The Ongoing Battle to Permanently Fix the SGR

SGR: Those three letters have the power to spark outrage in family physicians and strike fear into the hearts of politicians. Those three letters also consume a disproportionate amount of the AAFP's time and energy as we aggressively lobby Congress to permanently fix the SGR.

The sustainable growth rate, or SGR, formula is the mechanism used to set payment rates for physicians who participate in Medicare. But the formula is severely flawed, and it has led to steep reductions in the payment rate for a number of years. Those payment cuts have repeatedly been averted by congressional action, but the amount of the cut and the number of times Congress has had to intercede in the past couple of years has led to a great deal of anxiety and uncertainty among physicians and their patients.

In fact, last year, Congress approved five payment patches to block impending reductions called for by the SGR. The final passage in December of a yearlong fix averted a 25 percent physician payment reduction, but without further congressional intervention, physicians will face another steep payment reduction on Jan. 1, 2012.

The uncertainty generated by this continuous cycle of Medicare payment cuts that require temporary patches has left many family physicians angry, and we have had to relentlessly lobby Congress to fix the formula. Members and Academy staff have rallied around the issue and have written, phoned and met with our representatives in Washington repeatedly to demand an end to the flawed payment system. In August, the AAFP even unveiled a toolkit to help family physicians encourage their patients to lobby for a fix to the payment system.

We also have joined forces with other organizations to create a united front that has put enormous pressure on Congress to permanently fix the SGR. In the process, the AAFP has emerged as one of the nation's leading voices in calling for a new and more equitable payment system.

Congress created the SGR as a result of the Balanced Budget Act of 1997. The intent was to keep Medicare expenditures for physician services on a sustainable trajectory, one that was in line with growth in the nation's gross domestic project, or GDP. It was intended that the SGR would use the annual fee update to limit the fiscal impact of physician services based on expenditure targets.

According to the Medicare Payment Advisory Commission, CMS calculates the SGR's yearly target rates (i.e., the amount of cumulative spending allowed) based on the following factors:

CMS then compares the cumulative amount actually spent to the yearly SGR target and sets a payment update for the subsequent year. If the actual amount spent is greater than the target amount, then the update for the subsequent year is reduced. Similarly, if the actual amount spent is less than the target amount, then the update for the subsequent year is increased. Not surprisingly, growth in actual spending on physician services varies directly with the growth in the volume and intensity of services provided.

In the early years of the SGR, volume growth was below the SGR target, leading to payment updates that were at or above the Medicare Economic Index. Since 2002, however, volume growth increased and per-capita GDP slowed, leading to payment reductions, as actual expenditures exceeded the corresponding SGR target.

As a result, Congress has had to intervene on a continual basis since 2003 and pass a series of measures to override the reductions in payment and provide modest payment increases so they could be assured physicians would continue to care for Medicare patients. Unfortunately, however, these interventions postponed, rather than eliminated, the expected reductions. As the interventions have accumulated, so have the expected reductions, to the point that the SGR now requires a payment reduction of 25 percent or more.

There are other problems with the SGR, as well. For example, it doesn't differentiate updates by physician category, and thus, it fails to reward physicians who restrain unnecessary volume growth or penalize physicians who contribute to volume increases. The SGR also does little to counter the volume incentives inherent in the fee-for-service system.

So why hasn't Congress replaced the SGR with a more equitable payment formula, one that would pay for legitimate medical services and recognize and reward the value of primary care to the delivery of quality health care?

The short answer is: cost. The Congressional Budget Office estimates that a 10-year Medicare payment freeze would cost $276 billion, and a 10-year update based on the MEI would cost $330 billion. The cost of these proposals are untenable for many lawmakers, especially in the prevailing deficit-reduction environment in which legislators must find offsets elsewhere in the federal budget to pay for the cost of a payment fix.

Although the AAFP wants a permanent fix to the SGR and has repeatedly called on Congress to pass such a fix, in light of the current economic climate, the Academy has taken a pragmatic approach and asked that, at the very least, Congress pass a multiyear patch and include a payment differential for primary care physicians. If Congress can only bring itself to approve a multiyear patch, this at least would provide some payment stability for family physicians, as well as an opportunity for payment reform demonstration projects to produce evidence for a permanent replacement to the current poorly structured formula.

Meanwhile, lawmakers have made some attempts to fix the SGR permanently. In 2007, for example, the House considered a measure that would have eliminated the SGR. That measure was part of the original Children's Health and Medicare Protection Act, but it was taken out of the legislation after House members were unable to find enough offsets to pay for the provision. More recently, the House version of the health care reform bill contained a provision to eliminate the SGR, but that provision was stripped out of the bill because of its cost.

Congress continues to struggle with a solution to the SGR problem. In fact, the recently released proposed budget from the Obama administration includes ways to pay for at least a two-year patch to the SGR. The AAFP agrees that the budget proposal is a step in the right direction, but both the administration and Congress have a long way to go to permanently fix the SGR and ensure that family physicians can continue to provide health care to their Medicare patients. But whatever the course, the AAFP will be there every step of the way.