After seventeen years , over a dozen acts of Congress and innumerable reams of debate and conjecture about its fate, it’s time to say goodbye to the Medicare Sustainable Growth Rate (SGR) formula. As a proper wake, let’s take a moment to reflect on this enigma of health care economic theory. And then let’s not ever do it again.
A Brief History Of The SGR
From 1980-1990, Medicare payments to doctors were based on charges. During that period, spending under the program on physician services inflated rapidly, growing at an annual rate of 13.4 percent. Congress took note and reformed the system in two key ways: (1) rates paid for services would be determined by the resources, or inputs, necessary to perform them; and (2) annual increases for services would be restricted based on the total volume of services delivered.
That was all well and good; in fact it makes a good bit of sense. And it worked. From 1992 to 1997, spending growth was fairly steady at one to two percent per year.
But then Congress doubled down. The heralded budget deal struck in 1997 by then-President Clinton and the Republican-controlled Congress included a refinement to the aspect of Medicare physician payment rates linked to volume growth, newly labeled the Sustainable Growth Rate (SGR) formula. That’s when the fun really began.
In very short, the SGR boosted payments when the growth rate of spending on physician services fell short of growth in the gross domestic product (GDP). Likewise, it cut payments when physician spending grew more rapidly than GDP. Prices, the number of Medicare beneficiaries, and changes in law were all accounted for, essentially leaving utilization rate as the only key factor driving the SGR algorithm.
Makes sense, right? The SGR seemed a nice little incentive for docs to rein in their prescribing pens and be more efficient, except that the incentive was spread across over a million physicians and related professionals, creating a classic collective action problem. No one much seemed to care, though, until 2002, when Medicare’s base payment rate for these services was cut by 4.8 percent. Suddenly, the flaws in the formula got everyone’s attention, including Congress’s.
For 2003 (and ever since), Congress passed a law to block the cuts generated by the SGR formula. At first, there was some faint hope that these intrusions would be temporary. The “doc fixes” were designed (and paid for) in a manner that allowed the SGR (and physician payment rates) to basically pick up where they had left off the year prior. So there was some hope that the trend of rapid increases in physician resource use would wane and the formula could once again prevail.
After a few years, however, it became clear that was never going to happen. And enacting doc fixes in that manner was expensive; it required Congress to pay for a portion of cuts anticipated in future years, not just the next one. So, in 2006, they took the SGR train completely off the rails. That year, in the Tax Relief and Health Care Act (TRHCA – which some dexterously refer to as “Trisha”), Congress enacted a doc fix that froze out-year SGR cuts in place, creating a “cliff” when that patch expired. If the cut in 2007 was going to be five percent, then the cut coming up in 2008 would be ten percent, and so on.
This achieved two things. First, it cut the cost of enacting doc fixes to a third or so of previous episodes. And, it made 100 percent clear that the SGR would never again actually dictate Medicare physician payment policy. (Full disclosure: Yours truly helped draft TRHCA 2006, and I thought – and think – it was a splendid idea.)
I’m going to skim past 2009-2010, when things got truly absurd. During that spell, Congress enacted a series of very short doc fixes in anticipation of what became the Affordable Care Act disposing of the issue for a longer period of time. Doctors will recall this time with a shiver.
But it’s important to note that, meanwhile, despite pretty modest annual increases to doc pay of zero to one percent or so over the course of Congress’s extended veto of the SGR, overall expenditures on physician services by and large kept increasing at their historical rate. Basically, doctors started doing more work to offset their stagnant wages in order to keep their income levels constant.
Was this a sign of the industriousness that carried them through med school and residency? Yes. Was it good for the health care system (and your health)? Maybe not. Was it a lesson we should take to heart as the next iteration of physician payment policy is instituted? Definitely.
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