The "Unsustainable" Sustainable Growth Rate Formula

September 2005

A Flawed Formula

  • Under the current physician reimbursement system, the sustainable growth rate (SGR) formula determines annual updates to Medicare’s Physician Fee Schedule.
  • The SGR formula dictates that Medicare spending on physician services in a given year exceeds the target set by this formula, reimbursement in the following year is reduced.  The problem is that this formula is tied to the gross domestic product (GDP), bearing no relationship to patient’s health care needs or physicians’ costs to furnish services. 
  • Under the SGR formula, Medicare physician payments will be cut approximately 30 percent between 2006 and 2012 despite the fact practice expenses are estimated to increase 19 percent during the same period.  A 4.3% cut in physician payments is set to take effect as of January 1, 2006.
  • Because of the flawed SGR formula, many physicians face clear financial hardship and will have to make painful choices as to whether they should continue to practice medicine and/or care for Medicare beneficiaries. 

A Rational Fix

  • The Medicare Value-Based Purchasing for Physicians’ Services Act of 2005 provides a rational fix to the current badly flawed system of physician reimbursement.  Congresswoman Nancy L. Johnson (R-CT), Chair of the Subcommittee on Health, Committee on Ways and Means, is the sponsor of the bill.
  • Congresswoman Johnson’s bill would replace the SGR formula with one based upon the Medicare Economic Index (MEI), which more reasonably reflects inflationary pressures on medical practice costs. 
  • Congresswoman Johnson’s bill also contains provisions embracing pay-for-performance (PFP) principles, which reward physicians for quality care.  Such provisions include:
    • The phased establishment of a value-based purchasing program
    • The development of evidence-based quality and efficiency measures in collaboration with the physician community
    • The permitting of certain gainsharing arrangements between physicians and hospitals.
  • In addition to Congresswoman Johnson’s legislation, the medical community has also developed a consensus framework for the phased establishment of a PFP methodology.
  • The SGR and PFP are inconsistent methodologies. Consequently, implementation of PFP must be made contingent upon the repeal of the SGR formula.
  • The clock is ticking.  Contact your Representatives and Senators, and ask them to help fix the current flawed system of physician reimbursement.  Otherwise, Medicare may make deep cuts to payments for physicians’ services as early as January 1, 2006.