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Thursday, January 31, 2013

Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System

Jim Hahn
Specialist in Health Care Financing

Janemarie Mulvey
Specialist in Health Care Financing

The Sustainable Growth Rate (SGR) is the statutory method for determining the annual updates to the Medicare physician fee schedule. The SGR system was established because of the concern that the Medicare fee schedule itself would not adequately constrain overall increases in spending for physicians’ services. While the fee schedule limits the amount that Medicare will pay for each service, there are no limits on the volume or mix of services. Under the SGR formula, if expenditures over a period are less than the cumulative spending target for the period, the annual update is increased. However, if spending exceeds the cumulative spending target over a certain period, future updates are reduced to bring spending back in line with the target.

In the first few years of the SGR system, the actual expenditures did not exceed the targets and the updates to the physician fee schedule were close to the Medicare economic index (MEI, a price index of inputs required to produce physician services). For the next two years, in 2000 and 2001, the actual physician fee schedule update was more than twice the MEI for those years. Beginning in 2002, the actual expenditure exceeded allowed targets, and the discrepancy has grown with each year. However, with the exception of 2002, when a 4.8% decrease was applied, Congress has enacted a series of laws to override the reductions.

There is a growing consensus among observers that the SGR system is fundamentally flawed and is creating instability in the Medicare program for providers and beneficiaries. The SGR system treats all services and physicians equally in the calculation of the annual payment update, which is applied uniformly with no distinction across specialties. In addition, there has been an increased concern that continued declines in physician payment rates, especially among primary care specialties, may potentially jeopardize access to services. Finally, legislative overrides since 2002 have only provided temporary reprieve from projected reductions in payments under the SGR calculation, requiring even steeper reductions in payment rates in the future.

Several alternatives to the current SGR mechanism have been proposed in recent years. For example, H.R. 3162, the Children’s Health and Medicare Protection Act of 2007 (CHAMP), introduced in the 110
th Congress, would have created six categories of physicians services, each with a separate expenditure target, while H.R. 3961, the Medicare Physician Payment Reform Act of 2009, would have had only two expenditure categories: (1) evaluation, management, and preventive services, and (2) all other services. On October 14, 2011, the Medicare Payment Advisory Commission (MedPAC) sent its recommendations to Congress, repealing the SGR system and replacing it with a 10-year schedule of specified updates for the physician fee schedule, with primary care practitioners receiving a 0% update over the next 10 years and nonprimary care practitioners facing a 5.9% decline in payment rates the first three years and 0% thereafter. None of the proposals has garnered sufficient support to be passed into law.

On January 2, 2013, the President signed H.R. 8, the American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240). This provision averts the SGR-determined reduction and maintains the Medicare physician fee schedule payments at their current rates through December 31, 2013. The conversion factor for 2014 and afterwards will be computed as if the modification to the conversion factor in this section had never applied. 

Date of Report: January 17, 2013
Number of Pages: 25
Order Number: R40907
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