Medicare Physician Payment Innovation Act of 2012. That legislation was sponsored by U.S. Reps. Allyson Schwartz (D-Pa.) and Joe Heck (R-Nev.) in May 2012; it was referred to committee that same day and has not moved further forward.

The act would repeal the SGR and offset costs by using $300 billion savings from the reduction in military operations in Iraq and Afghanistan.

It would increase Medicare physician payment rates by 0.5 percent annually for four years, and raise payments for primary care services by 2.5 percent annually from 2014 to 2017.

Starting in 2016, it directs the HHS Secretary, through the Center for Medicare and Medicaid Innovation, to expand testing of each payment and service delivery model in at least three geographic regions and to include analysis of average implementation costs, per physician.  

It also directs the secretary to list the health care delivery models most likely to reduce spending without reducing quality of care, and to improve the quality of patient care without increasing spending.

By 2018, physicians in approved health care delivery models would begin receiving financial rewards. By 2019, physicians remaining in fee-for-service Medicare would start receiving payment reductions that grow each year. says the likelihood of the bill passing is 2 percent.

Recent budget proposals have addressed physician payment in the short-term, but did not come up with long-term solutions to the pay conundrum. Obama’s 2013 budget included a freeze on physician payments at the 2012 level for the next 10 years. The Simpson-Bowles deficit reduction plan also assumes a 10-year freeze on physician payments.

Finally, Rep. Paul Ryan’s (R-Wis.) 2013 budget would establish a “reserve fund” for Congress to repeal the SGR formula while staying deficit-neutral, but it doesn’t specify where the $245 billion (the cost of freezing physician payments for 10 years) would come from.

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