What Went Wrong With the Sustainable Growth Rate Formula?

Topics: Sustainable Growth Rate, Payments and Reimbursement, Physicians

The sustainable growth rate formula, which sets Medicare physician reimbursement rates, is back in the news. Even if you only occasionally monitor what's going on in health policy, you're probably familiar with about Congress' semi-annual efforts to address the formula's scheduled cuts to physician payments, a process known colloquially as the "doc fix." However, lost in the focus on the politics of the issue is an examination of the actual formula. How did the formula go so wrong? To get some insight, American Health Line discussed the issue with nearly a dozen Medicare experts.


First, it's important to understand the creation and intent of the SGR formula, which was spelled out in Section 4503 of the Balanced Budget Act of 1997 (HR 2015):

(2) SPECIFICATION OF GROWTH RATE- The sustainable growth rate for all physicians' services for a fiscal year (beginning with fiscal year 1998) shall be equal to the product of --

`(A) 1 plus the Secretary's estimate of the weighted average percentage increase (divided by 100) in the fees for all physicians' services in the fiscal year involved,

`(B) 1 plus the Secretary's estimate of the percentage change (divided by 100) in the average number of individuals enrolled under this part (other than Medicare+Choice plan enrollees) from the previous fiscal year to the fiscal year involved,

`(C) 1 plus the Secretary's estimate of the projected percentage growth in real gross domestic product per capita (divided by 100) from the previous fiscal year to the fiscal year involved, and

`(D) 1 plus the Secretary's estimate of the percentage change (divided by 100) in expenditures for all physicians' services in the fiscal year (compared with the previous fiscal year) which will result from changes in law and regulations, determined without taking into account estimated changes in expenditures resulting from the update adjustment factor determined under subsection (d)(3)(B), minus 1 and multiplied by 100.

SGR replaced the Medicare Volume Performance Standard. MVPS incorporated the estimated inflation rate, projected growth in Medicare enrollment, changes in spending because of law or regulation, and other factors.

Put simply, the SGR sets a target for spending on Medicare, relative to other factors, such as Medicare enrollment and the gross domestic product. The formula's basic goal is to keep spending per beneficiary from growing faster than the per-capita increase in gross domestic product.

In its first few years, the formula resulted in increased Medicare reimbursements for physicians. However, there were early indications that the formula had issues, such as in 2001, when the Medicare Payment Advisory Commission advocated in an annual report to Congress that lawmakers "scrap" the SGR. In 2002, for the first time, the SGR resulted in a reduction to physician Medicare reimbursements, to the tune of a 4.8% cut. Since 2003, Congress has enacted a "doc fix" 15 times to prevent ever-increasing scheduled cuts to Medicare physician payment rates, and lawmakers currently are considering a 16th such fix.

What Went Wrong?

In general, the experts American Health Line spoke to agreed that the formula failed because it worked to limit prices but did little to inhibit volume of services. So, while the price Medicare paid physicians for services might be lower, physicians had no incentive to order fewer tests and procedures.

"The formula applies equally to all services and all physicians across the U.S., with no individual incentives for physicians to provide more high-value services and fewer unnecessary or lower-value ones," Cristina Boccuti, senior associate at the Kaiser Family Foundation, said. Or, as Gail Wilensky -- head of Medicare under President George H.W. Bush -- said: Physicians have "no reward for good behavior" and "no penalty for aggressive behavior."

>> To check out Wilensky's piece in Health Affairs on developing a
workable Medicare physician payment strategy, click here

National Coalition on Health Care President and CEO John Rother said another problem with the SGR is that it "sought only to control prices paid to doctors, not costs of the entire system." Rother added that to effectively control costs, "you can't squeeze on just one part of the system, you have to constrain the entire system."

Further, Boccuti noted that the SGR's spending targets are cumulative. As a result, each of Congress' short-term fixes makes it harder for the formula to reach its goals and, therefore, deeper cuts are required each time, creating a death spiral in which the cuts grow larger each time, and thus need to be offset so that physicians don't abandon the program en masse.

Is SGR a Harbinger for Other Cost-Control Efforts?

The high-profile failure of the SGR might lead observers to be pessimistic about some of the current moves to slow down health care spending, such as the nascent cost-control effort in Massachusetts, which recently passed a law that capped the state's health care spending and tied it to the state's economic growth.

So, does the failure of the SGR portend failure for those efforts?

Most experts American Health Line talked to view the SGR as more of a cautionary tale instead of a predictor of what's to come regarding efforts to limit spending growth.

Kaiser Family Foundation Senior Vice President Tricia Neuman said, "The current SGR situation illustrates how the implementation of hard formulas can lead to unintended consequences, despite the best of intentions."

Stuart Guterman, vice president for Medicare and Cost Control at the Commonwealth Fund, agreed, saying that "imposing a broad spending target is tricky." He added that doing so "need to be implemented in a way that actually addresses the underlying factors that drive spending growth."

The experts also said that there are some lessons to be learned from what happened with the SGR. For example, Rother said lawmakers shouldn't "set targets that aren't politically enforceable," adding that the formula "has no credibility because Congress routinely overrides it." He said any future efforts to limit health spending growth "could face the same fate if they are perceived as arbitrary and potentially harming patient access and care."

There are indications that these are lessons lawmakers already have learned.

Paul Ginsburg, president of the Center for Studying Health System Change, noted that the lessons of the SGR have "led to other attempts to specify target spending not specifying a formula response to what happens if the target is exceeded, but instead launching a policy-making process to respond."

Still, that doesn't mean controlling costs will get any easier. For example, Ginsburg noted that although the Affordable Care Act's Independent Payment Advisory Board is trigged only if certain spending targets are exceeded, "the unpopularity of IPAB suggests that this may not be an easy process either."

by Anthony Wilson, Editor