THE SUSTAINABLE GROWTH RATE (SGR) FORMULA:

MEDICARE’S PAYMENT TO DOCTORS

Think the “automatic cuts” triggered by the Super Committee’s failure will actually happen? Not so fast. If we examine “cuts” triggered by the Balanced Budget Act of 1997, history shows Congress routinely blocks these types of deficit reduction measures from taking effect.

BUDGET GIMMICKING AT ITS FINEST

• What is the SGR?
• A Costly Fix
• Budget Gimmicks
• History of Congressional Action

What is the SGR?

In 1997, Congress passed the Balanced Budget Act in an effort to reduce budget deficits. Part of this law outlined a “sustainable growth rate” (SGR) for Medicare payments to doctors under Medicare Part B (for an explanation of Medicare Part B, check out our Budget Briefing Book). The SGR attempted to control the growth rate for Medicare Part B expenditures,¹ which come from a fee schedule that contains a list of “over 7,000 tasks and services for which physicians bill Medicare².”

The SGR was created in an attempt to constrain growth in Medicare spending³ – lawmakers had been concerned physicians would not constrain the cost of their services. The 1997 law limited Medicare’s reimbursement to doctors so the “total pay for physicians could not exceed the growth rate of the rest of the economy.”⁴ The only time the cuts called for in the 1997 Balanced Budget Act ever went into effect was in 2002 (the first year SGR was to take effect). In every year since then, Congress has taken actions to temporarily override the SGR reductions.⁵ The current SGR block lasts until the end of this year.⁶

Unless Congress can come up with a solution by the end of the year, a nearly 30 percent reduction in physician payments will occur.⁷

A Costly Fix
Why has Congress only enacted temporary fixes for the SGR? Generally, it’s because it “costs” too much to eliminate the SGR on a permanent basis.⁸ Last June, the independent Congressional Budget Office estimated that over a ten-year period, it would cost $275 billion to “maintain physician pay at current levels” (emphasis added because these payments have been increased over time).⁹

Budget Gimmicks

Instead of dealing with the SGR issue in a responsible (i.e., permanent) way, Congress has primarily used two strategies to deal with Medicare’s payments to physicians, clawback legislation and cliff legislation.

1. Clawback legislation: used from 2004 through 2006, this mechanism temporarily prevents the scheduled SGR reductions but allows the SGR to make up for additional spending in future years. By 2007, the clawback mechanism could no longer be used because it could no longer recoup the costs within Congress’ traditional ten-year budgeting window.¹⁰ The clawback mechanism qualifies as a budget gimmick because Congress’ past actions have proved it had no intention of allowing such a decrease to go into effect, making the recuperation in costs impossible.
2. Cliff legislation: Used primarily used since 2007, this mechanism temporarily prevents the scheduled SGR reductions but overrides the law that caps the reduction in proceeding years. Specifically, cliff legislation overrides the law that says that rate reductions cannot be more than seven percent in any year. ¹¹

This means that if the SGR were enacted next year, payments to doctors for Medicare Part B services would fall by more than 30 percent.¹²

The cliff mechanism also qualifies as a budget gimmick because the cost of the legislation is zero outside of the temporary fix and Congress’ past actions have proved it has no intention of allowing prospective decreases to go into effect.

History of the SGR¹³

2002 - First time the Medicare formula created by the 1997 Balanced Budget Act triggered cuts in Medicare spending; payments to physicians were reduced by 4.8 percent.

2003 - Congress overrode scheduled reduction and instituted a 1.4 percent increase.

2004 - Congress overrode the scheduled reduction and instituted a 1.5 percent increase for both 2004 and 2005.

2006 - Congress overrode the scheduled reduction and froze payments at the 2005 level.

2007 - Congress overrode the scheduled reduction and froze payments at the 2006 level.

2008 - Congress overrode the scheduled reduction and allowed for a 0.5 percent increase from January to June of 2008.

2009 - Congress overrode the scheduled reduction and allowed a 0.5 percent increase from July to December 2008 and a 1.1 percent increase for 2009.

2010 - Congress overrode the scheduled reduction; froze payments at the 2009 level through June 2010; increased payments by 2.2 percent through December 2010.

2011 - Congress overrode the scheduled reduction; froze payments at the 2009 level through June 2010; increased payments by 2.2 percent through December 2010.

2012 - Congress overrode the scheduled reduction and froze rates at 2011 Level January – February.¹⁴ It then extended the freeze through December of 2012. ¹⁵

SGR Updates¹⁶