What is the SGR

The Sustainable Growth Rate (SGR) began in 1998 with the aim to control spending for physicians’ services provided under Part B of Medicare. It does so by setting an overall target amount of spending (measured on both an annual and a cumulative basis) for certain types of goods and services provided under Part B; included are payments for physicians’ services as well as payments that Medicare makes for items—such as laboratory tests, imaging services, and physician-administered drugs—that are furnished in connection with physicians’ services.

Payment rates are adjusted annually to reflect differences between actual spending and the spending target—upward if spending is below the target, downward if spending is above the target. Policymakers had two main goals when they adopted the SGR mechanism: ensuring adequate access to physicians’ services and controlling federal spending for those services in a more predictable way.

In the recent past, more than 90 percent of physician and nonphysician providers agree to participate in Part B, and until recently, surveys generally show that beneficiaries do not experience significant difficulties in getting access to care. However, this situation is changing as payment rates are significantly reduced and the uncertainty exists on our future.

From 1997 (when the SGR method was first used to measure expenditures) through 2005, spending per beneficiary on services paid for under the physician fee schedule grew by 65 percent, or about 6.5 percent per year. In contrast, per-beneficiary spending in the rest of Medicare (excluding Medicare Advantage, the program’s managed care option) grew by about 35 percent over the same period.

Aside from growth in Part B enrollment, which has averaged about 1 percent annually since 1997, the growth of spending subject to the fee schedule can be attributed mainly to increases in the fees themselves and in the volume and intensity of services being provided by physicians. Since 1997, the fees that Medicare pays for each service have risen annually by an average of about 2 percent. Although some of the remaining growth has resulted from the addition of covered services, most of the rest is attributable to increases in the volume and intensity of services, which have averaged about 4.5 percent per year over the 1997–2005 period.

How many people see the flaws in this formula? Unless you are willing to severely ration care, you cannot set arbitrary caps on spending while adding additional covered lives and services. The fees for the covered services actually rose less than the cost of inflation during this time period so you cannot attribute the overrun to physician fees. In addition, patients are the ones who initiate care from physicians. We provide the service.

Since 2002, spending as measured by the SGR method has consistently been above the targets established by the formula. In 2005, expenditures counted under the method totaled $94.5 billion, about $14 billion more than the $80.4 billion expenditure target for that year. At the end of 2005, total spending since the SGR mechanism was put into place stood at about $30 billion above the SGR’s cumulative target. As a result, the SGR mechanism, under current law, will substantially reduce payment rates for physicians’ services over the next several years.

The band-aided approach once again recently passed extends current pay rates through November. But then we are looking at nearly a 30% rate cut to fulfill this flawed formula that was passed into law in 1998.

We need Congress to overturn this flawed law and move forward with real reform.