Medicare's Sustainable Growth Rate: What is it and why should I care?

Posted by Blake Wright on February 19, 2014 at 1:28 PM

If you’ve kept an eye on Capitol Hill activity for the past few months you’ve undoubtedly heard about the congressional push to fix the “SGR.” But what is an SGR? Why does it need to be fixed? Why is it important?

What is the SGR? The Medicare sustainable growth rate, known as the SGR, is a formula created under the Balanced Budget Act of 1997 to slow the growth of Medicare spending by reducing the amount doctors are paid by a certain percentage every year.  

Unlike Medicaid, whose funding is split between the states and the federal government, Medicare is funded fully by the federal government. Therefore, any increase in Medicare spending hits the federal government pretty hard.

The first SGR reductions to physician payments began in 2002 at 4.8%.  From 2002 to 2014 cuts have ballooned to 24%. To avoid these huge cuts to physician payments Congress performs last minute patches and legislation every year to defer the cuts. Each deferral only increases the size and price tag of the fix needed in the following year [1].

I’m sure you’re wondering why Congress continues to defer cuts without offering a permanent SGR fix, especially when the deferrals only lead to larger cuts for the following year.  Well, congressional leaders seem to be pretty fed up with this patchwork system too.

Why is SGR coming up now?  In December 2013, Congress deferred a 24% physician payment cut set to take place on Jan 1 2014. This deferral was very different from deferrals of the past because it set a 3-month deadline for a permanent SGR fix. Without the passage of legislation that fixes the SGR by March 31, 2014 the 24% cut will take effect-disallowing any patchwork to avoid the cut [2].

Congressional committees in the House and Senate are busy drafting legislation that would repeal the SGR and substitute it with a 0.5 % annual increase in physician payments while providing incentives for the use of alternate payment models to slow the growth of Medicare spending.

What is the political climate/feasibility for SGR changes?  The support for a total SGR fix is overwhelmingly bipartisan! Both sides of the aisle agree that Medicare spending needs to be curbed without dramatic cuts to the physician payment systems.  Two committees in the House –  the Energy and Commerce and Ways and Means – as well as the Senate Finance committee have passed bills that would repeal the SGR and replace it with a system that would reward physicians based upon quality while incentivizing alternative payment models that would improve quality and reduce cost [3]. Outside of the halls of Capitol Hill, the biggest proponents of a permanent SGR fix are physician groups who would benefit greatly from avoiding large payment cuts.

What will the proposed changes in SGR mean for Medicare? Recent SGR repeal and replacements conversations have centered upon the promotion of healthcare quality and the achievement of the triple aim – reducing costs, improving population health and improving patient experience. Opponents of the SGR argue that the SGR focuses on rewarding or punishing doctors for providing more services rather than providing better and more effective care [4].

Why should I care? The repeal of the SGR and its replacement legislation are very important to the trajectory of improving Medicare quality and lowering long run costs.  As the deadline for the March 31, 2014 SGR cut extension rapidly approaches, the legislation put forward on the Hill will set the stage for more comprehensive Medicare reform in the coming years! Staying informed on the issue will be crucial to the goal of reforming Medicare as a way to advance generational fairness.