Understanding the SGR: An Explainer

The Medicare Program is expensive. It provides medical care to millions of Americans over age 65, and their ranks are only going to grow in coming years. In efforts to control the growing costs of the Medicare program, US legislators focused on physician fees. Their logic was simple: cut the amount paid to care providers, and you cut the costs of care overall. However, business is not always logical. When Medicare began implementing physician fee schedules in the 1980s, total payments to physicians actually increased. Not surprisingly, physicians began ordering more tests and providing more services to patients in order to obtain reasonable payments. They did more work, but they got paid.

In the 1990s, Congress attempted to limit the overall rate in growth of Medicare expenditures with the Volume Performance Standards Set, allowing for reductions of fee schedules by 2-3% annually.¹

The system didn’t work, leading Congress to introduce the SGR, as part of the Balanced Budget Act of 1997. Per CMS, “The use of SGR targets is intended to control the growth in aggregate Medicare expenditures for physicians’ services.

The SGR targets are not direct limits on expenditures…the fee schedule update, as specified in section 1848(d)(4) of the Act, is adjusted to reflect the comparison of actual expenditures to target expenditures. If expenditures exceed the target, the update is reduced. If expenditures are less than the target, the update is increased.” To read more about the specific formula, see the handout at PracticalDermatology.com.

Since 2003, Congress has passed legislation to prevent the SGR from taking effect in each given year, and avoiding its substantial cuts to physician payments. Implementation of the SGR this year would result in essentially a 21 percent cut in physician payments. It’s not just Medicare participating physicians who worry. Private insurers base their payments on Medicare’s fee schedules, so they could begin dropping reimbursements as well.

Problems with the SGR

Problems with the SGR are numerous. Many critics, including the Heritage Foundation’s Chris Jacobs, note that the decision to tie physician payments to the GDP via the SGR was ill-conceived. As Mr. Jacobs writes, “Congress established a fiscal target bearing little resemblance to the actual cost of medical goods and services. Other targets, such as the consumer price index (CPI) or the medical economic index, provide a clearer link to price inflation and general health cost growth.²

Implementing the SGR “fixes” or freezes is costly to the Medicare system. The Congressional Budget Office (CBO) says permanently freezing SGR target levels would cost $139.1 billion over 10 years.³

Implementing the SGR “fixes” or freezes is costly to the Medicare system. The Congressional Budget Office (CBO) says permanently freezing SGR target levels would cost $139.1 billion over 10 years.3

Tables 1-3 from Health Care Spending the Medicare Program, 2014, Medicare Payment Advisory Commission.

Consider this, as pointed out by the American Association of Physician and Surgeons’ Richard Amerling, MD: From 2002-2012 Medicare spending on physician services per beneficiary increased by 72%. “A 9% increase in rates during this period was dwarfed by the growth in volume of physician services, including lab tests (91% increase), imaging (79% increase), and other procedures (up 68%).”⁴ (Table 1)

Pay cuts and freezes may be forcing physicians out of private practice and into costlier hospital systems; From 2002-2012, Medicare fee-for-service rates increased 9%, while the cost of operating a practice increased 27%.⁴

Numbers crunchers focus on the problems with the SGR formula and its implementation. But many overlook a key element of the equation: physician payments represent just a small proportion of overall Medicare program costs. (Tables 2,3) Congress is targeting the low-hanging fruit, but the larger, riper targets continue to swell. (Table 3)

What Now

The House of Representatives passed the Medicare and CHIP Reauthorization Act (MACRA) in March to repeal the SGR, but as of press time the Senate had not acted on it. The merits of any new system will need to be assessed, but the reality is that the SGR does not and cannot work. As physicians, we should actively educate our peers and our patients about the flawed SGR, as well as our overall place in the Medicare program. We provide important patient services, and our reimbursement for those services represents just a small proportion of the total costs of the Medicare program. An appropriate reimbursement model will value our diagnostic and clinical skill, encourage us to treat each individual patient as we see fit rather than to comply with government standards, and reward efficiency rather than incentivize the use of unnecessary tests and treatments. We don’t make treatment decisions based on the GDP, why should we get paid based on it? n

1. Arch Ophthalmol. 1990;108(2):180

2. Jacobs, C. Medicare’s Sustainable Growth Rate: Principles for Reform http://www.heritage.org/research/reports/2013/07/medicares-sustainable-growth-rate-principles-for-reform

3. http://cbo.gov/sites/default/files/cbofiles/attachments/44184_May_2013_SGR.pdf

4. Amerling, R. Missing From the Debate Over The Medicare Sustainable Growth Rate: Sanity. http://www.aapsonline.org/index.php/article/missing_from_the_debate_over_the_medicare_sustainable_growth_rate_sanity/