NCPA - National Center for Policy Analysis


September 28, 2009

Medicare's Sustainable Growth Rate (SGR) problem is another chapter in the big book of government central planning, an epic failure and a fountain of unintended consequences, says Dennis G. Smith, a senior fellow with the Heritage Foundation.

Medicare reimburses doctors and other medical professionals for their services according to a congressionally created fee schedule that is annually adjusted by the SGR formula.  Enacted in the 1990s, the SGR formula essentially says that the amount Medicare pays doctors for an average Medicare patient can't grow faster than the economy as a whole.  SGR is primary evidence of how Congress tries and ultimately fails to "bend the curve" of the health care costs in Medicare, says Smith.

The idea is relatively simple, says Smith:

  • If Medicare spending grows faster than our overall economy (which is almost always the case), then payments to Medicare providers are to be reduced proportionately to keep expenditures in line over a period of time.
  • Each year, the Centers for Medicare and Medicaid Services estimates how much the physician fee schedule update will have to be reduced the following year in order to meet the target Medicare expenditures on physician payment.
  • The 2010 update, for instance, reflects expenditures from April 1, 1996, to December 31, 2009.

If the SGR update goes into effect in 2010 as planned under current law, it will result in massive Medicare payment cuts, explains Smith.  But every year, Congress -- under both Democratic and Republican leadership -- routinely blocks the cuts from going into effect for a year or two at a time.  At the same time, House and Senate leaders have left intact the underlying requirement to keep doctor payment below the rate of gross domestic product (GDP) growth.

Subsequently, the necessary cumulative cut in Medicare payments grows bigger, says Smith.  Without a change to current law, payments to physicians would be reduced by 21.5 percent as of January 1, 2010, and by an additional 5.5 percent each year from 2011 through 2014 (and a small reduction in 2015).

Instead of fixing the SGR, the Senate Finance Committee bill repeats the prior pattern by providing a payment increase for 2010 and then pretending it did not happen.  The reason for this one-year change in the update is obvious: Fixing the problem long-term would cost $200 billion over 10 years.

Source: Dennis G. Smith, "The Baucus Health Bill: A Medicare Physician Payment Shell Game," Heritage Foundation, WebMemo No. 2629, September 25, 2009.


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