Examining the Medicare SGR and Why it is Truly Bad for Physicians

November 29, 2013

Each year we hear about the "flawed" SGR formula, but what's really wrong with it? Here's a look at the physician reimbursement model up for debate each year.

The Sustainable Growth Rate (SGR) is constantly in medical business world news. The Medical Group Management Association (MGMA), the AMA, and specialty and state medical societies throughout the country annually request that Congress repeal the "flawed SGR formula." I think we all know that the SGR causes Medicare payments to fall every year. But why? What's really wrong with the formula?

An SGR can be found in any organization; indeed, it is even found in our home budgets. Essentially, the SGR is the measure of how much a firm can grow without borrowing money. The Gale Encyclopedia of Small Business defines the SGR of a firm as "the maximum rate of growth in sales that can be achieved, given the firm's profitability, asset utilization, and desired dividend payout and debt ratios."

Medicare currently reimburses physicians under an SGR formula, which was a key provision in the Balanced Budget Act of 1997. This provision specifies the formula for establishing yearly SGR targets for physicians' services under Medicare. The use of SGR targets is intended to control the growth in Medicare spending for physician services.

According to CMS, the four factors for calculating the SGR are:

1. The estimated percentage change in fees for physicians' services;

2. The estimated percentage change in the average number of Medicare fee-for-services beneficiaries;

3. The estimated 10-year average annual percentage change in real gross domestic product per capita; and

4. The estimated percentage change in expenditures due to changes in law or regulation.

Payments for physician services are not withheld if the SGR target is exceeded by annual expenditures, but the fee schedule is updated for the following year to reflect the difference in actual expenditures ad target expenditures, either raising or lowering the fee schedule as appropriate to meet the target.

The SGR was intended to be a budgetary restraint on Medicare's total expenditures in order to maintain budget neutrality. Without congressional intervention, the SGR will continue to cut physician reimbursement rates, even though practice costs continue to rise. Under the SGR formula, if physician services increase above the target, reimbursement per service actually drops in the next year.

Every year since 2003, Congress has temporarily bypassed the SGR issue without addressing the real problem, by making small reductions to physician fees that prevent the larger cuts if the formula was followed, but that continue to increase the amount "owed." It is estimated that repealing the Medicare SGR would cost $175 billion, so instead of fixing the issue, small annual patches are applied so that physicians do not have to see the double-digit cuts to their Medicare pay that are threatened every year.

What exactly needs to be fixed? First, one key problem with the SGR formula is that it applies only to physician services under Medicare Part B. Other providers, such as hospitals and nursing homes, continue to receive positive payment updates. Another problem is that the SGR links specific Medicare payments to physicians to the general performance of the economy, without taking specific medical costs into account. In addition, payment cuts are applied across the board to all Part B providers, regardless of specialty or resource utilization.

Probably the biggest problem with the SGR formula, however, is that any deviation from the target expense will be carried over from year to year until it is either paid off or balanced. This carrying over of any yearly deficit, which influences the update adjustment factor for the next fiscal year, is considered the fatal flaw in the SGR. Based on current spending trends and legislative patches, the accumulated difference in the target and actual expenditures continues to grow, and cannot be zeroed out unless enormous physician payment cuts occur. The original goal of the SGR was to balance Medicare target and actual expenditures, and to keep Medicare from overtaking the federal budget by tying the target expenditures to GDP. However, the AMA and others believe that physician payments should be based on the Medicare Economic Index, which includes consideration of annual increases in the cost of medical practices.

With the arrival of the baby boomers to the Medicare generation the gap between target and actual expenditures has grown ever larger. In 2011 Medicare beneficiaries numbered 44 million. This number is expected to reach 50 million by 2016. Under the SGR formula there is no flexibility to readjust the target, despite rising costs due to the growing Medicare population and ever increasing practice expenses due to economic factors.

Jokes are frequently made about issues that would require an act of Congress to change. Fixing the SGR is a real life example of a situation that will require an act of Congress. Without congressional intervention Medicare physician payment rates are expected to be cut by about 25 percent in 2014, even though practice costs will rise.

The SGR is indeed flawed, and without a change physician pay for increasingly expensive services will continue to spiral downward, until the cost of caring for Medicare patients is economically impossible.

Beth A. Balen, MBA, FACMPE, has over 25 years of experience in the healthcare field, including 17 years as an orthopedic practice administrator. She is currently living in Arvada, Colo., and works as an independent medical practice consultant. E-mail her here.